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Thursday, 12 March 2015 00:00
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Cairn joins Vodafone in challenging the retro-tax law

Now that Cairn Energy Plc has decided to invoke the bilateral investment treaty (BIT) in response to the $1.6 billion tax notice served on it—plus interest and penalties—it becomes the second global firm to challenge India’s retrospective tax law, and in a foreign setting at that. Normally, BIT challenges centre around expropriation or, in the case of the 2G licenses, around court orders cancelling them—tax powers have never been the source of a BIT challenge. What the Vodafone and Cairn cases have done, however, is to get a neutral third party to rule on this, and there is no telling how that will go. While the government maintains that tax law cannot be part of a BIT challenge, in Cairn’s case, the company is arguing that by applying a retrospective tax, the taxman is in breach of the fundamental provision of the BIT, that nothing will be done to endanger an investment already made. And there can be little doubt that since there was no provision to tax either firm at the time the transactions were made—both around 2007—application of the retrospective tax has hurt an existing investment unfairly. In the case of Cairn, for instance, the tax applies to a global reorganisation it did in 2006, and none of the authorities that cleared it—the FIPB or the courts – ever spoke of a tax payment since that was not part of the statute at that point in time. At that point, the Indian oilfields that were held by Cairn Energy Plc through a series of offshore firms were transferred to Cairn India, but no money changed hands since all firms were owned by Cairn Energy Plc.

What makes the Cairn case even more important is that the company had invested over $5 billion in India by the time it exited and it set up an organisation that today accounts for over 30% of India’s oil production—in other words, it is not a fly-by-night operator by any circumstances. Ironically, had the government accepted the recommendations of the Parthasarathi Shome committee set up to look at fixing Indian tax law after the retrospective amendment, Cairn would not have been taxed since Shome had recommended that global reorganisation of assets not be taxed. The Cairn case could have easily been avoided since, as a measure to restore investor confidence, in his Budget last year, the finance minister had set up a committee to examine the use of the retrospective tax. The committee was to look at new cases and, to the extent the taxman had sent a notice to Cairn in January 2014, this was an old case. But given the background of the company and the ramifications of invoking of a BIT, the case could easily have been brought to the committee instead of taking a legalistic position in that it could not have been examined—indeed, the actual tax order was only served on Cairn a few days ago. It is a pity the finance minister who is trying his best to calm investor fears allowed things to come to this pass.

 

 

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