What’s the Cairn tax dispute about? What did the Everlasting Court docket of Arbitration rule in December 2020?
The story up to now: In December 2020, a three-member tribunal on the Everlasting Court docket of Arbitration within the Netherlands dominated in opposition to India in its long-running tax dispute with the U.Ok.-based oil and fuel firm Cairn Power Plc and a subsidiary, Cairn UK Holdings Ltd. The tribunal ordered India to pay about $1.four billion to the corporate. Following this, Cairn Power has efficiently moved courts in 5 nations, together with the US and the UK, to recognise its declare as per the arbitration award, in accordance with PTI. The Netherlands, France, and Canada are the opposite three nations. Such a recognition by courts opens the door for Cairn Power to grab belongings of the Indian authorities in these jurisdictions by the use of imposing its declare, in case the latter doesn’t pay its dues.
What’s the dispute about?
The dispute began in early 2014 when Indian tax authorities began questioning Cairn Power requesting info on the group’s reorganisation within the monetary yr 2006-07. This escalated, and by 2015, the authorities had despatched the corporate a draft evaluation order, assessing within the course of that there was a principal tax quantity of $1.6 billion that was due.
Additionally learn | India submitting enchantment in opposition to Cairn arbitration award, say sources
The yr in reference, 2006-07, was one by which large company adjustments and developments came about in Cairn Power. It was the yr by which it not solely undertook a company reorganisation, but additionally floated an Indian subsidiary, Cairn India, which in early 2007 acquired listed on the Indian bourses. By the company reorganisation course of, Cairn Power had transferred all of its India belongings, which had been till then held by 9 subsidiaries in varied nations, to the newly-formed Cairn India.
However the tax authorities claimed that within the technique of this reorganisation, Cairn Power had made capital features price ₹24,500 crore. This, the division asserted, was the idea of the tax demand.
In 2011, the U.Ok.-based Vedanta Sources purchased an almost 60% stake in Cairn India. In reality, 4 years after this, Cairn India acquired a tax discover for not withholding tax for the features ascribed to its former guardian firm.
Additionally learn | Govt could give oilfield to Cairn in lieu of $1.four billion dues
Is that this case just like Vodafone’s battle with the federal government of India?
The Vodafone case in 2007 was triggered by Hong Kong’s Hutchinson Telecommunications’ sale of its stake in India’s Hutchinson Essar to Vodafone Worldwide Holdings, based mostly out of the Netherlands. The Hong Kong agency made a capital acquire on this, which the Indian tax authorities deemed match to tax. They held that Vodafone ought to have withheld the tax, and due to this fact imposed a legal responsibility on it. The Supreme Court docket quashed the taxman’s demand, concluding that it didn’t agree that the sale of shares on this case “would quantity to switch of a capital asset throughout the which means of Part 2(14) of the Indian Revenue Tax Act”.
Within the Union Price range of 2012, the Revenue Tax Act, 1961 was amended to make it possible for even when a switch of shares takes place exterior India, such a switch could be taxed if the worth of these shares relies on belongings in India. And this was utilized retrospectively. The motion in opposition to Cairn Power was based mostly on this transfer. India misplaced its arbitration case in opposition to Vodafone as properly, with the federal government being requested to fork out round ₹80 crore.
Additionally learn | Vodafone wins worldwide arbitration in opposition to India in ₹14,200-crore tax dispute case
What occurred after the tax claims within the Cairn Power dispute?
After receiving a draft evaluation order from the tax authorities, Cairn UK Holdings Ltd. appealed earlier than the Revenue Tax Appellate Tribunal. The tribunal, whereas offering the corporate reduction from back-dated curiosity calls for, nonetheless, upheld the primary tax demand.
The corporate had initiated proceedings of arbitration beneath the U.Ok.-India bilateral funding treaty. However throughout this time, in accordance with a PTI report, “the federal government bought Cairn’s virtually 5% holding in Vedanta Ltd” (the residual stake the agency owned after promoting Cairn India), “seized dividends totalling ₹1,140 crore on account of it from these shareholdings”, and “set off a ₹1,590-crore tax refund in opposition to the demand”.
What was the primary argument of Cairn Power in the course of the arbitration?
The claimants, Cairn Power and Cairn UK Holdings, argued that until the modification was made to tax retrospectively in 2012, there was no tax on oblique transfers (switch by a non-resident of shares in non-Indian corporations which not directly held belongings in India). In addition they mentioned the federal government had accredited the 2006 reorganisation. The appliance of the 2012 amendments, they alleged, constituted “manifest breaches” of the U.Ok.-India bilateral funding treaty.
What was India’s defence in the course of the arbitration?
India’s counter to the primary cost of Cairn Power was that its 2006 transactions had been taxable regardless of the 2012 amendments.
It argued that “Indian regulation has lengthy permitted taxation the place a transaction has a powerful financial nexus with India”. It mentioned even whether it is retrospective, it’s “legitimate and binding making use of the longstanding constitutional, legislative and authorized framework by which the claimants have invested”.
What did the arbitration tribunal rule?
The tribunal mentioned the tax demand violated the U.Ok.-India bilateral funding treaty. The tribunal mentioned India “did not accord Cairn Power’s investments truthful and equitable therapy” beneath the bilateral safety pact it had with the UK.
It additionally ordered India to compensate Cairn Power and its subsidiary for “the whole hurt suffered” on account of the breaches of the treaty.
It has been reported within the media that India will enchantment in opposition to the tribunal’s determination.