About: Cairn dispute, Retrospective taxation , The Permanent Court of Arbitration

Cairn wins arbitration ruling against India in tax dispute

In News

  • The Permanent Court of Arbitration (PCA) at The Hague has ruled that the Indian government was wrong in applying retrospective tax on Cairn Energy Plc.
  • This is the second ruling against the Indian government at international tribunals over the retrospective tax issue in three months.
  • In September, 2020, a separate international arbitration tribunal had ruled against India’s decision to levy (impose) retrospective taxes on Vodafone Group.

About: Retrospective taxation

  • Retrospective taxation allows a country to pass a rule on taxing certain products, items or services, and deals, and charge companies for dealings before the date on which the law is passed.
  • Countries use this provision to correct any shortcomings in their taxation policies that may have allowed companies to take advantage of such shortcomings.
  • Apart from India, many countries including the US, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies, which had taken the benefit of shortcomings in the previous law.

About: Arbitration

  • Arbitration is a form of alternative dispute resolution (ADR), in which a dispute is submitted, to one or more arbitrators who make a decision on the dispute.
  • In choosing arbitration, the parties opt for a private dispute resolution procedure instead of going to court. Arbitration is used instead of going to a court because it is often quicker and not as expensive.
  • It is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions.

News Summary:

Details of the Cairn dispute:

  • In 2006-07, as a part of internal rearrangement, Cairn UK transferred shares of Cairn India Holdings to Cairn India.
  • The Income Tax authorities claimed that Cairn UK had made capital gains through the transfer of shares and demanded tax of Rs 24,500 crore for the same.
    • capital gains tax (CGT) is a tax on the profit from the sale of an asset. The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.

  • Due to different interpretations of capital gains, the company refused to pay the tax, and cases were 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.
  • Later, in 2011, Cairn Energy sold majority of its India business, Cairn India, to mining company 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.

Ruling by the The Permanent Court of Arbitration (PCA):

  • In its judgment, the PCA said the Cairn tax issue was not just a tax related issue but an investment related dispute, and therefore comes under the jurisdiction of the international arbitration court.
  • The three-member tribunal, ruled that India’s claim of past taxes over the 2006-07 internal reorganisation of Cairn’s India business was not a valid demand.
  • It ruled that the Indian government’s retrospective demand violated the guarantee of fair and equitable treatment under the UK-India Bilateral Investment Treaty.
  • The judgment has asked the Indian government to pay $1.2 billion (roughly Rs 8,800 crore) to Cairn Energy Plc, plus interest and cost of arbitration.
  • It also said that India must not make any more attempts to recover the alleged tax liability or any interest and or penalties.

Future Outlook

  • While the order does not contain a provision for challenge or appeal, the government said it would study the arbitration award and take a decision on the further course of action, including legal remedies.
  • India has recently challenged the Vodafone verdict in Singapore. The government believes taxation is not covered under investment protection treaties and the law on taxation is a sovereign right of the country.
  • According to experts, if India does not pay Cairn the above mentioned amount, Cairn can use the arbitration award to approach courts to seize any overseas property owned by India to recover the money.

About: The Permanent Court of Arbitration

  • The Permanent Court of Arbitration (PCA) is an intergovernmental organization located in The Hague, Netherlands.
  • It was established by the Convention for the Pacific Settlement of International Disputes, concluded at The Hague in 1899 during the first Hague Peace Conference.
  • It is not a court in the traditional sense, but provides services of arbitral tribunal to resolve disputes that arise out of international agreements between member states, international organizations or private parties.
  • The cases cover a range of legal issues involving territorial and maritime boundaries, sovereignty, human rights, international investment, and international and regional trade.