Cairn verdict may push govt to appeal Vodafone order, say officials

The unfavourable verdict in a tax dispute with Cairn Energy Plc may prompt the Centre to challenge the Vodafone order before a Singapore court, say tax officers.

The award of over Rs 8,800 crore in favour of Cairn Energy will mean a considerable hit in the government’s finances. This is likely to make the tax department file an appeal in The Hague. While the government’s liability in the Vodafone case will merely be around Rs 75 crore, India will need to follow a uniform approach in both the cases as they pertain to retrospective legislation under the bilateral investment treaty, said an official.

Besides, not appealing in the Vodafone case will set a precedent, he added. Hence, the central government will need to file an appeal in both the cases, said senior tax officers.

“Cairn verdict is going to be a game-changer. Since it is a big award, India will most likely appeal in The Hague. To maintain uniformity in approach, India will need to also appeal against the Vodafone verdict. A decision will be taken at the highest level soon,” said a tax official.

India had got 90 days’ to challenge the Vodafone award before a court in Singapore – which was the seat of arbitration. Similarly, in case of Cairn, India will need to file an appeal within 90 days, ending somewhere around March 22.

However, the deadline for filing an appeal is not sacrosanct. An appeal can be filed afterwards as well with condonation.

The Rs 8,842 crore worth of arbitration award includes the legal fees paid by Cairn for the case, reverse the dividend, tax refund it had ceased and shares that the tax department sold to recover part of the demand. The income tax department will press for challenging the Cairn verdict on the ground that the Indian government has the sovereign right to taxation and private individuals cannot decide on that matter. “Looking at the order, there is no way one can avoid an appeal. It is about Rs 8,800 crore,” said another tax official.

The principal tax demand in case of Cairn stands at Rs 10,247 crore, besides a penalty at 100 per cent of the principal tax due and interest at 12 per cent per annum from February 2017. This takes the total to Rs 24,500 crore.

India lost arbitration to the British telecom major over a 2012 legislation that gave the government powers to retrospectively tax deals like Vodafone’s acquisition of 67 per cent stake owned by Hutchison Whampoa in 2007. It had challenged that tax demand of Rs 22,100 crore, including interest and penalty, under the Netherlands-India Bilateral Investment Treaty (BIT).

Ravi S. Raghavan – tax counsel – Majumdar & Partner, a law firm, said, “It is likely that the Indian government will review the arbitral award in detail before deciding on the next step and perhaps prefer an appeal. It is unlikely that the award will bring an end to all tax litigation around the indirect share transfer issue.”

Rakesh Nangia, chairman, Nangia Andersen India, said that if India chooses to appeal against the Vodafone arbitral award, keeping consistency, it will appeal in Cairn’s case too.

India had argued during the Cairn arbitration that non-compliance to tax was not covered under international treaties and that the amendment in the Finance Act, 2012, (retrospective amendment) was only clarificatory in nature. Meanwhile, in 2017, the income tax appellate tribunal had tax department’s capital gains tax demand of Rs 10,240 crore. The matter is being heard by the high court. “The case in high court pertains to the computation of capital gains and not constitutionality of the tax demand. In case, the high court and Supreme Court rule in favour of the government, it will be difficult to reconcile two different verdicts,” pointed out another official.

The arbitration verdict was given by a three-member panel chaired by Dr Laurent Levy. The final hearing in the case was held in Paris in December 2018. However, Cairn had lost at the Income tax appellate tribunal (ITAT) and the matter is before the high court over valuation of capital gains. Business Standard