Even even though the government has mentioned it will challenge the Cairn Energy arbitration award, what the grounds of the appeal will be is not straight away clear. Some newspaper reports recommend one line of appeal could be that Cairn structured the deal in such a way as to keep away from paying tax, and that is not permitted beneath the law certainly, that argument is also in maintaining with the other argument created by the Indian taxman, that irrespective of the UPA’s retrospective tax amendment, the Cairn transaction was often taxable due to its tax-avoidant nature.
Whether that will work or not is unclear, but it would be a excellent concept to get an independent group of tax professionals to study the arbitration award due to the fact it appears to have debunked lots of of the arguments created by the Indian side like the ones on the retrospective tax becoming merely a clarification of the current law, of even the pre-retro-tax law enabling the taxman to charge taxes on overseas sales exactly where the underlying asset is in India, of the Cairn transaction becoming structured in such a way as to keep away from taxes, and so on.
The arbitration panel does not get into the taxman’s calculations of the capital gains created by Cairn but it does record that the taxman focused on just one leg of the transaction, and it also points out that if Cairn did not spend capital gains tax in the UK, that is the UK government’s policy decision, not simply because the deal was structured to be tax-avoidant.
Indeed, as aspect of its try to effectively challenge the Cairn award, the taxman will have to clarify why, for instance, when there have been 4 occasions – more than a period of a number of years – on which the Cairn deal was examined by the government, there was no try to slap a tax on it. Prior to the 2006 deal, for instance, the restructuring – exactly where Cairn’s overseas subsidiaries that owned the Indian assets got transferred to Cairn India – necessary the approval of the Foreign Investment Promotion Board (FIPB) that is led by the finance ministry the structure of the deal was also presented to Sebi even though it can be argued that examining the tax implications is not Sebi’s job.
Since the structuring of the deal amongst several Cairn Energy subsidiaries necessary to be fair, it was also examined by transfer pricing officers of the income division. Even this did not outcome in anybody suggesting that a capital gains tax had to be paid.
A handful of years later, in 2009, Cairn sold 2.3% of its shares in the Indian operations to Petronas and, in 2010, it a controlling stake to Vedanta. Once once again, the original restructuring was looked at to decide the acquisition expense for calculating the capital gains in neither case did the taxman ever say a tax was due on the 2006 IPO procedure. Indeed, due to the fact Cairn filed a case against the taxman on becoming charged a larger price of tax in the Petronas sale, it was also examined by the court Cairn won the case – its dues, even though, have been confiscated by the taxman!– and, no, the problem of a tax on the 2006 IPO was in no way brought up by even the taxman in the course of the case.
Interestingly, even though Cairn lost the case against the taxman at the Income Tax Appellate Tribunal (ITAT) in 2017, the tribunal mentioned Cairn “could not have visualize[d] its liability for payment of advance in the year of transaction therefore, there cannot be any interest payable by the assessee u/s 234A and 234B of the Act….” In other words, the taxman was pretty incorrect when he told the arbitration panel that, even if the retrospective tax had not been brought in, the transaction would have been eligible for taxation as it was aimed at tax avoidance.
As it occurs, in spite of the taxman arguing this, it could not provide one instance of it taxing offers like the Cairn one till the retrospective tax came in. Indeed, when Cairn initial came into India in 1996 when it purchased Command Petroleum’s interest in Ravva, it also involved offshore structures but no tax was paid at that time either. And even though the taxman argued the retrospective tax was not a new tax but was definitely just clarifying or reiterating the stated position, the Arbitration award cited lots of reports from several panels, and even quoted then finance minister Pranab Mukherji to show that this was definitely a new tax.
Though the Arbitration panel ruled that levying capital gains tax on Cairn’s IPO procedure violated India’s obligations beneath the bilateral investment treaty, it nonetheless examined it and just as nicely due to the fact India is now arguing the tax was justifiable as Cairn had structured the deal in a way as to keep away from paying taxes.
The structuring is a complicated one and involved Cairn Energy transferring its India assets such as the Rajasthan fields to Cairn India from several offshore subsidiaries that held them till then. Rather than having into the particulars of each and every leg of the transaction involving several holding providers in distinct tax jurisdictions, a basic way to comprehend this is to look at the reality that Cairn Energy owned Indian assets – valued by Rothschild in the course of the IPO procedure at $6-7.5bn – and it transferred these to Cairn India which did an IPO based on these assets for roughly this valuation. So there was, in reality, no capital gains that could be taxed in India.
And how ridiculous the taxman’s demand was is ideal brought out by the reality that even though Cairn India raised beneath $2bn by way of the IPO, the tax Cairn Energy was asked to spend was $1.4bn! Indeed, had Cairn Energy wanted to decrease its tax burden, all it necessary to do was to wait – for a year soon after Cairn India’s IPO – to sell its shares in Cairn India so as to qualify for the decrease lengthy-term tax. Also, if tax avoidance was the strategy, Cairn could have structured its sales to Petronas and later Vedanta to also keep away from paying taxes certainly, it could have sold its shares on the floor of the stock market place and then paid just the securities transaction tax due to the fact there was no capital gains applicable to such sales till a handful of years ago.
Given the arbitration panel’s rulings on so lots of problems raised by the taxman, finance minister Nirmala Sitharaman’s ideal bet is to seek the opinion of independent professionals on whether or not India can even win an appeal. After all, the nation does not want to reduce a sorry figure the second time about.