Home Legal News PCA Tribunal Directs Indian Government to Pay Cairn $1.23 Billion in 2006 Tax Dispute

PCA Tribunal Directs Indian Government to Pay Cairn $1.23 Billion in 2006 Tax Dispute

by Shreya
indian government to pay carin
A Permanent Court of Arbitration (PCA) Tribunal has directed the Indian government to pay Cairn Energy PLC over $1.23 billion as compensation for breaching terms of the India-UK Bilateral Investment Treaty (BIT).India has also been directed to pay Cairn over $22 million in legal costs and arbitration costs.

“[India] has failed to uphold its obligations under the UK- India BIT and international law, and in particular, that it has failed to accord the Claimants’ investments fair and equitable treatment in violation of Article 3(2) of the Treaty…”

The dispute stems from the Indian government’s claim for past taxes over the 2006-07 internal rearrangement of Cairn’s India business. .In 2006-07, as a part of its corporate restructuring, Cairn UK transferred shares of Cairn India Holdings to Cairn India.

Claiming that Cairn UK had made capital gains from this process, the Income Tax authorities then made a tax demand of Rs 24,500 crore from the company, which refused to pay the same. This prompted the filing of cases at the Income Tax Appellate Tribunal (ITAT) and the Delhi High Court. Cairn lost the case before the ITAT, while the Delhi High Court matter remains pending.

In August 2010, two subsidiaries of Cairn entered into a share purchase agreement with a subsidiary of Vedanta for the sale of 51 per cent of Cairn India Limited (CIL’s) share capital. Since the sale was potentially for a controlling interest in CIL, it required approval from the Indian government, which was granted in July 2011.

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Then, in 2012, the Indian government made amendments to the Finance Act, which had the effect of including in its scope indirect transfers of capital assets by non-residents. The 2012 amendment was passed with retroactive effect as of April 1, 1962

The PCA has held that the issue was a tax and investment related issue under its jurisdiction. The award reads,

“More precisely, this dispute concerns alleged violations of an investment treaty resulting from certain sovereign measures taken by the Respondent in the field of taxation, also referred to as fiscal measures. This type of dispute must be distinguished from tax disputes proper, which are disputes concerning the taxability (including the tax-amount) of a specific transaction. The distinction is significant.”

“…the highest court in the land ruled that the correct interpretation of Section 9(1)(i) was that, from 1 April 1962, it did not cover indirect transfers. When Parliament passed the 2012 Amendment in June 2012, it literally rewrote Section 9(1)(i) so that it would contain words giving it the meaning that Parliament wished it to have. In so doing, it changed the provision’s objective meaning and expanded its application, and expressly stated that it was doing so as of 1 April 1962. The retroactive effect of the law thus clearly extended some 50 years into the past.”

While determining whether the 2012 amendment was in breach of the BIT between India and the UK, the Tribunal held that India did not have a specific public purpose that would justify applying the 2012 Amendment to past transactions.

The PCA held that is the retroactive taxation of Cairn as being “grossly unfair”,

“By retroactively applying, without a specific justification, a new tax burden on a transaction that was not taxable at the time it was carried out, the Respondent deprived the Claimants of their ability to plan their activities in consideration of the legal consequences of their conduct, in violation of the principle of legal certainty, which the Tribunal considers to be one of the core elements of the FET standard, and of the rule of law more generally…”

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