The Author, Divyansh Hanu Rathi is Managing Partner of Lexidem & Rathi, Global Law Firm and Founder, LatestLaws.com.
Introduction
Cairn is one of Europe’s leading independent oil and gas exploration and development companies.
Cairn Energy began investing in India in the 1990s when it became one of the first international companies to participate in the country’s oil and gas industry. Cairn’s investment in India saw the company transform the Ravva oil and gas field along India’s eastern coast, which was producing just c.3,000 barrels of oil per day (bopd) before Cairn took over operatorship in the mid-1990s. Within 18 months, Cairn increased production to 50,000 bopd. More than two decades later, Ravva is still in production having produced more than 365 million barrels of oil equivalent, significantly higher than the original estimates, with production expected to extend into a fourth decade.
Cairn subsequently transformed India’s oil and gas industry with the discovery of the Mangala oil field in Rajasthan in January 2004. It was one of the biggest ever hydrocarbon discoveries in India and was quickly followed by the additional Bhagyam and Aishwarya oil discoveries nearby. Today, Mangala, Bhagyam and Aishwarya fields together have gross reserves of 2.2 billion barrels of oil equivalent.
Cairn Energy and its Investment in India
In early 2006, Cairn Energy sought to separate its India business and list it as a separate entity to raise capital to fund the development of the fields, and to create a distinct new domestic Indian oil and gas business, as well as to return some value to its shareholders. To prepare for the initial public offering (IPO), Cairn reorganised the Group to create the subsidiary Cairn India Limited (CIL) domiciled in India for tax jurisdiction. This structural change took place three years before the production commenced, providing full transparency to the Indian authorities, substantially ahead of taxable revenues accruing to CIL.
Cairn India was listed on the Bombay Stock Exchange in early January 2007 which allowed investors based in India to participate in the successful listing.
Over the following decade Cairn Energy sold down its stake in Cairn India, primarily to PETRONAS in 2009 and to Vedanta in 2011.
As these transfers involved shares in the Indian company (CIL), they fell within the purview of the Indian tax authorities. Accordingly, Cairn applied for the necessary tax clearances and paid more than INR 3700 Crore (US$500 million) in Indian Capital Gains Tax in 2009 and 2011. As part of those processes, the Indian tax authorities scrutinised the same 2006 transactions on multiple occasions.
India and UK Bilateral Investment Treaty
In order to understand the developments which have taken place in this case, it’s important to first understand what a Bilateral Investment Treaties are.
Bilateral investment treaties (or, BITs) are international agreements establishing the terms and conditions for private investment by nationals and companies of one state in another state.
Bilateral Investment Treaties (BITs), set forth actionable standards of conduct that applied to governments in their treatment of investors from other states, including:
- fair and equitable treatment (often meaning national treatment or most favoured nation treatment);
- protection from expropriation;
- free transfer of means and full protection and security.
The distinctive feature of many BITs is that they allow for an alternative dispute resolution mechanism, whereby an investor whose rights under the BIT have been violated could have recourse to International arbitration, often under the auspices of the ICSID (International Centre for the Settlement of Investment Disputes), rather than suing the host State in its own courts.
India and United Kingdom have signed a similar Bilateral Investment Treaty which protect the right is UK investors in India. BIT provides that the Government of India (GOI) is obliged, amongst other things, to accord fair and equitable treatment to investors and to provide full protection and security to investments.
What led to imposition of ‘Retrospective Taxation’ on Cairn?
The Ministry of Finance had pursued a case against Vodafone, seeking to tax indirect transfers of shares in a non-Indian company. But in January, 2012 the Supreme Court of India unanimously found in favour of Vodafone, confirming that such transfers were not within the Indian tax remit.
On 16th March 2012, less than two months after the Supreme Court had unanimously rejected the Income Tax Department’s attempts to expand the tax net in the Vodafone case, the Ministry of Finance introduced in the Finance Bill, 2012 an amendment to Section 9(1)(i) of the Income Tax Act, 1961 – the Retrospective Amendment. Among other things, it explained that shares in a non-Indian company shall always be deemed to have been situated in India if its value derived substantially from underlying Indian assets. Describing it as “clarificatory” in order to effectively overturn the Supreme Court’s decision in the Vodafone case, the Finance Act, 2012 declared that the retrospective amendment shall be deemed to have taken effect from 50 years earlier, on 1st April 1962.
