In a major setback to India, an international arbitration panel has rejected its demand for a stay on an arbitration initiated by British oil explorer Cairn Energy plc, against a £1.02 billion retrospective tax notice. Comprising of three judges of international repute, the panel also turned down an application for bifurcation of the issue of whether tax is covered under India-UK bilateral investment protection treaty.
The Income Tax department had charged Cairn Energy of making capital gains on transfer of India assets to a newly created firm, in January 2014. Instead of applying long-term capital gains tax, it levied a short-term capital gains tax and slapped a draft tax demand of £1.02 billion. It also debarred Cairn Energy from disposing of its 9.8 per cent remaining stake in Cairn India, which the British firm had sold to Vedanta Group in 2011. The tax department, in April 2014, slapped a £ 2.04 billion demand on Cairn India, the UK firm's erstwhile subsidiary for failing to deduct tax on the capital gains.
Sources said India sought a stay on proceedings in Cairn Energy's arbitration for potentially five years, stating that it is “unfair” that they have to defend two cases at once. However, it was the Indian government's decision to join both the arbitration which is why, they could not back down.
The three-member arbitration panel headed by Geneva-based arbitrator Laurent Levy, rejected the application for 'stay' on March 27, 2017. It rejected the bifurcation application on April 19, 2017, sources said, who added that India can, however, continue its fight and argue that tax matters are not covered under bilateral investment treaties under the main arbitration.
