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Final Award

List of Abbreviations

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
CGP CGP Investments
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
MFN Most-favoured nation
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

I. Introduction

1.
The present dispute arises out of tax measures applied by the Government of India to certain transactions undertaken in 2006 by the Claimants (the "2006 Transactions") in and around the time of their corporate reorganisation and the listing of a newly incorporated subsidiary, Cairn India Limited ("CIL"), on the Bombay Stock Exchange (the "BSE").
2.
The tax measures were applied to certain share transfers following an amendment made in 2012 to Section 9(1)(i) of the Income Tax Act 1961 (the "ITA 1961" or "ITA") (the "2012 Amendment"). The Claimants maintain that the corporate reorganisation and the initial public offering (the "IPO") were at all times conducted with due adherence to the then-applicable Indian tax laws, and that by applying retroactively the 2012 Amendment to the 2006 Transactions, and subsequently taking enforcement measures against Cairn's investments, the Respondent breached its obligations under the 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 (the "UK-India BIT", the "Treaty", or the "BIT"). Cairn claims that the Respondent's actions have caused them significant damage.
3.
The Respondent denies that the 2012 Amendment and the tax measures applied to the 2006 share transfers breaches the UK-India BIT. To the contrary, the Respondent argues that these transactions were taxable under Indian law even without the 2012 Amendment. In particular, the Respondent contends that the Supreme Court of India took an unduly formalistic approach to the "source" rule embodied in Section 9(1)(i) of the ITA (when it should have taken a purposive approach consistent with long-standing authority dating back at least to the 1940 decision of the Judicial Committee of the Privy Council in the Rhodesia Metals case) and, moreover, that the Claimants' corporate reorganisation and IPO were merely an elaborate guise to avoid paying tax in the first instance, and were in any event taxable in India in accordance with other provisions of Indian law. Accordingly, the Respondent alleges that Cairn owes approximately US$ 1.6 billion in capital gains tax and additional amounts accrued in interest and penalties following the Claimants' corporate restructuring. Consequently, the Government of India has taken certain enforcement measures against the Claimants and has proceeded with the forced sale of the Claimants' remaining assets in India.

A. The Claimants

4.

The claimants in this arbitration are Cairn Energy PLC ("Cairn Energy" or "CEP") and Cairn UK Holdings Limited ("CUHL", collectively, the "Claimants").1

5.
Cairn Energy is an oil and gas exploration and production company that is incorporated in Scotland, United Kingdom, and is listed on the London Stock Exchange. Its registered office is:

Cairn Energy PLC
50 Lothian Road
Edinburgh, EH3 9BY
Scotland, United Kingdom

6.
CUHL is a wholly-owned subsidiary of Cairn Energy and is incorporated in Scotland, United Kingdom. Its registered office is:

Cairn UK Holdings Limited
50 Lothian Road
Edinburgh, EH3 9BY
Scotland, United Kingdom

7.

The Claimants are represented in this arbitration by:

Mr Mark S. McNeill
Partner
Quinn Emanuel Urquhart & Sullivan, LLP
51 Madison Avenue, 22nd Floor
New York, NY 10010
United States of America
Email: [Redacted]

Mr Arvind P. Datar
No. E-61 Anna Nagar East
Chennai 600 102
Tamil Nadu
India
Email: [Redacted]

Ms Niti Dixit
Partner
S&R Associates
Advocates
64 Okhla Industrial Estate, Phase III
New Delhi 110 020
India
Email: [Redacted]

Mr Uday Walia
Partner
Platinum Partners
Plot 1 & 2, Block E, The Mira
Mathura Road, Ishwar Nagar,
New Delhi 110 065
India
Email: [Redacted]

Mr Paul Hally
Partner
Shepherd and Wedderburn LLP
1 Exchange Crescent
Conference Square
Edinburgh, EH3 8UL
Scotland, United Kingdom
Email: [Redacted]

Mr Maarten Drop
Advocaat | Partner
Cleber N.V.
Herengracht 450
1017 CA Amsterdam
The Netherlands
Email: [Redacted]

B. The Respondent

8.

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
Tel: [Redacted]
Email: [Redacted]

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
Email: [Redacted]

Mr [Person 9]
Deputy Commissioner of Income-tax (OSD) (FT&TR-I)
C Wing
Hudco Vishala Building
Bhikaji Cama Place
New Delhi 110066, India
Email: [Redacted]

9.

