Cairn Energy PLC and Cairn UK Holdings Limited (CUHL) v. Government of India

At a glance

Parties

Cairn Energy PLC (later Capricorn Energy PLC) and Cairn UK Holdings Limited (CUHL), both of the United Kingdom, v. the Republic of India

Case no.

PCA Case No. 2016-7

Forum and rules

Ad hoc arbitration under the UNCITRAL Arbitration Rules 1976, administered by the PCA; seat The Hague, the Netherlands

Treaty

UK–India BIT (in force 6 January 1995)

Tribunal

Laurent Levy (Presiding Arbitrator), Stanimir A. Alexandrov, J. Christopher Thomas QC

Sector

Oil and gas exploration and production; retroactive capital gains taxation

Outcome

Award of 21 December 2020: India breached fair and equitable treatment and was ordered to pay compensation and withdraw the tax demand. The Hague Court of Appeal annulled the award on 21 December 2021, at India's request and without objection from Cairn.

Amount

Awarded: USD 984,228,274 for lost proceeds from CIL shares, USD 240,645,158.81 and USD 7,946,710.55 for withheld tax refunds, each with interest at 6-month US$ LIBOR plus 1.375%, compounded semi-annually. A claim for USD 230,868,360 (UK corporation tax) was denied. Costs: USD 2,005,700.42 in arbitration costs and USD 20,389,413.97 in legal costs (the Claimants had claimed USD 26,159,184.91).

The dispute

In 2006 the Cairn group reorganised its Indian oil and gas business before listing Cairn India Limited (CIL) on the Bombay Stock Exchange. As part of this, CUHL transferred the shares of Cairn India Holdings Limited (CIHL), a Jersey company, to CIL. In 2012 India amended Section 9(1)(i) of the Income Tax Act 1961 with retroactive effect. On that basis the Income Tax Department reopened the assessment and, by a Final Assessment Order of 25 January 2016, taxed CUHL on alleged capital gains from the CIHL transfer. India also seized and later sold CUHL's shares in CIL and set off tax refunds against the demand. The Claimants argued that applying the 2012 Amendment to them retroactively breached the UK–India BIT, in particular fair and equitable treatment under Article 3(2). India objected that tax disputes fall outside the BIT and are not arbitrable, that the claims were premature and concerned "returns" rather than "investments", and that the 2006 transactions were taxable anyway, as tax-abusive or under Section 2(47)(vi) of the Act.

Key holdings

1. The Tribunal has jurisdiction and the claims are admissible. India's objections were rejected: that there was no protected investment, that tax disputes are excluded or not arbitrable, and that the claims were premature. Award ¶ 2032(1)
2. India failed to accord the Claimants' investments fair and equitable treatment, in breach of Article 3(2) of the BIT, by applying the 2012 Amendment retroactively to tax the 2006 CIHL transfer. The Tribunal found it unnecessary to rule on the other claimed breaches. Award ¶ 2032(2)
3. India's arguments on unlawful tax avoidance and on Section 2(47)(vi) of the Income Tax Act were not the grounds of the tax demand and, in any event, were not substantiated on the merits. Award ¶ 2032(7)
4. The tax demand for AY 2007-08 is inconsistent with the Treaty. India must permanently withdraw it and stop seeking to recover the tax, interest or penalties. India must also pay USD 984,228,274 for the net proceeds of the planned 2014 sale of CIL shares, and USD 240,645,158.81 and USD 7,946,710.55 for withheld tax refunds. Interest runs at the Claimants' borrowing rate, 6-month US$ LIBOR plus 1.375%, compounded semi-annually. Award ¶¶ 1951, 2032(3)–(5)
5. Costs follow the event. India bears all arbitration costs and most of the Claimants' legal costs. Excluded are the Claimants' costs of their unsuccessful request for interim measures, of the Indian domestic proceedings and of KPMG, and the Claimants must reimburse India's costs of the interim-measures request. Net result: India pays USD 20,389,413.97 in legal costs and USD 2,005,700.42 in arbitration costs. Award ¶¶ 2021–2031
6. India's request to stay the arbitration pending the parallel Vedanta arbitration was denied. A stay would seriously prejudice the Claimants, would not materially reduce the risk of inconsistent outcomes, and would cause unreasonable delay. The request to bifurcate jurisdiction from the merits was also denied, because by then it would not improve fairness or efficiency. PO3 ¶¶ 136–142; PO4 ¶¶ 84–88
7. The Hague Court of Appeal annulled the award without examining India's grounds (no valid arbitration agreement; public order). Cairn did not object to annulment, given India's Taxation Laws (Amendment) Act, 2021 and the Tax Rules 2021. The annulment also annulled the enforcement order of 8 January 2021, and each party bears its own costs. Judgment ¶¶ 2.2–2.4, 3

