British Oil Major Cairn Energy’s Tax Caper: Why Centre Is Right In Being Rational, Rather Than Pretending To Be Liberal

India will file an appeal against the Cairn arbitration award that has asked India to return $1.4 billion to Cairn Energy Plc. The government source also said, “Cairn had set up a tax abusive structure and did not pay taxes anywhere in the world on the gains that it made in India. In the said case, it was well within India’s sovereign powers to redress the situation of Double Non-Taxation and tax abuse.”

An international tribunal had in December 2020 unanimously ruled that India violated its obligations under the UK-India Bilateral Investment Treaty in 2014, when the Income Tax Department slapped a Rs 10,247 crore tax assessment using legislation that gave it powers to levy taxes retrospectively.

Soon after seeking Rs 10,247 crore in taxes over alleged capital gains made by the company over a 2006-07 reorganisation of India business before its listing, the tax department seized Cairn's residual 10 per cent stake in Cairn India.

India had earlier challenged in Singapore an international tribunal’s verdict in favour of British telecom giant Vodafone Group in a case involving a Rs 20,000 crore demand from the Indian income tax authorities.

It is good that the Narendra Modi government is digging in its heels and continuing the good work initiated in 2012 by the former finance minister late Pranab Mukherjee — nullifying the hyper-technical interpretation of the business connection rule of the income tax law by the Supreme Court in 2011 in the Vodafone case.

The business connection rule says that if a non-resident receives and earns income abroad thanks to a business connection in India, he will have to pay tax in India to that extent.

If the source of income is in India, then it is an Indian income, period. This martinet of a rule has rubbed many a non-resident on the wrong side but in all fairness to the Indian Parliament it is not a far-fetched law.

The SC while ruling in favour of Vodafone had said that the business connection rule cannot be extended to capital gains in the absence of an explicit provision to this effect.

Mukherjee did precisely that — enacting a specific provision to bring into the Indian income tax net retrospectively from the AY 1962-63 any capital gains earned abroad emanating from Indian operations and Indian assets.

After all, if the source rule should be made to capture business income, there is no reason why its pincer should not be extended to capture capital gains as well.

The transfer by Hutchison of its 67 per cent stake in a Camay Island shell company to Vodafone was all about its telecom assets and operations in India.

A similar caper was carried out by Cairn energy in respect of its Indian oil operations. It was therefore disingenuous on the part of Hutchison and now Cairn Energy UK to bridle in anger at the alleged tax overreach of the Indian government.

It is easy for tax liberals to be sanctimonious in their advice to the Indian government not to rock the foreigners’ boat. But no sovereign government likes to let go of its just share of the tax revenues.

Isn’t the US government justifiably angry with Ireland for providing tax sanctuary to US companies, notably Apple Computers that is US’ pride?

Hasn’t Organisation for Economic Co-operation and Development (OECD) given its thumbs up to the rights of its member nations to put their shovels into the profits of multinational companies leaving their footprints in multiple nations on the equitable ground that the nation where a profit is earned gives that nation the right to tax it?

Which by the way vindicates the Indian government’s so-called Google tax, pilloried by our own commentariat more out of its desire to be seen as liberal rather than rational.

In any case there has been a lingering doubt in knowledgeable quarters whether an income tax matter can become a subject of arbitration. Certain matters like crimes are not arbitrable.

Can a company thumb its nose against the Indian government’s demand of income tax by conveniently calling in the arbitrator? If you are doing business in India, you must abide by the Indian laws, period.

Incidentally, the income-tax law in India does not countenance arbitration because it has a well defined hierarchy of appeals. It is time the Indian Arbitration Act was amended to specifically prohibit foreigners from doing forum shopping.

In the list of nine countries whose judicial vindication Cairn Energy has obtained for the arbitral award in its favour, Cayman Island stands out as a butt of joke. It is a country that has scant regard for banking and tax norms.

Yet, its judiciary has been drafted by Cairn Energy to pontificate to India.

Indian government must fight tooth and nail Cairn Energy’s attempts at seizing Indian assets abroad in these countries in retaliation for what the Indian government did to it in 2014.