India asked to pay Rs 8,000 cr to Cairn Energy; govt says will study arbitration case verdict

• The international court said that the government's retrospective tax demand was "in breach of the guarantee of fair and equitable treatment

• It added that the government's retrospective demand was 'in breach of the guarantee of fair and equitable treatment'

New Delhi: In a late night verdict released on December 22, the International Court of Justice at The Hague ruled in favour of UK's Cairn Energy and asked the Indian government to pay Rs 8,000 crore in damages to the oil giant. Commenting on the verdict, the Ministry of Finance said on Wednesday that the government will study the award in the arbitration case and will thereafter take a decision on the further course of action. "It is stated that the award in the arbitration case under India-UK Agreement for Promotion and Protection of Investments invoked by Cairn Energy Plc and Cairn UK Holdings Limited against Government of India has been passed. The Government will be studying the award and all its aspects carefully in consultation with its counsels. After such consultations, the Government will consider all options and take a decision on further course of action, including legal remedies before appropriate fora," said an official statement on Wednesday.

The arbitration dispute between the government and Cairn Energy pertains to retrospective taxation. And the verdict comes three months after India lost another arbitration case to Vodafone over retrospective legislation.

What is the Cairn Energy arbitration case all about?

In 2006-07, Cairn UK had transferred shares of Cairn India Holdings to Cairn India as part of an internal group reorganisation. The Income Tax Department had contended at the time that Cairn had made capital gains before an initial public offer (IPO) of shares by Cairn India and was therefore required to pay Rs 24,503.5 crore in taxes to the Indian government. This claim was rejected by the UK-based company who interpreted the law differently. After the UK-based company refused to pay the taxes, a case was filed at the Income Tax Appellate Tribunal (ITAT) and the High Court. While Cairn Energy lost the case at ITAT, the case in the High Court is still pending.

In 2011, Cairn Energy sold Cairn India to mining billionaire Anil Agarwal's Vedanta Group, except for a minor stake of 9.8 percent, which the former was barred from selling by the I-T Department. The government, at the time, also froze payment of dividend by Cairn India to Cairn Energy. The freeze was, however, recently lifted by the government.

What did the International Court of Justice say?

In its verdict, the International Court of Justice said that the matter was not just a tax-related issue but a dispute related to investment and was hence under the jurisdiction of the international arbitration court. The court said that the government's retrospective demand was "in breach of the guarantee of fair and equitable treatment." 

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The government has been asked to pay Cairn Rs 8,000 crore in damages, which include the shares attached by the I-T Department in January 2014 and sold in 2018 to partially recover the tax dues. The government has been asked to pay dues at the share value of Rs 330 in 2014 instead of the Rs 220-240 per share price on which it was actually sold by the Income-Tax Department in 2018. The damages also include Rs 1,590 crore of tax refund due to the UK-based oil major besides the legal fees.

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