Government has sought putting on hold the arbitration initiated by British oil explorer Cairn Energy against a Rs 29,047 crore retrospective tax demand and instead wants a parallel arbitration initiated by Vedanta Resources to be taken up first.
The government using retrospective tax legislation had in January 2014 issued a tax notice on Cairn Energy for alleged capital gains it made on a 10-year old internal reorganisation of its India unit.
Three months later in April 2014, it imposed a tax demand of Rs 20,495 crore on Cairn India, the UK firm’s erstwhile subsidiary for failing to deduct tax on the capital gains. Cairn Energy and Vedanta, which had bought Cairn India from the Scottish firm in 2011, had initiated separate arbitrations against the tax demands.
Cairn Energy had initiated the arbitration in March 2015 and the three-member arbitration panel had been constituted. But at a hearing earlier this month, the government contended that the proceedings should be put on hold, sources said. Its counsel argued that the government wants the arbitration initiated by Vedanta to be taken up first.
Sources said the counsel also made an application seeking more time to file reply to Cairn Energy’s demand for $5.6 billion in compensation from the Indian government for raising a retrospective tax demand. As per the schedule drawn up, the reply was to be filed by mid-November.
Sources said that in the Vedanta arbitration, the government may contend that tax issues cannot be arbitrated under bilateral investment protection treaty and once it wins a favourable verdict there, it will use the same to quell Cairn Energy’s plea as well. A three-member arbitration panel headed by Geneva-based arbitrator Laurent Levy began hearing Cairn Energy’s plea against tax demand in May and the company filed its ‘Statement of Claim’ in late June.
The Indian government was to file its ‘Statement of Defence’ by mid-November and evidential hearing was expected to commence in early 2017, sources said, adding that the plea made by the government will essentially delay the entire process. The British firm challenged the tax assessment by seeking an international arbitration under the UK-India Investment Treaty, which unlike the Dutch treaty provides for resolution of tax issues. UK telecom firm Vodafone has initiated arbitration on a separate retrospective tax under the Dutch treaty.
Cairn Energy named former Bulgarian minister Stanimir Alexandrov as its arbitrator in the tax dispute while India appointed Singapore-based lawyer J Christopher Thomas as its arbitrator. The seat of the panel was decided to be in The Hague, the Netherlands. For the other arbitration, Vedanta Resources has named London-based arbitrator James Spigelman to represent its case. The government has named Donald McRae, a member of the UN International Law Commission, to defend itself while Singapore-based senior counsel and chartered arbitrator Michael Hawng will be the chairman of the arbitration panel.
The Income Tax Department had in January 2014 slapped a draft tax assessment of Rs 10,247 crore on Cairn Energy on alleged capital gains it made when in 2006, it transfered its India assets to a new subsidiary, Cairn India, and listed the firm. The British firm sold majority stake in Cairn India to Vedanta Resources in 2011, but still holds 9.8 per cent stake in the company, which was attached by the Income Tax Department.
This year, a final assessment order was slapped on it that included Rs 18,800 crore of interest on top of Rs 10,247 crore principal tax amount.
Cairn Energy, on its part, said no capital gains tax was due under the law in force in 2006 when the restructuring was done. The company is claiming full compensation for the $1 billion value lost following the tax notice and freezing of its 9.8 per cent shares in Cairn India.