London-listed independent Cairn Energy has won an arbitration case against the Indian government in the Hague over a 102.5bn rupees ($1.4bn) retrospective tax demand. Cairn was also awarded damages of $1.2bn plus interest and costs, it said.
The tribunal ruled unanimously that India had breached its obligations to Cairn under the UK-India bilateral investment treaty, Cairn said. Cairn's claim was brought under the terms of the UK-India bilateral investment treaty, while the legal seat of the tribunal was the Netherlands and the proceedings were under the registry of the Permanent Court of Arbitration.
India lost a similar tax claim in September against UK telecom major Vodafone. The government is unsure whether to appeal against the Vodafone and Cairn rulings or honour the judgements. In the past, the business friendly BJP government has contested international arbitration awards in Indian courts and lost, with the most recent involving private-sector Vedanta Resources, which won an arbitration award after the country's Supreme Court rejected the government's arguments.
But the government is continuing to evaluate options to delay executing the awards by appealing in Indian courts. India can appeal the award in the latest case in the Indian courts as it did in a previous case involving private-sector firm Reliance Industries following an unfavourable decision.
Foreign investors will watch the government's response to both the Cairn and Vodafone awards, which will be a key factor in influencing their investments in India. Former finance minister Arun Jaitley and other BJP leaders denounced the introduction of a retrospective tax amendment in 2012 by the previous Congress government as tax terrorism but continued to follow the same policy of refusing to honour judicial orders or arbitration awards.
The Indian government and private-sector Indian companies have shown a tendency to not accept unfavourable international arbitration decisions and approach Indian courts to drag out cases, as the local judicial system takes several years to deliver judgements. The World Bank has told India to speed up the contract resolution and integrity process because it is a key concern for foreign investors.
The dispute with the Indian authorities revolves around a retrospective tax demand imposed on Cairn after the UK firm initially sold its controlling stake in Cairn India to UK-listed India-focused resources firm Vedanta Resources in 2011. The Indian government alleged that the company failed to pay tax on Rs245bn of capital gains when transferring its Indian assets to a new firm from subsidiaries incorporated in the European tax haven of Jersey in transactions made in 2006.
The Indian tax department has also issued a Rs205bn tax demand, including penalties, against Vedanta, alleging the firm failed to pay back taxes on capital gains. Indian tax authorities have also seized the proceeds of sales of Cairn's shares in Vedanta and dividends due to Cairn.
