India to appeal against Cairn arbitration award: Sources

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New Delhi: The government is likely to file an appeal against the Cairn arbitration award contesting its sovereign rights to tax, sources said.

An international tribunal in December had unanimously ruled that India violated its obligations under the UK-India Bilateral Investment Treaty in 2014, when the income tax department had slapped a Rs 10,247-crore tax assessment using legislation that gave it powers to levy taxes retrospectively.

Soon after seeking Rs 10,247 crore in taxes over alleged capital gains made by the company over a 2006-07 reorganisation of India business before its listing, the tax department seized Cairn’s residual 10% stake in Cairn India.

In a ruling, which Cairn had previously described as “final and binding”, the tribunal had ordered New Delhi to pay USD 1.2 billion in damages, plus interest and costs, to compensate Cairn for the shares — long sold off by the tax department — as well as confiscated dividends and withheld tax refunds. This totals to USD 1.4 billion.

Its shareholders have been egging the management to take action to get the money back.

Cairn chief executive Simon Thomson had met Finance Secretary Ajay Bhushan Pandey on February 18 to discuss the arbitration award.

Sources said the government is planning to file an appeal against the tribunal order and it believes the arbitration tribunal cannot question a nation’s sovereign right to tax.

Britain’s Cairn Energy plc has filed cases in the US, the UK and the Netherlands courts to register a USD 1.4 billion arbitration award it had won in a tax dispute against India, as a preparatory action in case it is not paid by the Indian government.

Cairn filed a petition in a Washington DC Federal court on February 12, and followed it up with similar filings in the UK and the Netherlands courts.

Sources said the government will strongly contest other suits filed by Cairn Energy at various other international courts.

Sources said any dispute resolution to be sought by Cairn will have to be within already existing laws.

In a letter to the Indian government last month, Cairn had said its shareholders “expect an early resolution, failing which they will expect Cairn to pursue the award in conformity with its rights under the treaty”.

“The award can be enforced against Indian assets in numerous jurisdictions around the world for which the necessary preparations have been put in place,” it added.

The letter did not specify the assets that might be seized but it is widely speculated that the targets could include bank accounts as well as mobile and immobile property, including the assets of public sector enterprises such as state-owned Air India, but not diplomatic assets.

Earlier this month, Minister of State for Finance Anurag Singh Thakur had told Lok Sabha that the Cairn arbitration award was “under consideration of the government.” Cairn Energy had in 2011, sold Cairn India to mining billionaire Anil Agarwal’s Vedanta Group, barring a minor stake of 9.8%.

It wanted to sell the residual stake as well but was barred by the I-T department from doing so. The government also froze the payment of dividends by Cairn India to Cairn Energy.