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India And The Cairn Energy A Legal Quandary

Cairn Energy PLC is one of Europe's leading private oil and gas exploration and development companies we could compare it to RIL in India for better understanding. Its dispute with the Indian government has recently been in the public eye here in India as well as across the globe. And especially since it is the consecutive embarrassment for the Indian government after the Vodafone case.

I would recap the case and the order given as well as what's next after the order of the French court regarding freezing of assets of the Indian government in this article.

The dispute is largely a tax dispute between the parties and can be associated with the prominent Vodafone and Indian government tax case, which, simply put, resulted in Indian government introducing the Finance Act of 2012 which amended the Income-tax Act, 1961 retrospectively.

The Cairn Energy case dwell on the capital gains tax on a restructured company Cairn India sold nearly decade ago. Cairn UK Holdings Limited which is a subsidiary of Cairn Energy, is the parent company of Cairn India. Cairn Energy while restructuring its operations in India transferred the ownership of its Mangala oil field in Rajasthan to Cairn India. As a part of this, Cairn India acquired the entire share capital of Cairn India from Cairn UK Holdings.

It was just a business reorganisation with no tax motive the company said, Apparently the Indian Tax Department saw it very differently. In 2011, Cairn Energy UK sold more than half of its shareholding in Cairn India to Vedanta Resources (an Indian company) for $8.7 billion. Having said that, the Income-tax authorities of India prohibited it from selling about 10 per cent, citing pending taxation issues. Income tax authorities sold this and took over the proceeds and the gains of this shareholding.

Jump to 2014, Cairn Energy UK was presented with a USD 1.4bn claim from the Income-tax authorities of India for the unpaid taxes resulting from the intra-group share transfers undertaken in the year 2006 in preparation for the Initial Public Offering (IPO). So accordingly, Cairn Energy UK undertook the arbitration proceedings against the Indian government under the UK-India Bilateral Investment Treaty (BIT). In December last year, a three-member international tribunal at the Permanent Court of Arbitration, Hague, the Netherlands ruled against the Indian Government in this lengthy tax dispute.

India has, since the declaration of the arbitration award, not only opposed the same but has also proceeded with filing an appeal against the award in March 2021. The appeal against the decision of the tribunal has been raised on the grounds of sovereignty and tax avoidance by Cairn Energy UK. The Indian government's stance on the matter is that the government has the sovereign right to tax the company, and private individuals and companies cannot decide on that anyhow. Also, it is of the opinion that tax matters fall outside the domain of a BIT between India and the UK and beyond the jurisdiction of international arbitration.

The Indian government is also said that Cairn Energy UK did not pay tax in any jurisdiction across the globe and is trying to evade taxes everywhere. India has contested the Permanent Court of Arbitration's claim that the Cairn Energy UK case is not a tax dispute but a tax-related plus investment one, and hence, it falls under the court's jurisdiction (International Investment disputes are under the international tribunal's jurisdiction)

Since the conclusion of the arbitral proceedings, Indian government and Cairn Energy UK are trying to settle this dispute by negotiating. Cairn Energy UK has offered to invest the entire financial award in India itself, providing that the government must concedes on and withdraws the appeal it filed. Indian government, in response to this, rebuffed the proposal. Indian government also proposed to Cairn Energy UK that they settle the dispute by paying at least fifty percent of the disputed principal tax amount and get a waiver of interest and penalty along with the same.

Meanwhile, prior to the filing of the appeal, Cairn Energy UK has as a first step, also registered in France, the US, Canada, the UK, Singapore, the Netherlands and some other jurisdictions, the arbitration award it won against India, before it can petition court to enforce the award against Indian Government's assets overseas like offices, ports, hotels etc.

Courts in these five nations, including the United States and the United Kingdom, have given recognition to the arbitration award against India, thereby opening up the possibility of Cairn Energy UK seizing Indian assets in these countries if the government does not pay the amount. These confirmations came in just few days before Indian government filed its appeal against the arbitration order of the same.

If India loses this appeal, Cairn Energy UK's best possible option is to seek enforcement of the award in other jurisdictions where the Indian Government has assets like the countries mentioned above. Cairn Energy UK is confident of its position and has stated that it is looking to identify assets owned by the Indian Government abroad, in order to seize them for the repayment of the award in the event that India does not honour its obligations.

Now as subjected Cairn Energy UK has secured an order from a French court freezing the 20 properties of the Indian government in Paris which is valued over $20 million. Cairn Energy UK also reported that it identified Indian Government assets of over $70 billion in the world including the Air India aircraft.

This is done by the company to secure its$1.4 billion award which Indian government has to pay in advance. Indian government till now has reported no official notice regarding the freezing of the properties but a legal action would be taken to unfreeze and secure the assets over the world the spokesperson of the government said. Now, what would be the legal action the Indian government takes that would be seen but a similar instance happened in our neighbouring state Pakistan in the famous Riko Dig case.

In which a Canadian-Australian company to safeguard its award for the repayment of $5.8 billion from the Government of Pakistan froze the assets of the Pakistani government abroad. Pakistan then filed an appeal against freezing of assets in the High court of British virgin island and the high court pronounced the judgement in the favour of Pakistan. And now the Canadian-Australian company cannot freeze Pakistani assets in the US.

Similarly the Indian Government could appeal the court and safeguard its assets worldwide and wait for its appeal in the International Tribunal against the award.

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