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Cairn Energy and Air India dispute

Published: 24th May, 2021

  • Cairn Energy is suing Air India, the wholly owned and extensively controlled by the Indian government, in New York to seize its assets to enforce the $1.2 billion arbitration award it won against the Indian government in a retrospective tax dispute.

Context

  • Cairn Energy is suing Air India, the wholly owned and extensively controlled by the Indian government, in New York to seize its assets to enforce the $1.2 billion arbitration award it won against the Indian government in a retrospective tax dispute.

About

About the Cairn Energy-Air India dispute

  • A three-member international arbitral tribunal had ruled that the Indian government was “in breach of the guarantee of fair and equitable treatment” which was against the India-UK bilateral treaty and that the breach caused a loss to the British energy company.
  • It awarded Cairn $1.2 billion in compensation that India was liable to pay.
  • To enforce this award, Cairn moved a court in the South District of New York against Air India.
    • Because it has located substantial assets that it can recover the compensation from in that jurisdiction.
  • Since the arbitration award was delivered in Hague, India has moved an appeal in Netherlands.

What is the retrospective tax demand of Cairn?

  • The arbitration was initiated by Cairn, similar to the Vodafone for a breach relating to India’s 2012 retrospective amendments to tax laws.

Retrospective tax 

  • It means creating an additional charge or levy of tax by way of an amendment from specified date in the past.
  • In 2006, Cairn Energy made a bid to consolidate its Indian assets under a holding company named Cairn India Limited.
  • As part of that internal rearrangement, Cairn UK transferred shares of Cairn India Holdings to Cairn India, essentially transferring shares in non-Indian companies to an Indian holding company. It was being taxed retrospectively.
    • This retrospective taxation, Cairn argued, was in breach of the UK-India Bilateral Investment Treaty which had a standard clause that obligated India to treat investment from UK in a “fair and equitable manner”.
  • Subsequently, Cairn India then divested roughly 30 per cent of its shares through an Initial Public Offering.
    • Between 2009 and 2011, mining conglomerate Vedanta Plc acquired most of Cairn Energy but Cairn UK was not allowed to transfer its 9.8 per cent stake in Cairn India to Vedanta.
    • Tax authorities in India said in the 2006 transactions, the share transfers attracted capital gains tax of over Rs 6,000 crore by Cairn UK.

The retrospective tax situation in India

  • Supreme Court Ruling in 2012: In India's tax dispute with Vodafone Plc revolves around its purchase of Hutch Essar in 2007 for $11 billion. The Supreme Court ruled in January that year that Vodafone’s transaction was not taxable here.
  • Amendment in Income Tax Act: In 2012, following the Supreme Court ruled that a similar series of transactions which involves Vodafone did not attract capital gains as the transaction did not amount to transfer of a capital asset within the meaning of Section 2(14) of the Income Tax Act.
  • Then the government amended the law retrospectively.
  • In the Budget 2012-13, it was proposed to amend the Income Tax Act, 1961 with retrospective effect. The proposal was to allow the country to retrospectively tax cross-border transactions in which the underlying assets are located in India.
  • Following are the sections which were amended:
    • Section 2(14) - This provision defines a “capital asset
    • Section 2(47) - This provision defines a “transfer”
    • Section 9 - This provision defines when income is deemed to accrue or arise in India.
  • The 2012 amendment clarified that “an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

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