|9 Subsidiaries||The nine UK incorporated subsidiaries through which Cairn Energy held operations and assets in India|
|27 Subsidiaries||The further 18 subsidiaries held by the 9 Subsidiaries, together with the 9 Subsidiaries|
|2002 Task Force||2002 Task Force on Direct Taxes|
|2006 Transactions||The transactions undertaken in 2006 by the Claimants in and around the time of their corporate reorganisation and the listing of CIL on the BSE, specifically, Cairn's pre-IPO corporate reorganisation and post-IPO transactions|
|2012 Amendment or 2012 Clarification||Amendment made in 2012 to Section 9(1)(i) of the Income Tax Act 1961|
|AAR||Authority for Advanced Rulings|
|ACIT||Assistant Commissioner of Income Tax Circle 1(2)(1), International Taxation, New Delhi|
|Actual Scenario||What happened in reality|
|Addendum||Addendum to the Second Terms of Appointment of the Confidentiality Expert|
|Additional Document Request||Respondent's application for document production of 29 November 2017|
|Amarchand||Amarchand & Mangaldas & Suresh A Shroff & Co.|
|Application for Bifurcation||Application for bifurcation filed by the Respondent on 6 October 2016|
|AT-XX||The Tribunal's communications to the Parties|
|Authorised Persons||List of persons to whom the Restricted Documents may be disclosed|
|BIT or Treaty or UK- India BIT||Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Promotion and Protection of Investments, entered into force 6 January 1995|
|BJP||Bharatiya Janata Party|
|[Person 1] Documents||Evidence related to Ms [Person 1] filed in the Delhi High Court Proceedings|
|BSE||Bombay Stock Exchange|
|But For Scenario||Situation which would, in all probability, have existed if the act had not been committed|
|Buy-Back Programme||CIL's plan to buy back its shares, formally announced 14 January 2014|
|Cairn||The Cairn group of companies|
|Cairn Energy Holdings||Cairn Energy Holdings Ltd|
|Cairn Energy India||Cairn Energy India Pty Limited|
|Cairn Energy or CEP||Cairn Energy PLC|
|Cairn's corporate reorganisation||Cairn's 2006 pre-IPO corporate reorganisation|
|CBDT||Central Board of Direct Taxes|
|CCom-XX||Claimants' communications to the Tribunal|
|CEA||Cairn Energy Australia Pty Limited|
|CEA Loan||Loan account from Cairn Energy used by CEA to acquire 100% of Command Petroleum|
|CEGHBV||Cairn Energy Group Holdings BV|
|CEHL||Cairn Energy Hydrocarbons Ltd|
|CEHL Debt||Debt of £29,780,710 assigned by Cairn Energy to CUHL, owed to Cairn Energy by CEHL|
|CIHL||Cairn India Holdings Limited|
|CIHL Acquisition||The transaction taxed by the Respondent (i.e., the transfer of the shares in CIHL from CUHL to CIL)|
|CIL||Cairn India Limited|
|CIL/VIL or VIL||Vedanta Limited|
|Claimants||Cairn Energy PLC and Cairn UK Holdings Limited, collectively|
|Claimants’ Document Request No. 1||Claimants’ request for documents concerning the FIPB’s review and approval of CUHL’s application of 10 August 2006|
|Claimants’ Document Request No. 2||Claimants’ request for documents relating to the proceedings conducted by the Standing Committee on the preparation of the Standing Committee Report|
|Claimants’ Original Request on Dividends||Claimants’ request of 12 May 2017 that the Tribunal order the Respondent to confirm that all dividends can be paid to CUHL without further delay|
|Claimants’ Publication Application||Claimants’ request that the Tribunal issue a ruling finding that PO2 and PO16 are fit for publication|
|Claimants’ Updated Request for Relief||Final request for relief submitted by the Claimants on 14 December 2018|
|Closing Hearing||Hearing on closing submissions held in Paris on 19 and 20 December 2018|
|CNHBV||Cairn Energy Netherlands Holdings BV|
|Command Petroleum||Command Petroleum Limited|
|Confidentiality Expert||Dr Dirk Pulkowski, PCA Senior Legal Counsel designated to act as confidentiality expert|
|Cost Basis Theory||Respondent’s theory that the 2006 Transactions had been abusively structured so as to inflate the cost basis of CIL’s shares so that less tax would be payable on future sales of CIL shares|
|CRL||Cairn Resources Limited|
|CUHL||Cairn UK Holdings Limited|
|[Person 2] Committee||Committee for Reforming the Regulatory Environment for Doing Business in India, chaired by Mr [Person 2]|
|DAO||9 March 2015 draft assessment order issued by ITD against CUHL|
|Daylight Loan||The "daylight overdraft" (i.e., a loan repayable in one day) obtained by Cairn Energy from Citibank|
|Demand||Tax demand against the Claimants in respect of AY 2007-2008, as set forth in the FAO|
|DIP||Disclosure and Investor Protection|
|Direct Transfer Theory||Respondent’s argument that the 2006 Transactions were, in substance, a transfer / divestment of Cairn’s underlying oil and gas assets in India|
|Dividend Migration Scenario||Respondent’s argument that had CUHL provided an alternative security to the tax authorities, such as a bank guarantee, CIL could have remitted the dividends to CUHL before receipt of the notice under Section 226(3) of the ITA dated 16 June 2017|
|DRP||The Dispute Resolution Panel|
|DRP Ruling||31 December 2015 ruling of the Dispute Resolution Panel|
|DTAA||Double Taxation Avoidance Agreement|
|DTC 2009||Direct Tax Code Bill of 2009|
|DTC 2010||Direct Tax Code Bill of 2010|
|DTC 2013||Direct Tax Code Bill of 2013|
|Dutch Arbitration Act||Code of Civil Procedure of The Netherlands|
|ECHR||European Convention on Human Rights|
|ECtHR||European Court of Human Rights|
|FAO||Final Assessment Order issued 25 January 2016|
|FET||Fair and equitable treatment|
|FIPB||Foreign Investment Promotion Board|
|FIPB Application||Application submitted by CUHL (together with CIL) to the FIPB on 10 August 2006|
|First CIHL Acquisition||CIL’s acquisition of the first tranche of CIHL shares (16.5 per cent) from CUHL|
|First Report of the Confidentiality Expert||Report of the Confidentiality Expert issued 20 December 2017|
|First ToA of the Confidentiality Expert||Terms of Appointment of the Confidentiality Expert issued 28 November 2017|
|Fourth CIHL Acquisition||CIL’s acquisition of the remaining 24.3 per cent of CIHL from CUHL|
|Frozen Shares||CUHL’s 184,175,764 equity shares in CIL provisionally frozen by the Section 281B Order|
|GAAR||General Anti-Avoidance Rule|
|HEL||Hutchison Essar Ltd|
|Hutchison||Hutchison Telecommunications International Ltd.|
|IBA Rules||IBA Rules on the Taking of Evidence|
|ICIJ||International Consortium of Investigative Journalists|
|India Hold Co.||Single UK holding company in which all of Cairn’s Indian shareholdings and underlying assets were consolidated|
|Indian Sub||Indian subsidiary company|
|IPO||Initial public offering|
|ITA 1961 or ITA||Income Tax Act 1961|
|ITAT||The Income Tax Appellate Tribunal|
|ITAT Order||9 March 2017 order issued by the Income Tax Appellate Tribunal|
|ITD||Income Tax Department|
|JOAs||Joint operating agreements|
|Joint Statement||Joint statement produced by the Claimants’ and Respondent’s valuation experts of 28 November 2018|
|Law Commission||Law Commission of India|
|Legal Costs||Costs of legal representation and assistance referred to in Article 38(e) of the UNCITRAL Rules|
|Lock-In Requirement||Requirement that the promoter retain the 20 per cent shareholding for three years before it could sell it|
|Minimum Promoter Contribution or MPC||The 20 per cent of the post-IPO share capital of the Indian entity in which Cairn Energy was required to acquire in cash|
|MoF||Ministry of Finance of India|
|MST or Minimum Standard of Treatment||Customary international law minimum standard of treatment|
|NELP||New Exploration Licensing Policy|
|Notice of Demand||Notice of demand issued by ITD and received by CUHL on 4 February 2016|
|ONGC||India's Oil and Natural Gas Commission|
|Parliament||Parliament of India|
|Penalty Order||Penalty order issued by the Respondent against CUHL on 29 September 2017|
|Petronas||Petronas International Corporation Ltd.|
|PO1||Procedural Order No. 1|
|PO2||Procedural Order No. 2|
|PO3||Procedural Order No. 3|
|PO4||Procedural Order No. 4|
|PO5||Procedural Order No. 5|
|PO6||Procedural Order No. 6|
|PO7||Procedural Order No. 7|
|PO8||Procedural Order No. 8|
|PO9||Procedural Order No. 9|
|PO10||Procedural Order No. 10|
|PO11||Procedural Order No. 11|
|PO12||Procedural Order No. 12|
|PO13||Procedural Order No. 13|
|PO14||Procedural Order No. 14|
|PO15||Procedural Order No. 15|
|PO16||Procedural Order No. 16|
|PO17||Procedural Order No. 17|
|PO18||Procedural Order No. 18|
|PO19||Procedural Order No. 19|
|President of the Tribunal or President||Mr Laurent Lévy, the Presiding Arbitrator|
|Project Sapphire Presentation||Document containing the slides of a presentation made by ABN Amro Rothschild at a board meeting of Cairn Energy PLC on 4 April 2005|
|PSCs||Production sharing contracts|
|RBI||Reserve Bank of India|
|RCom-XX||Respondent's communications to the Tribunal|
|Renewed RIM||Claimants' renewed request for interim measures of 6 May 2017|
|Request for Vedanta documents||The Respondent’s document production request of 17 December 2016|
|Respondent||Republic of India|
|Respondent's Confidentiality Application||Application of the Respondent that PO2 and PO16 remain confidential and not be disclosed to the Delhi High Court|
|Respondent's Updated Request for Relief||Updated request for relief submitted by the Respondent on 14 December 2018|
|Restricted Documents||The documents produced in response to the Claimants’ Document Request No. 2 that are subject to confidentiality protections|
|RIM||Request for interim measures issued by the Claimants on 13 April 2016|
|RIM Hearing||Hearing in London on 12 June 2017 on the Renewed RIM|
|Rothschild||NM Rothschild & Co|
|SEBI||Securities and Exchange Board of India|
|Second CIHL Acquisition||CIL’s purchase of an additional 5.3% of shares in CIHL from CUHL|
|Section 131 Notice||22 January 2014 summoning of CUHL by ITD to provide information on the CIHL Acquisition|
|Section 148 Notice||21 January 2014 notification by ITD to CUHL regarding the escapement of assessment for income chargeable to tax|
|Section 274 Notice||Section 274 Notice received by CUHL on 4 February 2016|
|Section 281B Order||22 January 2014 order issued by the Deputy Director of Income Tax|
|Share Purchase Deed||Share Purchase Deed dated 12 October 2006|
|Share Sale Migration Scenario||Respondent’s argument that had CUHL provided an alternative security to the tax authorities, such as a bank guarantee, it would have been able to obtain an authorisation to sell its shares in CIL despite the Section 281B Order|
|Shares||The Claimants’ equity shares in CIL|
|Shell||Shell India Production Development BV|
|[Person 3] Committee||Committee led by Dr [Person 3] to examine the implications of the 2012 Amendment|
|SOCO BVI||SOCO Australia Limited|
|SSE||Substantial Shareholding Exemption|
|SSPA||Subscription and Share Purchase Agreement dated 15 September 2006 (and amended on 5 October 2006)|
|Standing Committee||Standing Committee on Finance|
|Standing Committee Report||Official report of the Standing Committee on the DTC 2010|
|Statutory Rate||The statutory rate applied to tax refunds in India (0.5% per month, in INR terms, without compounding)|
|Stay Application||Application for a stay of the proceeding filed by the Respondent on 6 June 2016|
|Supreme Court||Supreme Court of India|
|TARC||Tax Administration Reform Commission|
