NE LEGAL BUREAU
NEW DELHI, MAY 23
India has challenged an international arbitration tribunal asking it to return $1.2 billion to UK’s Cairn Energy Plc on grounds that it had never agreed to arbitrate over a “national tax dispute”, the finance ministry said on Sunday.
While the government appointed a judge on the three-member arbitration panel and fully participated in the proceedings against India seeking Rs 10,247 crore in back taxes from Cairn, the ministry said the tribunal “improperly exercised jurisdiction over a national tax dispute that the Republic of India never offered and/or agreed to arbitrate.”
India had seized and sold shares of Cairn in its erstwhile India unit, confiscated dividend due and withheld tax refunds to recover the tax demand it had levied two years after passing a law in 2012 that gave it powers to levy tax retrospectively.
Cairn invoked arbitration under the India-UK bilateral investment treaty.
In December last year, Cairn won an award that held the levy of taxes using the 2012 law unfair on the company and the tribunal asked the Indian government to return $1.2 billion plus cost and interest.
In a statement, the finance ministry called the 2006 reorganisation of Cairn’s India business for listing on the local bourses as “abusive tax avoidance scheme that were a gross violation of Indian tax laws, thereby depriving Cairn’s alleged investments of any protection under the India-UK bilateral investment treaty.”
“The award improperly ratifies Cairn’s scheme to achieve double non-taxation, which was designed to avoid paying taxes anywhere in the world, a significant public policy concern for governments worldwide,” it said, adding the government on March 22 challenged the arbitration award in a court in The Hague — the seat of the arbitration.
It is not clear if a court in The Hague can go into merits of levy of taxation by the Indian government over a corporate amalgamation scheme.
Precedence dictates that challenges to international arbitration award are restricted to tribunal not following due process.
The tribunal that went into Cairn’s challenge consisted of three judges – one judge each being named by the company and the Indian government and a third neutral presiding officer.
The three-member panel unanimously overturned the tax and asked India to return the value of shares sold, dividend seized and tax refund withheld. This together with interest and cost comes to $1.72 billion.
With India refusing to pay, Cairn registered the award in nine jurisdictions, including the US, the UK, Canada and Singapore, and has started a process to recover the money from government-owned entities.
Earlier this month, it filed a plea in a court in New York for declaring Air India as India’s alter ego so it can be forced to pay the award.
“The Government of India is vigorously defending its case in this legal dispute. It is a fact that the Government has filed an application on March 22, 2021 to set aside the highly flawed December 2020 international arbitral award in The Hague Court of Appeal,” the Department of Revenue in the Ministry of Finance said in the statement.
India’s appeal before The Hague Court also says that the claims underlying the award are based on an abusive tax avoidance scheme that was a gross violation of Indian tax laws, thereby depriving Cairn’s alleged investments of any protection under the India-UK bilateral investment treaty.
It further said the proceeding before The Hague court is pending and the government is committed to pursuing all legal avenues to defend its case in this dispute.
It added that Cairn’s CEO and its representatives have approached the government 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,” the statement added.
If the New York court were to recognise Air India as the alter ego of the Indian government, Cairn can seek attachment or seizure of its assets in the US such as airplanes, immovable assets and bank accounts to recover the amount it was awarded by the arbitration tribunal.
Even if Cairn succeeds in getting Air India recognised as the alter ego of the government, it would not mean that the airline’s assets will fall into the hands of the British firm, sources said.
All it means is that Cairn can seek seizure of any asset Air India may have in the US. There may not be many such assets.
The only threat there could be is that when an Air India airplane lands at any US airport, Cairn would be able to move court and get that attached before it flies out.
