India has challenged an international arbitration tribunal asking it to return $1.2 billion to UK's Cairn Energy Plc on grounds that it had never agreed to arbitrate over a "national tax dispute", the finance ministry said on 23 May 2021. While the government appointed a judge on the three-member arbitration panel and fully participated in the proceedings against India seeking Rs 10,247 crore in back taxes from Cairn, the ministry said the tribunal "improperly exercised jurisdiction over a national tax dispute that the Republic of India never offered and/or agreed to arbitrate."

What

  1. India had seized and sold shares of Cairn in its erstwhile India unit, confiscated dividend due and withheld tax refunds to recover the tax demand it had levied two years after passing a law in 2012 that gave it powers to levy tax retrospectively.
  2. Cairn invoked arbitration under the India-UK bilateral investment treaty.
  3. In December last year, Cairn won an award that held the levy of taxes using the 2012 law unfair on the company and the tribunal asked the Indian government to return USD 1.2 billion plus cost and interest.
  4. The finance ministry called the 2006 reorganisation of Cairn's India business for listing on the local bourses as "abusive tax avoidance scheme that was a gross violation of Indian tax laws, thereby depriving Cairn's alleged investments of any protection under the India-UK bilateral investment treaty."
  5. The award improperly ratifies Cairn's scheme to achieve double non-taxation, which was designed to avoid paying taxes anywhere in the world, a significant public policy concern for governments worldwide.
  6. The tribunal that went into Cairn's challenge consisted of three judges -- one judge each being named by the company and the Indian government and a third neutral presiding officer.
  7. The three-member panel unanimously overturned the tax and asked India to return the value of shares sold, dividend seized and tax refund withheld. This together with interest and cost comes to USD 1.72 billion.