The Indian government has refunded Cairn Energy Plc ₹7,900 crores in taxes collected to enforce a retrospective tax demand, putting an end to a seven-year-old dispute that had tarnished the country’s image as an investment destination. The company, which has changed its name to Capricorn Energy PLC, stated in a statement that it received “net proceeds of $ 1.06 billion,” nearly 70% of which will be returned to shareholders.
The tax department sought ₹10,247 crores in taxes from Cairn under a 2012 legislation that empowered it to go back 50 years and impose capital gains levies wherever ownership changed hands overseas but business assets remained in India.
Prior to its initial public offering on stock exchanges in 2006-07, Cairn reorganized its India business, which included operations of Rajasthan’s prolific oil fields. While the company sold the majority of its India operations to Vedanta in 2011, it was hit with a tax demand notice in 2014 for alleged capital gains on the reorganization.
Cairn contested against India’s claim and won the case
The British firm contested the demand, claiming that all taxes were properly paid at the time of the reorganization, which was approved by all applicable statutory authorities. However, the tax department attached and later sold Cairn’s residual shares in the Indian unit in 2014. Additionally, it withheld tax refunds and seized dividends owed to it in order to satisfy a portion of the tax demand. All of this came to a total of ₹7,900 crores.
Cairn took the government to international arbitration over the levy and enforcement proceedings and obtained a favorable ruling on December 22, 2020, ordering India to refund the tax collected, along with interest and penalties.
The government initially refused to honor the award but amended the law in August 2021 to eliminate all retrospective tax demands and to refund money collected without interest or penalty.
Cairn’s change of heart came after he began seizing the Indian government’s overseas assets — ranging from flats used by its diplomatic staff in Paris to Air India planes in the United States — in order to recover the refund due.
Cairn withdrew all cases brought to collect the tax refund ordered by the international arbitration tribunal following the rescinding of the retrospective raising of demand as part of the settlement reached with the government over the imposition of back taxes.
“India holds a special place in our company’s history, and we are delighted that this matter has been resolved,” said Simon Thomson, chief executive of Capricorn Energy. He stated that the company began investing in India in the 1990s as one of the first international companies to enter the country’s oil and gas industry with operations in Andhra Pradesh and then Gujarat.
However, it was the January 2004 discovery of the Mangala oil field in Rajasthan, one of the largest hydrocarbon discoveries in Indian history, that had the greatest impact.
“Ultimately, the company made over 40 discoveries in the area and built the world’s longest heated pipeline to transport crude from the Mangala Processing Terminal to the coast, with production beginning in August 2009. The terminal continues to supply more than a third of India’s total crude oil production today,” he explained.
India enacted new legislation to avoid Cairn like conflict
To rehabilitate India’s damaged reputation as an investment destination, the government enacted new legislation in August 2021 to waive 1.1 lakh crore in outstanding claims against multinationals such as Vodafone, Sanofi, and brewer SAB Miller, which is now owned by AB InBev, and Cairn. Around ₹8,100 crores collected from businesses under the now-defunct tax provision will be refunded if firms agree to drop pending litigation, including interest and penalty claims. Cairn alone is owed ₹7,900 crores.
Following this, the government notified rules in November 2021 that, if followed, will result in the government withdrawing tax demands made under the 2012 retrospective tax law and any tax collected in enforcing such demand being refunded.
Companies must agree to indemnify the Indian government against future claims and to withdraw any pending legal proceedings in exchange for this.
Cairn initiated proceedings on November 26, 2021, to withdraw lawsuits it had filed in several jurisdictions to enforce the international arbitration award, which reversed India’s retrospective tax levy of ₹10,247 crores and ordered India to refund the money already collected. To begin, the Mauritius lawsuit seeking recognition of the arbitration award was withdrawn, followed by similar actions in the courts of Singapore, the United Kingdom, and Canada.
On December 15, 2021, it sought and obtained the ‘voluntary dismissal of a lawsuit it filed in a New York court seeking to seize Air India’s assets in order to recover money owed to the government. On the same day, it filed a similar motion seeking recognition of the arbitration award in a Washington court.
Recognizing an arbitration award is the first step toward initiating enforcement proceedings such as asset seizure. Following that, the critical lawsuit in a French court, which had attached Indian properties on Cairn’s petition, was withdrawn, as was another in the Netherlands. Following that, the company provided documentary evidence of the withdrawal of cases and executed an indemnity bond. It was refunded ₹7,900 crores following a thorough examination of the document.