Arbitration Intelligence India: Cairn Energy v. The Government Of India
This article is about ‘Arbitration Intelligence India: Cairn Energy v. The Government Of India‘ decision at The Hague directing the Indian government to pay damages worth $1.2 billion to Cairn Energy since a case of retrospective tax was wrongly applied on the company. Introduction In today’s time, it is pertinent to indulge in the discussion regarding the aspects… Read More »
This article is about ‘Arbitration Intelligence India: Cairn Energy v. The Government Of India‘ decision at The Hague directing the Indian government to pay damages worth $1.2 billion to Cairn Energy since a case of retrospective tax was wrongly applied on the company.
In today’s time, it is pertinent to indulge in the discussion regarding the aspects of the significance of Bilateral Investment Treaties or BITs to be regarded as one of the most valued tools to investors to protect their assets and investment. We will have this discussion in the background of the recent dispute between Cairn Energy and the Indian government.
Now while it appears that Cairn Energy and the Indian government have almost buried the hatchet, the journey of this dispute from the institution of the arbitration to the making of the award and to its eventual enforcement has offered us some valuable insights. We can make it concretely assertive by considering an example that explains the importance of the bedrock principle of fair and equitable treatment to investors to protect their assets and investment.
Secondly, it is the approach of the arbitral tribunals while dealing with issues raised by the state in regards to the non-arbitrability of tax issues. The third one is the most important point that the issues faced by an investor while seeking to enforce an award.
How Did the Case Arise?
The critical point of the origin of this muddle primarily lies in a somehow separate but similar case between the Government of India and a telecom giant, Vodafone. Vodafone had been famously purchased significant shares of a non-Indian company called Hutchison Whampoa. The leading global mobile telecommunication giant, Hutchison Whampoa, in return, owned substantial assets in India. Now, the issue is that the Indian government contended that this transaction led to Vodafone owing capital gains tax and withholding tax to the Indian government.
However, Vodafone resisted this demand. Owing to this matter, the dispute eventually reached the Supreme Court of India, and now, the Indian Supreme Court had given its judgment and concluded this case in favor of Vodafone. As a response to this decision, the Indian government resorted to the amendment of the Income Tax Act with the retrospective effect to tax all the transactions where there is an indirect transfer of capital assets in India by a non-resident company or entity.
Key Issues in The Case
Now the amended tax law caught within its scope a transaction of Cairn Energy of as far back as of 2006. The income tax department primarily raised a demand on Cairn Energy of principal tax dues of approximately 1.6 billion dollars. The fact should also be borne in mind that there was also a restriction on Cairn Energy from selling its shares in the Indian subsidiary which was involved in the transaction of 2006. On 21st December 2020, the Arbitral Tribunal passed a unanimous award rejecting the objections on the jurisdiction.
The finding of the tribunal was that the same was not a taxation case per se. It was primarily one of a tax-related investment dispute, in which the tribunal carried out a balancing exercise between India’s public policy objectives and one of preserving the values of legal certainty and predictability. As per the Arbitral Tribunal, it was observed that the Government of India did not have a clear public purpose objective of introducing the retrospective tax.
On the other hand, resorting to the imposition of the new tax burden on a transaction that had already taken place and which was not taxable at the relevant time, Cairn Energy had been deprived of examining the consequences of its conduct. This was considered to be a clear violation of the principles of legal certainty as per the tribunal and this according to the tribunal was a core element of the fair and equitable treatment standard.
Now, construing the matter of the same, the tribunal gave directions to the Indian government to withdraw its tax demand and to further compensate Cairn Energy to the extent of 1.23 billion dollars along with further interests and costs.
What Can Be Learnt from The Case
The Vodafone and Cairn Energy cases are a timely reminder of the limits placed by Bilateral Investment Treaties (BITs) on sovereign’s rights of taxation. Conversely, it has its prime stand regarding the highlights of the issues and certain more hardships faced by an investor while seeking to enforce an award. For instance, Cairn Energy was also seeking to enforce the award against assets owned by state-owned entities for which it would have to meet a high bar to show and justify the fact that these entities are nothing but an alter ego of the state.
Also, it is unclear whether Indian courts would be in a position to assist Cairn Energy with enforcement of the award in India considering certain recent rulings of high courts casting doubt over whether these awards are recognized under the Indian Arbitration Act. Now while these questions continue to remain unresolved the fact that the Indian government has withdrawn the retrospective tax amendment person to the arbitral award certainly underscores the importance of BITs to protect the interests of investors.
Despite the epidemic, India’s achievements and development on the Foreign Direct Investment (FDI) landscape in 2020 significantly attest to the prime investment prospects offered to foreign investors in India. The much-discussed cases of Vodafone and Cairn, on the other hand, sincerely serve as a clear reminder of the limitations imposed by international law on even states’ sovereign taxation powers.
It is justifiable to assert that the states have the authority to levy tax and assess whether or not a transaction is taxable. As a result, India can defend the use of its sovereign prerogative in relation to security or revenue authority measures. However, the method in which tax is levied taking an example, whether it is used to target, discriminate against, or impose liability on foreign investors arbitrarily can be fairly assessed under a BIT.
In order to establish a reputation as an investment-friendly nation, it is critical for India to make pragmatic judgments about foreign investment and foreign investors, as well as to bestow the reverence of its sovereign obligations to other countries under international treaties as part of its efforts to do so. The best course of action is to recognize sovereign powers while exercising them in a manner that is consistent with international law and custom.