Cairn Energy-Govt dispute

Cairn Energy-Govt dispute

Subject: Economy

Context: The Cairn officials met govt officials to discuss the way forward with respect to the $1.2 billion (roughly Rs 8,000 crore) arbitration award by the Permanent Court of Arbitration (PCA) at The Hague in December 2020.

Concept:

• The court had ruled that the Indian 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.
• It was an amicable and “positive” solution to the retrospective taxation issue.

About dispute

• The dispute relates to retrospective taxation (rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed).
• In 2006-2007, Cairn UK had, as part of an internal rearrangement process, transferred shares of Cairn India Holdings to Cairn India.
• Indian income tax authorities concluded that since Cairn UK had made capital gains, it ought to pay capital gains tax up to Rs 24,500 crore. But the company interpreted the law differently ad refused to pay.
• It followed litigation at the Income-Tax Appellate Tribunal (ITAT) and the High Court. Cairn lost the case at ITAT and a case on the valuation of capital gains is pending before Delhi High Court.
• While Cairns sold most of its assets, 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.
• The matter went to the Permanent Court of Arbitration which ruled in favour of the company and it said that the 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 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.