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DAILY NEWS ANALYSIS

  • 09 July, 2021

  • 12 Min Read

Cairn issue explained

Cairn issue explained

What is the issue about?

  • The dispute started in early 2014 when Indian tax authorities started questioning Cairn Energy requesting information on the group’s reorganization in the financial year 2006-07.
  • This escalated, and by 2015, the authorities had sent the company a draft assessment order, assessing in the process that there was a principal tax amount of $1.6 billion that was due.
  • The year in reference, 2006-07, was one in which big corporate changes and developments took place in Cairn Energy.
  • It was the year in which it not only undertook a corporate reorganization but also floated an Indian subsidiary, Cairn India, which in early 2007 got listed on the Indian Stock Market.
  • Through the corporate reorganization process, Cairn Energy had transferred all of its India assets, which were until then held by nine subsidiaries in various countries, to the newly-formed Cairn India.
  • But the tax authorities claimed that in the process of this reorganization, Cairn Energy had made capital gains worth ?24,500 crores.
  • This, the department asserted, was the basis of the tax demand.

What was the ruling of the Permanent Court of Arbitration?

  • The claimants, Cairn Energy and Cairn UK Holdings argued that till the amendment was made to tax retrospectively in 2012, there was no tax on indirect transfers.
  • Indirect transfers here meant transfer by a non-resident of shares in non-Indian companies which indirectly held assets in India.
  • The application of the 2012 amendments, they alleged, constituted “manifest breaches” of the U.K.-India bilateral investment treaty.
  • In December 2020, a three-member tribunal at the Permanent Court of Arbitration in the Netherlands ruled against India in its long-running tax dispute with the U.K.-based oil and gas company Cairn Energy.

Permanent Court of Arbitration

  • It is an intergovernmental organization located in The Hague, Netherlands.
  • It is not a court in the traditional sense but provides the services of an arbitral tribunal to resolve disputes that arise out of international agreements between member states, international organizations or private parties.
  • The cases span a range of legal issues involving territorial and maritime boundaries, sovereignty, human rights, international investment, and international and regional trade.
  • The PCA is constituted through two separate multilateral conventions with a combined membership of 122 states.
  • The organization is not a United Nations agency, but the PCA is an official United Nations Observer.

  • India has been ordered to return up to $1.4 billion to Cairn Energy PLC of the U.K. after an international arbitration overturned tax demanded retrospectively — an award the government indicated it may challenge.
  • The three¬member tribunal, which also comprised a nominee of the Indian government, unanimously ruled that India’s claim of 10,247 crore in past taxes over a 2006¬07 internal reorganisation of Cairn’s India business was not a valid demand.
  • India “failed to accord Cairn Energy’s investments fair and equitable treatment” under the bilateral investment protection pact it had with the U.K.
  • The tribunal ordered the government to desist from seeking such a tax and 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.

Source: TH


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