The Respondent is represented in this arbitration by:

Mr Salim Moollan, QC
Essex Court Chambers
19 Duxton Hill
Singapore 089602
Email: [Redacted]
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
Emails: [Redacted]

C. The Tribunal

10.

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 Alexandrov
Stanimir A Alexandrov PLLC
1501 K Street N.W.
Suite C-072
Washington D.C. 20005
Tel: [Redacted]
Email: [Redacted]

11.

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
Vancouver
British Columbia
Canada V7X-1T2
Email: [Redacted]

12.

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
Switzerland
Tel.: [Redacted]
Fax: [Redacted]
Email: [Redacted]

13.

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
Switzerland
Tel.: [Redacted]
Fax: [Redacted]
Email: [Redacted]

II. The Facts

A. The petroleum industry in India

14.
Prior to the 1990s, the hydrocarbon industry in India was under state control. Despite efforts by India's Oil and Natural Gas Commission ("ONGC"), there was limited investment and technical expertise committed to developing India's domestic petroleum industry. As a result, India was predominantly dependent on imported petroleum.2
15.
The 1990 Persian Gulf crisis increased the cost of oil significantly. Combined with high levels of public spending and debt, this created a major financial crisis in India in 1991. The International Monetary Fund granted loan assistance to India on the condition that the Government of India instigate major reforms. Assisted by the World Bank, India undertook structural changes to prepare it to become a free market economy open to foreign investment. As a part of this liberalisation programme, in the 1990s India implemented a series of reforms to deregulate and de-license the petroleum sector.3
16.
A major element of these reforms included the development of a legal structure designed to attract foreign investment and expertise into the oil and gas sector. This was achieved predominantly by increasing the ONGC's ability to enter into ventures with foreign investors to increase production from the existing fields and fund further exploration.4
17.
Throughout the 1990s, India continued with its attempts to attract foreign investment in the oil and gas sector. In 1997, the Indian Government instituted the New Exploration Licensing Policy ("NELP"), which opened up additional blocks for exploration by multinational companies and put private companies on a more competitive footing with the two national oil companies, ONGC and Oil India Limited. The NELP fostered greater foreign participation by instituting a process for competitive bidding and allowing greater foreign investment in production sharing contracts ("PSCs").5

B. The Claimants’ investments in India

1. Cairn’s acquisition of Command Petroleum

18.

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

19.

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

20.

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

21.

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

2. Cairn’s expansion in India

22.

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

23.

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

24.
In December 2004, Cairn sold interests in two PSCs to the ONGC for approximately US$ 135 million. Cairn entities also acquired interests in certain minor exploration assets from ONGC. According to the Claimants, these transactions also required detailed disclosures to the Government of India to secure the Government's consent to the assignment of the relevant PSCs.19 According to the Claimants, "[o]nce again, the disclosures about the Cairn group structure that were scrutinised by the Government of India reflected that Cairn then indirectly held its significant underlying Indian assets", but "[a]t no time did India ever suggest that the Cairn corporate group had failed to settle any capital gains tax liabilities in connection with the Command Acquisition and Reorganisation."20
25.

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

26.

According to the Claimants, "[i]n the course of its decades of oil and natural gas exploration and production in India, Cairn contributed more than US$ 3 billion in tax and other revenue to India."25

3. Cairn’s 2006 corporate restructuring

27.

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

28.

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.

29.

On 20 April 2006, at its annual general meeting, CEP announced to its shareholders its plan to reorganise its Indian assets and operations under an Indian holding company that would be publicly listed in India after launching an IPO.28

30.

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.

31.
The Claimants allege that, on this basis, Cairn structured its Indian reorganisation as summarised below.

a. Initial steps of the restructuring

32.

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

33.

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

34.

On 26 June 2006, CEP incorporated CUHL (the second Claimant in this arbitration) in Scotland as a wholly-owned subsidiary.32

35.

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

36.

On 2 August 2006, CUHL incorporated Cairn India Holdings Limited ("CIHL") in Jersey,38 as a wholly-owned subsidiary.39

37.

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

38.