|TARC Report||First Report of the Tax Administration Reform Commission|
|Tata||Tata Cellular Industries|
|Tax Leakage Theory||Respondent's theory that by planning to collapse all of the holding structure between CIL and the oil and gas assets into CIL, the Claimants avoided paying the full amount of Indian tax on dividends that would have been otherwise applicable|
|Tax Planning Theory||Respondent's argument that the Claimants chose an unnecessarily complex and artificial structure to consolidate the oil and gas assets under CIL with the dominant purpose of avoiding taxes|
|Third CIHL Acquisition||CIL's acquisition of 135,267,264 shares in CIHL from CUHL|
|[Person 4] WS||Witness statement of Mr [Person 4]|
|ToA||Terms of Appointment|
|TPO||Transfer Pricing Officer|
|UK-India DTAA||Double Taxation Avoidance Agreement between the UK and India|
|UNCITRAL Rules||United Nations Commission on International Trade Law Arbitration Rules 1976|
|VCLT||Vienna Convention on the Law of Treaties|
|Vedanta||Vedanta Resources Plc|
|Vedanta arbitration||Arbitration initiated by Vedanta against the Respondent|
|VEL||Vodafone Essar Ltd|
|Venice Commission||European Commission for Democracy through Law|
|Vodafone||Vodafone International Holdings BV|
|VWAP||Volume weighted average price|
|Withheld Appendices||Appendices V and VI not filed with the Claimants' new version of the Project Sapphire Presentation|
The Claimants are represented in this arbitration by:
Mr Mark S. McNeill
Quinn Emanuel Urquhart & Sullivan, LLP
51 Madison Avenue, 22nd Floor
New York, NY 10010
United States of America
Mr Arvind P. Datar
No. E-61 Anna Nagar East
Chennai 600 102
Ms Niti Dixit
64 Okhla Industrial Estate, Phase III
New Delhi 110 020
Mr Uday Walia
Plot 1 & 2, Block E, The Mira
Mathura Road, Ishwar Nagar,
New Delhi 110 065
Mr Paul Hally
Shepherd and Wedderburn LLP
1 Exchange Crescent
Edinburgh, EH3 8UL
Scotland, United Kingdom
Mr Maarten Drop
Advocaat | Partner
1017 CA Amsterdam
The respondent in this arbitration is the Republic of India (the "Respondent"). For the purposes of this arbitration, the Respondent’s contact details are:
Mr [Person 7]
Joint Secretary (FT&TR-I)
Central Board of Direct Taxes
Department of Revenue
Ministry of Finance
Government of India
Room No. 803, 8th Floor,
C Wing, Hudco Vishala Building,
Bhikaji Cama Place,
New Delhi 110066
Mr [Person 8]
Additional Commissioner of Income-tax (OSD) (FT&TR-I)
Room No. 903, C Wing
Hudco Vishala Building
Bhikaji Cama Place
New Delhi 110066, India
Mr [Person 9]
Deputy Commissioner of Income-tax (OSD) (FT&TR-I)
Hudco Vishala Building
Bhikaji Cama Place
New Delhi 110066, India
The Respondent is represented in this arbitration by:
Mr Salim Moollan, QC
Essex Court Chambers
19 Duxton Hill
Professor Chester Brown
7 Wentworth Selborne Chambers,
7 /180 Phillip Street,
Sydney NSW 2000, Australia Email: [Redacted]
Mr Shreyas Jayasimha
Mr Mysore Prasanna
Mr Krishnan Shakkottai
Ms Bhavya Chengappa
Aarna Law LLP
No. 5, Second Main Road, Vyalikaval,
Bangalore 560003, India
In accordance with Article 9 of the UK-India BIT, on 2 April 2015, the Claimants informed the Respondent that they had appointed Mr Stanimir Alexandrov, a national of Bulgaria, as arbitrator. Mr Alexandrov accepted his appointment on 1 April 2015. Mr Alexandrov’s contact details are as follows:
Stanimir A Alexandrov PLLC
1501 K Street N.W.
Washington D.C. 20005
As the Respondent did not appoint an arbitrator within the time limit set out in Article 9 of the UK-India BIT, on 12 August 2015 and in accordance with Article 9(3)(c)(ii) of the UK India-BIT, the Claimants requested the President of the International Court of Justice, H.E. Judge Ronny Abraham, to act as appointing authority. Ultimately, on 9 November 2015, the Respondent informed the Claimants that it had appointed Mr J. Christopher Thomas, QC, a national of Canada, as arbitrator. Mr Thomas accepted his appointment on 20 November 2015. Mr Thomas’s contact details are as follows:
Mr J. Christopher Thomas, QC
Suite 1200, Waterfront Centre
200 Burrard Street
P.O. Box 46800
On 13 January 2016, in accordance with Article 9 of the UK-India BIT, the co-arbitrators notified the Parties that they had appointed Mr Laurent Lévy, a national of Switzerland and Brazil, as the Presiding Arbitrator in this matter. Mr Lévy confirmed that he accepted his appointment that same day. Mr Lévy's contact details are:
Mr Laurent Lévy
3-5 Rue du Conseil-Général
Case Postale 552
CH-1211 Genève 4
With the consent of the Parties, the Tribunal appointed Ms Sabina Sacco, a national of Chile, Italy, and El Salvador, as Secretary of the Tribunal. Her contact details are:
Ms Sabina Sacco
3-5 Rue du Conseil-Général
Case Postale 552
CH-1211 Genève 4
Cairn began oil and gas exploration and development activities in India in 1996, with the acquisition of Command Petroleum Limited ("Command Petroleum"), an Australian company that held interests in a 1994 PSC for the Ravva oil and gas field. Command Petroleum was also involved in a venture with ONGC and other foreign investors.6
Id., ¶ 56; First Witness Statement of Ms [Person 1] ("[Person 1] WS1"), ¶ 24; Respondent's Rejoinder ("R-Rejoinder"), ¶ 132. As a general matter, the Respondent does not dispute the Claimants' account of its investments in India prior to 2006. According to the Respondent, "the purported history of CEP's investment in the oil and gas sector in India covered at great length in the SOC is of merely historical interest: it has no bearing on the issues at the heart of this dispute." Respondent's Statement of Defence ("R-SoD"), p. 14 n. 22.
To purchase Command Petroleum, Cairn Energy incorporated Cairn Energy Australia Pty Limited ("CEA") in Australia. CEA acquired 100% of Command Petroleum using a loan account from CEP (the "CEA Loan"). CEA also acquired SOCO Australia Limited ("SOCO BVI") (incorporated in the British Virgin Islands), which held approximately 31 per cent of Command Petroleum.7
[Person 1] WS1, ¶ 24.
Once it had acquired Command Petroleum, between 1996 and 1997 CEP restructured its holdings through a series of intra-group share transfers, as follows:
a. CEP incorporated two wholly owned subsidiaries, Cairn Energy Holdings Limited ("Cairn Energy Holdings") in the UK and Cairn Energy Group Holdings BV ("CEGHBV") in the Netherlands.
b. CEP then transferred to Cairn Energy Holdings its interest in the CEA Loan, its shares in CEA, and its shares in CEGHBV in consideration for the issue of shares in Cairn Energy Holdings.
c. Cairn Energy Holdings then transferred its interest in the CEA Loan and the shares in CEA to CEGHBV in exchange for the issue of shares in CEGHBV.
d. CEGHBV then cancelled the CEA Loan in consideration for the issue of further shares in CEA. As a result, by September 1997, CEGHBV owned the entirety of the Command Petroleum assets through its shareholding of CEA.
e. In January 2001, a new parent company entity, Cairn Energy Netherlands Holdings BV ("CNHBV"), was inserted within the Cairn corporate group above CEGHBV. This required Cairn Energy Holdings to transfer the entire share capital of CEGHBV to CNHBV in consideration for an issue of shares by CNHBV.8
Id., ¶ 25, citing Cairn Energy Holding, Certificate of Incorporation of a Private Company Limited Company dated 14 October 1996, Exh. CWS-[Person 1]-4; Issuance of Registered Shares by CEGHBV to Cairn Energy Holdings dated 30 December 1996, Exh. CWS-[Person 1]-7, p. 1; Statutory Declaration by [Person 5] on behalf of Cairn Energy dated 22 January 1997, Exh. CWS-[Person 1]-9, pp. 2-3; Issuance of Registered Shares by CEGHBV to Cairn Energy Holdings dated 30 December 1996, Exh. CWS-[Person 1]-7, pp. 1-2; Deed of Contribution of Shares in CNHBV between Cairn Energy Holdings, Cairn Energy and Netherlands Holdings BV, Holland Sea Search Holding NV and CEGHBV dated 18 January 2001, Exh. CWS-[Person 1]-22, pp. 2-3.
The Claimants note that, "[i]n total, the transaction involved five transfers of share capital in non-Indian companies - entities incorporated in Australia, the UK, the Netherlands, and the British Virgin Islands - all of which derived substantial value, directly or indirectly, from their underlying assets in India."9 They further note (and the Respondent does not dispute) that the Indian Government was "fully aware of this change in foreign control in connection with one of the most important PSCs in the Indian oil and gas sector, the Ravva concession."10 The Under-Secretary of India’s Ministry of Petroleum and Natural Gas signed an amendment to the Ravva PSC to reflect Command Petroleum’s acquisition by CEP and its resulting name change, and the Government accepted a new parent company guarantee by a company of the Cairn group in relation to liabilities under the Ravva PSC.11 However, the Claimants allege that "India did not indicate that any tax liabilities had accrued to any member of the Cairn corporate group as a result of the transfers of shares of the non-Indian corporations involved which derived substantial value from Indian interests."12 In particular, Ms [Person 1] testifies that "[t]he Indian Income Tax Department [...] never once sought to assess capital gains tax on any of these transactions."13
C-SoC, ¶ 57; [Person 1] WS1, ¶ 26.
[Person 1] WS1, ¶ 27.
Ibid., citing Addendum to the Production Sharing Contract dated 31 July 1998, Exh. CWS-[Person 1]-14, pp. 2-3; Guarantee by Cairn Energy Asia Limited to Cairn Energy India Limited dated 23 July 1998, Exh. CWS-[Person 1]-13.
C-SoC, ¶ 59.
[Person 1] WS1, ¶ 28.
From their acquisition of Command Petroleum in India in 1996 up until their 2006 corporate reorganisation, Cairn developed numerous other interests in India. Beginning in 1998, through a series of transactions with Shell India Production Development BV ("Shell"), a Dutch company, Cairn acquired a 100 per cent interest in, and became the operator of, a PSC in Rajasthan.14 This interest was ultimately held by two Cairn subsidiaries, Cairn Energy India Pty Limited, an entity incorporated in Australia ("Cairn Energy India") and Cairn Energy Hydrocarbons Limited, an entity incorporated in Scotland ("CEHL"). These transactions required three assignments of the relevant PSC, which in turn required the prior consent of the Government of India.15 The Claimants allege that, in connection with securing India's consent to its acquisition of the Raj asthan PSC, it disclosed its India-related corporate structure to the Indian Government, but the Government "never once suggested that Cairn owed or was in default for not having paid capital gains tax on transfers of shares in non-Indian corporations with underlying Indian assets."16
Id., ¶ 29; R-Rejoinder, ¶ 132.
[Person 1] WS1, ¶¶ 29-30.
C-SoC, ¶ 62.
Through its exploration activities, in 2004 Cairn discovered the Mangala oil field in Rajasthan, "the largest onshore discovery in India [in] over two decades,"17 followed by the Aishwariya and Bhagyan fields, also in Rajasthan. The Claimants affirm, and the Respondent does not dispute, that "these Rajasthan fields currently account for roughly one quarter of India's entire domestic oil production."18
[Person 1] WS1, ¶ 31, citing Vedanta Limited ("VIL"): Oil & Gas Operations dated 30 March 2016, Exh. CWS-[Person 1]-117; "Prime Minister dedicates Mangala Oil Field to Nation" (Government of India, 29 August 2009), Exh. CWS-[Person 1]-80.
