Cairn asset seizure: How we came to this pass
PremiumThe government can slug it out in foreign courts or settle the issue and send out FDI-friendly policy signals
The news that “Cairn Energy has taken over 20 Indian state-owned properties in Paris", as reported of Cairn’s escalation of its battle “over India’s reluctance to pay $1.7 billion awarded" by an international tribunal “in a tax dispute" following an order by a French court sent the Indian media into expressions of shock, anguish and concern, perhaps in that order. This, at a time when Cairn is understood to be contemplating moving courts in other jurisdictions, too, to recover its money, as awarded. This reaction is natural, given the ramifications it has—but not so for experts who have been following these developments through the past few years. Some of them even saw it coming.
For those uninitiated to the dispute, some background. This news follows an award passed by an arbitral tribunal at The Hague, which had ruled in favour of Edinburgh-based Cairn Energy that India had “failed to uphold its obligations" under the UK-India Bilateral Investment Treaty (BIT) executed for promotion and protection of investments on 14 March 1994 and which came into force on 6 January 1995.
However, this is not the first time such an issue has cropped up. There is a significant history to it, besides the Vodafone taxation issue. AT&T Corp of the US faced a similar issue when it paid for equity shares through its Mauritian subsidiary—a transfer outside India and not taxable, given the Double Taxation Avoidance Agreement between India and Mauritius. Whilst no capital asset situated in India had been transferred and no income accrued or arose in India, or could be deemed to have accrued or arisen in India from the sale of shares of that non-Indian company within the ambit and scope of the Indian Income Tax Act, 1962, the revenue department determined just the opposite: that this transfer meant a taxable gain for AT&T Cellular Pvt Ltd, Mauritius, notwithstanding its tax-residence certificate in Mauritius. The judgement by the Supreme Court of India in the Azadi Bachao case ought to have kept the AT&T deal outside the Indian tax net. The matter went to the Bombay high court, which found merit in the revenue department’s contention, a ruling that was then challenged before the Supreme Court.
While that was pending, the apex court in 2012 put to rest the Vodafone issue (where AT&T Corp was an ‘intervenor’) and laid down that Section 9(1)(i) of the Act did not tax indirect transfers. One would have thought that the law was therefore settled in this respect. The revenue department then sought to change the settled interpretation of Section 9(1)(i) of the Act, and Parliament enacted the 2012 amendment that effectively overturned the court’s decision in Vodafone by amending that section with retroactive effect so that indirect transfers by non-residents could be taxed. Vodafone invoked the India-UK BIT, which resulted in an adverse award against India.
In the Cairn matter, the revenue department in 2014 had sought to tax capital gains by applying the amended Section 9(1)(i) of the Act, and issued the company a ‘notice of demand’ for $1.6 billion, plus interest and penalties, which it claimed has arisen from Cairn’s reorganization in India qua its “2006 transactions".
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Cairn invoked the BIT as a consequence and initiated arbitration proceedings, contending inter alia that the 2012 amendment constituted “manifest breaches of the India-UK BIT" and the claimants ought to be compensated for it. India contended that its obligation under the treaty could not be “turned into a regulatory or legislative freeze" on it and that the taxation of Cairn’s capital gains must be assessed on the premise of the principle that an investor must conform to India’s legislative framework, and so there was no expropriation.
The Tribunal, by its award dated 21 December 2020, held that India had failed to uphold its obligations under the BIT and international law and held that India must compensate Cairn for its losses, a ruling that India has challenged.
It is not surprising that Cairn would seek to have the award in its favour executed. The execution proceedings of such awards can be done wherever in the world the debtor’s assets are located. Obviously, Cairn would avoid coming to India for the award’s execution. It has filed proceedings in Paris and is looking elsewhere to pick up Indian state assets wherever they may be located.
The government, currently ascertaining the facts, has said “whenever such an order is received, appropriate legal remedies will be taken." It may not have received the French court’s notices for execution yet, as this could take time. Whenever it does, it would have two options: the first would be to take specific legal recourse aimed at convincing the court at The Hague that the award be set aside while simultaneously asking the court seized of the execution proceedings in Paris to not execute the same. This would be enormously challenging, as each court adjudicates a dispute in accordance with its municipal laws. The second option is for the government to explore a settlement of the whole retrospective taxation issue, given that negative signals are being sent out on India as a global investment destination. India’s commitment to its international obligations and principles of public international law must be put into practice, not just left written in statute books. Anything else would be frowned upon by the world at large.
Whatever it is, it’s a quick call for the Prime Minister to take, a decision best taken with his inclination to showcase India as “investor friendly" kept firmly in mind.
Mamta Tiwari is counsel at Fox Mandal & Co.
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