On 21 August 2006, CIL was incorporated in India as a wholly-owned subsidiary of CUHL.44 At that point in time, CUHL held 50,000 shares in the Indian company, which were valued at INR 500,000 (approximately US$ 10,752 at that time).45

39.

The corporate structure of Cairn's holdings in India at that point can be illustrated as follows:46

Corporate Structure as of 21 August 2006

40.

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

41.
Immediately after this, CUHL assigned the CEHL Debt to CIHL in return for the issuance of 29,780,710 ordinary £1 shares in CIHL.51 In other words, CUHL obtained shares in CIHL which it paid for in kind (through the assignment of the CEHL Debt), and now CIHL now had an account payable of £29,780,710 against CEHL. This transaction is illustrated in the following diagram:52
42.
As a result, by 1 September 2006, CIHL had acquired the 9 Subsidiaries and the CEHL Debt, and CUHL was the owner of 251,224,744 shares of £1 shares each in CIHL,53 as illustrated in the following diagram:54

b. The transfer of Cairn’s Indian assets to CIL

43.

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

44.

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.

45.

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.

46.

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

47.

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

48.

By letter of 29 August 2006, the FIPB requested more information from CUHL on the planned transactions (in particular, the precise number of shares involved in the proposed share exchange between CUHL and CIL).66

49.

On 5 September 2006, CUHL submitted its application to the RBI. According to the Claimants, this application also included a detailed description of the restructuring and the IPO, and annexed the FIPB Application.67

50.

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

51.
The FIPB considered CUHL's application at its meeting of 8 September 2006.69 The minutes of that meeting note that "approval has been sought" for the following:

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

52.

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

53.

After this meeting, the FIPB recommended the application for consideration and approval by the Minister of Finance.74 On 21 September 2006, FIPB approved the final steps of Cairn's corporate reorganisation.75

54.

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

55.

On 12 October 2006, Cairn filed a draft red herring prospectus with SEBI in accordance with its regulations. According to the Claimants, this document (which was made available to the public), set out the full details of Cairn’s corporate reorganisation in India and the IPO.82

56.

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

(i) Step 1 : CIL acquires 21.8 per cent of CIHL

57.

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

58.

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

59.

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

60.

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.

61.
As a result of these two transactions (CUHL's subscription of shares issued by CIL, and CIL's purchase of CIHL shares from CUHL), the cash provided by the Daylight Loan (INR 50,373,987,924) entered and exited India on the same day. The Claimants note in this respect that "the first transfer that the Indian Income Tax Department has alleged to be a taxable event involves taxation of the return of these borrowed funds (infused solely as a result of Indian securities law requirements)."101 As shall be seen, the Parties dispute whether this transaction meets the MPC requirement and SEBI regulations more generally.102
62.

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

63.

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

64.

The Second CIHL Acquisition brought CIL’s total holdings in CIHL to 21.8%.108 This acquisition is also one of the transactions subject to the taxation measures at issue in this arbitration.

65.
Once the IPO price range was set, CUHL was required to pay an additional share premium to ensure that it did not acquire the CIL shares at less than the higher end of the price range.109 Accordingly, on 8 December 2006, CUHL paid a further additional share premium of INR 1,427,262,991.18 to CIL, in respect of the 365,028,898 shares issued by CIL on 12 October 2006.110
66.

The following diagram illustrates the ownership structure of Cairn’s Indian assets at this point in time:111

(ii) Step 2 : CIL acquires the remaining 78.2 per cent of CIHL

67.

The bidding period for CIL’s IPO opened on 11 December 2006, and ran through 15 December 2006.112 Shortly thereafter, CIL acquired the remaining 78.2% shareholding in CIHL also in two tranches.113

68.

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.

69.

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

70.

The share swap between CIL and CUHL can be illustrated as follows:117

Share Swap Between CIL and CUHL (20 December 2006)

71.

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.

72.

The Fourth CIHL Acquisition can be illustrated as follows:120

Cash Acquisition of CIHL Shares by CIL (29 December 2006)

73.

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

74.

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

75.
It is CIL’s acquisition of CIHL from CUHL (performed in four stages, through the First to Fourth CIHL Acquisitions) that is the subject of the tax measures at issue in this arbitration. The Tribunal will refer to these four acquisitions jointly as the "CIHL Acquisition."
76.
According to the Respondent, "by the conclusion of the 2006 Transactions, CUHL had:

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

77.
As discussed in Section VII.A.1.b(iii)(1) below, the Claimants dispute this, arguing that no capital gain was made.
78.