Ibid., citing "Signing of MoU to develop Natural Gas Infrastructure in Rajasthan" (Government of India, 9 September 2015), Exh. CWS-[Person 1]-114; and VIL: Oil & Gas Operations dated 30 March 2016, Exh. CWS-[Person 1]-117.
By 2006, CEP held operations and assets in India through nine UK incorporated subsidiaries (the "9 Subsidiaries"), which subsequently held between them a further 18 subsidiaries (together, the "27 Subsidiaries") incorporated in different jurisdictions around the world.21 These interests included 12 PSCs, (three entered into before the NELP regime, and seven under that regime),22 interests in various joint operating agreements ("JOAs") with ONGC and other parties in respect of PSCs in the Cambay Basin, Rajasthan, and the Krishna-Godavari Basin,23 three processing plants, 12 platforms, 250 kilometres of pipelines, several active drilling programmes, and considerable reserves of oil and gas.24
Id., ¶ 74; [Person 1] WS1, ¶ 43; R-SoD, ¶ 14.
C-SoC, p. 22 n. 64; Letter from DSP Merrill Lynch Limited, ABN AMRO Securities (India) Private Limited and JM Morgan Stanley Private Limited to SEBI dated 12 October 2006 (enclosing CIL's Draft Red Herring Prospectus dated 12 October 2006 "DRHP"), Exh. CWS-[Person 1]-70, p. 56.
C-SoC, ¶ 66; DRHP, Exh. CWS-[Person 1]-70, pp. 71, 84; R-Rejoinder, ¶ 132.
Claimants' Notice of Arbitration ("C-NoA"), ¶ 21.
C-SoC, ¶ 66; [Person 1] WS1, ¶ 31, citing Cairn Energy, Corporate Responsibility Report 2005 [excerpt], Exh. CWS-[Person 1]-38, p. 36; Cairn Energy, Corporate Responsibility Report 2006 [excerpt], Exh. CWS-[Person 1]-43, p. 44; Cairn Energy, Corporate Responsibility Report 2007 [excerpt], Exh. CWS-[Person 1]-77, p. 35; Cairn Energy, Corporate Responsibility Report 2008 [excerpt], Exh. CWS-[Person 1]-78, p. 21; Cairn Energy, Corporate Responsibility Report 2009 [excerpt], Exh. CWS-[Person 1]-79, p. 125; Cairn Energy, Corporate Responsibility Report 2010, Exh. CWS-[Person 1]-85, pp. 127-128; Cairn Energy, Corporate Responsibility Report 2011 [excerpt], Exh. CWS-[Person 1]-94, p. 52.
According to the Claimants’ witness, Ms [Person 1], "[b]y 2006, the Cairn Energy group’s remarkable success in India raised the possibility of gathering all Indian operations and assets under a single entity and offering shares to the public. The resulting capital increase would allow further investment in Rajasthan and other locations in India. CEP’s Board considered two primary options for accomplishing this goal: gathering its Indian assets and operations under a UK company and listing on the London Stock Exchange, or incorporating a holding company in India and offering shares for public sale on the Bombay Stock Exchange (the 'BSE’)."26
[Person 1] WS1, ¶ 40.
On 8 March 2006, a committee of CEP's Board of Directors decided to proceed with the India option.27 The reasons for this decision, and the process that Cairn underwent to arrive to determine the form that this reorganisation would take, are discussed below in Section II.B.3.b. For present purposes, the Tribunal will record the steps that Cairn took to reorganise its Indian assets.
[Person 1] WS1, ¶ 42, citing Cairn Energy Board Committee Meeting Minutes dated 8 March 2006, Exh. CWS-[Person 1]-45, p. 5; see also Cairn Energy, Annual Report & Accounts 2005 [excerpt], Exh. CWS-[Person 1]-37, p. 2.
[Person 1] WS1, ¶ 44, citing "Annual General Meeting Statement" (Cairn Energy, 20 April 2006), Exh. CWS-[Person 1]-48, p. 1.
Cairn's India reorganisation was composed of three main elements: (i) the incorporation of an Indian subsidiary, (ii) the consolidation of Cairn's Indian assets under that Indian subsidiary, and (iii) listing that subsidiary in the Indian stock exchanges and launching the IPO. As discussed further below, the Claimants allege that they structured this reorganisation under the guidance of experienced advisors, and that the specific structure that was ultimately adopted was dictated by the following Indian legal requirements:29
a. The corporate entity under which all 27 Subsidiaries would be consolidated needed to be incorporated in India, since only Indian companies could list on Indian stock exchanges.
b. As promoter of the IPO, CEP was required to acquire in cash 20 per cent of the post-IPO share capital of the Indian entity (the "Minimum Promoter Contribution" or "MPC"). This requirement could only be fulfilled in cash because a share exchange would have substantially delayed the IPO.
c. Cairn was required to retain its Minimum Promoter Contribution for three years before being able to sell it, and to retain any additional shareholding for at least one year.
C-SoC, ¶¶ 76-84; [Person 1] WS1, ¶¶ 47-48.
In April 2006, CEP initiated the separation of its Indian and non-Indian assets and operations with the incorporation of Cairn Resources Limited ("CRL"), a Scottish entity wholly owned by CEP. CEP subsequently transferred to CRL the various subsidiaries holding its non-Indian assets and operations in exchange for issues of its shares.30
[Person 1] WS1, ¶ 58.
In May and June 2006, CEP gradually consolidated all of the 27 Subsidiaries (nine of which were held directly by CEP and 18 of which were held indirectly). All 27 Subsidiaries were incorporated outside of India, and collectively held virtually all of the group's assets and operations in India. This consolidation process involved the transfer of shares in non-Indian companies with underlying assets in India.31
[Person 1] WS1, ¶ 59, citing Share Exchange Agreement between Cairn Energyand CUHL dated 30 June 2006, Exh. CWS-[Person 1]-54.
On 30 June 2006, CEP transferred the entire issued share capital of the 9 Subsidiaries it held directly to CUHL in exchange for an issuance of 221,444,034 ordinary shares (at £1 each) in CUHL.33 As a result, CUHL became the direct and indirect owner of the 27 Subsidiaries.34 According to Ms [Person 1], the value of the 27 Subsidiaries was reflected in CUHL's accounts at the nominal value of the share certificates tendered by CUHL in consideration, pursuant to the international accounting principles prevailing at the time.35 (This assumes importance in the later taxation of the transaction.) The Claimants note that this transaction involved nine separate transfers of interests in non-Indian companies with underlying assets in India.36 This transaction is illustrated in the diagram below:37
*CEP UK = Cairn Energy Plc
C-SoC, ¶ 90; [Person 1] WS1, ¶ 60; R-SoD, ¶ 15(c); Share Exchange Agreement between Cairn Energy and CUHL dated 30 June 2006, Exh. CWS-[Person 1]-54. According to the Schedule of that agreement, the 9 Subsidiaries that were transferred to CUHL were Cairn Energy Holdings Ltd; Cairn Energy Hydrocarbons Limited; Cairn Petroleum India Limited; Cairn Energy Discovery Limited; Cairn Energy Gujarat Block 1 Limited; Cairn Exploration (No. 2) Ltd; Cairn Exploration (No. 4) Ltd; Cairn Exploration (No. 6) Ltd; and Cairn Exploration (No. 7) Limited.
Ibid. The 18 subsidiaries held indirectly were: Cairn Energy Netherlands Holdings BV; Cairn Energy Group Holdings BV; Cairn Energy Australia Pty Limited; Cairn Energy India Holdings BV; CEH Australia Limited; CEH Australia Pty Ltd; Cairn Energy Asia Pty Limited; Cairn Energy Investments Australia Pty Ltd; Wessington Investments Pty Limited; Sydney Oil Company Pty Ltd; Command Petroleum Limited (PPL56) Ltd; Cairn Energy India Pty Ltd; Cairn Energy India West Holding BV; Cairn Energy India West BV; Cairn Energy Cambay Holding BV; Cairn Energy Cambay BV; Cairn Energy Gujurat Holding BV; and Cairn Energy Gujurat BV. See also R-SoD, p. 9 n. 24.
[Person 1] WS1, ¶ 60.
C-SoC, ¶ 91; [Person 1] WS1, ¶ 61.
Diagram taken from R-SoD, ¶ 15(c).
[Person 1] WS1, ¶ 62, citing CIHL, Certificate of Incorporation of a Limited Company dated 2 August 2006, Exh. CWS-[Person 1]-55.
With the exception of two shares, as explained in the following paragraph.
On 7 August 2006, CUHL transferred the 9 Subsidiaries (and as a result, its holdings in all 27 Subsidiaries) to CIHL in exchange for shares in CIHL.40 In exchange for the 27 Subsidiaries, CIHL issued 221,444,032 shares (one again at a value of £1 each) to CUHL, and Juris Limited and Lively Limited (each holders of one share in CIHL), transferred their CIHL shares to CUHL.41 The Claimants again note that this involved transfers by non-residents in non-Indian companies with underlying assets in India.42 This transaction is illustrated in the following diagram:43
[Person 1] WS1, ¶ 62, citing Share Exchange Agreement between CUHL and CIHL dated 7 August 2006, Exh. CWS-[Person 1]-56.
See Share Exchange Agreement between CUHL and CIHL dated 7 August 2006, Exh. CWS-[Person 1]-56.
C-SoC, ¶ 93; R-SoD, ¶ 15(e).
Diagram taken from R-SoD, ¶ 15(e).
[Person 1] WS1, ¶ 64, citing CIL, Certificate of Incorporation dated 21 August 2006, Exh. CWS-[Person 1]-57.
Id., ¶ 64 n. 57, citing CIL Prospectus dated 22 December 2006 [without annexures], Exh. CWS-[Person 1]-75, p. 26 n. 23.
On 1 September 2006, pursuant to a debt conversion agreement between CEP, CUHL, CIHL, and CEHL, CEP assigned to CUHL a debt of £29,780,71047 owed to it by CEHL (the "CEHL Debt"). In consideration for that debt, CUHL issued 29,780,710 shares (at £1 each) to CEP. In other words, CEP obtained shares in CUHL paid for in kind (through the assignment of the CEHL Debt), and now CUHL had an account payable of £29,780,710 against CEHL. (This is noted because the Respondent (and its witness, Mr [Person 6]), have placed much emphasis on it for the calculation of the alleged capital gain.48 The debt conversion agreement was later cited in the Final Assessment Order ("FAO").)49 This transaction is illustrated in the following diagram:50
This debt was originally US$ denominated; R-SoD ¶ 15 (g)(i).
R-SoD, ¶ 18(a), citing First Witness Statement of Mr [Person 6] dated 3 February 2017 ("[Person 6] WS1"), ¶¶ 50-51.
Final Assessment Order dated 25 January 2016 ("FAO"), Exh. C-70, ¶ 6.1.6; C-SoC, ¶ 94 ("As part of the transaction, on 1 September 2006, Cairn Energy, through a debt conversion agreement, assigned an intra-company debt owed to it by its subsidiary, CEHL, to CUHL. In exchange, CUHL issued 29,780,710 shares to Cairn Energy. The value of this debt was reflected in CUHL's accounts at the nominal value of the share certificates tendered by CUHL in consideration pursuant to the international accounting principles prevailing at the time. CUHL then assigned this debt to CIHL, which issued 29,780,710 shares to CUHL as consideration for the assignment of the debt. As a result, the total shareholding of CIHL was 251,224,744 shares, which at that time was held by CUHL. This debt was subsequently capitalised into shares in CEHL. See Debt Conversion Agreement among Cairn Energy, CUHL, CIHL and CEHL dated 1 September 2006, Exh. CWS-[Person 1]-59".).
Diagram taken from R-SoD, ¶ 15(g).
The final step in the reorganisation was the transfer of all Cairn’s Indian assets to CIL, the Indian subsidiary. This was to be implemented by transferring CIHL from CUHL to CIL in a series of incremental steps. Specifically, the plan was that CIL would acquire 20% of CIHL in cash prior to the IPO, and after the IPO it would acquire the remainder of CIHL’s shares, partly with cash (obtained through the IPO) and partly through a share exchange.55
[Person 1] WS1, ¶ 55.
