Accept the cairn arbitration award

Accept the cairn arbitration award

The government must accept the verdict of the Permanent Court of Arbitration at The Hague in the Cairn tax dispute and move on. It is the second loss for India in an international arbitration after the Vodafone group won an arbitration award on its capital gains tax dispute with the government. The court’s ruling is that the over $1.2 billion tax demand on Cairn Energy is not valid, principally on the ground that the company did not receive fair and equitable treatment, as was its due under the bilateral investment treaty between India and Britain. This is hard to dispute.

Cairn’s case relates to business reorganisation in 2006 prior to its Indian initial public offering (IPO), in which it consolidated assorted group hydrocarbon assets under Cairn India, without change in ultimate beneficial ownership. Cairn sought and obtained permission from the Foreign Investment Promotion Board, which included representatives of Revenue and Finance, and no one ever raised any question of the company having to pay tax for a reorganisation.

Clearly, the tax office had erred in raising the demand on Cairn in 2014 by invoking the retrospective clarification to demand capital gains tax on the transfer of different Cairn subsidiaries to a single Cairn subsidiary in India, prior to Cairn India’s IPO, which culminated in listing in January 2007. Nor has Cairn sought to dodge paying tax when it was due. When Cairn Energy sold its stake in Cairn India to Petronas in 2009 and Vedanta in 2011, it did pay Rs 3,700 crore as capital gains tax, given that these transfers involved shares in an Indian company (CIL).

However, tax authorities had seized 10% of Cairn India’s shares, then valued at about $1 billion. Now, the government has been asked to repay the funds withheld along with interest to Cairn. Cairn discovered hydrocarbons where others, including ONGC, had failed to and has saved the nation much oil import. India’s treatment of Cairn is not an inspiring story. The least that can be done is to accept the arbitration award, and move on.