Explained: All about taxation case between Cairn Energy and the Indian Government

On 8 July, Cairn Energy secured a French court order allowing it to seize about 20 Indian government properties in Central Paris, which are valued at more than 20 million euros.

BACKGROUND OF THE CASE:

The Cairn – IT (Income Tax) department dispute arouse due to retrospective taxation issue.

What is Retrospective Taxation?

It means to pay tax for goods and services which are purchased in the past or the income earned in the past.
For example, suppose a person begins a business in the year 2021 by investing some money and the person is earning through the business but after 10 years in 2031, the government says to pay tax for the past 10 years. This is known as retrospective tax.
So, this tax plays with the sentiments of investors. Hence, it can be said that retrospective taxation isn’t good for investors. But still, most of the developed countries like the USA and developing countries like India use this taxation.

So, fifteen years ago, in 2006-2007, an Initial Public Offering (IPO) was started Cairn India Limited (CIL) means it became a public company but before becoming a public company in India its parent company Cairn which is UK based made a very smart move, what they thought is before bringing IPO in India, whatever subsidiaries they had in India, they sold all its shares to Cairn India Holding Limited (CIHL) and this company was incorporated in Jersey, USA.
After this all, these shares were again sold to CIL of which IPO was brought in 2006-2007.

The Income Tax Department found something fishy and in 2015, IT did an audit to CIL and found that whatever the deal was done by Cairn UK through CIHL and CIL was for capital gain, so IT ought to pay capital gain tax up to 24,500 crores to the Indian authorities.

What Government and CIL said about the audit?
The government said that there was the involvement of different entities in Jersey – a reorganization of Cairn’s India business before Cairn India Ltd.’s IPO which led to capital gains to Cairn UK Holdings which is taxable in India.

While Cairn India said that this retrospective tax goes against the investor’s agreement and refused to pay it.

Now the Cairn India filed a case with ITAT (Income-tax Appellate Tribunal) and also in Delhi HC.

They lost the case in ITAT while the case is still pending in Delhi HC.

In 2017, Cairn brought up the case to the Permanent Court of Arbitration (PCA), Hague, Netherlands.

In December 2020, the PCA said this is not just a tax-related issue but an “investment-related dispute” too. The PCA gave the verdict in support of Cairn Energy, they said that Cairn Energy does need not pay the taxes and the Indian Government has to give an arbitration award of $1.2 billion to Cairn Energy.

Recently, there was a meeting between government officials and Cairn executives to find an amicable and positive solution to the retrospective taxation issue.

Cairn Energy wanted quick resolution while the government wasn’t sure enough to go for an out-of-court settlement or to challenge the PCA’s verdict to higher courts.

The Government of India has also hinted in the meeting that the only possible solution to further litigation was for Cairn Energy to agree to the government’s Vivad se Vishwas tax amnesty and dispute resolution mechanism which will be according to Indian Laws in front of Indian Officials.

Vivad se Vishwas tax amnesty is a one-time amnesty scheme. This scheme has a clause where the company has to pay only 50% of the tax to resolve the issue or appeal and counter appeal will go on.

So, the government suggested Cairn Energy pay around 12500 crores which was around 50% of the earlier tax.

But these all were speculative discussions.

Since Jan 2021, Cairn began to identify Indian assets abroad against which it can enforce the arbitration award.

These assets include aircraft, ships, and bank accounts too. The organization also moved to courts in the UK, Canada, Singapore, France, the Netherlands, and three other countries to register its claim against India, some of which have recognized the arbitration award.

Meanwhile, Cairn Energy, in May 2021, moved a US court to sue Air India, seeking to form the flagship carrier responsible for the quantity it won within the judgment, arguing that Air India is a state-owned company and is, therefore ‘legally indistinct from the state itself’. 

Written by: 

Vinay Kumar Singh