$1.2-bn arbitration award: Cairn, govt focus on long-term capital features tax

$1.2-bn arbitration award: Cairn, govt focus on long-term capital features tax

Throughout a collection of hectic talks between Cairn Power and the Indian authorities over the $1.2-billion arbitration award in favour of the previous final week, a slew of choices was proposed by the 2 sides, together with computation of capital features and participation within the Vivad se Vishwas (VsV) dispute decision scheme.

The federal government is more likely to go forward and enchantment in opposition to the arbitration award by a Everlasting Court docket of Arbitration at The Hague earlier than March 21, indicated finance ministry officers.

Cairn Power Plc on Sunday mentioned it was hopeful that a suitable answer to its tax dispute with the Indian authorities could possibly be discovered to keep away from prolonging and exacerbating the ‘damaging problem’ for all events. The corporate mentioned it was clear it ought to proceed to take all mandatory steps to guard the pursuits of its shareholders.

The vitality main is learnt to have raised issues over the tax computation of the 2006-07 deal, which it felt ought to have been computed on a long-term capital features (LTCG) foundation as an alternative of short-term capital features (STCG), leading to a tax legal responsibility of Rs 1,800-2,000 crore, as an alternative of the Rs 10,500-crore tax demand.

The federal government has emphasised that whereas it welcomed Cairn’s transfer to succeed in out for a decision, any dispute decision to be sought by Cairn should be inside already present legal guidelines.

Sources identified that Cairn invested in India in 1998 and exited in 2006-07, which might have attracted LTCG on the price of 10 per cent or 20 per cent, together with indexation.

Nonetheless, with the intention to circumvent this legal responsibility, Cairn created layers of subsidiary corporations in reorganising its India enterprise by means of the creation of Cairn UK Holdings (CUHL) in 2006, however ended up attracting STCG tax. Cairn had earlier raised this in its argument on the income-tax appellate tribunal (ITAT), which it subsequently misplaced. The answer might lie in re-computing the tax demand on LTCG foundation, knowledgeable a supply.

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“However and with out prejudice to our rights below the worldwide arbitration award, now we have mentioned a lot of proposals with the goal of discovering a swift decision that could possibly be mutually acceptable to the Govern¬ment of India and the pursuits of Cairn’s shareholders. Assu¬ming such a decision might be achieved, we look ahead to having the ability to transfer on to additional alternatives to put money into India, which continues to import a majority of the vitality sources it consumes,” mentioned Cairn Power in an announcement.

The Authorities of India, on its half, requested it to return below the VsV scheme — the window for which is open until February 28 after 4 extensions. The scheme gives for settlement of disputed tax, disputed curiosity, disputed penalty or disputed payment in relation to an evaluation or reassessment order on cost of 100 per cent of the disputed tax and 25 per cent of the disputed penalty or curiosity or payment. The taxpayer is granted Immunity from levy of curiosity, penalty, and establishment of any continuing for prosecution of any offence below the I-T Act in respect of issues coated within the declaration.

In reality, in 2016 the federal government had supplied Cairn Power settlement of the retrospective tax dispute by means of its one-time tax dispute decision scheme, which offered for waiving curiosity and penalties if the principal quantity was paid.

“Probably the most affordable answer for Cairn will likely be to take part within the VsV scheme. The window continues to be open. They will come and declare below the scheme,” mentioned a authorities official. The corporate, nonetheless, has up to now dominated out co¬ming in as a part of this scheme.

The case pertains to the Rs 24,500-crore tax demand on capital features made by the oil main in reorganising its India enterprise in 2006-07.


June 26, 2006: Cairn first created Cairn UK Holdings (CUHL). Indian belongings transferred to it

June 30: It bought 221.44 million shares of CUHL

September 1:

  • It bought one other 29.78 million shares on the market of £29.78-million debt

  • Tax division handled this as short-term capital features (STCG)

  • Cairn argued it was holding shares for an extended interval

March 9, 2017: Revenue-tax appellate tribunal confirms levy of Rs 10,247-crore STCG tax

The Indian authorities had misplaced a global arbitration case to vitality big Cairn Plc below the retrospective tax laws modification in a verdict on December 21.

The agency mentioned the freezing of its belongings in 2014 to implement a retrospective tax measure had been extraordinarily damaging for all events, and that it was “very eager to have the ability to put this legacy matter behind and transfer ahead positively”.

A global arbitration seated at The Hague and constituted below the phrases of the UK-India bilateral funding treaty (BIT) has dominated conclusively on the matter and issued a remaining and binding award in Cairn’s favour, ordering the refund of the worth of the belongings taken, being $1.2 billion, plus vital curiosity and prices, famous the corporate.

“That arbitration additionally dominated decisively that this matter falls throughout the jurisdiction of the UK-India treaty, having heard arguments from the events on that topic. Now we have had cordial and constructive discussions in Delhi over the previous few days with officers from the Ministry of Finance,” it added.

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Cairn mentioned it loved a protracted and profitable historical past working in India, investing billions of {dollars} and the enterprise it created in India has generated greater than $20 billion in income for the federal government.

On June 26, 2006, Cairn first created CUHL and transferred the Indian belongings to it. In retu¬rn, it bought 221.44 million shares of CUHL on June 30, 2006. It bought one other 29.78 million shar¬es on the market of £29.78-million debt on September 1, 2006.

The tax division took a view that STCG tax ought to apply, given CUHL had acquired 251.22 million shares of Cairn India Holdings at the price of £251.22 million in August-September 2006. The identical was then bought to the newly created Cairn India inside a couple of months. The STCG of Rs 24,503 crore on the hand of CUHL was confirmed by the ITAT in March, following which a requirement word was despatched, searching for Rs 10,247 crore.

Whereas each side hardened their stand, with Cairn Power submitting for enforcement of the December arbitration award in opposition to the Indian authorities, India’s income division has been readying to file an enchantment in opposition to the award. It’s more likely to file an enchantment at The Hague by March 10 and is in talks with senior Dutch attorneys. New Delhi has time until March 21 to file an enchantment in accordance with the 90-day window.

The award will probably be contested on two key grounds — jurisdiction and worldwide public coverage. Cairn Power Plc’s Chief Government Officer Simon Thomson had, nonetheless, in a video message final week, expressed willingness to satisfy Finance Minister Nirmala Sitharaman, however she handed it on to Finance Secre¬tary Ajay Bhushan Pandey.

Cairn Power has filed a case in a US district courtroom to implement the arbitration award. Earlier, the Edinburgh-based firm had filed an analogous case in a Dutch courtroom.

Within the enchantment, India is predicted to take a stand that the federal government has the sovereign proper of taxation and personal people can’t determine on that.

In response to the Centre, the award falls exterior the area of BIT and past the jurisdiction of worldwide arbitration.

Additionally, the federal government is more likely to invoke worldwide public coverage, arguing that Cairn didn’t pay tax in any jurisdiction throughout the globe.