In parallel, Cairn and/or its advisors liaised with the various governmental offices in India to obtain the necessary regulatory approvals for the IPO.56 These approvals included:
a. Approvals by the Foreign Investment Promotion Board ("FIPB"), an inter-ministerial group led by the Ministry of Finance ("MoF"). Ms [Person 1] explains that "[a]t that time, foreign investment in oil and natural gas exploration enjoyed automatic approval under the Foreign Exchange Management Act ("FEMA"). However, [...] because the Cairn corporate group’s reorganisation involved a share allotment for consideration other than cash, [Cairn] submitted the full details of the proposed transaction to FIPB for the necessary approval".57
b. Approvals by the Reserve Bank of India ("RBI"). According to Ms [Person 1], "[a]t the time of the transaction, RBI regulations allowed an Indian company to invest in foreign joint ventures or subsidiaries as long as its total financial commitment outside of India did not exceed 200 per cent of its net worth."58 As the reorganisation involved an investment by an Indian company in a foreign company by way of a share swap, CEP’s advisers recommended that it obtain RBI approval. This approval could only be granted after receiving FIPB approval.
c. Approvals by the Securities and Exchange Board of India ("SEBI") (which regulates the Indian securities market, including the BSE.
Id., ¶ 65.
Id., ¶ 49, referring to RSM, Phase I Plan C – Concept Paper dated 11 May 2006 [without annexures], Exh. CWS-[Person 1]-49, p. 15.
Id., ¶ 50.
In particular, in June 2006, Cairn met with SEBI to provide it with a description of the planned transaction. According to the Claimants, the presentation to SEBI explained that CIL would acquire CIHL through an exchange of its shares and cash from the IPO proceeds.59 This point is addressed in Section II.B.3.b(ii) below.
Id., ¶ 65; Cairn Energy, Presentation to SEBI dated 27 June 2006, Exh. CWS-[Person 1]-53.
Also around this time, Cairn’s tax advisors, the accounting firm RSM, and underwriters met separately with the FIPB and the RBI to explain the proposed restructuring and IPO.60 The Claimants allege that, in doing so, they explained that a part of the transaction would take place through a share swap between CUHL and CIL for the remaining shares in CIHL.61 According to Ms [Person 1], "[b]y the end of June, [Cairn] had secured indications from both regulatory bodies that the planned reorganisation and IPO as proposed would be compliant with their regulations."62
[Person 1], WS1, ¶ 66.
On 10 August 2006, CUHL (together with CIL, the IPO promoters) submitted its application to the FIPB (the "FIPB Application").63 According to the Claimants, "[t]his application provided all relevant details regarding the planned reorganisation and the listing of CIL on the Indian stock exchanges (which now included the National Stock Exchange ('NSE’) in addition to the BSE)."64 The cover letter to that application specified that:
The investment in CIL, an oil and gas exploration and production company will be partly in cash and partly in shares. The cash element will be approved under the automatic route. This application is therefore to obtain the FIPB’s permission for the investment by way of share exchange, full details of which are in the accompanying proposal.65
Id., ¶ 67; Letter from CUHL to the MoF dated 10 August 2006 enclosing CUHL's FIPB Application, Exh. C-1.
C-SoC, ¶ 97; [Person 1] WS1, ¶¶ 67-71; Letter from CUHL to the MoF dated 10 August 2006 enclosing CUHL's FIPB Application, Exh. C-1.
Letter from CUHL to the MoF dated 10 August 2006 enclosing CUHL's FIPB Application, Exh. C-1, p. 1.
[Person 1] WS1, ¶ 72; Letter from the MoF to CUHL dated 29 August 2006, Exh. CWS-[Person 1]-58.
C-SoC, ¶ 106; [Person 1] WS1, ¶ 74; Letter from RSM to the RBI dated 5 September 2006, Exh. CWS-[Person 1]-61.
In parallel and to comply with RBI regulations for overseas direct investments by Indian companies, CUHL also obtained an independent valuation of CIHL carried out by NM Rothschild & Co. ("Rothschild"). The purpose of such a valuation was to demonstrate that the consideration that CIL would pay for CIHL would not be disproportionate to CIL's ultimate value. On 18 September 2006, Rothschild issued a certificate valuing CIHL at between US$ 6 billion and US$ 7.2 billion.68
[Person 1] WS1, ¶ 75; Letter from Rothschild to CIL dated 18 September 2006, Exh. CWS-[Person 1]-66, p. 4.
Approval for Cairn India Limited for issuing and allotting equity shares aggregating to up to 70% of its post IPO equity capital, to Cairn UK Holdings Limited, in exchange for shares (up to 70%) of Cairn India Holdings Limited held by Cairn UK Holdings Limited.
Subsequent to the completion of the IPO, CIL would require the balance equity shares (at least 10%) of CIHL from CUHL, for a cash consideration under automatic route.70
CEP was not invited to send a representative to the meeting, but received a copy of the agenda, which the Claimants claim listed Cairn's application for review and noted that the Secretary for the Department of Revenue was scheduled to attend.71 The Respondent denies that the Secretary for the Department of Revenue attended the meeting.72 In any case, the record suggests that the Department of Revenue did receive the minutes of the meeting.73
C-SoC, ¶¶ 108-109, citing Government of India, Meeting of the FIPB dated 4 September 2006, Exh. CWS-[Person 1]-60, pp. 1-2.
Transcript, Evidentiary Hearing, Day 4, 5:23-6:3 (Mr Moollan), Day 10, 41:8-10, 23-25; 42:1-14 (Mr [Person 10]).
Transcript, Evidentiary Hearing, Day 3, 229:10-11 (Mr McNeill), Day 4, 3: 4-7 (Mr McNeill, citing RCom-22).
FIPB, Excerpt of Minutes of the 84th Meeting held on 8 September 2006, Exh. C-162.
[Person 1] WS1, ¶ 77, citing Letter from the MoF to CUHL dated 21 September 2006, Exh. C-3.
Also in September 2006, Cairn sent two letters to the RBI to enquire on the status of its application.76 The RBI responded on 18 September 2006 saying that "[a]s the proposals envisage[d] investments in the oil exploration sector, [it was] examining the matter in consultation with the Government of India."77 Ms [Person 1] testifies that she met with the RBI in early October 2006 "to explain the assets that CIL was intended to hold following the IPO as well as the projected timeframes of the transaction."78 She also sent, on behalf of CIL, a letter dated 6 October 2006 providing this information in writing.79 In that letter, Ms [Person 1] indicated to the RBI that Cairn understood that the RBI had "received a clarification from the Ministry of Finance of their having considered our transaction structure in its entirety while giving the FIPB approval."80 The RBI approved the transaction on 10 October 2006, noting that "the Foreign Investment Promotion Board (FIPB) ha[d] considered the entire proposal and approved the share swap transaction between Cairn UK Holdings Ltd (CUHL), Cairn India Holdings Ltd (CIHL) and Cairn India Ltd. (CIL) which follows the first two legs of the proposed transaction, vide its approval letter dated September 21, 2006."81
Id., ¶¶ 78, 62; Letter from Cairn Energy to the RBI dated 15 September 2006, Exh. CWS-[Person 1]-64.
Letter from the RBI to RSM dated 18 September 2006, Exh. CWS-[Person 1]-65.
[Person 1] WS1, ¶ 78.
Ibid.; Letter from CIL to the RBI dated 6 October 2006, Exh. CWS-[Person 1]-67.
Letter from CIL to the RBI dated 6 October 2006, Exh. CWS-[Person 1]-67.
[Person 1] WS1, ¶ 78; Letter from RBI to Citibank India dated 10 October 2006, Exh. CWS-[Person 1]-68.
[Person 1] WS1, ¶ 79; Letter from DSP Merrill Lynch Limited, ABN AMRO Securities (India) Private Limited and JM Morgan Stanley Private Limited to SEBI dated 12 October 2006 (enclosing CIL DRHP), Exh. CWS-[Person 1]-70, p. 96.
Having obtained the necessary approvals, the last stage in Cairn’s reorganisation proceeded in two steps:
a. Step 1 : Pursuant to a Subscription and Share Purchase Agreement dated 15 September 2006 (the "SSPA"),83 CIL acquired 21.8 per cent of CIHL from CUHL, for cash consideration.84
b. Step 2 : After the IPO bidding period closed, and once the IPO price range had been set, CIL acquired the remaining 78.2 per cent of CIHL from CUHL, partly through a share exchange and partly for cash consideration. This step took place pursuant to the Share Purchase Deed dated 12 October 2006 (the "Share Purchase Deed").85
[Person 1] WS1, ¶ 82; Subscription and Share Purchase Agreement between Cairn Energy, CUHL, CIL, and CIHL dated 15 September 2006 (and amended on 5 October 2006) ("SSPA"), Exh. C-6.
[Person 1] WS1, ¶ 82; R-SoD, ¶ 15(i). At that time, CIHL had an authorized share capital of £300,000,000 divided into 300,000,000 ordinary shares of £1 each. See SSPA, Exh. C-6, Recital A.
[Person 1] WS1, ¶ 82; Share Purchase Deed between Cairn Energy, CUHL, CIL, and CIHL dated 12 October 2006 ("Share Purchase Deed"), Exh. C-7.
The Claimants allege that the sequence of transactions required for Step 1 (and in particular, the flow of funds involved) was dictated by the need to comply with SEBI regulations.86 CUHL, (together with CEP, the promoter of the IPO), was required to invest a MPC of 20 per cent of the estimated post-IPO share capital in CIL,87 which amounted to over US$ 1 billion.88 The MPC needed to be fulfilled in cash, because a share swap was only permitted if the IPO was to occur three years after the acquisition of the MPC,89 a timing that was not suitable to Cairn.90 The promoter was also required to retain the 20 per cent shareholding for three years before it could sell it (the "Lock-In Requirement"), and retain any additional shareholding for at least one year.91
C-SoC, ¶¶ 76-77.
[Person 1] WS1, ¶ 48, referring to RSM, Plan C – Concept Paper dated 19 May 2006 [without annexures], Exh. CWS-[Person 1]-50, p. 19. See also DIP Guidelines, Exh. C-111, Clause 4.1.1 [extract] (providing that in a public issue by an unlisted company, the promoter is to contribute not less than 20 per cent of the post-issue capital).
[Person 1] WS1, ¶ 83.
SoC ¶ 77; [Person 1] WS1, ¶ 48(ii), referring to RSM, Plan C – Concept Paper dated 19 May 2006 [without annexures], Exh. CWS-[Person 1]-50, p. 19.
Second Witness Statement of Ms [Person 1] ("[Person 1] WS2"), ¶ 53.
Id., ¶ 48(iii); RSM, Plan C – Concept Paper dated 19 May 2006 [without annexures], Exh. CWS-[Person 1]-50, p. 20.
To meet the MPC requirement, CEP obtained a "daylight overdraft" (i.e., a loan repayable in one day) from Citibank (the "Daylight Loan").92 Because CEP’s articles of association imposed a maximum borrowing limit, this loan had to be taken in two tranches.93 CEP then loaned these funds to CUHL via intercompany loan.94
[Person 1] WS1, ¶ 83; Letter from Royal Bank of Scotland to Cairn Energy dated 12 September 2006, Exh. CWS-[Person 1]-63.
[Person 1] WS1, ¶ 83.
Letter from Royal Bank of Scotland to Cairn Energy dated 12 September 2006, Exh. CWS-[Person 1]-63.
On 12 October 2006, CUHL in turn used the funds from the Daylight Loan to subscribe for shares in CIL.95 The Tribunal understands that this involved payment of the shares subscribed under the SSPA of 15 September 2006. Indeed, according to the SSPA, CUHL had agreed to subscribe in cash for 365,028,898 CIL shares.96 The Share Purchase Deed confirmed that, as on that date, CUHL had subscribed and paid for 365,078,892 shares in CIL (the remaining six shares being held at that date by six different individuals, including Ms [Person 1]).97 The Tribunal understands that these six shares were thereafter transferred to CUHL.98
[Person 1] WS1, ¶ 84, citing SSPA, Exh. C-6; [Person 1] WS2, ¶ 82.
