The Permanent Court of Arbitration (PCA) has ruled that the Indian government was wrong in applying a retrospective tax on energy giant Cairn Plc.

The verdict comes barely three months after India lost arbitration to Vodafone Plc over the retrospective tax legislation amendment.

• Background:
  • In 2006-07, Cairn UK transferred shares of Cairn India Holdings to Cairn India on which Income Tax authorities slapped a tax demand of Rs. 24,500 crore as it contended that Cairn UK had made capital gains.
    • Owing to different interpretations of capital gains, the company refused to pay the tax, which prompted cases being filed at the Income Tax Appellate Tribunal (ITAT) and the Delhi High Court.
  • In 2012, Indian government’s budget retrospectively amended the tax code, giving itself the power to go after mergers and acquisitions (M&A) deals all the way back to 1962 if the underlying asset was in India.
  • In 2015, Cairn Energy Plc commenced international arbitration proceedings against the Indian government.
• PCA Ruling:
  • The Indian government must pay roughly Rs. 8,000 crore in damages to Cairn.
  • Cairn Tax Issue was not just a tax-related issue but an investment-related dispute, and therefore the issue comes under its jurisdiction.
  • The Indian government’s retrospective demand was in breach of the guarantee of fair and equitable treatment.
  • The Centre had failed to uphold its obligations under the UK-India Bilateral Investment Treaty and international laws in seeking tax payments from the company for its business reorganisation in the country.
• India’s Stand:
  • The government will study the award and all its aspects carefully in consultation with its counsel.
  • After such consultations, the government will consider all options and make a decision on the further course of action, including legal remedies before appropriate fora.

Retrospective Taxation

• It allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.
• Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
• Retrospective Taxation hurts companies that had knowingly or unknowingly interpreted the tax rules differently.
• Apart from India, many countries including the USA, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies.

Income Tax Appellate Tribunal

• Establishment: Income Tax Appellate Tribunal (ITAT) is a quasi-judicial institution set up in 1941under section 5A of the Income Tax Act, 1922.
  • Initially, it had three Benches at Delhi, Kolkata (Calcutta) and Mumbai (Bombay).
    • But presently ITAT has 63 Benches at 27 different stations covering almost all the cities having a seat of the High Court.
  • ITAT is referred to as ‘Mother Tribunal’ being the oldest Tribunal in the country.
• Functions: It deals with appeals under the Direct Taxes Acts namely, the Income-tax Act, 1961.
  • The orders passed by the ITAT are final, an appeal lies to the High Court only if a substantial question of law arises for determination.

Permanent Court of Arbitration

• It was established in 1899 and is headquartered in The Hague, Netherlands.
• Purpose: It is an intergovernmental organization dedicated to serve the international community in the field of dispute resolution and to facilitate arbitration and other forms of dispute resolution between States.
• It has a three-part organizational structure consisting of:
  • Administrative Council – to oversee its policies and budgets,
  • Members of the Court – a panel of independent potential arbitrators, and
  • International Bureau – its Secretariat, headed by the Secretary-General.
• Funds: It has a Financial Assistance Fund which aims at helping developing countries meet part of the costs involved in international arbitration or other means of dispute settlement offered by the PCA.