Cairn Energy hopeful of solution in tax tussle with Centre

After three rounds of discussions on the $1.2 billion retrospective tax litigation last week, the government and UK-based Cairn Energy PLC have expressed hope to settle the matter amicably outside the court through legally available mechanisms such as the tax amnesty scheme “Vivad se Vishwas” [from dispute to trust], two people with direct knowledge of the matter said on Sunday.

In a statement on Sunday, Cairn Energy said the two parties have discussed “a number of proposals with the aim of finding a swift resolution that could be mutually acceptable to the Government of India and the interests of Cairn’s shareholders”. The statement came after finance secretary Ajay Bhushan Pandey and Cairn Energy chief executive Simon Thomson discussed the matter on Thursday, Friday and Saturday. Pandey is leading an inter-ministerial team holding discussions with the visiting Cairn delegates led by Thomson.

One of the people mentioned above said discussions have progressed in the right direction so far. “The government is hopeful about a mutually acceptable solution soon within the legal framework, and Vivad se Vishwas is the legal framework,” he said on condition of anonymity. HT first wrote about it on February 16.

“Another meeting cannot be ruled out as both parties [the government and Cairn] are willing to resolve the dispute as soon as possible,” he added.

Cairn said its discussions with the officials of India’s finance ministry were “cordial and constructive” “notwithstanding and without prejudice” to the company’s rights under the international arbitration award.

“Assuming such a resolution can be achieved, we look forward to being able to move on to further opportunities to invest in India which continues to import the majority of energy sources it consumes,” it said in the statement.

“We remain hopeful that an acceptable solution can be found, in order to avoid further prolonging and exacerbating this negative issue for all parties. However, we have also been clear that we must continue to take all necessary steps to protect the interests of our shareholders,” Cairn said.

A finance ministry spokesperson did not respond to HT’s queries.

The first person quoted above said this litigation is a legacy issue inherited by the National Democratic Alliance (NDA) government. “The government [incumbent] is in principle against any retrospective tax. But, it is also committed to act as per the law of the land. The I-T [Income Tax] Act was amended retrospectively, and companies [Cairn and Vodafone] challenged it on the basis of bilateral investment treaties, which would have far reaching consequences. No treaty could challenge the sovereign right to tax. Hence, the government has no option to challenge such arbitration awards, unless withdrawn,” he said. The government has already appealed against the arbitration award in the case of Vodafone, and has time till next month on the Cairn matter, he added.

India is involved in two legal battles over retrospective taxation – one with Vodafone Group PLC and another with Cairn. On September 25, 2020, an international arbitration tribunal in The Hague ruled that the Indian government’s decision to retrospectively amend the Income Tax Act, 1961 in the 2012-13 budget was not consistent with an investment treaty signed between India and the Netherlands.

Another arbitration tribunal, constituted under the agreement between the UK and India for the promotion and protection of investments, on December 21, 2020 ruled in favour of Cairn on similar grounds. Earlier this month, Cairn moved a US district court to enforce the arbitration award.

The retrospective amendment of the Income Tax Act in 2012 was applied to Cairn, when it was exiting from its subsidiary Cairn India Ltd in January 2014. The Act was amended retrospectively during the tenure of then finance minister Pranab Mukherjee after the Supreme Court ruled in favour of Vodafone on a ₹11,000 crore tax dispute with the government.

Abhishek A Rastogi, partner at law firm Khaitan & Company, said: “The GoI’s proposal to resolve the tax dispute under the ongoing ‘Vivad se Vishwas’ scheme is a pragmatic solution to end the litigation quickly and settle the matter amicably. Any other approach would prolong the litigation.”