Cairn Energy's decision to seek compensation from Indian government at an international tribunal for the loss due to retrospective taxation may 'encourage' other companies to take a similar course, feel tax and legal experts.
Experts feel that Cairn Energy's argument that when the company conducted restructuring there was no capital gains applicable on such activities, and had they known that there could be any tax applicable, they would have acted differently is a 'good' argument and the international tribunal may give an favourable award to the company.
"It is a very good argument, and something which may move the tribunal in Cairn Energy's favour. If tomorrow there is an award against India, the government would have no option but to pay the company, because international reputation also matters. Such an award would encourage companies who are waiting in the wings," says Naresh Thacker, partner and head, litigations and dispute resolution, Economic Laws Practice.
Citing violation of India-UK investment treaty, Cairn Energy has filed a settlement of claim with an international tribunal seeking withdrawal of tax demand and a compensation of $5.6 billion for loss in value due to the retrospective taxation. The move came despite the Indian government's offer to the company to only pay the tax amount and it would waive the interest and penalties.
However, going by Cairn Energy's stance, it looks like they are not in a mood to go for settlement and pay the tax. The government has raised a tax demand of Rs 10,247 crore on Cairn Energy on 'capital gains' it made when it transferred its India assets to its subsidiary Cairn India in 2006.
"The move by Cairn Energy suggest that they don't want to settle the tax dispute with India on conditions put down by the Indian government," says Neha Malhotra, Senior Member, Nangia & Co. Neha also feels that companies like Vodafone, which is also suffering from the impact of retrospective taxation, may take cue from Cairn Energy.
Vodafone has also moved the Hague-based International Court of Justice (ICJ) in the Rs14,200-crore tax case. The tax demand on Vodafone is related to its acquisition of 67 per cent stake in Hutchison Whampoa in 2007. The tax department has argued that Vodafone should have withhold the tax on capital gains made by the owners of Hutchison Whampoa.
When contacted a Vodafone spokesperson said it is not possible for us to make any comment at this stage whether they could go for such an option as the matter is still sub judice.
In 2011, an international tribunal had found India guilty of violating the India-Australia investment treaty in case of White Industries and given an award against India. Though this case was not related to retrospective taxation, the company concerned (White Industries) had also invoked the investment treaty as Cairn Energy has done in its plea.