In 2006, the ownership of Indian assets was passed down from Cairn UK Holdings to Cairn India Ltd. (CIL), a new company formed exclusively for Indian operations. Before this, CI Holdings, a subsidiary of Cairn UK Holdings headquartered in Jersey, UK, was responsible for all Indian operations. When CIL was introduced in 2006, the entire share capital of Cairn India Holdings (CIH) under Cairn UK Holdings was acquired by the new company. During the deal, 69 percent of CI shares were acquired by Cairn UK Holdings.
Cairn India Profits
According to Indian tax authorities, CI made a profit of 24,500 crore rupees during this exchange deal. In 2011, Cairn Energy sold CI to the Vedanta group, owned by mining billionaire Anil Agarwal. The Income Tax Department of India did not permit the company to sell all its stakes and was forced to keep a residual minor stake of 9.8 percent. Later the Indian government even froze the payment of the dividends by CI to Cairn Energy.
In 2012, India made amendments to its Income Tax Act(1961), which stated that a transfer of shares that involves places outside India would also be taxed if the shares’ value is based on India’s assets. Based on this amendment, the Income Tax Department launched a retrospective tax probe into the transactions involving the exchange of shares between the companies undertaken by the IPO. This kind of retrospection taxation permits countries to enact a law that will enable them to tax any products, goods, and services and charge the involved entities from a date before the date on which the law had become effective.
When Cairn UK Holdings received a draft assessment order from the Income Tax Department, the company appealed to both the Income Tax Appellate Tribunal(ITAT) and the Delhi High Court. Even though the tribunal relieved back-dated interest demands, it ruled against the company and upheld the tax demand. The company proceeded to initiate its arbitration proceedings concerning the UK-India Bilateral Investment Treaty under the Permanent Court of Arbitration registry.
According to the claimants, i.e., Cairn Energy and Cairn UK Holdings, no tax was levied on share transfers by a non-resident of shares in non-Indian companies until the amendment to the Income Tax Act indirectly held its assets in India. They also put forward that the Indian government had approved of the 2006 reorganization of shares. Their overall claim was that the taxation of 10,247 crore rupees imposed on them by the government breaches the earlier UK-India Bilateral Investment Treaty.
This development is a second blow to the Indian government after the Vodafone Group Plc. won a similar international arbitration case over a demand of 22,100 rupees in taxes using retrospective legislation. This was regarding the telecom giant’s USD 11 billion acquisition of a 67 percent stake in the mobile phone enterprise owned by Hutchison Whampoa in the year 2007. The tribunal concluded that the demand for past taxes is a breach of the Dutch bilateral investment protection pact.
During the arbitration, the Indian government sold off Cairn’s almost 5 percent holding and seized dividends amounting to 1,140 crore rupees and set off a tax refund of 1,590 crore rupees against the demand. In a strikingly similar manner, even in the Cairn dispute, the tribunal decided that the government is to return the shares and dividends seized during the exchange and even compensate Cairn Energy for the total losses suffered along with interest.
“Tax demand against the claimants (Cairn Energy Plc and Cairn UK Holdings Limited) regarding AY (assessment year) 2007-08 is inconsistent with the treaty. The claimants are relieved from any obligation to pay it and order the respondent (Indian government) to neutralize the continuing effect of the demand by permanently withdrawing the demand,” the three-member arbitration panel said in its judgment. The company was awarded a compensation of USD 1.2 billion that India was liable to pay.
To enforce this award, the company has secured a court order from the French court to authorize the suing of Air India’s United States operations in New York, which is wholly owned and controlled by the Indian government. This is just one of the Indian assets that Cairn Energy has sued along with many others to solidify their claim on the compensation in case the government failed to do so.
Edited by Tanish Sachdev