Cairn gains in India's Rs 10k-cr retro tax case

New Delhi: India has been ordered to return up to $1.4 billion to Cairn Energy plc of the UK after the central government lost an international arbitration over the retrospective levy of taxes.

A three-member international arbitration tribunal, which also comprised a nominee of the Indian government, unanimously ruled that India's claim of Rs 10,247 crore in past taxes over a 2006-07 internal reorganisation of Cairn's India business was not a valid demand. India, it said, "failed to accord the Claimants' (Cairn Energy's) investments fair and equitable treatment" under the bilateral investment protection pact the nation had with the UK, it said in a 582-page order.

The tribunal ordered the government to return the value of shares it had sold, dividends seized and tax refunds withheld to recover the tax demand. The government was asked to compensate Cairn "for the total harm suffered" together with interest and cost of arbitration, according to the order. While the order does not contain a provision for challenge or appeal against the award, the government said it will study the arbitration award and "will consider all options and take a decision on the further course of action, including legal remedies before appropriate fora."

Cairn, according to people aware of the matter, can use the arbitration award to approach courts in countries such as the UK to seize any property owned by India overseas to recover the money if the award is not honoured. In a statement, Cairn Energy said it had been awarded $1.2 billion damages plus interest and costs. Sources said including $200 million of interest and $20 million of arbitration cost, the total amount payable by the Indian government is $1.4 billion (about Rs 10,500 crore).

This is the second loss the government has suffered in three months over the retrospective levy of taxes. In September, UK's Vodafone Group won an international arbitration against the demand of Rs 22,100 crore in taxes. However, Cairn was the only company against which the government took action to recover retrospective taxes.

During the pendency of the arbitration, the government sold Cairn's near 5 per cent holding in Vedanta Ltd, seized dividends totalling Rs 1,140 crore due to it from those shareholdings and set off Rs 1,590-crore tax refund against the demand.

Besides Cairn Energy, the government also slapped a similar tax demand on its erstwhile subsidiary Cairn India (which is now part of Vedanta Ltd). Cairn India too has challenged the demand through a separate arbitration. " Cairn had challenged the Indian government seeking taxes over an internal business reorganisation using the 2012 retrospective tax law, under the UK-India Bilateral Investment Treaty. "The tribunal ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty and has awarded to Cairn damages of $1.2 billion-plus interest and costs, which now becomes payable," it said.

Cairn Energy, which gave the country its biggest oil discovery, was in March 2015 slapped with a tax demand of Rs 10,247 crore over alleged capital gains it made by reorganising its India unit into a separate subsidiary for listing on local stock exchanges.

Commenting on the issue, Ministry of Finance in a statement said the Government will be studying the award and all its aspects carefully in consultation with its counsels.