In yet another setback to the government, an international arbitral tribunal has ruled unanimously that India has breached its obligations to Cairn under the UK-India Bilateral Investment Treaty and has awarded to Cairn damages of $1.2 billion plus interest and costs. It has now become payable. This is the second such defeat for the government after a similar order was passed by an international tribunal against the retrospective taxation on Vodafone in September this year.
Even as people speculate whether the government would appeal against the tribunal order in the Cairn case, many experts are intrigued by the fact that the government remains mum on the Vodafone tribunal order even as the three-month period for appeal is about to get over. The Vodafone verdict was pronounced on September 25, 2020, and the three-month limit is about to get over.
Experts say that the government's response to the Vodafone case could give a hint to what it does in the Cairn case. A couple of Finance Ministry sources told Business Today that the government has not yet spelt out its next move in the Vodafone case, and they cannot say anything more than that as yet.
So, what options does the government have in both the Cairn and Vodafone cases?
"If India wishes to challenge the award, it would have to do so in the Dutch courts (the seat of the arbitration was The Hague) and it would have three months from the date of the award to file any such challenge. In the meantime, Cairn would be entitled to enforce the damages award world-wide against India's assets, as long as those assets are not immune from enforcement," says Rishab Gupta, Partner, Shardul Amarchand Mangaldas & Co.
Supreme Court lawyer Arvind Datar, who has represented Cairn in this case, says that the government has the right to appeal but he does not know they will appeal or not. At the time of Vodafone arbitration order, Datar had told Business Today that the government should have gone for the settlement long back.
Will the government go for a settlement? Some experts believe the government may not go for the appeal and instead resist enforcement of the awards.
Sunil Arora, taxation partners, ASA & Associates, says that the government has in the past made it clear that issues of tax should be independent of bilateral investment treaties as taxation is a sovereign matter.
Amit Maheswari, Partner, AKM Global, a consulting firm states, "India has cancelled most of the existing bilateral investment treaties and the under the new model, tax disputes cannot be subject to arbitration."
Although he says that retrospective action has rightly been held to be unfair to foreign investors, this decision will have a bearing on ongoing disputes. "The government had been waiting for this (Cairn) decision to decide on its next course of action," he says.
A tax official had earlier told Business Today that the government has been contesting that a tax demand cannot be adjudicated by such a tribunal. "Tax matters are always outside the purview of the investment treaty as taxation is a sovereign function. If the Parliament of India has enacted a law, how can any foreign tribunal say that such a law is wrong? The issue then becomes about sovereignty, and internationally opinion is divided if investment treaty can cover tax matters or not," he says.
The Cairn issue has its roots in the tax demand by the Income Tax Department against Cairn UK Holdings Ltd. for its failure to pay capital gains tax when it sold shares in Cairn India Holdings Ltd, a Jersey company, to Cairn India Ltd, an Indian company.