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

c. The transfer pricing assessment by the ITD

79.

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

80.
On 30 October 2007, CIL (through its chartered accountants, BSR & Co.), filed a Form 3CEB with the ITD providing details of the international transactions in which CIL had been involved in during 2006, including the transactions related to the CIHL Acquisition.134 Specifically, the form reflected CIL’s investment in CIHL for a total amount paid or payable of INR 289,083,710,140, with the following explanation:

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.

81.

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

82.
The TPO issued its order on 5 October 2010, holding that "no adverse inference is drawn in respect of the arm's length price in respect of 'international transactions' entered into by the assessee during the year."137
83.

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

4. Cairn’s divestments of its shareholding in CIL

84.

Between 2009 and 2010, CUHL sold much of its shareholding in CIL to third parties. The most important transactions were two off-market share sales: one to Petronas International Corporation Ltd. ("Petronas") in 2009, and another to a subsidiary of Vedanta Resources Plc ("Vedanta") in 2010.140

a. The Petronas transaction

85.

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

86.

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

87.

The Parties dispute the role of the ITD in reviewing this transaction. It is however undisputed that, when assessing the Petronas transaction, the ITD did not suggest that CUHL was liable to pay capital gains tax for the CIHL Acquisition.148

b. The Vedanta transaction

88.

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

89.

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

90.

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).

91.

Once again, the Parties dispute the ITD’s role in reviewing this transaction. It is however undisputed that, when assessing the Vedanta transaction, the ITD did not suggest that CUHL was liable to pay capital gains tax for the CIHL Acquisition.156

c. Other divestments

92.
In June and September 2012, and in January 2014, CUHL sold additional shares in CIL in on-market transactions, amounting to 3.5%, 8%, and 2.5%, respectively, of the issued share capital of CIL. CUHL paid an aggregate amount of INR 79 million as securities transaction tax in accordance with applicable Indian law.157
93.
On the date of the Notice of Arbitration (22 September 2015), CUHL held 9.82 per cent of the issued share capital of CIL.158 According to the Claimants, in January 2014 (when the ITD issued its attachment order) those shares were valued at approximately US$ 1 billion. However, by the date of the Notice of Arbitration, the value of the shares had decreased by almost 60% (according to the Claimants, largely as a result of the decline in the global price for oil) to approximately US$ 400 million.159

C. Evolution of the legal framework relevant to capital gains tax in India

1. Background to the Income Tax Act 1961

94.
A capital gains tax was introduced in India in 1947 pursuant to the Income Tax and Excess Profits Tax (Amendment) Act. This tax was applied to non-residents by amending the scope of the "deeming fiction" in Section 42(1) of the Income Tax Act 1922, according to which certain income that accrued, arose, or was received outside of India would be deemed to accrue, arise, or be received in India. Specifically, this deeming fiction now encompassed gains arising or accruing "through or from the sale, exchange or transfer of a capital asset in the taxable territories."160
95.
In 1956, the Government appointed the first Law Commission of India (the "Law Commission") to restructure and simplify the Income Tax Act. The Law Commission found that Section 42(1) was ambiguous, and made the following recommendation:

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

96.
The ITA 1961 adopted the Law Commission's recommendations. Section 9(1)(i) of the ITA 1961, which was the law in force at the time of Cairn's 2006 restructuring and of the CIHL Acquisition, provided as follows:

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

97.
In 2002, the Indian Government constituted a Task Force on Direct Taxes (the "2002 Task Force"), which was tasked with, among other objectives, "(i) [the] [r]ationalisation and simplification of the direct taxes with a view to minimising exemptions, removing anomalies and improving equity".163 The 2002 Task Force indicated that its approach "ha[d] been influenced by the recognition that in the recent past economies have increased their tax revenue-to-GDP ratio not by increasing tax rates but by simplifying tax structures, widening the tax base and improving tax administration."164 It noted that it had "examined best tax practices in the world, deliberated on ways to reduce costs of tax administration and extensively debated means of empowering Central Board of Direct Taxes (CBDT) to fulfill its function effectively."165 With respect to the taxation of non-residents, the 2002 Task Force stated:

