CAIRN ENERGY V. INDIA

                             CAIRN ENERGY V. INDIA 

The Cairn – I T (Income Tax) Department dispute stems from the much debated retrospective taxation issues.  There were matters of violation of Article 20 Clause 1 of the Indian Constitution. Article 20 Clause 1 talks about Ex- Post Facto Law. This means that a person can neither be punished for any offence which was at the time of commission not charged as an offence nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offence. 

                   However, this principle was applicable only for Criminal offences. It was no where mentioned that a retrospective law can be made or not for a civil offence. Taxation comes under Civil Offence and therefore made the retrospective taxation a debating issue. 

Background of Cairn India dispute

 In 2014, Indian tax authorities started questioning Cairn group about its 2006-07 internal reorganizations which also involved the setting up of an Indian subsidiary called Cairn India. This news was limited in 2007 in the Indian stock market.

                 Fifteen years ago, in 2006-2007, prior to the Initial Public Offering (IPO) of Cairn India, Cairn UK transferred shares of all its subsidiaries to Cairn India Holdings Limited (CIHL). Later, Cairn India Holdings Limited (CIHL) transferred back all its subsidiaries back to Cairn India Limited (CIL). This transaction, according to Indian tax authorities gave Cairn Energy capital gains of Rs. 24,500 crore. Indian authorities demanded tax on these transactions.  When this happened in 2006-07, there was no prevailing law to give tax on such capital gains. The Cairn India interpreted the Indian Taxation Laws on capital gains differently, and refused to pay the retrospective taxes. 

                  In 2012, India amended its Income Tax Act, 1961 to ensure that a transfer of shares that takes place outside India can also be taxed if the value of shares is based on the assets in India. This Law was applied retrospectively.

Legal Proceedings 

Due to differing interpretations, a case was filed with Income Tax Appellate Tribunal (ITAT) and also in Delhi High Court by Cairn. However, Cairn India had lost the case at ITAI.  In 2017, Cairn dragged this case to the Permanent Court of Arbitration. Permanent Court of Arbitration, established in 1899 is situated in Hague, Netherlands. In December 2020, the Permanent Court of Arbitration at The Hague said, Cairn Tax Issue was not just a tax related issue but an “investment related dispute”, and therefore under the jurisdiction of the International arbitration court. Similar to ruling in the Vodafone arbitration case, the PCA once again ruled that the Indian government’s retrospective demand was in breach of the guarantee of fair and equitable treatment. Cairn India won the arbitration award (Judgement in arbitration) and thus India had to compensate Cairn Energy with $ 1.2 Billion.

                  After this, Cairn Energy shareholders wanted a quick resolution, but government officials of India had not decided then to go for an out of court settlement or to challenge the arbitral award. The government had 90 days to challenge the award of PCA in a higher court in Singapore. 

                    In a meeting between both the parties, Indian Government had hinted that the only possible solution was for both parties to avoid further litigation and resolve the dispute through Indian Tax resolution Mechanism. 

                However, Cairn India then filed a case in US to push India to pay $1.2 Billion award. The centre also had decided to challenge all Cairn Cases in International Courts.  

Recent Changes

 Cairn Energy Plc said it was ready to withdraw all cases it had slapped against the Indian government for enforcing a $1.2-billion arbitration award the company had won in December 2020. This is part of the settlement under recent legislation by Parliament. It has entered into a deal with India to settle its long-running tax dispute that will see India refund $1.06 billion in return for the British oil and gas explorer dropping all legal proceedings against the country. India also decided to cancel the 2012 policy of Retrospective Taxation.