Cairn Energy Tax Dispute

By : Neha Dhyani

Updated : May 31, 2022, 12:12

The Cairn Energy Tax Dispute with the Indian Government is an investment and tax dispute that has its roots in 2005-2006. The Cairn Energy Tax Dispute is not only a tax-related matter but also involves investment issues, and therefore, the issue comes under the jurisdiction of PCA. That transfer of Cairn India Holding shares took place from Cairn UK to Cairn India.

The Income-tax authorities then decided that since Cairn UK could make capital gains from this transfer, it is bound to pay capital gain tax amounting to INR 24,500 crore. This, the company refused to pay as it had interpreted Indian Laws on capital gain from a different perspective. This was followed by several rounds of litigation at ITAT(Income-Tax Appellate Tribunal) and the High Court. Cairn lost the tax dispute case at ITAT, and a case regarding the valuation of capital gains made by Cairn is pending before the Delhi High Court.

What fuelled the Cairn Energy Tax Dispute?

The dispute was fuelled by the amendment of the Income Tax Act in 2012. Transactions made by non-residents involving the transfer of shares from an overseas company and derivation of substantial value from Indian assets are taxable on a retrospective basis starting from 1961. Based on this retrospective amendment, the Government of India demanded tax from Cairn UK Holdings Ltd. on the ground of capital gains made by the latter in 2006. But, on the refusal by the company to pay the tax, a case was filed at the Income Tax Appellate Tribunal and in the Delhi High Court.

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Cairn Energy Tax Dispute - PACs Verdict Against India

  1. However, in 2020 came the Permanent Court of Arbitration verdict that stated that the Indian Government's decision to apply a retrospective tax on Cairn Plc was wrong.
  2. The three-member tribunal at the Permanent Court of Arbitration ruled against India. India had initially also lost the case with Vodafone Plc over the same retrospective tax legislation amendment.
  3. According to the PCA verdict, the Indian Government has to pay 8000 crores to Cairn.
  4. The verdict further stated that the retrospective tax as demanded by the Indian government was breaching the guarantee of equitable treatment.
  5. It also highlighted how the Central Government of India has failed to keep up with the obligations of the UK-India Bilateral Investment Treaty.

Cairn Energy Tax Dispute's Claim

  • The argument as sighted by Cairn Energy and Cairn UK Holdings was that there was no tax levied on indirect transfers until the time of amendment of the Income Tax Act in 2012 regarding retrospective tax.
  • The claimants further alleged that the amendment breached the UK-India Bilateral Investment Treaty.
  • According to the arbitration award, Cairn Energy successfully moved courts in five countries to recognise its claims. These five countries are the US, the UK, the Netherlands, France, and Canada.

Going ahead, India must take adequate measures in matters related to retrospective taxation. There must be a plan of action to avoid loss of revenue or credibility.

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FAQs on Cairn Energy Tax Dispute

Q.1. What is Cairn Energy Tax Dispute?

The Cairn Energy Tax Dispute is a long-running case between Cairn Energy and the Government of India that resulted from the amendment of the Income Tax Act in 2012 concerning the application of retrospective tax before the date of passing the law.

Q.2. In connection to Cairn Energy Tax Dispute, what is Retrospective Taxation?

The Concept of Retrospective Taxation, as highlighted by the Cairn Energy Tax Dispute, lets a country pass a tax rule on certain products, items, or services and charges companies from a time that is before the date of passing of the law.

Q.3. Concerning the Cairn Energy Tax Dispute, what was the verdict of the PAC?

PAC ruled that the Indian Government's application regarding the retrospective tax from Cairn Energy was wrong. The Government was to pay INR 8000 crores to the company for the damages caused to the latter.

Q.4. Cairn Energy Tax Dispute Started in which year?

The Cairn Energy Tax Dispute started between 2005 and 2006