In January 2014, eight years after the pre-IPO group reorganisation, Cairn Energy was preparing to sell its final stake in CIL. It was then that the Indian Income Tax Department decided to launch a retrospective tax investigation into the company.
As a result, Cairn received notification from the India Income Tax Department (IITD) that it was restricted from selling its remaining ~10% shareholding in Cairn India Limited (CIL, since merged with Vedanta Limited). The IITD has subsequently sold the majority of this shareholding and received the proceeds and dividend payments.
Action taken under the India-UK Bilateral Investment Treaty:
Cairn India Limited (“Cairn India”), a subsidiary of Vedanta Resources Plc (“Vedanta”), received an assessment order from Indian Income Tax Department regarding a decision by the Government of India ("GOI") in 2012 to amend the Indian Income Tax Act, 1961 to impose retrospective tax on various prior transactions.
In this respect, Vedanta filed a Notice of Claim against the GOI (“Notice”) under the UK-India BIT in order to protect its legal position and shareholder interests.
Notice related to retrospective tax legislation passed by the GOI and a related tax demand made against Cairn India, an Indian company in which Vedanta had an approximate 59.9% interest.
Tax demand was for an alleged failure to deduct withholding tax on alleged capital gains arising during 2006-07 in the hands of Cairn UK Holdings Limited, Cairn India's erstwhile parent company, a subsidiary of Cairn Energy Plc. The sums demanded from Cairn India total INR 204,947,284,528 (equivalent to approximately USD3.293 billion) comprising INR102,473,642,264 of "tax", and the same amount again as "interest".
A parallel tax demand was also made by the Indian Income Tax Department on Cairn UK Holdings Limited.
Notice is the first step required prior to the commencement of international arbitration pursuant to the BIT.
Arbitration Proceedings:
Cairn commenced international arbitration proceedings against the Government of India under the UK India Bilateral Investment Treaty in March 2015. Arbitration proceedings were to decide whether India breached its obligations under the Treaty to protect Cairn’s investments in India by retroactively applying a newly enacted capital gains tax law to an internal corporate reorganisation undertaken in 2006.
Arbitral Tribunal comprised of Dr Laurént Levy (Chairman), Dr Staminir Alexandrov and J.Christopher Thomas QC as the Co-Arbitrators. Hearing on the merits hearing took place on 20-31 August 2018 in The Hague, with a final hearing in Paris in December 2018. After hearing both the sides, the Arbitral Tribunal issued an Award on 22 December 2020.
Post Arbitral Award Developments:
On March 22, 2021 Government of India files appeal against the arbitration verdict at The Hague.
Cairn has secured French Court- Tribunal Judiciaire de Paris’s ruling based on Cairn Energy’s application will impact some 20 properties, valued at more than 20 Million euros (Rs 177 crore), as part of a guarantee of the debt owed to the British company that exited India a few years ago. It has been stated that some of the properties are in the 16th Arrondissement of Paris, which is one of the wealthiest areas in the city.
Arbitration award has also been registered in other jurisdictions, including the US, the UK, Canada, Singapore, Mauritius, France and the Netherlands as the company intends to focus on high-value assets.
Cairn has also filed cases in the Southern District of New York, seeking judicial confirmation that Air India can be classed as the alter ego of the Indian state and thereby jointly liable for the arbitral award.
Minister of State for Finance Pankaj Chaudhary while addressing the Rajya Sabha on the issue of Cairn Arbitration Award and it enforcement by Cairn stated that, “In consultation with its counsel team, the Government is taking all appropriate legal steps to protect its interest”.
In an official statement, the Centre had on July 8, 2021 said that the CEO and the representatives of Cairn had approached the Government of India for discussions to resolve the matter.
“Constructive discussions have been held and the Government remains open for an amicable solution to the dispute within the country’s legal framework,” official statement further added.
SOURCE ; .latestlaws.com
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