There’s an embarrassing snarl that the Indian government should resolve with Cairn Energy as soon as possible. Cairn has been in the driver’s seat ever since an international tribunal at the Hague last December ruled that the Indian government was “in breach of the guarantee of fair and equitable treatment” and awarded Cairn $1.2 billion in compensation. The dispute harks back to the company reorganising itself in preparation of an IPO in 2006-07. A tax demand was raised retrospectively, invoking a change in the Income Tax Act in 2012. Cairn’s case is that such retrospective demands are against international law, despite which the government seized its residual shares in Cairn India as well as a tax refund, amounting to approximately $1.4 billion.
We had reminded the government as early as mid-March in these columns not to allow the dispute to fester. However, festered it has, and Cairn has now filed a lawsuit in a US court in New York against Air India seeking to seize its assets. Cairn has said Air India is the “alter ego” of India and as a wholly-owned national carrier of the government, it is liable for payments due from the government. An appeal has been filed in the Hague against the tribunal order and the government is challenging the jurisdiction of the New York court too.
But Cairn is on the offensive, and has got courts in five countries, including the US and Britain, to recognise the Hague tribunal award. This means Indian assets—banks, ships, etc.—can be seized in multiple locations. At the centre of the dispute is retrospective taxation—it is not permitted in international law and is in breach of the UK-India Bilateral Investment Treaty. Our own Supreme Court has ruled against it. Again, India’s international image is being damaged, with our government failing to honour an arbitration award of the Hague. We are on a weak legal wicket, and at best the seizure process can be delayed. In this context, the government should settle the Cairn compensation issue away from the glare of international opprobrium and with the least loss of face to both parties.