India’s contentious tax dispute with Scotland-based Cairn Energy has come to an end, putting to rest corporate litigation to seize the Indian government’s properties in France, and Air India’s assets overseas.
Cairn Energy CEO Simon Thomson said in early September, when announcing the company’s half-year results, that the Indian government had indicated during its talks with the global energy major that it wanted to resolve the issue, and that the final resolution of India’s tax dispute was in sight.
Cairn Energy has agreed to drop all legal proceedings to seize Indian assets overseas after it receives a INR79 billion (USD1.06 billion) tax refund. This is against the USD1.2 billion arbitral award it secured last December against the government. It also follows the government axing the disputed and nearly decade-old retrospective tax through the Taxation Laws (Amendment) Act, 2021, on 13 August 2021.
It is debatable whether Cairn Energy’s move to end the retrospective tax dispute with India is a win-win for both sides, or one love favouring the Indian government.
“The maximum loss the government would bear is limited to the legal fees if parties accept the proposal,” said Shinoj Koshy, a partner with L&L Partners in New Delhi.
When India failed to honour the USD1.2 billion arbitral award granted by the Permanent Court of Arbitration (PCA) at The Hague in December 2020, Cairn took legal action across several jurisdictions to recover not only the US$1.2 billion arbitral award but also interest and penalties.
The arbitration tribunal had said that the retrospective tax demand was “in breach of the guarantee of fair and equitable treatment” and against the India-UK bilateral investment treaty.
A French court order gave Cairn permission to seize 20 Indian government properties in Paris. The global energy company also went after Air India’s overseas assets, having filed a lawsuit in a US district court.
Cairn carefully weighed its options – it could have held out longer, or bargained for more. But, as its spokesperson says, “reaching an agreement with the government of India would be in the best interests of all parties”, including shareholders such as Blackrock, Franklin Templeton, MFS and Aberdeen Standard Investments, among some of the biggest global financial institutions.
“The positive progress in resolving our India tax issue will result in a refund of USD1 billion to Cairn from the government of India, with payment anticipated shortly,” said the spokesperson.
Koshy added: “No party will waive its rights unless it gets some prior guarantee or payout from the government.”
In accepting the terms of the new legislation in India, Cairn would be required to withdraw its international arbitration award claim, interest and costs, and end all legal enforcement actions.
Commenting on the trade-off, Meyyappan Nagappan, leader of the international tax practice at Nishith Desai Associates in Mumbai, told India Business Law Journal that there was a risk of enforceability of the arbitration award in multiple jurisdictions.
India’s enactment of the updated tax legislation, viewed as a “bold move”, scraps the 2012 policy that gave the income tax department the authority to go back 50 years and impose capital gains tax where ownership of business assets in India changed hands overseas, starting with Vodafone.
When Vodafone agreed to acquire Li Ka Shing Holdings’ 67% stake in Indian telecoms company Hutchison Essar for USD11.1 billion in February 2007, the Indian government decided to tax Vodafone.
Settle or push ahead?
Cairn Energy’s acceptance lays to rest doubts on whether entities that have won sizeable arbitral awards would willingly settle for less.
When Revenue Secretary Tarun Bajaj said the government would only pay the principal amount and nothing more, some members of the legal fraternity said that it might have helped if India had been more gracious and had agreed to pay interest on tax amounts recovered from the assessees.
Questions were raised as to whether the assessees would be interested in entering into a settlement with the government when the revised legislation does not provide for the payment of any interest. Instead, entities might prefer to continue the litigation proceedings in anticipation of a refund with interest.
“Corporates would generally prefer the certainty of cash flows in the short term, as compared to higher cash flows in the long term fraught with uncertainty,” said Bijal Ajinkya, a partner at Khaitan & Co in Mumbai.
Against 17 demand notices issued by the tax authority, Finance Minister Nirmala Sitharaman cited only three cases where the government would refund disputed tax amounts collected, namely INR79 billion to Cairn Energy, INR447.4 million to Vodafone, and INR480 million to WNS Capital.
There is a possibility that the 2021 tax amendment could leave the government vulnerable to legal action by corporates that would have paid the tax and not opted to litigate. “There is a legal basis for the companies to seek a refund of the tax paid by them,” said EQX Business Consultancy’s founder and director, Nemin Shah, in Mumbai.
While Shah identifies that the claim for refund may be barred by a limitation period, he is confident that the government will make rules for such a situation, or courts will permit belated refund requests, given that there is sufficient justification for the delay.
The Briefing is prepared by Freny Patel.