Exit the Cairn Arbitration Loop

New Delhi’s response to Cairn Energy Plc’s obtaining an injunction to seize Indian assets in France, a step towards the recovery of part of its contributions following a tax dispute, was predictable. The finance ministry said it will explore appropriate legal options to protect its interests, but remains open to a friendly solution within the legal framework. It goes without saying that the Indian government is fully within its right to appeal any order or verdict in any jurisdiction. However, this argument has dragged on for far too long now and is getting ugly. Rather than prolonging the case, it would be in New Delhi’s best interest to accept the arbitration award, explore settlement options, and pay. Cairn said a French court froze 20 residential properties worth more than € 20 million owned by the Indian government. In mid-May this year, the Scottish oil explorer attempted to seize Air India’s assets in the United States.

If Cairn took possession of the properties in Paris, India’s image as an investment destination would be tarnished. Rather than continue to fight in multiple jurisdictions – in which the arbitration award is binding – and devote more time and resources, the government should accept the $ 1.7 billion payable amount and move on. In March of this year, the government filed a request to quash the international arbitration award of December 2020. The decision of the Permanent Court of Arbitration (PCA) declared the Indian government’s tax request of Cairn at 10,247 crore. Energy, incompatible with the India-UK bilateral investment treaty. The PCA ordered New Delhi to permanently withdraw the request. The dispute stems from Cairn’s reorganization of its oil fields in 2016.

The reshuffle was carried out with the permission of the FIPB, prior to its IPO, and there has been no change in the ownership of the final beneficiary. The tax authorities, however, argued that these transactions were taxable because they involved the indirect transfer of underlying real estate, including natural resource assets. They claimed the reorganization was tax evasion. In 2012, a retrospective amendment was made to Section 9 (1) (i) of the Informatics Act, under the leadership of then Finance Minister Pranab Mukherjee, which allowed the government to levy a tax on mergers and acquisitions involving foreign companies with business assets. in India. The changes actually meant that any income generated or generated outside of India due to a business relationship in India would be deemed to have been generated or generated in India and would be taxable for all those assessed, regardless of their status. residence status. The amendment was first used to levy a tax and penalty on Vodafone Plc when it purchased a 67% stake in Hutchsion-Essar in India. Later, in 2014, the tax authorities used this amendment to demand the capital gains tax from Cairn Energy.

The PCA found the IRS argument over real estate an afterthought, pointing out that the Indian government was fully aware of the 2006 transactions, but had not hinted at their tax eligibility. The government must be prepared to accept the decisions of arbitration, in the Cairn case as in other cases where it has received an unfavorable verdict. Failure to do so sets a bad precedent and will discourage global companies from investing in India. Merely lowering the corporate tax rate or offering incentives will not convince global investors that India is the perfect place to settle; they must ensure that the rules and regulations will be fair and that contracts will be honored. This government promised not to be adversarial in tax matters, and it must keep that promise.

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