Govt's retro tax settlement with Cairn Energy may hinge on Vedanta case

The Union government’s offer of settling the retrospective taxation case with Cairn Energy may hinge on Vedanta withdrawing the ongoing arbitration from the Singapore Tribunal on the same issue.

The government has offered to refund Cairn Energy Rs 7,900 crore that it had collected under the retrospective tax demand on fulfilment of certain conditions, including withdrawal of pending litigation and furnishing of an undertaking to the effect that no claim for cost, damages, interest, etc., would be filed. This condition is also part of the Taxation Laws (Amendment) Bill, 2021, passed by Parliament earlier this week.

The proposal of Vedanta withdrawing a parallel arbitration on the same issue was also taken up with Cairn executives in a meeting with the finance ministry on Wednesday. 

Under the arbitration in Singapore, Anil Agarwal-led Vedanta has sought damages worth close to Rs 5,000 crore under the India - Singapore investment treaty over significant decline in share value due to the Rs 10,250-crore tax notice to its erstwhile subsidiary Cairn India. The Indian entity subsequently merged with Bombay Stock Exchange-listed Vedanta, leading to Cairn Plc holding in Vedanta as well.  

The amendment allows the government to withdraw the retrospective tax demands made using a 2012 legislation on the indirect transfer of Indian assets. The government is now formulating the rules for the amendment. "This is a very peculiar case. There are multiple cases. The Vedanta case is in the Singapore Tribunal. They are inter-related as they are starting from the 2012 order. So ideally they will all need to be withdrawn. But we are still in the process of formulating the rules," said a government official. "The rules will clarify the mode of action on what both the parties need to do in order to honour the amendment," he added. 

India lost the international arbitration with Cairn Energy at The Hague in December and the former was given an award of $1.2 billion. It was appealed by India in March and the hearing for setting aside the order is scheduled in September. 

London-based Vedanta Resources has also served a notice of claim against the Government of India under the India-United Kingdom BIT, challenging the tax demand on March 27, 2015. A senior Vedanta official, however, maintained that his company was not party to Cairn Energy litigation.

In May 2021, a Singapore tribunal had rejected an Indian government plea on the Vedanta case seeking to implement a regime to permit cross-disclosure of documents between the two arbitrations. The government had pleaded that there was a potential overlap between the Cairn and Vedanta arbitration cases and the appellant was concerned about the risk of inconsistent findings by the two tribunals.
 

Cairn Energy had also filed the case in the Delhi High Court pertaining to computation of capital gains and abuse of tax. The appeal was filed by Cairn over the ITAT order. ITAT had given Rs 18,800-crore interest amount relief to Cairn but had upheld the I-T department’s capital gains tax demand of Rs 10,240 crore. The ITAT had in 2016 given relief on interest to Cairn on grounds that advance tax was a retrospective levy so it could not have been anticipated by the assessee. The tribunal also held that a foreign company that pays tax deducted at source is not liable to pay advance tax, as per section 234B of the Income Tax Act.

Cairn has argued in its appeal that the cost of acquisition should be taken as full value of consideration, and therefore the capital gain arising from the transaction should be zero.