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Explained: Why is Cairn Energy suing Air India?

Cairn Energy is suing Air India in New York to seize its assets to enforce the $1.2 billion arbitration award it won against the Indian government in a retrospective tax dispute. What is this dispute?

Written by Apurva Vishwanath , Edited by Explained Desk | New Delhi |
Updated: May 20, 2021 1:06:32 am
An Air India aircraft at Chandigarh International Airport. (Express Photo/File)

British oil company Cairn Energy Plc is suing Air India in New York to seize its assets to enforce the $1.2 billion arbitration award it won against the Indian government in a retrospective tax dispute.

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What is the Cairn Energy-Air India dispute about?

In December last year, a three-member international arbitral tribunal had ruled in a 568-page unanimous verdict that the Indian government was “in breach of the guarantee of fair and equitable treatment” which was against the India-UK bilateral treaty and that the breach caused a loss to the British energy company. It awarded Cairn $1.2 billion in compensation that India was liable to pay.

To enforce this award, Cairn moved a court in the South District of New York against Air India.

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Meanwhile, India has also challenged the arbitration award in Netherlands.

Why are the challenges in different jurisdictions?

Since the arbitration award was delivered in Hague, India has moved an appeal in Netherlands.

Cairn, on the other hand, has chosen New York to sue India because it has located substantial assets that it can recover the compensation from in that jurisdiction. Specifically, Air India’s United States operations are headquartered in this district, at 570 Lexington Avenue, New York, New York, 10022. Cairn also told the court it has “initiated proceedings in numerous other locations around the world seeking recognition and enforcement of the award.”

Why is Cairn Energy suing Air India?

Cairn’s main argument is that Air India is the “alter ego” of India, and that it should be held jointly and severally responsible for India’s debts, including those arising from a judgment. As the national carrier, Air India is wholly owned and extensively controlled by the Indian government. Cairn cited a 1983 US Supreme Court verdict to argue that a principal-agent relationship exists between them.

The court will have to determine the level of economic control of Air India by the government; whether Air India’s profits go to the government; the degree to which government officials manage the entity or otherwise have a hand in its daily affairs, among others.

What is the retrospective tax demand?

The arbitration was initiated by Cairn, similar to what Vodafone did for a breach relating to India’s 2012 retrospective amendments to tax laws. In 2006, Cairn Energy made a bid to consolidate its Indian assets under a holding company — Cairn India Limited. As part of that internal rearrangement, Cairn UK transferred shares of Cairn India Holdings to Cairn India, essentially transferring shares in non-Indian companies to an Indian holding company.

Subsequently, Cairn India then divested roughly 30 per cent of its shares through an Initial Public Offering. Between 2009 and 2011, mining conglomerate Vedanta Plc acquired most of Cairn Energy but Cairn UK was not allowed to transfer its 9.8 per cent stake in Cairn India to Vedanta. Tax authorities in India said in the 2006 transactions, the share transfers attracted capital gains tax of over Rs 6,000 crore by Cairn UK.

In 2012, following the Supreme Court ruling that a similar series of transactions involving Vodafone did not attract capital gains as the transaction did not amount to transfer of a capital asset within the meaning of Section 2(14) of the Income Tax Act, the government amended the law retrospectively.

The 2012 amendment clarified that “an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

This retrospective taxation, Cairn argued, was in breach of the UK-India Bilateral Investment Treaty which had a standard clause that obligated India to treat investment from UK in a “fair and equitable manner”.

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First published on: 18-05-2021 at 01:20:02 pm
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