Cairn Energy Dispute


    In News

    In a recent setback to India, Britain’s Cairn Energy Plc has secured a French court order to seize around 20 government properties in Paris to recover a part of the USD 1.72 billion due from India following an arbitration panel overturning levy of retrospective taxes.

    About the Issue

    • The French court, Tribunal Judiciaire de Paris, agreed to Cairn’s application to freeze (through judicial mortgages) residential real estate owned by the Government of India in central Paris.
    • Meanwhile, the Ministry of Finance holds that it has not received any order from the French court and will take appropriate legal remedies after it gets an order.
    • In December, the three-member tribunal in the Permanent Court of Arbitration (PCA) at The Hague ruled unanimously against the retrospective tax levied by India on Cairn in 2015.
      • It ruled that the tax fell afoul of the bilateral investment pact between India and the United Kingdom (UK).

    Background of Dispute

    • The dispute stems from the much debated retrospective taxation issue
    • In 2006-2007, Cairn UK had, as part of an internal rearrangement process, transferred shares of Cairn India Holdings to Cairn India. 
    • Income-Tax authorities then decided that since Cairn UK had made capital gains, it ought to pay capital gains tax up to Rs. 24,500 crore.
    • The company interpreted Indian laws on capital gains differently and refused to pay. 
    • Several rounds of litigation at the Income-Tax Appellate Tribunal (ITAT) and the High Court (HC) followed.
    • Cairn lost the case at ITAT and a case on the valuation of capital gains is pending before Delhi High Court.
    • While Cairn Energy sold the majority of its India business, Cairn India, to mining giant Vedanta in 2011, 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.

    (Image Courtesy: HBL)

    Permanent Court of Arbitration Ruling

    • In its judgment, the PCA held that 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 (IAC).
    • A three-member arbitration panel, in its judgement held that, tax demand against the claimants (Cairn) in respect of Assessment Year 2007-08 is inconsistent with the treaty and the claimants are relieved from any obligation to pay it.
    • It ordered the respondent (Indian government) to neutralise the continuing effect of the demand by permanently withdrawing the demand.
    • The arbitration tribunal also held 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”.

    Way Ahead

    • India must move forward with adequate preparation and caution in such cases related to retrospective taxation.
    • The government should come out with an action plan to deal with such cases to avoid loss of revenue and credibility.

    Capital Gains Tax

    • It is a tax on the profit realized on the sale of a non-inventory asset. 
    • The most common capital gains are realized from the sale of stocks, bonds, precious metals, real estate, and property.

    Retrospective Taxation

    • It allows a country to pass a 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.
    • Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes. 
    • While governments often use a retrospective amendment to taxation laws to “clarify” existing laws, it ends up hurting companies that had knowingly or unknowingly interpreted the tax rules differently.
    • 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 loopholes in the previous law.

    Permanent Court of Arbitration

    • Established in 1899, it is an intergovernmental organization providing a variety of dispute resolution services to the international community.
    • It has a three-part organizational structure consisting of:
      • Administrative Council that oversees its policies and budgets.
      • Panel of independent potential arbitrators known as the Members of the Court.
      • Secretariat, known as the International Bureau, headed by the Secretary-General.
    • Headquarters: Peace Palace in The Hague
      • It has also opened offices in various cities in order to make its services more accessible in different regions of the world.
    • It has a Financial Assistance Fund which aims at helping developing countries meet part of the costs involved in international arbitration or other means of dispute settlement offered by the PCA.

    International Court of  Arbitration

    • Founded in 1923, it is an institution for the resolution of international commercial disputes. 
    • It does not make formal judgments on disputed matters, instead, exercise judicial supervision of arbitration proceedings.
    • It operates under the auspices of the International Chamber of Commerce (ICC) and consists of more than 100 arbitrators from roughly 90 countries.
    • Headquarters: Paris. France.

    Source: TH