Procedural history

1. 22 September 2015Notice of Arbitration filed under Article 9 of the UK–India BIT.
2. 25 January 2016Final Assessment Order issued against CUHL for AY 2007-08.
3. 18 April 2016First procedural hearing in Paris.
4. 12 August 2016Procedural Order No. 2: India's request to apply the UNCITRAL Transparency Rules is rejected. Only basic case information, orders and awards may be published.
5. 9 March 2017India's Income Tax Appellate Tribunal (Delhi) confirms capital gains of Rs 245,035,012,588 in CUHL's hands but deletes interest under Sections 234A and 234B; the appeal is partly allowed.
6. 31 March 2017Procedural Order No. 3: India's application to stay the proceedings is denied.
7. 19 April 2017Procedural Order No. 4: India's application for bifurcation is denied.
8. 18 March 2019Procedural Order No. 16: the parties may not disclose arbitration materials to any outside body, including the Delhi High Court, without the other party's consent or the Tribunal's leave.
9. 21 December 2020Final Award: India is found to have breached fair and equitable treatment and is ordered to pay compensation and costs and to withdraw the tax demand.
10. 21 December 2021The Hague Court of Appeal annuls the award, on India's summons of 22 March 2021, which Cairn did not oppose; the leave to enforce granted on 8 January 2021 falls with it.

Tribunal, counsel and experts

Decided by

• Laurent Lévy President — chosen by the co-arbitrators
• Stanimir A. Alexandrov Co-arbitrator
• J. Christopher Thomas Co-arbitrator
• C.A. Joustra Judge, The Hague Court of Appeal — appointed by a court
• P. Glazener Judge, The Hague Court of Appeal — appointed by a court
• A.J. Swelheim Judge, The Hague Court of Appeal — appointed by a court
• H. S. Sidhu Judge, Income Tax Appellate Tribunal, Delhi Bench (Judicial Member)
• Prashant Maharishi Judge, Income Tax Appellate Tribunal, Delhi Bench (Accountant Member)

For the claimant

Quinn Emanuel Urquhart & Sullivan, LLP · Shearman & Sterling LLP · Cleber Advocaten · Shepherd and Wedderburn LLP · S&R Associates · Platinum Partners · Blackstone Chambers · Chambers of Arvind Datar · Harish Salve · G.J. Meijer · N. Peters · Percy Pardiwala · P Maheshwari · Aarti Sathe

For the respondent

Income Tax Department · G.J. Siegers · M.M. van Leeuwen · Albert Jan van den Berg

Experts

Richard Boulton (claimant) · John Gardiner (claimant)

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Keywords

• retroactive taxation
• capital gains tax
• 2012 Amendment
• Section 9(1)(i) Income Tax Act
• indirect transfer
• Vodafone
• fair and equitable treatment
• UK–India BIT
• tax avoidance defence
• arbitrability of tax disputes
• Vedanta
• oil and gas
• stay of proceedings
• bifurcation
• confidentiality
• transparency
• annulment
• Taxation Laws (Amendment) Act 2021

Summary generated with AI from the published documents — refer to the award for the authoritative text.