Double Whammy: After Vodafone, India loses Cairn case too

New Delhi’s 2012 law empowering itself to make tax demands concerning cross-border deals all the way back to 1962, citing ‘underlying Indian assets’ has been exposed as a misadventure for the second time in a little over three months. The Permanent Court of Arbitration at The Hague on Wednesday not only invalidated India’s $2.74-billion 2015 tax claim on Cairn Energy, but also ordered it to return up to $1.4 billion in funds withheld, interest and costs, to the firm.

The new ruling came amid a looming December-end deadline for India to appeal against a similar September 2020 verdict by the same tribunal in favour of telecom major Vodafone (Now Vodafone-Idea in India) and anxiety among investors over India’s imminent move.

Cairn Energy surged as much as 45% in early London trading, its biggest intraday gain in almost 17 years, according to Bloomberg.

“The tribunal ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty…,” the company said in a statement.
Cairn (now Vedanta in India) has been a major foreign investor in India since 1990s with cumulative investments to the tune of $6 billion; it is credited with more than 40 hydrocarbon discoveries, initially on the east coast (Ravva field) and then the west coast (Barmer), where it was more prolific.

In its 582-page order, three-member tribunal, including India’s nominee J Christopher Thomas QC, went on the same lines as its ruling in the Vodafone case, and said that the retrospective demand was “in breach of the guarantee of fair and equitable treatment”. Affirming its jurisdiction over the case, the tribunal said the Cairn case was not just a tax-related, but an investment-related dispute.

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.

“We will consider all options and take a decision on the further course of action, including legal remedies before appropriate fora,” the government said in a statement.

Although the government is armed with an opinion from the Solicitor General that an “arbitral tribunal can’t render a law passed by a sovereign Parliament ineffective,” analysts expect the two decisive rulings of The Hague tribunal, both delivered unanimously, to weigh on its mind. While senior government functionaries have asserted India’s sovereign taxation rights “can’t be subservient to bilateral investment treaties,” prime minister Narendra Modi had assured global investors that “concerns over retrospective taxation would be taken care of”. Also, finance minister Nirmala Sitharaman is on record saying, “we won’t use retrospective taxation for income generation”.

Quoting “people aware of the matter,” PTI reported that Cairn 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.

On September 25, the Vodafone had won international arbitration case against Delhi; the Hague Court held India was in breach of the India-Netherlands Bilateral Investment Treaty in making a tax demand of Rs 22,000 crore on the firm, by retrospectively amending the law. It also asked India to pay 4.3 million pounds ($5.47 million) to the company as compensation for its legal costs.

On November 18, the GoI told Delhi High Court it is yet to take a call on whether to challenge the Vodafone award. It was then presumed that the government was waiting for the Cairn verdict, which was due.

Appearing for Vodafone-Idea, senior counsel Harish Salve recently told the Delhi High Court that the telecom major will not proceed with the second arbitration – this one over New Delhi’s alleged violation of India-UK treaty–, until the international award already passed (in connection with the Netherlands treaty) is set aside, if at all.

A government official told FE on Wednesday on condition of anonymity that a final call was yet to be taken on whether to challenge the Vodafone award, but he added that “it makes sense to appeal”. Sources said an empowered committee of the Cabinet would soon meet to decide on the issue.

While Cairn said it had been awarded $1.2 billion damages plus interest and costs, PTI quoted sources as saying that, 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).

The Cairn tax dispute may be sequenced as follows: In 2006-07, as a part of internal rearrangement, Cairn UK transfers shares of Cairn India Holdings to Cairn India. The taxman then raises a demand of capital gains tax on Cairn UK amounting to $2.74 billion. The firm disputes the demand and the matter is heard by the I-T Appellate Tribunal and then the Delhi High Court. While Cairn lost the case at ITAT, a case on the valuation of capital gains is still pending before the High Court.

In 2011, Cairn Energy sold majority of its India business, Cairn India, to Vedanta. The Indian taxman, however, did not allow Cairn UK to sell 10% and attached Cairn India shares as well as dividends that the company paid to its parent.