Explained: Dispute between Cairn Energy and Government of India

A French court permitted Scottish oil producer Cairn Energy to
seized nearly 20 properties of the Indian government in France, reports PTI.
The properties are said to be used to compensate and help Cairn recover a part
of $1.7 billion arbitration awarded by an international tribunal over a monetary dispute.

Also Read | French court permits Cairn Energy to seize 20 Indian govt assets in France

However, India’s ministry of finance has refuted the report and
said: “There have been news reports that Cairn Energy has seized/frozen
state-owned property of the Government of India in Paris. However, the Govt of
India has not received any notice, order, or communication, in this regard from
any French court.”

But what is the dispute between India and Cairn Energy?

The dispute between India and Cairn Energy is on the hotly
debated question of retrospective taxation.

In 2006–07, Cairn UK had transferred shares of Cairn India
Holdings to Cairn India as part of an internal rearrangement process. India’s income
tax authorities decided that since Cairn UK had made capital gains, it was
imperative that it pay capital gains tax of Rs 24,500 crore.

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However, citing its own interpretation of Indian laws, Cairn
refused to pay. Several rounds of litigation followed culminating in Cairn
losing that case at Income Tax Appellate Tribunal (ITAT); a case on the
valuation of capital gains is still pending before the Delhi High Court.

Later, Cairn sold majority of its India business to mining giant
Vedanta. At the time, income tax authorities barred it from selling nearly 10% of
the company citing pending tax issues. The payment of dividend by Cairn India
to Cairn UK was frozen.

India introduced its retrospective tax system in 2012 and made capital
gains made by the transfer of shares from a foreign entity whose assets were
located in India taxable from 1962.

Also Read | Cairn Energy wins retro tax arbitration

When tax authorities approached Cairn with this law, the company
went to the Permanent Court of Arbitration (PCA) at the Hague.

What did the PCA say?

The PCA, in its judgement, said that the issue was not related
to taxation but an investment-related dispute and therefore under its
jurisdiction.

“Tax demand against the claimants (Cairn
Energy Plc and Cairn UK Holdings Limited) in respect of AY (assessment year)
2007-08 is inconsistent with the treaty and the claimants are relieved from any
obligation to pay it and orders the respondent (Indian government) to
neutralise the continuing effect of the demand by permanently withdrawing the
demand,” the arbitration panel had said in its judgement.

The tribunal further said that India
must not make any more attempts to recover “the alleged tax liability or any
interest and or penalties arising from this alleged liability through any other
means.”