SSPA, Exh. C-6, Recital D, Sections 2.1 and 3.1. The subscription was to take place on the Subscription Date, which was scheduled to take place on 19 September 2006 or any other date agreed by the parties (Section 1.1). Given what followed, the Tribunal understands that the Subscription Date ended up being 12 October 2006.
Share Purchase Deed, Exh. C-7, Recital G.
The Respondent does not dispute that, eventually, CUHL held all 365,028,898 CIL shares that it agreed to subscribe per the SSPA. See, e.g., R-SoD, ¶ 15(i); FAO, Exh. C-70, ¶ 7.1.3.
On that same day, CIL used the proceeds it received from CUHL's share subscription (specifically, INR 50,373,987,924) to acquire the first tranche of CIHL shares (16.5 per cent) from CUHL (the "First CIHL Acquisition").99 This allowed CUHL to repay this tranche of the Daylight Loan.100 The First CIHL Acquisition is one of the transactions subject to the taxation measures at issue in this arbitration.
C-SoC, ¶ 116; [Person 1] WS1, ¶ 84; R-SoD, ¶ 15(i). According to the SSPA, CIL agreed to purchase a first tranche of 45,703,161 CIHL Shares from CUHL, at a price of 55,484,392,496 (SSPA, Exh. C-6, Recital E and Section 4). The Tribunal notes however that, according to the Share Purchase Deed, CIL ended up acquiring only 41,493,659 shares in CIHL (Share Purchase Deed, Exh. C-7, Recital G). According to Ms [Person 1]'s testimony ([Person 1] WS1, p. 25 n. 84) and as recorded in the FAO, the total price paid for these shares was INR 50,373,987,924 (FAO, Exh. C-70, ¶ 7.1.3).
[Person 1] WS1, p. 25 n. 81.
On 22 November 2006, CUHL paid an additional share premium of INR 17,554,239,705 to CIL for the shares it had subscribed for in October. This was to ensure that the price paid by CUHL for its shares in CIL was not less than the highest price per share at which the CIL shares were to be marketed in the IPO.103 The Tribunal understands that CUHL obtained these funds through the second tranche of the Daylight Loan.104
[Person 1] WS1, ¶ 85; CIL Red Herring Prospectus dated 27 November 2006 [without annexures], Exh. CWS-[Person 1]-72, p. 28; SSPA, Exh. C-6, Clauses 5.1 and 5.2.
[Person 1] WS2, ¶ 82; see also [Person 1] WS1, ¶ 86 (stating that "the second transfer that the Indian Income Tax Department has alleged to be a taxable event likewise involves taxation of the return of borrowed funds injected to comply with Indian law.").
On that same date, CIL used the funds obtained through CUHL's subscription of shares in order to purchase from CUHL an additional 5.3% of shares in CIHL, specifically a further 13,390,789 shares at a price of INR 17,554,239,705 (the "Second CIHL Acquisition").105 This allowed CUHL to repay the second tranche of the Daylight Loan.106 Once again, the Parties dispute whether this transaction meets the MPC requirement and SEBI regulations generally.107
[Person 1], WS1, ¶ 86; SSPA, Exh. C-6, Recital F and Section 6; Share Purchase Deed, Exh. C-7, Recital B; FAO, Exh. C-70, ¶ 7.1.3. The Tribunal notes that, according to the SSPA, this second tranche of CIHL shares was envisaged to comprise 9,181,287 shares. However, as noted in the Share Purchase Deed, CIL ended up acquiring 13,390,789 in this second tranche, as reflected also in the FAO.
[Person 1] WS1, ¶ 86; [Person 1], WS2, ¶ 82.
See Section VII.A.3.e below.
[Person 1] WS1, ¶ 90; CIL, Annual Report and Financial Statements 2006, Exh. C-5, p. 50.
[Person 1] WS1, ¶ 88.
On 20 December 2006, CIL acquired 53.9 per cent of CIHL through a share swap with CUHL. More specifically, CIL acquired 135,267,264 shares in CIHL from CUHL, for which it issued 861,748,893 of its own shares to CUHL in consideration (the "Third CIHL Acquisition").114 The Third CIHL Acquisition is one of the transactions subject to the taxation measures at issue in this arbitration.
C-SoC, ¶ 121; [Person 1] WS1, ¶ 88, p. 27 n. 88; R-SoD, ¶ 15(i)(v); Share Purchase Deed, Exh. C-7, Recital L, Sections 4.1(A), 5.1; FAO, Exh. C-70, ¶ 9.1.3. The Tribunal notes that there is a slight discrepancy in the record as to the number of CIL shares issued that is not material to the outcome of this case. For the sake of completeness, the Tribunal notes that the Claimants refer to the issuance of 861,748,893 CIL shares, the Respondent refers to 861,864,893 CIL shares, and the FAO refers to 861,764,893 CIL shares.
According to the Respondent, "[t]he value of the CIL shares so transferred was INR 160 per share. This value was fixed by the price achieved for CIL’s shares in the IPO brought in the Indian Capital Market for General Persons on 29 December 2006. This was the value declared, for instance, to the Transfer Pricing Officer in Form 3CEB filed on 30 October 2007. Accordingly, the total consideration for the third tranche of shares was INR 137,882,382,880[…]"115 The Claimants have not disputed this value, and indeed accept that the Income Tax Department ("ITD") confirmed that the cost basis of the CIL shares INR 160 per share (noting however that, depending on the date, that value was INR 190 per share).116
R-SoD, ¶ 15(i)(v), citing Form No. 3CEB dated 30 October 2007, Exh. C-4.
Claimants' Updated Reply ("C-Updated Reply"), ¶¶ 402-406; Claimants' Post-Hearing Brief ("C-PHB"), ¶ 560, citing CUHL, Annexure 3 to Application for Withholding Certificate under Section 197 of the ITA 1961 dated 19 October 2009, Exh. CWS-[Person 1]-83; CUHL, Petition to the High Court of Delhi dated 27 September 2012, Exh. CWS-[Person 1]-107, p. 171 of the bundle; Cairn UK Holdings Limited v. Director of Income Tax  Writ Petition Index Volume - II (High Court of Delhi, 27 September 2012), Exh. C-318, p. 203 of the bundle; Order under Section 197 of the ITA 1961 dated 3 June 2011, Exh. CWS-[Person 1]-95.
On 29 December 2006, following completion of CIL's pre-IPO placement and IPO, CIL acquired the remaining 24.3 per cent of CIHL from CUHL for cash consideration, using a portion of the proceeds from the IPO (the "Fourth CIHL Acquisition").118 Specifically, CIL acquired 61,073,032 shares in CIHL for a consideration of INR 61,008,099,631.119 The Fourth CIHL Acquisition is one of the transactions subject to the taxation measures at issue in this arbitration.
C-SoC, ¶ 121; [Person 1] WS1, ¶ 88, p. 27 n. 89; R-SoD, ¶ 15(vi); Share Purchase Deed, Exh. C-7, Recital A, Sections 4.1(B), 6.1, 6.3; FAO, Exh. C-70, ¶ 7.1.3.
[Person 1] WS1, p. 27 n. 89.
Following the IPO and the Third and Fourth CIHL Acquisitions:
a. CIHL was a wholly-owned subsidiary of CIL, and
b. CIL in turn was 69 per cent owned by CUHL, with the remaining 31 per cent of CIL shares held by the public.121
c. Following the IPO, CIL became one of India’s top 25 listed companies by market capitalisation.122
[Person 1] WS1, p. 28 n. 91 (According to Ms [Person 1], "[t]hese percentages account for the exercise of the Green Shoe Option, under a stabilisation agreement dated 12 October 2006, by the underwriter, DSP Merrill Lynch. Pursuant to this agreement, CIL issued an additional 13,085,041 shares to CUHL on 2 February 2007 as part of the underwriter's efforts to stabilise the initial price of CIL shares".). See CIL Prospectus dated 22 December 2006, Exh. CWS-[Person 1]-75, pp. 6-8.
[Person 1] WS1, ¶ 90; "Cairn IPO opens today; co to be among top 25", The Economic Times, 10 December 2006, Exh. CWS-[Person 1]-73.
The IPO raised nearly US$ 1.98 billion.123 The Claimants assert that these funds were distributed as follows:
a. "US$ 600 million was for the account of CIL, and was earmarked to fund further exploration and development activities in Rajasthan and elsewhere in India."124 The Tribunal understands that these US$ 600 million remained in CIL and were used to fund its normal operations, as well as further exploration and development activities.
b. "Approximately US$1.35 billion went to CUHL and then to CEP, which returned roughly US$940 million to its shareholders and used the remaining funds for its on-going business and operations."125 The Tribunal understands that CUHL received those US$ 1.35 billion as consideration for the sale of CIHL. In turn, the Tribunal understands that CEP distributed US$ 940 million to its shareholders as dividends,126 retaining approximately US$ 440 million to fund its business operations.127
[Person 1] WS1, ¶ 93; Cairn Energy, Annual Report & Accounts 2006, Exh. CWS-[Person 1]-42, p. 32 ("The total proceeds raised in the flotation were $1.98bn with $751.8m pre IPO placing funds included in net cash at the year end.").
C-SoC, ¶ 124; [Person 1] WS1, ¶ 91; Cairn Energy, Annual Report & Accounts 2006, Exh. CWS-[Person 1]-42, p. 32 ("Cairn India has retained $600m, with the remainder of the proceeds currently being held to fund Cairn's ongoing business held by its wholly owned subsidiary Capricorn. This provides financial flexibility to support the growth of Capricorn, with the aim of creating and realising further value for shareholders in the future.").
C-SoC, ¶ 124; [Person 1] WS1, ¶ 91; Cairn Energy, Annual Report & Accounts 2006, Exh. CWS-[Person 1]-42, p. 32.
Cairn Energy, Annual Report & Accounts 2006, Exh. CWS-[Person 1]-42, p. 32 ("On 27 February 2007, the Company announced the proposed return of £481m (approximately $940m) of this cash to shareholders of Cairn Energy (equivalent to £3 per share).").
[Person 1] WS1, ¶ 91.
a. Acquired the shares in CIHL at a cost of £251,224,744 (INR 21,783,697,552 at an average conversion rate of INR 86.7139);
b. Transferred those shares to CIL in return for a total consideration in cash and shares of INR 266,818,710,140; and
c. Thereby achieved a short-term capital gain of INR 245,035,012,588 (i.e., approximately US$ 3.6 billion)."128
The Claimants acknowledge that, through the sale of 31% of CIL shares to the public in the IPO, they made an "exceptional gain of US$ 1,537 billion."129 Ms [Person 1] explains that "[t]his exceptional gain of US$ 1,537 billion reflects how CEP recorded in its consolidated group accounts its 69 per cent portion of the US$ 1.98 billion in proceeds from the IPO, offset by the historical net book value of those assets now attributable to minority shareholders."130 However, this capital gain has not been the subject of any taxation measures by the Respondent. It is undisputed that, pursuant to Indian law, capital gains made through a fresh issue of shares in an IPO are not chargeable to tax.131
[Person 1] WS1, ¶¶ 92-93; Cairn Energy, Annual Report and Accounts 2007, Exh. CWS-[Person 1]-76, p. 29. ("Reflecting that the proceeds were not chargeable to tax in the consolidated group accounts also indicated that they were not chargeable to tax on the accounts of any individual subsidiary.").
[Person 1] WS1, ¶ 93.
C-SoC, ¶ 126; [Person 1] WS1, ¶ 93; Cairn Energy, Annual Report and Accounts 2007, Exh. CWS-[Person 1]-76, p. 29 (stating that "The Group made an exceptional gain of $1,537.0m on the disposal of 31% of Cairn India through the IPO […]. These gains are not chargeable to tax."). Ms [Person 1] explains that "[r]eflecting that the proceeds were not chargeable to tax in the consolidated group accounts also indicated that they were not chargeable to tax on the accounts of any individual subsidiary." [Person 1] WS1, p. 29 n. 95; Claimants' Answers to the Tribunal's Questions, ¶ 32; Respondent's Answers to the Tribunal's Questions, ¶ 93.
