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Thursday, January 28, 2021

Cairn wins arbitration ruling against India in tax dispute: What is this case?

Like Vodafone, this dispute between the Indian government and Cairn also relates to retrospective taxation.

Written by Aashish Aryan , Edited by Explained Desk | New Delhi | Updated: December 29, 2020 9:09:19 am
Worker cycles by machinery at Cairn India, Oil and Gas exploration plant at Barmer in Rajasthan. (Photo via Bloomberg)

The Permanent Court of Arbitration at The Hague has ruled that the Indian government was wrong in applying retrospective tax on Cairn. In its ruling, the international arbitration court said that Indian government must pay roughly Rs 8,000 crore in damages to Cairn.

What is the dispute all about?

Like Vodafone, this dispute between the Indian government and Cairn also relates to retrospective taxation. In 2006-07, as a part of internal rearrangement, Cairn UK transferred shares of Cairn India Holdings to Cairn India. The Income Tax authorities then contented that Cairn UK had made capital gains and slapped it with a tax demand of Rs 24,500 crore. Owing to different interpretations of capital gains, the company refused to pay the tax, which prompted cases being filed at the Income Tax Appellate Tribunal (ITAT) and the High Court. While Cairn had lost the case at ITAT, a case on the valuation of capital gains is still pending before the Delhi High court.

In 2011, Cairn Energy sold majority of its India business, Cairn India, to mining conglomerate Vedanta. Cairn UK was however not allowed to sell a minor stake of about 10 per cent by the income tax authorities. Authorities had also siezed Cairn India shares as well as dividends that the company paid to its parent UK firm.

What has the arbitration court said?

In its judgment, the Permanent Court of Arbitration at The Hague said Cairn Tax Issue was not just a tax related issue but an investment related dispute, and therefore under the jurisdiction of the international arbitration court.

Akin to the ruling in the Vodafone arbitration case, the PCA at The Hague has once again ruled that the Indian government’s retrospective demand was “in breach of the guarantee of fair and equitable treatment”. It has noted that Cairn UK’s argument that the demand on them was made after the Vodafone retrospective tax demand, which has since been set aside by Indian courts.

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