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GS-II : International Relations International issues

09 July, 2021
12 Min Read

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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