After more than a decade in courts around the world, and millions of dollars spent in legal fees, India is now no better off in its tax battle with UK energy firm Cairn Energy PLC. In fact, it may be manifestly worse off. Cairn has moved a US court to seize the assets of the government of India-owned Air India, to enforce collection of the $1.2 billion award it won in the Permanent Court of Arbitration in The Hague in December 2020. India has filed an appeal against that order at the Dutch Court of Appeals, and the same is expected to be listed for hearing only in September this year.
Meanwhile, Cairn, under pressure from its shareholders to recover the money, has moved court in as many as nine countries to try and seek enforcement of the award. The attempt to seize Air India’s assets is only the first salvo from Cairn. The company has reportedly identified over $70 billion in assets owned by the government of India or government-owned entities, including ships of the Shipping Corporation of India and public sector banks with overseas operations and assets. If these attempts go through, India will be in the company of countries like Pakistan and Venezuela, which have had assets seized for failing to meet international obligations. This is certainly not what a country with superpower ambitions, and which wishes to sit on equal terms with the world’s most developed economies at forums like the G7, would like to find itself in.
The Cairn case centres around capital gains tax on a restructured company, which Cairn subsequently sold. In the restructuring, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings in exchange for 69 per cent of its shares. Cairn India was subsequently listed, prompting a capital gains tax demand of $1.4 billion. Cairn Energy sold its Indian unit to Vedanta Resources for $8.7 billion in 2011. However, the tax authorities stopped the sale of the residual stake of 9.8 per cent (and later seized them) and also froze dividend payments from Cairn India to Cairn Energy.
The tax demand itself hinges on the infamous retrospective amendment to the tax laws effected in 2012. India amended Section 9 (1) of Income Tax Act, 1961 with effect from April 1, 1962, to clarify the state’s powers to levy tax on transactions which may have taken place overseas, but covered assets which were in India. Cairn moved for arbitration under the UK-India investment treaty in 2015 to make good the losses on its investment in India. The Cairn debacle follows the loss of yet another dispute – between Vodafone and the tax authorities – on a similar transaction. In fact, the tax authorities had even lost their case in the Supreme Court, prompting the infamous retrospective amendment in the first place.
While India has justified the tax demands citing its sovereign right to tax, it must be noted here that none of the rulings have per se denied India’s sovereign right to tax. The Arbitration Courts have only held that India’s actions were violative of the ‘fair and equitable treatment’ guaranteed to foreign investors under relevant bilateral investment protection treaties – the Netherlands in case of Vodafone and the UK in case of Cairn. Now, the stubborn refusal to accept multiple negative rulings in international courts, on treaties it had signed and guaranteed as the sovereign state, points more to bruised egos than a rational approach to the developments.
In fact, India’s response to these disputes, ranging from the retrospective amendment to the subsequent abrogation of a number of bilateral investment treaties, has caused considerable damage to India’s global reputation as a country governed by the rule of law and as a safe destination for international investors. The Cairn move to seize assets, something which may well be copied by others who have won international arbitration awards, including Vodafone UK and Devas Multimedia in the Antrix case, also puts a spoke in the wheel of the government’s ambitious disinvestment plans, which are slated to garner a whopping Rs 1.75 lakh crore for the exchequer in the current financial year alone. With uncertainty over the ownership of assets, the disinvestment process is bound to be hit, not to speak of the damage to the valuation of the listed public sector entities.
Given the direct and indirect financial costs, as well as the far more damaging reputational loss, the government’s stubborn refusal to honour international rulings, as well as its failure to repudiate the retrospective amendment, is inexplicable. In fact, when the UPA government passed the retrospective amendment, the BJP, then in opposition, had termed it ‘tax terrorism’. It is also inexplicable why Cairn Energy’s offer to invest the entire proceeds of the award in India was not taken seriously. Instead of standing on ego and causing further damage to India’s global image, it would be best if the government bit the bullet and moved on.