During the course of 2007, CIL was subjected to a transfer pricing assessment by the ITD. As the Claimants explain (and the Respondent does not dispute) that the ITA 1961 requires Indian taxpayers who entered into an international transaction in the previous year to file a report on that transaction with the Transfer Pricing Officer ("TPO") in the Office of the Additional Commissioner of Income Tax. The task of the TPO is to ensure that the transaction has been carried out at arm’s length pricing,132 and more specifically, "to ensure that India does not lose any tax revenues as a result of a multinational group intentionally allocating its profits to low-tax jurisdictions via non-arms’ length pricing."133
C-SoC, ¶ 128; R-SoD, ¶ 30(d).
[Person 1] WS1, ¶ 96.
During the year assessee [i.e., CIL] has acquired 272,389,192 ordinary shares of £1 each, in Cairn India Holdings Limited out of which 251,224,744 shares has been acquired from its holding company Cairn UK Holdings UK for total purchase consideration of Rs 266,818,710,140 for which it has issued 861,764,893 shares shares [sic] at Rs 160 each to Cairn UK Holdings Limited by way of share swap arrangement for acquiring 135,267,264 ordinary shares of Cairn India Holdings Limited. The said transaction does not impact P&L account and is in accordance with the provisions of Foreign Exchange Management Act (FEMA) and CCI guidelines. Thus, the transaction is considered to be at arm's length.
On 29 December 2009, the ITD requested CIL to provide detailed information regarding the arm's length price of its international transactions during the fiscal year 2006-2007.135 During the course of 2010, CIL representatives attended hearings with the ITD and submitted "detailed information about the pricing of the CIL shares and underlying CIHL assets and the process of their acquisition by CUHL", including certain key documents prepared during the course of the restructuring, such as the FIPB and RBI approvals, the Rothschild valuation and the final CIL prospectus.136
Notice under Section 92CA(2) and 92D(3) of the ITA 1961 to CIL dated 29 December 2009, Exh. C-146.
[Person 1] WS1, ¶ 97; Letter from CIL to the Additional Commissioner of Income Tax dated 3 September 2010 [without annexures], Exh. CWS-[Person 1]-88 (enclosing the CIL Prospectus, the Rothschild valuations dated 18 September 2006 and 19 December 2006, the RBI approval dated 10 October 2006 and the FIPB approval dated 10 October 2006); Letter from CIL to the Additional Commissioner of Income Tax dated 20 September 2010 [without annexures], Exh. CWS-[Person 1]-89 (discussing a hearing held on 3 September 2010 and providing details on the CIHL Acquisition); Letter from CIL to the Additional Commissioner of Income Tax dated 29 September 2010 [without annexures], Exh. CWS-[Person 1]-90 (enclosing the brokers' reports referred to in the Rothschild valuation).
The Claimants allege, and the Respondent has not disputed, that the TPO communicated this finding to the assessing officer, who reviewed the TPO's determination and the evidence submitted by CIL, and then closed the assessment, without imposing any tax on CIL in connection with the assessment.138 It is also undisputed that between 2006 and 2010, the ITD never suggested to CIL or CUHL that CUHL was liable to pay capital gains tax for the CIHL Acquisition.139
C-SoC, ¶ 130; [Person 1] WS1, ¶ 99; R-SoD, ¶ 30(d).
C-SoC, ¶ 130; [Person 1] WS1, ¶ 100. The Respondent has not disputed this.
[Person 1] WS1, ¶¶ 102, 104.
In October 2009, CUHL sold 2.3 per cent of CIL’s issued share capital to Petronas.141 This transaction involved the off-market sale of shares in an Indian company, and it is undisputed that any capital gains deriving from this transaction were taxable in India. The ITD considered this to be a short-term capital gain, and applied a rate of 20%, with the result that CUHL paid approximately INR 820 million (approximately US$ 17.8 million) in short term capital gains tax for this transaction.142
NoA, ¶ 28. Ms [Person 1] explains that "[t]he transaction was made pursuant to an agreement providing for a transfer of 43,600,000 shares to Petronas for consideration of INR 11,141,823,040 or approximately US$ 241,426,379." [Person 1] WS1, p. 32 n. 100, referring to Heads of Agreement between Cairn Energy and Petronas International Corporation Ltd dated 14 October 2009, Exh. CWS-[Person 1]-81 ; Cairn UK Holdings Limited v. Director of Income-Tax  Writ Petition (Civil) No. 6752/2012 dated 7 October 2013, Exh. CWS-[Person 1]-108, ¶ 3.
[Person 1] WS1; ¶ 103. Order under Section 197 of the ITA 1961 dated 23 October 2009, Exh. CWS-[Person 1]-84; National Securities Depository Limited, Quarterly Statement of TDS under Section 200(3) of ITA 1961 dated 11 January 2010, Exh. CWS-[Person 1]-86 (showing payment by Petronas International Corporation Limited of INR 819,899,863 in assessment year 2010-2011).
In its application to ITD for a withholding certificate, CUHL had argued that long-term capital gains tax at a rate of 10 per cent (rather than 20 per cent) should apply.143 To support this argument, CUHL had provided information on how it had acquired CIL’s shares, including the consideration it had given for them (i.e., cash and exchange of shares in CIHL).144 However, the ITD rejected this request, and CUHL contested the ITD’s decision before the Indian courts.145 The Delhi High Court ultimately agreed that the ITD should have applied a 10 per cent rate, and that CUHL had a right to a rebate of half the US$ 17.8 million withheld.146 The Claimants allege that, to date, CUHL has not been paid this rebate.147
[Person 1] WS1; ¶ 103.
Ibid.; CUHL, Application for Withholding Certificate under Section 197 of the ITA 1961 dated 19 October 2009 [without annexures], Exh. CWS-[Person 1]-82 (enclosing the FIPB approval granted to CUHL and the certificate issued by the Statutory Auditor certifying CIL's value); CUHL, Annexure 3 to Application for Withholding Certificate under Section 197 of the ITA 1961 dated 19 October 2009, Exh. CWS-[Person 1]-83.
[Person 1] WS1; ¶ 103; CUHL, Petition to the High Court of Delhi dated 27 September 2012, Exh. CWS-[Person 1]-107.
[Person 1] WS1, ¶ 103; Cairn UK Holdings Limited v. Director of Income-Tax , Decision on Writ Petition (Civil) No. 6752/2012 dated 7 October 2013, Exh. CWS-[Person 1]-108.
C-SoC, ¶ 135; [Person 1] WS1, ¶ 103; C-Updated Reply, ¶ 204.
C-SoC, ¶ 135; [Person 1] WS1, ¶ 103. The Respondent does not dispute this.
In August 2010, CEP and CUHL entered into a share purchase agreement with Twin Star Energy Holdings Ltd. (then THL Aluminium Limited), a subsidiary of Vedanta for the sale of 51 per cent of CIL’s share capital.149 Since the sale was potentially for a controlling interest in CIL, it required approval from the Indian Government, which was granted in July 2011.150
[Person 1] WS1, ¶ 104; Share Purchase Deed relating to the shares of CIL between Cairn Energy, CUHL, THL Aluminium Limited, Vedanta dated 15 August 2010, Exh. CWS-[Person 1]-87, Background, Recital A.
[Person 1] WS1, ¶ 104; Letter from Cairn Energy to the Ministry of Petroleum and Natural Gas dated 23 November 2010, Exh. CWS-[Person 1]-93; Facsimile from the Government of India to Cairn Energy, CIL, Cairn Energy India, CEHL, and Vedanta dated 26 July 2011, Exh. CWS-[Person 1]-97.
The sale was completed in December 2011. CUHL ultimately sold 40 per cent of CIL’s issued share capital, as follows:
a. 38.5 per cent of the shares were sold in an off-market transaction, in two tranches: the first for approximately 10 per cent of the fully diluted equity share capital of CIL (191,920,207 shares), and the second for 28.5 per cent (546,953,379 shares).151
b. Approximately 1.5 per cent of the shares (29,907,241 shares) were sold on market.152
[Person 1] WS1, ¶ 104; Amendment Deed among Cairn Energy, CUHL, Twin Star Energy Holdings Ltd., and Vedanta dated 27 June 2011, Exh. CWS-[Person 1]-96; Letter from CUHL to the Assistant Director of Income-tax dated 14 December 2011, Exh. CWS-[Person 1]-105.
[Person 1] WS1, ¶ 104; DSP Merrill Lynch Limited, Contract Note – Form AA dated 9 December 2011, Exh. CWS-[Person 1]-104.
It is undisputed that any capital gains made through the off-market portion of the sale would be subject to capital gains tax in India, as they involved the private sale of shares in an Indian company.153 As with the Petronas transaction, CUHL applied for a tax withholding certificate in which it requested the application of a 10 per cent tax rate.154 Once again, the ITD rejected this request, and applied a tax rate of 20 per cent.155 On this basis, Vedanta withheld approximately INR 26.7 billion (about US$ 536 million).
[Person 1] WS1, ¶ 105. With respect to the remaining 1.5 per cent, the Tribunal understands that, because the shares were sold in the Bombay Stock Exchange and had been held for over 12 months, they were exempt from capital gains tax. See Form No. 15CB dated 7 December 2011, Exh. CWS-[Person 1]-103 (stating "[t]he remittance being sale proceeds of sale of shares at the Bombay Stock Exchange. The shares sold were held for over 12 months and therefore the gain is LTCG [Long Term Capital Gain] which is exempt from Tax.").
[Person 1] WS1, ¶ 105; CUHL, Application for Withholding Certificate under Section 197 of the ITA 1961 dated 4 October 2010, Exh. CWS-[Person 1]-91 [Without Annexures]; Annexure 4, CUHL, Application for Withholding Certificate under Section 197 of the ITA 1961 dated 4 October 2010, Exh. CWS-[Person 1]-92.
Order under Section 197 of the ITA 1961 dated 3 June 2011, Exh. CWS-[Person 1]-95 (Withholding Certificate).
C-SoC, ¶ 138; [Person 1] WS1, ¶ 105. The Respondent has not disputed this.
The words 'sale [...] of a capital asset in the taxable territories' in the existing section 42(1) are slightly ambiguous, since 'in the taxable territories' can be read either with 'sale' or with 'capital asset'. To remove this ambiguity, the word 'situate' has been added after 'capital asset.'161
Income deemed to accrue or arise in India.
9. (1) The following incomes shall be deemed to accrue or arise in India :-
(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.162
Non-residents are taxed only on Indian-sourced income and on income received, accruing or arising in India.
Nonresidents may also be taxed on income deemed to accrue or arise in India through a business connection, through or from any asset or source of income in India, or through the transfer of a capital asset situated in India (including a share in a company incorporated in India).166
Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.171
a. The Economic Times on 5 February 2010 reported that the then British Prime Minister, Gordon Brown, had written to Prime Minister Singh in relation to the Vodafone case. According to the article, Mr Brown had stated that taxing cross-border deals such as Vodafone’s could "create uncertainty for foreign investors and affect the country’s investment climate".191
b. On 5 February 2010 Indian Prime Minister Singh responded to Prime Minister Brown’s letter assuring him that Vodafone would "have the full protection of the law" and indicating his understanding that "there is no retrospective application of taxation and a recent court judgment has affirmed this position". Prime Minister Singh also provided his assurance that the Government of India was "fully committed to providing a transparent and growth oriented environment for profitable international investment".192
c. Acting chairman Sudhir Chandra of the CBDT was quoted as saying "This (Vodafone case) is a test case, we will look at similar cases" in an article published in The Hindu on 9 September 2010. The article also said:
The government will look into more cross-border mergers involving Indian assets, like the Vodafone-Hutchison deal, after the Bombay High Court rejected the UK-based Vodafone’s petition against the imposition of tax by authorities here. [...] Recently, London listed Vedanta Group has signed a deal to acquire UK-based Carin Energy’s Indian arm for USD 8.43 billion. Chandra said, "(Income Tax) Department’s position stands vindicated. It is a clear cut case of deliberate non-compliance to law on misplaced legal advice."
