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Retrospective tax: After Vodafone, India loses Cairn arbitration case

The international tribunal also ruled that India’s demand of $1.2 billion in retrospective tax was “in breach of the guarantee of fair and equitable treatment”.

Written by Aashish Aryan , Aanchal Magazine | New Delhi |
December 24, 2020 3:50:01 am
The Cairn India Ltd. logo is displayed on a sign outside the venue of the company's annual general meeting in Mumbai, India, on Thursday, Aug. 18, 2011. (Photographer: Adeel Halim/Bloomberg)

Cairn Energy Plc won a major relief on Wednesday as the Permanent Court of Arbitration at The Hague ruled that the Indian government’s retrospective tax demand against the global oil and gas major was “inconsistent” with the UK-India bilateral treaty.

The international tribunal also ruled that India’s demand of $1.2 billion in retrospective tax was “in breach of the guarantee of fair and equitable treatment”.

The judgment has asked the government to pay $1.2 billion (roughly Rs 8,800 crore) to Cairn Energy Plc — this, at a time when its revenues are strained due to the economic slowdown in the aftermath of the Covid-19 pandemic.

Cumulatively, corporate advance tax collections until mid-December have been recorded at Rs 2.39 lakh crore, down 4.9 per cent from last year, while advance personal income-tax collections are down 10.4 per cent at Rs 60,491 crore. As per latest government data, released for April-October, gross tax collections were at Rs 8.75 lakh crore, down 16.7 per cent from the same period last year.

The Cairn ruling is the second arbitral setback to India over its position on retrospective taxation. On September 25, the Singapore seat of the Permanent Court of Arbitration had unanimously decided that India’s retrospective demand of Rs 22,100 crore as capital gains and withholding tax imposed on British telecommunication company Vodafone Plc for a 2007 deal was “in breach of the guarantee of fair and equitable treatment”.

In its judgment in the Cairn case, the three-member arbitration panel said: “Tax demand against the claimants (Cairn Energy Plc and Cairn UK Holdings Limited) in respect of AY (assessment year) 2007-08 is inconsistent with the treaty and the claimants are relieved from any obligation to pay it and orders the respondent (Indian government) to neutralise the continuing effect of the demand by permanently withdrawing the demand.”

The tribunal also said that India must not make any more attempts to recover “the alleged tax liability or any interest and or penalties arising from this alleged liability through any other means”.

The Union Finance Ministry, in its initial reaction, said it was “studying” all aspects of the verdict in consultation with its counsel. “After such consultations, the Government will consider all options and take a decision on further course of action, including legal remedies before appropriate forums,” the Ministry said in a statement.

In the Vodafone taxation case, the government has until Thursday (December 24) to challenge the arbitration court’s order. Senior officials from the Department of Telecommunication and Finance Ministry met on Wednesday, but no decision was reached. The government is learnt to have also sought an opinion from the Solicitor General of India. Senior officials from the ministries may meet again on Thursday, sources said.

The tax demand against Cairn Energy Plc dates back to the time when, as part of its internal rearrangement, Cairn UK transferred shares of Cairn India Holdings to Cairn India. The Income Tax authorities contended that Cairn UK had made capital gains and slapped it with a Rs 24,500-crore tax demand.

Owing to different interpretations of capital gains, the company refused to pay, which prompted cases in the Income-Tax Appellate Tribunal (ITAT) and the High Court. Cairn lost the case at ITAT; a case on the valuation of capital gains remains pending before the Delhi High Court.

Retrospective taxation effectively allows a country to pass a rule on taxing certain products, items or services, and deals, and charge companies from a time before the date on which the law is passed.

In 2012, after the Supreme Court ruled that the Vodafone Group’s interpretation of the Income-Tax Act of 1961 was correct, and that it did not have to pay any taxes on the stake purchase, then Finance Minister Pranab Mukherjee circumvented the ruling by proposing an amendment to the Finance Act, which gave the I-T Department power to retrospectively tax such deals.

The Act was passed by Parliament that year, and the onus of paying the tax fell back on Vodafone. The same Act was used to tax Cairn Energy Plc’s transfer of shares as well.

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