India pleads for stay in Cairn arbitration
An international arbitration panel at The Permanent Court of Arbitration at The Hague in the Netherlands, has rejected India’s income tax department’s plea to stay the proceedings invoked by British oil explorer Cairn Energy Plc against a Rs10,247 crore retrospective tax notice.
Livemint reports that the Indian Government sought the stay on the basis that it has been spending significant resources on the same matter in two arbitration proceedings at different fora, and that the other proceeding which had been initiated by Vedanta was at an advanced stage.
The Statement of Claim filed by Cairn in 2016 stated that the seizure of $1-billion worth of Cairn India shares under the retrospective amendment was in breach of the UK-India Investment Treaty obligations.
The controversy regarding the retrospective Amendment made to the Income Tax Act through Finance Act 2012 relating to the Cairn Case, are, inter alia:
Widely worded amendments to Section 9 that capital gains generated from share transaction between two non-resident entities resulting in indirect transfer of assets lying in India, would be taxable with effect from 1962 (the year of enactment of the Indian Income Tax Act). The effect of the amendment was that many transactions, which would otherwise not be considered as taxable, capital gains were exposed to this retrospective change. This, now acts as a powerful deterrent for International Companies decisions on potential investment in India due to the unpredictability of Government actions in the future
A brief summary of the Cairn and Vedanta cases against the Indian Government in relation to the retrospective tax amendment:
In 2006, UK-based Cairn UK Holdings (Cairn Energy) sold its shares in Cairn India Holdings (a Jersey based company), which owned 9 subsidiaries in India, to a new company Cairn India (formerly subsidiary of Cairn UK Holdings). Cairn UK sold the majority stake in Cairn India to London-listed Vedanta Resources in 2011 and retained 9.8 per cent shareholding in the company.
In January 2014, the Income Tax (I-T) department carried out a survey at Cairn India and issued a 10,247-crores tax notice to Cairn UK Holdings (former parent company) under the retrospective amendment of 2012 on the grounds that capital gains tax was to be paid for the 2006 transaction involving indirect transfer of assets situated in India.
Further, in April 2014, the I-T department made a tax demand of Rs. 20, 495 crores from Cairn India.
In April 2015, Cairn India filed proceedings in the Delhi High Court against the tax demand I-T Department, and Vedanta Resources sought resolution of the dispute under the UK-India bilateral investment protection treaty through Arbitration and the seat of the arbitration panel was set in Singapore.
Subsequently, Cairn UK Holdings challenged the Final Assessment Order of the I-T Department, at the Delhi-bench of Income Tax Appellate Authority (ITAT), contesting this demand on the grounds that the retrospective amendment was bad in law and the 2006 sale of shares was an internal re-organisation of its India operations and did not get any capital gains out of the transaction.
Simultaneously in 2015, Cairn UK Holdings filed a Notice of Dispute under the UK-India Investment Treaty and the arbitration commenced in January 2016. Cairn UK has sought $1.05 billion in compensation for the loss of value its 9.8 per cent shareholding in its former subsidiary Cairn India following Income Tax Department raising the tax demand in January 2014 and that the expropriation of company’s property without proper compensation, denial of equitable treatment in respect of its investments and its right of free transfer of funds.
In 2016, the Finance Ministry had offered a direct tax dispute resolution scheme offering to waive interest and penalty if the principal tax amounts involved in disputes were paid, Cairn India declined.
In March 2017, ITAT confirmed the tax demand including the payment of interest amount, against Cairn India (validating the amendment) and at the same time, both the former and current parent companies are fighting the dispute at different arbitration panels seeking protection of their respective positions.
Both companies allege that the retrospective tax legislation passed was a violation of protections accorded under the Bilateral Investment Treaty, and constituted a serious impingement of the protections therein. It is claimed that the ramifications of these decisions will have a great impact on not only Indian Arbitration but also in India’s trade relations with the UK as well as other countries
Read more on the 2012 amendment at http://www.indianeconomy.net/splclassroom/149/what-is-the-controversy-related-to-retrospective-taxation-in-india/
Find the Finance Bill 2012 here and the relevant amendment at Page 9 http://220.127.116.11/BillsTexts/LSBillTexts/asintroduced/Finance%20Bill,%20Eng..pdf