Tax authorities had slapped a notice on Vodafone over its acquisition of Hong Kong’s Hutchison Telecommunications, involving its Indian telecom JV Hutch Essar, for over USD 11 billion in 2007.
They said that in this case the buyer, Vodafone, was liable to pay capital gains tax even if it failed to deduct it at source, that is, while making payment to Hutch for the deal that happened overseas. Vodafone challenged the notice.
Although he did not name the companies or deals that could be investigated, Chandra said, "There are already some cases under investigation.193
After the Vodafone decision was issued, the United States, the United Kingdom and the European Union issued the following joint statement, which was cited by the Minister of State in the MoF Shri S. S. Palanimanickam:
Indian Revenue Authorities have asserted the unprecedented view that India is entitled to capital gains on transactions taking place wholly outside India and that they have imposed retroactive taxing jurisdiction in transactions involving the transfer of shares in a company not resident in India, in which both the buyer and seller are also nonresidents of India.194
Rajya Sabha Written Answers dated 1 March 2011, Exh. C-118.
(1) The income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from [...] (d) the transfer, directly or indirectly, of a capital asset situate in India.196
The income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from: [...] (d) the transfer of a capital asset situated in India.198
The income deemed to accrue in India under sub-section (1) shall, in the case of a non-resident, not include the following, namely: — [...] (g) income from transfer, outside India, of any share or interest in a foreign company unless at any time in twelve months preceding the transfer, the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent of the fair market value of all assets owned by the company.199
Where the income of a non-resident, in respect of transfer, outside India, of any share or interest in a foreign company, is deemed to accrue in India under clause (d) of sub-section (1), it shall be computed in accordance with the following formula -
A x B / C where
A = Income from the transfer computed in accordance with provisions of this Code as if the transfer was effected in India;
B = fair market value of the assets in India, owned, directly or indirectly, by the company;
C = fair market value of all assets owned by the company.201
Amendment of section 9.
4. In section 9 of the Income-tax Act, in sub-section (1),—
(a) in clause (i), after Explanation 3, the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962, namely:—
Explanation 4.—For the removal of doubts, it is hereby clarified that the expression "through" shall mean and include and shall be deemed to have always meant and included "by means of", "in consequence of or "by reason of".
Explanation 5.—For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India'.219
See, e.g., "Decision to amend IT Act retrospectively 'capricious', says economist Raghuram Rajun" (The Economic Times, 12 April 2012), Exh. C-207 (noting that "several global organisations, including International Chamber of Commerce (ICC), BIAC (which represents OECD's business community) have written to Prime Minister Manmohan Singh, Finance Minister [Person 38] and others, expressing concern over the government's proposed move").
On 30 July 2012, the Prime Minister appointed a special tax expert committee (the "[Person 3] Committee") to examine the implications of the 2012 Amendment. The committee was led by Dr [Person 3], an advisor to the Finance Minister. The [Person 3] Committee issued its draft report on 1 October 2012.222
Expert Committee, Draft Report on Retrospective Amendments Relating to Indirect Transfer (2012), Exh. C-56.
In August 2012, in response to the World Bank’s Doing Business Report which had ranked India at the bottom of certain indices, the Ministry of Corporate Affairs established the Committee for Reforming the Regulatory Environment for Doing Business in India (the "[Person 2] Committee"). The Committee was chaired by Mr [Person 2], the former Chairman of SEBI, and included representatives from the federal government, state governments, public sector enterprises, and regulatory bodies.223 The Committee addressed a number of issues, including that of retroactive taxation.224
Committee for Reforming the Regulatory Environment for Doing Business in India, Report of the Committee for Reforming the Regulatory Environment for Doing Business in India (2 September 2013), Exh. C-136.
Id., pp. 76-77.
In May 2014, an expert group (consisting of Dr [Person 3] and former government officials) which had been tasked with "address[ing] the thus-far missing elements of best practices in tax administration in a comprehensive manner"225 released the "First Report of the Tax Administration Reform Commission" (the "TARC Report"). Amongst many of its observations, the committee indicated a series of "major fault lines in the tax administration", and commented on the 2012 Amendment.226
C-SoC, ¶ 235; Tax Administration Reform Commission, First Report of the Tax Administration Reform Commission, Tax Administration Reform in India: Spirit, Purpose and Empowerment, 30 May 2014 ("TARC Report"), Exh. C-137, p. ii.
Id., pp. 6, 249.
[A]n asset or a capital asset, being any share of, or interest in, a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets (whether tangible or intangible) located in India.228
The share or interest, referred to in sub-section (2), shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of such assets, (i) exceeds the amount as may be prescribed; or (ii) represent at least twenty per cent of the fair market value of all the assets owned by the company or entity, as the case may be.230
In his first budget speech in July 2014, the new Finance Minister, [Person 11], proposed that a CBDT-supervised "High Level Committee" be implemented to scrutinise fresh cases that had arisen following the 2012 Amendments. After stating that, "[t]his Government will not ordinarily bring about any change retrospectively which creates a fresh liability", he announced that "henceforth, all fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of the Assessing Officers will be scrutinized by a High Level Committee to be constituted by the CBDT before any action is initiated in such cases."232
Budget 2014-2015 speech of [Person 11], Minister of Finance of 10 July 2014, Exh. C-35; C-SoC, ¶ 302.
In a live interview on Indian television on 7 November 2014 (which also featured the former Finance Minister, Mr [Person 12]), the Finance Minister admitted that it was not on his immediate agenda to repeal the 2012 Amendment, but insisted that his government had taken a "policy decision that as far as this government is concerned [...] even though there is a sovereign power of retrospective taxation, we are not going to exercise that power."234
"The Clash of the Titans" (Headlines Today, 7 November 2014) [unofficial transcript], Exh. C-209.
"[Person 11] promises to attract investors 'scared away' by previous regime" (The Indian Express, 13 January 2015), Exh. C-37; C-SoC, ¶ 244.
"[Person 13] to refresh 'Make in India' Manufacturing Drive" (The Financial Times, 14 February 2016), Exh. C-223.
In February 2015, Finance Minister [Person 11] introduced a new 2015 Finance Bill which would "clean up" certain "ambiguities" in Section 9(1)(i).237 For example, the bill defined "substantially" in Section 9(1)(i) to mean that at least 20 per cent of value of the foreign company was attributable to assets in India (as opposed to 50 per cent proposed under the DTC Bill 2010). The 2015 Finance Bill also proposed the insertion of further explanations to Section 9(1)(i) which clarified the situations in which indirect transfers of capital assets situated in India could be taxed, and which would apply only prospectively.238
Budget Speech 2015-2016 – Speech of [Person 11] – Minister of Finance, 28 February 2015, Exh. C-36, ¶ 114.
Finance Bill, 2015, Exh. C-131, Sections 5-7.
By late 2013, Cairn held approximately 10 per cent of the shares of CIL. According to Ms [Person 1], "[p]rompted by a downward trend in the Indian economy, as well as global macroeconomic uncertainty, CEP decided that it was the appropriate time to monetise that shareholding."244 It had been reported in the press that CIL was planning to use its significant cash reserves to buy back some of its shares, and Cairn’s management decided to participate in such a buy-back programme, should one be offered.245
[Person 1] WS1, ¶ 108.
Ibid.; "Cairn India plans buyback" (The Financial Times, 26 November 2013), Exh. CWS-[Person 1]-111; [Person 1] Paper for Cairn Energy Board Meeting dated 19 November 2013, Exh. CWS-[Person 1]-109; Cairn Energy Board Minutes dated 19 November 2013, Exh. CWS-[Person 1]-110.
On 26 November 2013, CIL publicly announced that it was contemplating a buy-back of its shares.246 On 4 December 2013, CEP’s board approved the company’s participation in any buy-back programme.247 As explained by Ms [Person 1]:
To benefit from a tax exemption under UK law,248 Cairn Energy was required to sell its entire shareholding within 12 months of its holding dropping below 10 per cent. Given that Cairn Energy did not expect to be able to dispose of its entire remaining stake through the buyback programme, the board also authorised the sale of any residual shareholding through on-market transactions, such that all of our shares in CIL would be sold. Based on market considerations, Cairn Energy expected to sell most of its shares in CIL through the buyback programme (approximately 6-7 per cent of CIL’s shares) by March 2014 and its remaining shares by May 2014.249
[Person 1] WS1, ¶ 109; "Board proposes Buyback of Equity Shares" (CIL, 26 November 2013), Exh. CWS-[Person 1]-112.
[Person 1] WS1, ¶ 109; Cairn Energy Board Minutes dated 4 December 2013, Exh. CWS-[Person 1]-113.
Ms [Person 1] explains that this tax relief was due to the Substantial Shareholding Exemption available to Cairn Energy under UK tax law, by virtue of which the sale of CUHL shares in CIL would not have incurred taxes in the UK. [Person 1] WS1, p. 36 n. 115; Cairn Energy, Paper by [Person 1] for Cairn Energy Board Meeting dated 19 November 2013, Exh. CWS-[Person 1]-109, p. 2.
[Person 1] WS1, ¶ 109; Cairn Energy Board Minutes dated 4 December 2013, Exh. CWS-[Person 1]-113;
On 14 January 2014, CIL formally announced its intention to buy back shares with up to 14.98 per cent of its total paid-up share capital and free reserves, at a maximum price of INR 335 per share (the "Buy-Back Programme"). The Buy-Back Programme was scheduled to open on 23 January 2014.250 That same day, the Economic Times published an article entitled, "Cairn India’s Rs 5,725 crore share buyback starts on January 23", which noted that "[t]he purchase may include a part of the 10.3 per cent stake held by former promoter Cairn Energy Plc." The article quoted an analyst stating that "Cairn Energy is a known seller for a long time and the share buyback may present it with an opportunity to exit from Cairn India".251
[Person 1] WS1, ¶ 110; "Public Announcement of Share Buyback" (CIL, 14 January 2014), Exh. C-84.
"Cairn India's Rs 5,725 crore share buyback starts on January 23" (The Economic Times, 14 January 2014), Exh. C-87.
On 15 January 2014, the Investigation Wing of the Income Tax Authority in New Delhi, led by Mr [Person 14], conducted an unscheduled survey of CIL’s premises in Gurgaon, to review the files relating to the 2006 restructuring.252 The Claimants maintain that the visit was triggered by CIL’s announcement of the buy-back, and "was plainly an excuse to initiate tax proceedings against CUHL based on the Retroactive Amendment more than seven years after the 2006 restructuring and to block Cairn from selling its investment."253 The Respondent states that the timing was merely coincidental and that the case against CIL had been under consideration for months. According to the Respondent "[t]he purpose of the survey was twofold: (a) to seek information relating to the failure of CUHL to disclose the write-off of an investment of INR 149,527,800,000 (INR 14,952.78 crores) in the Financial Year 2012-13; and (b) to obtain further information relating to the prima facie case of taxability that Mr [Person 14] believed to exist based on his study of the financials of CIL for the Financial Year 2006-2007".254
[Person 1] WS1, ¶ 110.
C-SoC, ¶ 248.
R-SoD, ¶ 47; First Witness Statement of Mr [Person 14] ("[Person 14] WS1"), ¶ 19. See also Survey Report in the Case of Cairn Group submitted on 24 February 2016, Exh. CWS-[Person 6]-1, p. 1.
