Explained | India's Dispute With Cairn Energy & $1.7 Billion Arbitration Award

On 8 July, the Cairn Energy had secured a French court order to seize 20 Indian govt properties in Central Paris.

Cairn Energy has secured a French court order allowing it to seize about 20 Indian government properties in Central Paris which are valued at more than 20 million euros.

(Photo: Aroop Mishra/The Quint)

(This story was first published on 9 July 2021 and has been republished in the light of Cairn Energy saying that it will drop litigations to seize Indian properties in other countries within days of getting a $1 billion refund resulting from the scrapping of a retrospective tax law.)

India’s tax dispute with oil and gas firm Cairn Energy seems to be costing the Indian government not just millions of dollars but is severely damaging its image as an investment destination with ‘ease of doing business'.

On Thursday, 8 July, the energy firm secured a French court order allowing it to seize about 20 Indian government properties in Central Paris, which are valued at more than 20 million euros.

Cairn Energy’s move comes after the arbitration tribunal in The Hague had ruled in December 2020 that the Indian government must pay $1.2 billion plus taxes to the oil and gas firm, which after penalties and interests, now amounts to about $1.7 billion.

To enforce the $1.7 billion arbitration award on the Indian government, Cairn has registered the arbitration award in other international jurisdictions, including the US, the UK, Canada, Singapore, Mauritius, France and the Netherlands.

What is the restrospective tax dispute? What are some other cases? Here’s all you need to know.

What Is the Case?

The Cairn tax dispute began 15 years ago in 2006–2007 after Cairn UK had transferred shares of Cairn India holdings to its counterpart, Cairn India.

In 2012, India's retrospective tax amendment was introduced by the UPA government.

The amendment signified that any capital gains made from the transfer of shares from a foreign entity to its assets located in India will be taxable from 1962.

Two years after the retrospective tax amendment was introduced, Cairn received a notice from India's Income Tax department in January 2014, raising a preliminary assessment of Rs 10,247 crore tax liability, on capital gains it made in 2006 when it reorganised businesses of its Indian holdings under Cairn Energy India Pvt Limited.

Meanwhile, Cairn Energy had in 2010-11 sold majority of Cairn India to mining giant Vedanta.

Indian tax authorities then barred it from selling about 10 percent citing pending taxation issues. Moreover, the payment of dividend by Cairn India to its parent company was also frozen.

Raising its tax demand, in March 2015, the Income Tax department had contended that Cairn UK made a capital gain of Rs 24,503 crore in the internal reorganisation and demanded Rs 24,000 crore as tax.

Cairn Energy called the tax imposed as illegitimate and initiated an international arbitration to challenge the retrospective taxation in 2015.

Have Other Assets Been Seized?

Since January this year, Cairn had begun attempts to identify Indian assets abroad against which it could enforce the arbitration award.

These assets include aircraft, ships and even bank accounts. The organisation also moved to courts in the UK, Canada, Singapore, France, the Netherlands and three other countries to register its claim against India, some of which have recognised the arbitration award.

Meanwhile, Cairn Energy, in May 2021, moved a US court to sue Air India, seeking to make the flagship carrier liable for the amount it won in the judgement, arguing that Air India is a state-owned company and is therefore 'legally indistinct from the state itself'. This puts another roadblock in the government's overdue plans to sell the flagship carrier.

A report by Reuters quoted the lawsuit, which states, "The nominal distinction between India and Air India is illusory and serves only to aid India in improperly shielding its assets from creditors like (Cairn)."

Why Has the Central Government Refused To Pay?

The Narendra Modi government has swayed from honouring the award in the past, which is the reason behind Cairn filing its claim in several countries.

Meanwhile, the Finance Ministry on Thursday, 8 July, denied having received any communication from any French court on British gas and oil firm Cairn Energy's seizure of Indian government assets, adding that both parties are in discussions to resolve the matter.

"There have been news reports that Cairn Energy has seized/frozen State-owned property of the Government of India in Paris. However, Government of India has not received any notice, order, or communication, in this regard, from any French Court."

India's Finance Ministry, as per ANI

Moreover, the ministry said that it has filed an application dated 22 March 2021 to dismiss the December 2020 international arbitral award in The Hague Court of Appeal.

"The Government of India will vigorously defend its case in Set Aside proceedings at The Hague," ANI quoted the ministry as saying.

It further added:

"The CEO and representatives of Cairns have approached Govt of India for discussions to resolve the matter. Constructive discussions have been held and Government remains open for an amicable solution to the dispute within the country’s legal framework."

However, according to Cairn Energy, the freeze on the official properties approved by Tribunal Judiciaire de Paris was 'a necessary preparatory step to taking ownership of the properties and ensure that the proceeds of any sales would be due to Cairn,' Financial Times reported.

What Are Other Similar Cases?

Vodafone Group Plc

Vodafone Group Plc won an international arbitration case against the Indian government in September, 2020, involving a retrospective tax dispute amounting to Rs 20,000 crore.

The telecommunications company had contended that the tax liability it was subjected to through retrospective amendments to the income tax law was in violation of principles of equitable and fair treatment under India-Netherlands investment treaty agreement, reported BloombergQuint.

Accepting the contention, the tribunal had ruled in Vodafone's favour.

The Indian government had used the tax amendment to retrospectively tax deals like the telecom company’s $11 billion acquisition of a 67 percent stake in Hutchison Whampoa in 2007.

Devas Multimedia

The dispute began back in 2011 when the state-owned company Antrix Corp annulled an agreement with Devas Multimedia. After petitioning that the the annulment wore down the value of its multi-million dollar investments, Devas was awarded more than $111 million plus interest by an arbitration tribunal. It also won $562.5 million in damages plus interest from separate proceedings at the International Chamber of Commerce.

In 2005, Antrix, the commercial arm of ISRO, had signed an agreement with Devas Multimedia, to lease the S-band satellite spectrum. S-band is meant specifically for satellite-based communication and Devas was allowed use of 70 MHz of 150 MHz of space that ISRO owned in the S-band spectrum, to launch satellite-based applications on mobile devices.

The sudden withdrawal from the deal led to Devas approaching the International Chamber of Commerce (ICC) tribunal and the Permanent Court of Arbitration (PCA), demanding damages.

Now, Devas Multimedia Pvt has joined Cairn Energy in trying to seize Air India Ltd's assets abroad, after winning over $1.2 billion in international arbitration from India.

Devas termed Air India an 'alter ego' of the Indian state, adding that they should be liable for the sovereign's debts. Asking Air India to pay the amount or forfeit its US property including planes, cargo handling equipment and artwork, Devas filed a petition in New York.

(With inputs from ANI, Financial Times and Reuters)