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

98.
It is undisputed that the 2002 Task Force "made no mention of the possibility of enacting a tax on indirect transfers of Indian assets through the sale of shares in foreign companies."167
99.
The 2002 Task Force recommended the creation of a Working Group led by the Director General of Income Tax for International Taxation to examine various issues related to the taxation of non-residents. The Working Group issued its "Report on Non Resident Taxation" in January 2003. It is undisputed that the report "limited its general anti-abuse recommendations to the introduction of Controlled Foreign Corporation regulations, consistent with the UK and the US models, and provided the recognition of income and creditable tax at the parent company level to prevent companies from accumulating profits in low-tax jurisdictions", and "did not refer to taxation of income of non-residents arising through indirect transfer of shares as an avenue for combatting tax avoidance."168 It is also undisputed that, in the context of Section 9(1)(i) of the ITA 1961, the report suggested that the term "business connection" be amended to include an "agency PE" (permanent establishment), and that the provision should be amended "to deem that the income in respect of artistes [sic] and sportspersons shall accrue in India if the income earned is in respect of personal activities performed in India";169 it did not issue comments or suggest an amendment of the last limb of Section 9(1)(i) of the ITA.170
100.
In 2003, the OECD updated its Model Convention on Income and Capital. The updated Model Convention included for the first time a provision contemplating the taxation of capital gains arising from transfers of shares in offshore companies by non-residents. Pursuant to Article 13(4), these are taxable only where 50 per cent of the value of the offshore company ultimately derives from immovable property located in the taxing State, as follows:

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

101.
By the date of the Statement of Claim, only a few OECD States (namely Australia, Canada, Japan, and the United Kingdom) had adopted a similar provision in their legislation or tax treaties.172 According to the Claimants, "in all such countries, this new tax was applied on a prospective basis only".173

2. The Vodafone case - Part 1

102.
It is necessary to now turn to a separate legal proceeding also involving a claim to tax a transaction which effected an indirect transfer of Indian capital assets under Section 9(1)(i) of the ITA, because that matter went up to the Supreme Court of India (the "Supreme Court"). This case was the first time that the fourth limb of Section 9(1)(i) was ever subjected to judicial consideration since the ITA’s enactment in 1961. The Supreme Court’s decision and steps taken thereafter by the Parliament of India ("Parliament") are highly relevant facts for the instant case. As shall be seen, the Supreme Court rejected the ITD’s attempt to tax an indirect transfer of capital assets situated in India. This led Parliament to quickly enact what has been referred to by the Claimants as the "Retroactive Amendment" and by the Respondent as the "2012 Clarification" and this amendment to the ITA formed the legal basis for the ITD’s FAO levied in connection with Cairn’s reorganisation culminating in the IPO which is said to have generated a taxable capital gain.
103.
In 2007, Hutchison Telecommunications International Ltd. ("Hutchison"), a company incorporated in the Cayman Islands, sold a single share in CGP Investments ("CGP"), another company incorporated in the Cayman Islands, to Vodafone International Holdings BV ("Vodafone"), a company incorporated in the Netherlands, for approximately US$ 11.1 billion.174 CGP held various subsidiaries in Mauritius, which, together with certain Indian entities, ultimately held a 67 per cent stake in Hutchison Essar Ltd. ("HEL").175 As the Claimants note, "the transaction was a sale by a non-resident of an interest in a non-Indian company (which indirectly derived value from its underlying Indian assets)".176 Hutchison realised a capital gain before tax of approximately US$ 9.5 billion from the sale of the share.177
104.
In March 2007, the ITD sought information from HEL regarding the transaction.178 On 6 August of that year, it issued HEL (then called Vodafone Essar Ltd, "VEL"), a notice to show cause, specifically to explain why it should not be treated as a representative assessee of Vodafone.179
105.
On 19 September 2007, the ITD issued Vodafone, as purchaser in the Hutchison-Vodafone transaction, a notice to show cause as to "why it should not be treated as an assessee-in-default for failure to withhold tax" from the consideration paid to Hutchison for the acquisition of CGP.180
106.
On 3 December 2008, the Bombay High Court declined to exercise its jurisdiction in a challenge to the show cause notice.181 The matter was taken to the Supreme Court, which directed the ITD to determine the jurisdictional challenge, reserving Vodafone's right to challenge any decision before the Bombay High Court, leaving all questions of law open.182
107.
On 30 October 2009, the ITD issued Vodafone a second notice to show cause, to which Vodafone replied on 28 January 2010. On 31 May 2010, the ITD upheld its jurisdiction.183
108.
Also on 31 May 2010, the ITD issued Vodafone another notice to show cause as to "why it should not be treated as an agent/representative assessee of [Hutchison]",184 and alleging its failure to withhold capital gains tax from its payment to Hutchison for the acquisition of CGP.185 According to the ITD, Section 9(1)(i) of the ITA was a "look through" provision, and covered income that derived indirectly from the transfer of a capital asset, even if the transfer took place abroad.186
109.
As discussed in Section II.C.4 below, Vodafone challenged this notice and the ITD’s assertion of jurisdiction to tax the offshore transaction before the Bombay High Court, and later before the Supreme Court.187 Its main argument was that the transaction concerned the sale of a share in a company incorporated in the Cayman Islands. As this share was a capital asset situated outside of India, it contended, no income had accrued or arisen, or could be deemed to have accrued or arisen in India under Section 9(1)(i) of the ITA, even if the company, the share of which was sold, had capital assets situated in India. In response, the ITD argued that the real object of the transaction was an indirect transfer of rights in HEL held by Hutchison, which resulted in an accrual or deemed accrual of income for Hutchison from a source of income in India.188
110.
The parties diverge as to whether this was the first time the ITD sought to tax indirect transfers of Indian capital assets by non-residents.189 The Claimants allege that high-ranking officials of the Central Board of Direct Taxes ("CBDT") publicly acknowledged that the ITD’s tax of the capital gains arising from the Hutchison-Vodafone transaction was a "test case".190
111.
The Vodafone case attracted considerable international attention. The following evidence and allegations arise from the record:

