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India loses Cairn case in arbitration, asked to pay $ 1.2 billion in damages to company
New Delhi, December 23, 2020
In the second such setback in recent months, the Government of India has lost arbitration to oil and gas exploration major Cairn in a case under the retrospective amendment to the tax laws and the tribunal has asked it to pay $ 1.2 billion in damages to the company.
In its verdict late on Tuesday, the tribunal ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty.
"Cairn announces that the tribunal established to rule on its claim against the Government of India has found in Cairn’s favour," a statement from the company said.
Cairn’s claim was brought under the terms of the UK-India Bilateral Investment Treaty, the legal seat of the tribunal was the Netherlands and the proceedings were under the registry of the Permanent Court of Arbitration.
"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 US $ 1.2 billion plus interest and costs, which now becomes payable," the statement added.
Reacting to the arbitration verdict, the Government said that it would study the award and decide its future course of action.
"It is stated that the award in the arbitration case under India-UK Agreement for Promotion and Protection of Investments invoked by Cairn Energy Plc and Cairn UK Holdings Limited against Government of India has been passed," a statement from the Ministry of Finance said.
"The Government will be studying the award and all its aspects carefully in consultation with its counsels. After such consultations, the Government will consider all options and take a decision on further course of action, including legal remedies before appropriate fora," the statement added.
The verdict by the Permanent Court of Arbitration (PCA) at The Hague has come three months after the Government had lost a similar case over a retrospective demand of more than Rs 20,000 crore against Vodafone.
In the case of Cairn, the Income Tax Department had sent to it a draft order on March 10, 2015 in respect of fiscal year 2006007 to the amount of $ 1.6 billion plus any applicable interest and penalties.
The Department had indicted that the assessment stemmed from amendments introduced in the 2012 Finance Act which sought to tax prior year transactions under retrospective legislation.
"The transactions subject to the assessment are those undertaken to effect the group reorganisation that was required to enable the Initial Public Offering of Cairn India Limited (CIL) in 2007," the company had said at that time.
Cairn had maintained that, throughout its history of operating in India, the company had been fully compliant with the tax legislation in force in each year and paid all applicable taxes.
The international arbitration tribunal ruled that India's tax claim of Rs 10,247 crore in past taxes over internal reorganisation of Cairn's India business was not a valid demand.
Cairn Energy had in 2010-11 sold Cairn India to Vedanta. Post the merger of Cairn India and Vedanta in April 2017, the UK firm's shareholding in Cairn India was replaced by a shareholding of about 5 per cent in Vedanta issued together with preference shares.
Along with attaching its shares in Vedanta, the tax department seized dividends of around Rs 1,140 crore due to it from the shareholdings and set off a Rs 1,590-crore tax refund against the demand.
In 2015, Cairn initiated an international arbitration to challenge retrospective taxation.