Cairn India Ltd & Ors Vs Government Of India: Foreign Investors Continue To Find Relief From Sovereign Retrospective Taxation Powers Of States Under International Law

DATE OF JUDGEMENT:
19/02/2020

PARTIES:

• Petitioner:Cairn India Ltd. & Ors
• Respondent: Government of India

CORAM:

• HON’BLE JUSTICE RAJIV SHAKDHER

SUBJECT

This judgment is an interesting exposition on the status and enforceability of foreign awards in India. Foreign Investors continue to find relief from sovereign retrospective taxation powers of states under International Law. A foreign award holder can without unnecessary delay, proceed directly to execution in India, without having to await a ruling on any challenge to enforcement.

OVERVIEW

• In March 2012, the Parliament passed the Finance Act 2012 which was in response to the Supreme Court verdict in the Vodafone case pertaining to taxation on capital gains.It explained that an asset or a capital asset which includes a share in a company which is incorporated outside India should be regarded as having been situated in India if its value has significantly grown in India.
• As a result of the 2012 amendments, the Assessment Office (AO) initiated reassessment proceedings against Cairn UK Holdings Limited (CUHL).The department sought details related to a transaction that was made in 2006. It stated that the income was unassessed as per the provisions of the Income Tax Act. It stated that the 2012 amendments were retrospective and therefore, they could be initiated under the reassessment proceedings.
• On March 9, 2015, the draft assessment order was issued against Cairn UK Holding Limited for its 2006 transaction. The order stated that the company had been required to pay a total amount of Rs 102 billion as principal tax.
• The company approached the Income Tax Appellate Tribunal, Delhi after the draft assessment order. The same was upheld by the ITAT on March 9, 2017.The CUHL filed an appeal in Delhi High Court.

RELEVANT PROVISIONS

• Article 3(2) of UK-India BIT- Investments of investors of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.
• Article 7 of UK-India BIT-Each Contracting Party shall in respect of investments grant to investors of the other Contracting Party the unrestricted transfer of their investments and returns. Transfers shall be effected without delay in the convertible currency in which the capital was originally invested or in any other convertible currency agreed by the investor and the Contracting Party concerned. Unless otherwise agreed by the investor, transfers shall be made at the rate of exchange applicable on the date of transfer pursuant to the exchange regulations in force.

ISSUE

• Whether an action to enforce a foreign award was barred by limitation?
• Whether the arbitral tribunal acted beyond its jurisdiction in awarding USD 278.87 million to the petitioners by ignoring the provisions contained in the proviso to Article 15.5(e)(iii) of the PSC?

ANALYSIS

• In December 2011, Vedanta Resources, which is incorporated in the UK, acquired a majority of shares of CIHL India Ltd. Cairn Energy Ltd. initiated an international arbitration proceeding after the UK-India BIT was adopted. It sought restitution of all the penalties and orders passed against it.
• The arbitration proceedings began in January 2016. The income tax department then seized and sold the shares of the CUHL to recover the tax due.In their case, the CUHL claimed that they were treated wrongly and that the actions taken against them were illegal. They asked the Tribunal to restore their position and compensation from India.
• On December 21, 2020, the Tribunal held that India failed to honour its obligation under the India-UK BIT, 1994. It ordered the country to compensate Cairn. The BIT is a treaty that was signed between India and the UK in 1994. It was aimed at promoting and protecting the investment between the two countries.
• The Delhi High Court enforced a foreign arbitral award, rejecting all the objections raised against it for resisting enforcement. The enforcement proceeding was filed over 3 years after the date of the arbitral award. The Delhi High Court, interpreting the Indian Limitation Act, 1963 (‘Limitation Act’), held that an application of enforcement of a foreign arbitral award can be filed up to a period of 12 years from date of the arbitral award. The Court has reverted to the judicial approach in upholding the enforcement of foreign awards.
• This judgment clarifies the scope and nature of public policy regarding the treatment of a foreign award under the Limitation Act, 1963.The Court noted that a foreign award could be used to set aside a case in India or as evidence in a trial or a proceeding by the award holder.
• The Court noted that if the GOI's contention is accepted, then a foreign award would not be admissible in any other legal proceedings conducted in India. This according to the Court was an undesirable outcome as it would result in delay and undermine the objectives of the Act.

CONCLUSION

This judgment is a reminder of the limits imposed by international law on States’ sovereign rights in taxation. The argument for upholding treaty obligations is that treaties provide sovereign commitments to protect foreign investors' interests. This is because treaties also act as instruments of state. Tribunals have held that claimants cannot simply treat as irrelevant their statutory rights of appeals and available constitutional review processes, and bring before tribunals a decision made by the lowest revenue officer in the assessment chain and purport to treat it as a finally adjudicated demand.

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