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

112.

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

3. The Direct Tax Code Bills of 2009 and 2010

113.
While the ITD was seeking to tax the Hutchison-Vodafone transaction, the MoF was proposing amendments to the country's tax laws. In August 2009, the MoF introduced in Parliament a Direct Tax Code Bill (the "DTC 2009"), which included a provision that taxed "the transfer, directly or indirectly, of a capital asset situate in India".195 Specifically, Clause 5(1) of the DTC 2009 provided:

(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

114.
According to the Claimants, the DTC 2009 also incorporated a General Anti-Avoidance Rule ("GAAR") granting the ITD the statutory power to "look through" a transaction to determine whether it lacked commercial substance and was primarily intended to avoid tax in India.197
115.
The DTC 2009 was not enacted into law. It was subsequently revised based on suggestions from stakeholders and replaced by the Direct Tax Code Bill of 2010 (the "DTC 2010"), introduced in Parliament by the Finance Minister in August 2010. Proposed Clause 5(1) of the DTC 2010 provided as follows:

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

116.
Clause 5(4)(g) then specified as follows:

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

117.
In other words, the DTC 2010 proposed to tax the "transfer, outside India, of any share or interest in a foreign company" if "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".200 Clause 5(6) of the DTC 2010 proposed a formula for calculating the income that would be taxable in such an indirect transfer, as follows:

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 [5](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

