Saturday 31 July 2021
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Cairn gets French court order to attach Indian assets

Cairn kept options open for a settlement of the retrospective tax dispute with India even as the NDA government failed to correct UPA's mistake

India’s high-profile tax dispute with Cairn Energy took an embarrassing turn for New Delhi on Thursday, with the Scottish energy company reportedly securing a French court order to seize about 20 Indian government properties in Central Paris.

The properties, which mostly comprise flats valued at more than € 20 million, are used by the Indian government in France, sources said.

The company’s move is in line with its declared plan to recover $ 1.7 billion ‘due’ from New Delhi by attaching assorted Indian assets overseas, including real estate and Air India planes, following a December 2020 international arbitration award overturning levy of Delhi’s retrospective taxes.

However, Cairn kept the options open for a conciliatory settlement of the tax dispute with the Indian government. Calling the latest move a “necessary preparatory step” towards taking up the ownership of the properties, a company spokesperson stressed the firm still preferred to reach an “agreed, amicable settlement” with New Delhi to close the matter. The company has submitted a number of proposals to the government since February, she said. “However, in the absence of such a settlement, Cairn must take all necessary legal actions to protect the interests of its international shareholders,” the spokesperson said.

Responding to the report, the finance ministry said the government had not received any notice, order or communication, in this regard, from any French court. “The government is trying to ascertain the facts, and whenever such an order is received, appropriate legal remedies will be taken, in consultation with its counsels, to protect the interests of India,” the ministry said.

The government also stated that the CEO and other representatives of Cairn had approached it for discussions to resolve the matter. Constructive discussions have been held and the government remains open for an amicable solution to the dispute within the country’s legal framework, it added.

If the company manages to attach the Central Paris properties, it will be the first asset freeze application to succeed among many filed by Cairn in different countries to enforce the arbitration award. While Cairn is unlikely to evict the Indian officials residing in those properties, the government cannot sell them after the court order.

Earlier, during discussions between finance ministry officials and Cairn Energy CEO Simon Thomson and his team here in February 2021, the government had asked Cairn to settle the dispute using the Vivad se Vishwas scheme; under the scheme, the company will have to pay around half the amount due sans interest and penalties in cases where the tax department has lost a case in a forum and filed an appeal, as the instant one.

Even before the arbitral award was pronounced, India had seized and sold shares of Cairn in its erstwhile India unit, confiscated dividend due and withheld tax refunds (totalling Rs 7,600 crore) to recover the taxes it felt were due.

Delhi’s 2012 law empowering itself to make tax demands concerning cross-border deals all the way back to 1962 citing ‘underlying Indian assets’ was exposed as a misadventure for the second time in a little over three months, on December 24, 2020. On that day, the Permanent Court of Arbitration at The Hague not only invalidated India’s $ 2.74 billion 2015 tax claim on Cairn Energy Plc but also ordered the government of India to return up to $ 1.4 billion in funds withheld, interest and costs, to the firm. A similar September 2020 verdict was delivered by the same tribunal in favour of telecom major Vodafone (Now Vodafone-Idea in India) in a high-profile retrospective tax dispute with India. The Hague Court held in both cases India was in breach of the relevant Bilateral Investment Treaties (BITs).

The government, of course, filed an application in The Hague court on 22 2021, seeking the setting aside of the arbitral award that favoured Cairn. However, since the tribunal has affirmed its jurisdiction over the Cairn case despite the existence of the India-UK BIT, the chances of a reversal of the order in a review is remote. Virtually, a reversal is possible only if mala fide in the award is established.

Cairn has reportedly identified $ 70 billion of Indian assets overseas for potential seizure. If the moves succeed, it would put India in league with Pakistan and Venezuela which faced similar enforcement action over failure to pay arbitration awards. Cairn has also filed a lawsuit with the US District Court for the Southern District of , claiming that Air India is controlled by the Indian government so much that they are “alter egos”. It sought direction from the court to hold the airline company liable for payment towards the arbitration award.

Last year, India’s Supreme Court turned down a government appeal to stop a $ 476-million award that Vedanta and Videocon had won way back in January 2011. And while the government appeal against the $ 672-million arbitration award that Devas Multimedia won in 2016 against Isro-arm Antrix Corporation, the fact that the Supreme Court asked Devas whether it would be willing to waive off the interest component of the money owed to it suggests the challenge may not hold.

There are, on the other hand, cases where the Supreme Court has ruled against enforcing arbitration awards on grounds that they ran contrary to India’s public policy; this was the argument the government made in the Supreme Court while asking for the award to be set aside.

In 2011, Cairn Energy sold a of its then India business, Cairn India, to Vedanta. The Indian taxman, however, did not allow Cairn UK to sell 10% and attached Cairn India shares as well as dividends that the company paid to its parent. The Hague court also ordered the government to return the value of shares it had sold, dividends seized and tax refunds withheld. In fact, the government was asked to compensate the Edinburgh-headquartered firm “for the total harm suffered” together with interest and cost of arbitration.

The Cairn tax dispute arose in 2006-07, as a part of internal rearrangement through a firm in the European tax haven of Jersey, Cairn UK transferred shares of Cairn India Holdings to Cairn India. Later, India retrospectively raised a demand of capital gains tax on Cairn UK amounting to $ 2.74 billion.

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