Panel rejects stay on Cairn arbitration

Panel rejects stay on Cairn arbitration

Panel rejects stay on Cairn arbitration

In a setback to India, an international arbitration panel has rejected its demand for a stay on an arbitration initiated by British oil explorer Cairn Energy against a Rs 10,247 crore retrospective tax notice.

The panel, comprising three judges of international repute, has also turned down India’s application for bifurcation of the issue of whether tax is covered under India-UK bilateral investment protection treaty, sources privy to the development said.

Income tax department had in January 2014 charged Cairn Energy of making capital gains on transfer of India assets to a newly created firm, Cairn India and listing it on stock exchanges. Instead of applying long-term capital gains tax, it levied a short-term capital gains tax and slapped a draft tax demand of Rs 10,247 crore.

Also, it debarred Cairn Energy from disposing of its 9.8% remaining stake in Cairn India, which the British firm had in 2011 sold to Vedanta Group.

In April 2014, the tax department slapped a Rs 20,495 crore demand on Cairn India, the UK firm’s erstwhile subsidiary for failing to deduct tax on the capital gains. Both firms denied any tax was due and initiated arbitrations — Cairn Energy under India-UK investment treaty and Vedanta under India-Singapore investment treaty.

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 government’s decision to join both the arbitration and hence it could not go back on anyone of them.