India To Challenge Cairn Energy Arbitration Award

A day after Cairn Energy Chief Executive Officer Simon Thomson met Finance Secretary Ajay Bhushan Pandey in New Delhi, a person familiar with the matter said the Indian government will contest its sovereign right to tax.

The person cited above said the government will also strongly contest other suits filed by Cairn Energy at various international courts.

While welcoming the British explorer’s move to reach out to the government for a resolution, the person said any dispute resolution will have to be sought within the already existing laws. The government is going to maintain in the arbitration appeal that Cairn had conducted transactions via tax havens to evade taxes.

After his meeting with the Finance Secretary on Friday, which went on for over an hour, Thomson had told reporters that the talks were “constructive” while refusing to share any further details.

In the meeting, the Indian government had offered the company an out-of-court settlement, which was seen by the government officials to be the last opportunity for settling the matter.

India had lost arbitration proceedings and the tribunal directed the government to pay Cairn Energy over $1.2 billion. The payout stems from an initial tax demand of Rs 10,247 crore on Cairn U.K. Holdings Ltd. for alleged capital gains it made in the 2006 business re-organisation of its Indian holdings. With penalties and interest added the tax claim has risen to over Rs 22,000 crore, part of which was recovered via the sale of Cairn assets the tax department had seized.

Earlier this week, the British oil explorer asked a U.S. district court to enforce the arbitration award, according to a Reuters report.

Before the meeting, a top Finance Ministry official had said the government viewed the Vodafone and Cairn Energy arbitration cases in the same light.

The dispute arose from an amendment made in the law by the Indian government in 2012 to retrospectively tax firms going for offshore transfer of shares during mergers and acquisitions. The move significantly impacted two international firms—Vodafone Plc. and Cairn Energy.

In September 2020, the Indian government lost a case to Vodafone in international arbitration over a $3-billion tax demand. However, the government has taken the case to a high court in Singapore to set aside the order.

During the arbitration hearings, India had argued that the cases involve the exercise of its sovereign authority in the field of taxation.