118.
Parliament referred the DTC 2010 to the Standing Committee on Finance ("Standing Committee") on 9 September 2010. In its official report on the DTC 2010 (the DTC 2010, Forty-Ninth Report, or "Standing Committee Report"), the Standing Committee noted that "Clause 5(1)(d) read with Clause 5(4)(g) and Clause 5(6) seek to tax income of a non-resident, arising from indirect transfer of capital asset, situated in India."202 The Standing Committee Report noted in this respect that the "IT Act does not contain a provision analogous to clause 5(4)(g) and Clause 5(6) of the DTC, 2010."203 The Standing Committee recommended that there be certain exemptions added to this provision, as well as clarifications in relation to the criteria for computing the fair market value of assets situated in India. In particular, it recommended that "exception may also be provided to intra group restructuring outside India, when the Code itself provides exemption from capital gains in cases of business reorganization through Clause 47(1)(g) and Clause 47(1)(h) of the Code."204
119.
The Standing Committee also explained that the DTC 2010 proposed to introduce GAAR principles for the first time to combat tax avoidance, specifically "to prevent a tax payer from using legal construction or transactions to gain undue fiscal advantage."205 The Standing Committee noted however that this had raised serious concerns among stakeholders, and recommended that "the Ministry and the CBDT should seek to bring greater clarity and preciseness to the scope of the provisions", so that "widely worded and [...] subjective" concepts such as "misuse or abuse of DTC provisions", "manner applied for the arrangements not for bona fide business purpose", and "lacks commercial substance", would "need to be more specifically defined to avoid undue discretion to tax authorities."206 In the Standing Committee’s view, "the onus should rest on the tax authority invoking GAAR and this should not be shifted to the taxpayer."207 The Standing Committee specifically recommended that "[t]he provisions to deter tax avoidance should not be end up penalizing tax-payers who have genuine reasons for entering into a bonafide transaction",208 and that "[i]t would also be fair to apply GAAR provisions prospectively so that it is not made applicable to existing arrangements/transactions. Alternatively, suitable grandfathering provisions may be made to protect the interest of the tax- payers who have entered into structures / arrangements under the existing law."209

4. The Vodafone case - Part 2

120.
On 8 September 2010, the Bombay High Court issued its decision in Vodafone, dismissing Vodafone’s petition and confirming the ITD’s jurisdiction. Specifically, it found that the transaction had involved the transfer of "put" and "call" options between two Indian entities, which could be considered "assets situate in India".210 On this basis, it found that "the transaction in question had a significant nexus with India", as the essence of the transaction was a change in the controlling interest in HEL which constituted a source of income in India.211 Accordingly, the ITD had jurisdiction to assess capital gains tax in respect of the transaction.212 Vodafone appealed to the Supreme Court.
121.
On 20 January 2012, the Supreme Court issued a decision in Vodafone’s favour, in which all three judges concurred in the result213 finding that Section 9(1)(i) was not a "look through" provision; i.e., that it did not allow the ITD to "look through" the transfer of a share in a foreign company so as to tax the indirect transfer of underlying assets in India.214 The Supreme Court also found on the facts of that case that the Hutchison-Vodafone transaction had not been a sham or tax avoidant transaction, and thus was not subject to tax under the "look at" doctrine.215
122.
The Claimants maintain (and the Respondent has not disputed) that the ITD applied for a review of the Vodafone decision, but its application was dismissed by the Supreme Court on 20 March 2012.216

5. The 2012 Amendment

123.
On 16 March 2012, the MoF introduced in Parliament the Finance Bill 2012, which inter alia amended Section 9(1)(i) by way of certain "Explanations", which had the effect of including in the scope of this provision indirect transfers of capital assets by non-residents.217
124.
The Finance Act 2012 received assent on 28 May 2012, and introduced into law the amendment to Section 9(1)(i) made in the bill.218 The 2012 Amendment was passed with retroactive effect as of 1 April 1962, and provided as follows:

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

125.
The Parties dispute whether the amendments merely clarified the existing law, or whether they introduced a new retroactive measure.220
126.

The 2012 Amendment raised concerns and uncertainty amongst the business community.221 To address the business community's concerns, three different committees were formed to examine the 2012 Amendment.

127.

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

128.

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

129.

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

6. Further clarifications to the 2012 Amendment

130.
The Government issued new clarifications to the 2012 Amendment in the subsequent months and years. At the same time, it continued its tax reform efforts.
131.
In May 2012, the CBDT issued a circular indicating that "in case[s] where assessment proceedings have been completed [...], before the first day of April, 2012, and no notice for reassessment has been issued prior to that date, [...] such cases shall not be reopened."227
132.
In April 2014, the MoF proposed a revised Direct Tax Code Bill (the "DTC 2013"). The DTC 2013 revised Clause 5(4)(g) of the DTC 2010 to clarify instances in which income from an indirect transfer of capital assets situated in India would be deemed to accrue in India. In particular, Clause 5(2) provided:

[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

133.
The DTC 2013 also provided that shares in foreign companies would be deemed to be situated in India if only 20 per cent of the company’s value (rather than 50 per cent, as the DTC 2010 proposed) was attributable to assets in India.229 Clause 5(3) provided:

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

134.
The DTC 2013 was not enacted into law.

7. The BJP assumes power

135.
Following the general election in 2014, the Bharatiya Janata Party (the "BJP") assumed power in India. The BJP’s election manifesto criticised the preceding government for having unleashed "tax terrorism" and "uncertainty", which "negatively impact[ed] the investment climate".231
136.

