Why Cairn Fought Overseas

In tax matters in particular, the government of India, is a compulsive and reckless litigant, which explains why it loses most of its cases.

In tax matters in particular, the government of India, is a compulsive and reckless litigant, which explains why it loses most of its cases, at every level of the judiciary, be it the ITAT, the High Courts and the Supreme Court too. In doing so, the government is completely unmindful of the immense hardship that it causes to the tax payers, which vitiates the overall business environment and erodes the ease of doing business in India. The government is also the most unsporting, grudging, disgruntled and vengeful litigant, such that when the stakes are high, or some neta/babu’s misplaced pride and customary arrogance is at stake, then after losing a case at the Supreme Court, it blatantly amends the tax law retrospectively, to undo the court judgement and the tax payer’s victory. The most famous of such cases in recent times has been that of Vodafone, where the government after losing in the Supreme Court in January 2012, immediately amended the Income Tax Act retrospectively, from its very inception in 1961, and thus nullified the Supreme Court judgement in the case of Vodafone. It was an unjust and unbecoming conduct on the part of the government, which got it the shameful tag of ‘tax terror’ and enormous amount of bad press for India, in the global media.

The government can easily indulge in such bluster and bully, because it fights tax payers on its own turf, where it has the unchallenged, undisputed and end to end power to make the law, enforce it and amend it too, at its sweet will. It’s a game where it is the player and the referee too. But it’s a totally different story and the dynamics of law enforcement and litigation change completely, when a tax payer drags the government to courts abroad, and litigates under a foreign law, in a foreign land. On a foreign territory and under a foreign law, the Indian government’s power to amend the law and undo a tax payer’s victory is gone. It creates a neutral level playing field, where the mighty Indian government, is just another ordinary litigant, with no special powers, of the kind it has in India. The moral of the story is that, if the stakes are high and if you want a fair litigation, where the government cannot bend and amend the tax law, unmindful of the niceties and principles of justice, then fight the government in foreign courts, under international laws and treaties and not under an Indian law which it can amend as and when it wants to do so. And that’s what we are seeing in the case of the British company Cairn Energy.

Lets have a look at the sequence of events in this case, which at the moment is in global limelight. In,

2004 – Cairn discovered the Mangala oilfield at Barmer, Rajasthan.

2006 – Cairn restructured its group shareholding in UK, under an internal reorganisation, involving the ownership of Cairn India, on which it paid no tax in India, since the transaction was fully conducted abroad and was beyond the ambit of the Indian tax laws.

2012 – The government amended the Income Tax Act retrospectively, wef 1961, after losing the Vodafone case in the Supreme Court.

2014 – The government raised a tax demand of $ 1.4 bn on Cairn UK, saying that its internal restructuring in 2006, was now taxable in India, by virtue of the retrospective amendment of the tax law, which demand soon ballooned to over Rs 22000 cr together with interest and penalty.

2015 – Wizened by the Vodafone experience, Cairn focused on litigating abroad, and rushed into international arbitration at The Hague, contending that such tax demand was a stark violation of the India UK Investment Treaty and hence was invalid and not enforceable.

2018 – The hearing concluded in the case.

In December 2020, an arbitration award was unanimously given in favour of Cairn UK, holding that the dispute is not just one of a tax issue, but is an investment related one too and is thus within its jurisdiction to decide. It held that the disputed tax levied on Cairn by the government of India was in breach of guarantee of fair and equitable treatment, under the India UK Investment Treaty. It asked the Indian government to pay $ 1.2 bn to Cairn, together with interest and costs, which aggregated to $ 1.72 bn.

The turn of events after this arbitration award was given in December 2020, have been fast paced, with Cairn seizing and leading the initiative. In,

Jan 2021 – Cairn demanded that the government pay it the award amount of $1.72 bn and said that it will do whatever is needed, to recover the amount and protect its shareholders interests.

Feb 2021 – Cairn filed a separate case in a US Court to recognise and confirm the arbitration award.

Feb 2021 – The Cairn CEO visited India, exploring an amicable out of court settlement. The Finance Minster refused to meet him. He met the Finance Secretary and the CBDT Chairman, who suggested that Cairn should accept the tax demand and settle it under the ongoing Vivad Se Vishwas Scheme for settlement of tax disputes, without paying interest and penalty.

Mar 2021 – Cairn told its shareholders in its Annual Report that the arbitration award is enforceable against the Indian government in 160 nations, which have ratified the UN Convention on Recognition & Enforcement of Foreign Arbitral Awards. The company said that it has already moved courts in USA, UK and three other nations, looking into the possibility of seizing assets of the Indian government, including its bank balances.

Mar 2021 – The government filed an appeal in a Dutch Court, challenging the arbitration award and seeking a stay on it. It also said that it was contesting the award in at least 8 jurisdictions, including UK, USA, France and Canada. It said that it is contesting and defending its sovereign right to levy and collect tax in India.

Apr 2021 – Cairn said that it has identified assets of over $ 70 bn of the Indian government, which included air planes, oil & gas cargoes, bank balances, assets of PSUs and PSBs etc and that it has initiated the process of seizing them, to recover its claim of $ 1.72bn.

May 2021 – The government asked the public sector banks to watch out and protect their overseas foreign bank balances.

May 2021 – Cairn has sued Air India in the NY District Court, to enforce the $ 1.72 bn award, challenging that the distinction between Air India and the government is illusory and improperly shields its assets from Cairn.

May 2012 – The government says that it has assembled a global team of experts to defend its assets in overseas courts and that the arbitration enforcement action is illegal.

The fact of the matter is that this action of Cairn is not without international precedents and has often been effective and successful against erring governments. In 2019, ConocoPhillips of USA, effectively recovered $ 2bn from PDVSA the Venezuelan government oil company, towards a 2007 arbitration award, in another case, an American Hedge Fund enforced the recovery against bonds of the Argentine Government by seizure of a ship of the Argentine Navy, in yet another matter, a French Court ordered seizure of a Congo government airplane towards recovery of $ 30mn from its state owned oil company and last year the Malaysian government seized planes of the PIA at Kuala Lumpur, to enforce recovery of airplane lease rentals for an Irish company.

A few interesting points emerge out of this unprecedented case :

1. If you have the resources, then drag the government and litigate on a neutral foreign turf, or else a victory will always elude you. But, you cannot do that, if you have other local assets and businesses in India at stake. Cairn UK has been able to do so because it is wholly based abroad and is therefore beyond the clutches of the Indian government. That perhaps explains why, despite a similar victory, Vodafone has not gone the Cairn way.
2. With the Cairn dispute having reached an advanced stage and no party willing to relent, and both determined to explore any and all options, any closed door and dignified settlement of the case is ruled out.
3. India’s best hope in this case is that it wins its appeal against the arbitration award. But whether it wins or loses, more bad press for India is inevitable. After all such retrospective tax demand, which is the root cause of this litigation is neither honourable, nor just and is thus not defensible.