The tax dispute between Cairn Energy and the Indian government and why the company says it is freezing Indian assets in Paris

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Yesterday (July 8), Cairn Energy, a British oil and gas exploration and development company, claimed it would freeze at least 20 Indian properties in central Paris in accordance with a French court ruling.

This is the dispute between the company and the Indian government over the 2012 retrospective changes to tax laws.

In December 2020, a three-member arbitral tribunal of the Permanent Court in The Hague delivered a unanimous 568-page verdict in the case.

It found that the Indian government had “violated the guarantee of fair and equitable treatment”, which caused a loss for Cairn Energy. The court said India’s decision violated the India-UK bilateral treaty and held India responsible for paying Cairn $ 1.2 billion in compensation.

Yesterday, the company said it had obtained a French court order allowing it to freeze Indian properties in Paris. However, the Indian government has denied any knowledge of the order.

“The government tries to ascertain the facts, and whenever such an order is received, appropriate legal remedies will be taken, in consultation with its lawyers, to protect the interests of India,” a statement from the Ministry of Foreign Affairs said. Union Finances, stressing that no notice, order or communication had been received by the government from any French court.

The Hindu The report quoted a Cairn Energy spokesperson as saying the ball was in India’s court to stop asset enforcement proceedings.

The case of retrospective taxation

The 2012 retrospective tax amendment made by the Indian government stated that “any asset or capital asset (share or interest) in a company registered outside India will be deemed to be located in India, if the share or the interest arises, directly or indirectly, its value coming mainly from the assets located in India ”.

Since the amendment applies retrospectively, it can be used to impose capital gains tax on transactions prior to 2012 between different subsidiaries of the same company.

The government made the amendment after the Supreme Court of India in 2012 ruled against the government in a similar case degrading the Vodafone group. The court ruled that Vodafone’s series of transactions was not subject to capital gains tax, as the transaction did not amount to a transfer of an asset within the meaning of Article 2 ( 14) of the Income Tax Act.

The amendment made by the then United Progressive Alliance (UPA) government overturned the judgment.

In 2006, Cairn Energy made an offer to consolidate its Indian assets under a holding company – Cairn India Limited, then divested its shares, mostly bought by mining conglomerate Vedanta Plc. However, Cairn UK was not allowed to transfer its 9.8% stake in Cairn India to Vedanta. Indian tax authorities have said that in 2006 transactions, share transfers drew capital gains tax of over Rs 6,000 crore per Cairn UK.

This retrospective imposition, Cairn argued, violated the UK-India bilateral investment treaty, which contained a standard clause obliging India to treat UK investments in a “fair and equitable manner.” .

The case reached the Permanent Court of Arbitration which ruled in Cairn’s favor. India challenged the arbitral award.

“The government has already filed a request on March 22, 2021 for the annulment of the international arbitration award of December 2020 before the Court of Appeal in The Hague. The Indian government will vigorously defend its cause in the layaway procedure in The Hague, ”the Ministry of Finance said yesterday (July 8).

The problem reaches the New York court

In May of this year, Cairn Energy sued Air India in New York to seize its assets to enforce the $ 1.2 billion arbitration. The company asserted that Air India is India’s “alter ego” and that it should therefore be held jointly and severally liable for India’s debts.

Cairn also told the court that he had “initiated proceedings in many other places around the world to seek recognition and enforcement of the award,” saying other state-owned companies may also be targeted.

Last month, some foreign investors in Devas Multimedia filed a similar plea in the same court, seeking to declare Air India as the “alter ego” of the Indian government. They hope to recover $ 160 million in compensation awarded to the company for its canceled deal with the commercial arm of the Indian Space Research Organization (ISRO), Antrix Corporation.

The government has until next week to challenge Cairn Energy’s plea in New York City court.

Amicable settlement

However, the Indian government and Cairn Energy have said they are open to further discussions on the matter.

“Our strong preference remains an amicable settlement with the Indian government to bring this matter to a close, and to that end, we have submitted a detailed set of proposals to them since February of this year,” the Cairn spokesperson said.

“However, in the absence of such a settlement, Cairn must take all necessary legal measures to protect the interests of its international shareholders,” he added.

According to sources, the move was “the necessary preparatory step” to take possession of the properties and ensure that all proceeds from the sale of the properties would be returned to Cairn Energy PLC as part of its efforts to enforce the Hague Award. in favor of Cairn.

The Parisian properties referred to in the order of the Judicial Court of Paris are estimated to bring in around 23 million dollars in Cairn. The company has also identified assets worth around $ 70 billion in several jurisdictions that it could potentially seize through court orders.

Cairn’s lawyers are said to have registered the Hague award in courts of at least 10 jurisdictions, including the US, UK, Netherlands, Canada, France, Singapore, Japan, UAE United Arabs and even the Cayman Islands.


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