Mr [Person 14], the Investigation Officer who conducted the initial investigation, testified that his investigation was prompted by information discovered on the "Offshore Leaks Database" published by the International Consortium of Investigative Journalists ("ICIJ"). The database provides a "comprehensive list of offshore companies and the beneficial owners behind them". Mr [Person 14] said that he studied the database and profiled cases that in his opinion fell within the jurisdiction of Delhi, Unit IV-2 of the ITD, and which raised suspicions of undisclosed income. Mr [Person 14] found the name of Mr [Person 15], who was named as the Chairman of the Corporate Advisory Board of CIL, on this list. Mr [Person 14] further explains in his witness statement:
I decided to follow up on that lead [finding Mr [Person 15]'s name] by looking through the Balance Sheets of CIL for the year 2012-2013, which were available in the public domain, so as to gain a basic understanding of the nature of the business of the company. In doing so, I discovered that CIL had accounted for a massive write-off of an investment of Rs. 149,527,800,000 (this amount being also referred to as "INR 14,952 crores") in the context of a corporate reorganization conducted by CIL in 2013. Coming from a background in the analysis of transfer pricing, I queried whether the initial purchase was correctly valued, given perhaps that an inflated value was used which was subsequently required to be written off. In pursuing this matter, I decided to look at the Balance Sheets and Annual Reports of CIL and CEP, CIL's original holding company and, at the time, minority shareholder, in previous years (i.e. from 2013 backwards), to determine the nature of the transactions by which CIL acquired its assets.255
R-SoD, ¶¶ 43-44; [Person 14] WS1, ¶ 13.
Mr [Person 14] testified that in July 2013256 he located the "relevant transaction documents [...] and discovered that CUHL had not filed a tax return for the Assessment Year 2007-08" and accordingly "no tax had been paid, nor had the transaction been disclosed to the relevant Assessing Officer." He explains:
[T]he transaction seemed to involve the sale of Indian oil and gas assets held by the Cairn Energy group, headed by CEP, through an Indian IPO, merely routed through a network of offshore companies. None of the offshore companies, including CIHL, which was incorporated for the purpose of the 2006 Transactions, seemed to have any business or assets of their own, and as such, all shareholding in CIL seemed to derive its value from underlying Indian assets. Having thus studied the financials of CIL, CUHL and CEP for the Financial Year 2006-2007 and thereafter, including in particular the Draft Red Herring Prospectus issued by CUHL in relation to the IPO of CIL shares, and having checked internally that CUHL had not filed a tax return for the Assessment Year 2007-08, I was of the opinion that there arose strong reasons to believe that certain income had escaped assessment in relation to the sale of Indian assets. This was prima facie within the scope of Section 9 of the ITA, which is the provision in the ITA which defines what income is deemed to accrue or arise in India.257
R-SoD, ¶ 45; [Person 14] WS1, ¶ 12.
R-SoD, ¶ 45; [Person 14] WS1, ¶ 14.
At this time, Mr [Person 14] "formally requested permission to carry out a survey at the two office premises of CIL under s. 133A of the ITA."258 On 13 January 2014, Mr [Person 14] drafted a "satisfaction note" to his immediate superior, the Additional Director of Income Tax (Investigation), in which he recorded his reasons for believing that certain income had escaped assessment. Mr [Person 14] indicates that two issues warranted investigation: (1) the first was "in relation to the failure of CUHL to disclose the write-off of an investment of INR 149,527,800,000 (INR 14,952.78 crores) in the Financial Year 2012-13"; and (2) the second was "in relation to the prima facie case of taxability that [he] believed to exist based on my study of the financials of CIL for the Financial Year 2006-2007".259 Also on 13 January 2014, the Additional Director of Income Tax (Investigation)-Unit IV granted his approval for the survey and ordered Mr [Person 14] to seek a second approval by the Additional Director of Income Tax (Investigation)-Faridabad.260
[Person 14] WS1, ¶ 15.
Id., ¶ 16.
Interim Report from the Office of the Deputy Director of Income Tax dated 16 January 2014, Exh. RWS-[Person 14]-5, ss. 10, 11, 13; Survey Report in the Case of Cairn Group submitted on 24 February 2016, Exh. RWS-[Person 6]-1.
a. The Deputy Director of Income Tax stated that, "[d]uring the course of survey proceedings, it was found" that CIL had purchased 251,224,744 shares in CIHL from CUHL, for a sum of INR 266,818,710,140.266 As CUHL had acquired these shares for INR 21,783,697,552, it was "evident" that this amount exceeded the book value of the CIHL shares "by a sum of [INR] 254,225,134,287/ which is represented by Goodwill in the consolidated financial statements, clearly indicating that substantial gains or to be more precise 'short term capital gains’ have accrued to the assessee company [CUHL]."267 The Order noted that, according to CUHL’s financial statements, "no tax has been paid on these gains in any tax jurisdiction including India and United Kingdom".268
b. The Deputy Director of Income Tax then invoked Explanation 5 to Section 9(1)(i) of the ITA 1961 as basis for taxing this capital gain. The Deputy Director of Income Tax stated that, during the survey operations, the ITD had obtained the Rothschild valuation report prepared for the 2006 reorganisation and IPO, and that this report "ma[de] it amply clear that all the assets of [CIHL] and its subsidiaries [were] located in India alone."269 The Deputy Director of Income Tax also cited statements by CIL’s CEO and CFO, affirming that during 2006, the assets of CIHL’s subsidiary companies "derived [their] value directly or indirectly, substantially from the assets i.e. oil and gas rights / reserves located in India."270 As a result, the Deputy Director of Income Tax concluded that "it is evident that the shares of [CIHL] which were acquired by [CIL] from the assessee company [CUHL] derive [their] value solely from the assets located in India and therefore in accordance with the provisions of Explanation 5 to Section 9(1)(i) of the [ITA] shall be deemed to have been situated in India and consequently any gains arising from [the] transfer of such shares is chargeable to tax under the [ITA 1961]."271
c. The Deputy Director of Income Tax noted further that CUHL’s shares in CIL were being frozen to prevent their sale in CIL’s Buy-Back Programme:
During the course of the survey proceedings, it was noticed that as on 31.12.2013, [CUHL] was holding 196,174,600 shares of [CIL]. During the course of survey action it was also noticed that on 14.01.2014, CIL has made a public announcement for Buy Back of its shares. The date of opening of the Buy Back of shares as per the public announcement is 23.01.2014. [...] Possibility of [CUHL] selling off its shares in [CIL] in this buy back cannot be ruled out.272
(A) As per provisions of schedule II, para-26, the principal officer of Cairn India Limited is directed not to do/permit any transfer of these shares to anybody.
(B) So far as the receivables by Cairn UK Holdings Ltd in the books of Cairn India Limited are concerned the Principal Officer of Cairn India Limited is directed not to remit/pay any amount to Cairn UK Holdings Ltd.
(C) It is ordered that the assessee or its nominee or any other person on behalf of the assessee is prohibited and restrained from creating a charge on or part with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer, whatsoever) of the properties mentioned in [the] schedule below, without prior sanction of the undersigned. Any such charge or transfer, shall be void as against any claim in respect of any income tax of other sum payable by the assessee as a result of completion of the assessment proceedings[…]
On 2 April 2014, CUHL responded to its Section 148 Notice, challenging the ITD's jurisdiction and submitting that the Section 148 Notice and the Section 281B Order were issued on the basis of Explanation 5 and that such retrospective application was "unconstitutional".278 However, it complied with the notice and filed a tax return for the financial year 2007/2008, indicating a "nil" income.279
Letter from CUHL to the Deputy Director of Income Tax dated 2 April 2014, Exh. C-14.
CUHL Tax Return for Assessment Year 2007-2008 dated 3 April 2014, Exh. C-169; [Person 6] WS1, ¶ 66.
The Parties dispute the extent to which the Claimants cooperated with the authorities in the lead up to the DAO and the FAO. The Claimants maintain they were fully cooperative and supplied all requested information.313 The Respondent maintains that the Claimants were not cooperative, took a long time to respond, and did not submit the appropriate requested information.314
C-SoC, ¶ 249; [Person 1] WS1, Sections III-VIII.
R-SoD, ¶ 53(a); ITAT Order of 9 March 2017, Cairn UK Holdings Ltd v. D.C.I.T., ITA No. 1669/Del/2016, Exh. C-228, p. 18.
On 3 March 2016, Mr [Person 6], Commissioner of Income Tax and a witness for the Respondent in this arbitration, sent a letter to the Joint Commissioner of Income Tax, copying CUHL, referring to the Finance Minister's budget speech of 29 February 2016 in which an offer was made of a "one time scheme of Dispute Resolution" for past cases which were "ongoing under the retrospective amendment". The offer indicated that interest and penalty fees incurred would be dropped subject to the assessee's withdrawing from any pending case before "any court or tribunal". The letter stipulated that the Claimant, being a party to the present arbitration, should have "some time to consider the offer" and stated that a deadline of 30 June 2016 was accordingly set before the tax demand of 25 January 2016 could be pursued.319
Letter from the Commissioner of the Income Tax to the Joint Commissioner of Income Tax dated 3 March 2016, Exh. C-75.
On 8 March 2016, Cairn representatives met with the ITD. The Claimants assert that, during this meeting, the ITD officials indicated that, after 30 June 2016, the Department would immediately start liquidating CUHL's shares in CIL unless CUHL agreed to pay the entire principal of the disputed tax demand and withdraw its claims in the arbitration.320 The Respondent has not disputed this.
C-SoC, ¶ 290; First Witness Statement of Mr [Person 16] ("[Person 16] WS1"), ¶ 9.
On 22 December 2015, the Claimants filed a Notice of Arbitration pursuant to Article 9(3)(c) of the UK-India BIT and Article 3(1) of the United Nations Commission on International Trade Law Arbitration Rules 1976 (the "UNCITRAL Rules").
In accordance with Article 9 of the UK-India BIT, on 2 April 2015 the Claimants informed the Respondent that they had appointed Mr Stanimir Alexandrov, a national of Bulgaria, as arbitrator. Mr Alexandrov accepted his appointment on 1 April 2015.
As the Respondent did not appoint an arbitrator within the time limit set out in Article 9 of the UK-India BIT, on 12 August 2015 and in accordance with Article 9(3)(c)(ii) of the UK India-BIT, the Claimants requested the President of the International Court of Justice, H.E. Judge Ronny Abraham, to act as appointing authority. Ultimately, on 9 November 2015, the Respondent informed the Claimants that it had appointed Mr J. Christopher Thomas, QC, a national of Canada, as arbitrator. Mr Thomas accepted his appointment on 20 November 2015.
The first procedural hearing was held on 18 April 2016 in Paris. The following participants attended the hearing:
Mr Laurent Lévy (Presiding Arbitrator)
Mr Stanimir Alexandrov (via teleconference) (Co-arbitrator)
Mr J. Christopher Thomas QC (via teleconference) (Co-arbitrator)
Ms Sabina Sacco (Secretary of the Tribunal)
Mr Mark McNeill (Shearman & Sterling LLP)
Ms Natalia Mikolajczyk (Shearman & Sterling LLP)
Mr Wesley H. Pang (Shearman & Sterling LLP)
Mr Robert L. Nelson Jr. (Shearman & Sterling LLP) (via teleconference)
Mr [Person 16] (CFO, Cairn Energy PLC)
Mr [Person 17] (Group Legal Manager, Cairn Energy PLC)
Ms [Person 18] (Cairn Energy PLC)
Mr Salim Moollan QC (Essex Court Chambers)
Professor Chester Brown (Essex Court Chambers)
Mr Shreyas Jayasimha (Aarna Law)
Mr Mysore R. Prasanna (Aarna Law)
Mr [Person 6] (Commissioner of Income Tax, International Taxation, Department of Income Tax)
a. The Respondent’s application on the applicable transparency regime for the present arbitration;
b. The Respondent’s intention to file an application for a stay and the relevant briefing schedule. At this juncture, the Respondent also indicated that it intended to wait until the Claimants filed their Statement of Claim before formulating its objections to jurisdiction and admissibility, and proposed that whether those objections should be heard in a preliminary bifurcated phase should be determined thereafter; and
c. The Claimants’ RIM. In particular, the President proposed language for a possible undertaking by the Respondent.343
If, once the Respondent has received the Claimants’ Statement of Claim, the Respondent wishes to raise objections to jurisdiction and/or admissibility, it may file a request for bifurcation and should do so as soon as reasonably possible, failing which the Respondent will submit its Statement of Defense in full. If the Respondent does request a bifurcation, the Tribunal would then allow the Claimants to comment and will ultimately make a decision