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Wednesday, March 03, 2021

Govt to contest Cairn award, suits in international courts

“The government will file an appeal against Cairn arbitration award soon and will contest its sovereign rights to tax. It will also strongly contest other suits filed by Cairn Energy at various other international courts,” an official said.

Written by Aanchal Magazine , Sandeep Singh | New Delhi |
Updated: February 20, 2021 9:35:27 am
Cairn Energy, Cairn tax dispute case, Cairn CEO meets FinSecy, Indian ExpressThe company interpreted Indian laws on capital gains differently and refused to pay . (Representational)

The government is learnt to have decided to file an appeal against the $1.2-billion arbitration award in the retrospective tax demand case involving Cairn Energy. Following Cairn Energy chief executive officer Simon Thomson’s meeting with Finance Secretary Ajay Bhushan Pandey for the second consecutive day on Friday, government sources indicated that the Centre will also consider contesting other suits filed by the company at various international courts.

Company sources, meanwhile, indicated that the issue of appeal was not discussed in the meeting.

“The government will file an appeal against Cairn arbitration award soon and will contest its sovereign rights to tax. It will also strongly contest other suits filed by Cairn Energy at various other international courts,” an official said.

The government has welcomed Cairn’s move to reach out for a resolution. However, it is of the view that any dispute resolution to be sought by Cairn will have to be “within the already existing laws”, the official said.

After Friday’s meeting, Thomson said it was a “constructive” interaction. The company is hoping for a positive resolution, a source close to the entity said. “It was a very constructive discussion and there was no discussion on whether the government would appeal in the Cairn retrospective tax demand case. However, it was a constructive discussion and we are looking forward to a solution,” the source said.

Queries sent by The Indian Express to the Finance Ministry on the issue went unanswered.

Thomson had earlier met Pandey on Thursday to discuss the way forward with respect to the arbitration award by the Permanent Court of Arbitration (PCA) at The Hague in December 2020. The court had ruled that the government’s retrospective tax demand on Cairn Energy was “in breach of the guarantee of fair and equitable treatment”, and against the India-UK bilateral treaty.

He had earlier sought a meeting with Finance Minister Nirmala Sitharaman but the interaction was not formalised.

The government had 90 days — until March — to challenge the December award in a higher court in Singapore. The government had earlier hinted that the only possible solution for both parties to avoid further litigation was for Cairn Energy to agree to the government’s Vivad se Vishwas tax amnesty and dispute resolution mechanism.

The dispute stems from the much debated retrospective taxation issue. In 2006-2007, Cairn UK had, as part of an internal rearrangement, transferred shares of Cairn India Holdings to Cairn India. Income-tax authorities then decided that since Cairn UK had made capital gains, it ought to pay capital gains tax up to Rs 24,500 crore.

The company interpreted Indian laws on capital gains differently and refused to pay. Several rounds of litigation at the Income-Tax Appellate Tribunal (ITAT) and the High Court followed. Cairn lost the case at ITAT; a case on the valuation of capital gains is pending before Delhi High Court.

While Cairn Energy sold the majority of its India business, Cairn India, to mining giant Vedanta in 2011, income-tax authorities barred it from selling about 10 per cent, citing pending taxation issues. The payment of dividend by Cairn India to Cairn Energy was also frozen.

In its judgment, the PCA at The Hague said the issue was not just related to tax, but was an investment-related dispute – and was therefore under the jurisdiction of the international arbitration court.

The arbitration tribunal added 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”.

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