Feb 18, 2021
Tax matters: The Cairn conundrum and the future of tax arbitration
The arbitration ruling by the Permanent Court of Arbitration (PCA) in the Cairn Energy case, coming just three months after the Vodafone ruling, is testimony that jurisdiction is and will remain the primary issue of contention in international tax law. The applicability of withholding tax on capital gains arising from the transfer of underlying capital assets in offshore transactions, in particular, has been a matter of continuing controversy in India ever since Vodafone first challenged Revenue’s stand before the Bombay High Court in 2007. It eventually culminated in a historic decision by the Supreme Court of India in January 2012. What followed thereafter was retrospective amendments to various sections of the law to overturn the apex court’s verdict, resulting in both Vodafone and Cairn seeking protection under India’s Bilateral Investment Treaties (BIT) with the Netherlands and the UK, respectively.
With the Cairn ruling, the same set of questions, barring the jurisdiction for appeal, that arose after Vodafone will have to be reviewed and re-examined: Will India yield to/accept the tribunal’s ruling and restore the equilibrium arising out of the Supreme Court’s 2012 judgement, having legislated a retrospective law with a validation clause or will it continue with its assertion that tax is a sovereign entitlement and the Indian Parliament does not concur with the Supreme Court’s view, which it had reversed retrospectively? The government is already on record that it is beyond the arbitration panel’s prerogative to adjudge the scope of national tax laws. In the wake of recent awards, the government would additionally scrutinise the repercussions of accepting the tribunal’s order and its implications on other arbitrations.