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

137.
On 28 August 2014, the CBDT established the abovementioned High Level Committee, directing assessing officers that in cases where no notice had been issued or proceedings commenced, no action should be taken without its prior approval.233
138.

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

139.

On 13 January 2015, Mr [Person 11] was quoted in The Indian Express as saying the 2012 Amendment had "scared away investors from India", and that "the government ha[d] no intention of using the retrospective tax provision".235

140.

This view was confirmed by Prime Minister [Person 13] on 14 February 2016. The Prime Minister was quoted in the Financial Times as saying that the government "will not resort to retrospective taxation; we are making our tax regime transparent, stable and predictable".236

8. Further legislative changes

141.

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

142.
The Finance Act 2015 introduced Explanations 6 and 7 (on a prospective basis), clarifying inter alia that Explanation 5 would only apply to those share transfers which were valued above Rs. 10 crores or the company derived not less than 50% of its value from Indian assets,239 or to cases in which the transferor held the right to manage or control the company which directly or indirectly held the Indian assets.240
143.
In March 2015, the CBDT issued a circular clarifying that the 2012 Amendment did not apply to a dividend declared by a foreign company with substantial assets in India.241
144.
In 2016, the Government introduced a method for computing the value of the underlying assets, as well as several exemptions to the tax on indirect transfers.242
145.
In May 2016, the Government proposed a methodology for calculating gains.243

D. The ITD’s investigation into the CIHL Acquisition

146.

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

147.

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

148.

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

149.

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

150.

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

151.

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

152.

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

153.

By 15 January 2014, Mr [Person 14] had received the second approval required to conduct the search. On that same day, Mr [Person 14] led the unscheduled survey of CIL’s offices in Gurgaon discussed at paragraph 149 above.261

154.

On 16 January 2014, Mr [Person 14] submitted a 125-page interim report in relation to the survey proceedings carried at CIL’s offices in Gurgaon.262

155.
On 21 January 2014, the ITD notified CUHL pursuant to Section 148 of ITA 1961 (the "Section 148 Notice") that it had "reason to believe that [CUHL’s] income chargeable to tax for the Assessment Year 2007 - 2008 has escaped assessment within the meaning of section 147 of the [ITA] 1961." It thus "propose[d] to assess/re-assess the income/re-compute the loss/depreciation allowance for said assessment year" and required CUHL to file a return for the Assessment Year 2007-08 within 30 days.263
156.
On 22 January 2014, invoking Section 131 of ITA 1961, the ITD summoned CUHL’s "Principal Officer" or an authorised representative to appear in person before the Deputy Director of Income Tax in New Delhi eight business days after the date of the summons in order to provide information on the CIHL Acquisition (the "Section 131 Notice").264
157.
Also on 22 January 2014, the Deputy Director of Income Tax issued an order pursuant to Section 281B of ITA 1961 (the "Section 281B Order") notifying CUHL that, during the survey of 15 January 2014, the ITD had found evidence that CUHL had failed to report a short term capital gain of INR 245,035,012,588 based on its 2006 sale of 251,224,744 shares of CIHL to CIL. The order provisionally froze CUHL’s remaining 184,175,764 equity shares in CIL (the "Frozen Shares"), as well as any dividends payable by CIL to CUHL.265 Specifically:

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

158.
In view of the above, the Deputy Director of Income Tax concluded that "for the purpose of protecting the interests of the revenue and in terms of the provisions of section 281B of the Act, it is necessary to attach provisionally" CUHL’s 196,174,000 shares in CIL, as well as any receivables from CIL. The Deputy Director of Income Tax thus made the following order:273

(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[…]

159.
Both CEP and CUHL received additional notices from the ITD in March 2014. Specifically, on 29 March 2014, CEP received a notice pursuant to Section 148 of ITA 1961, informing it that certain income for the assessment year 2007-2008 had "escaped assessment" and requiring CEP to file a tax return for its income chargeable to tax for that year within 30 days.274
160.
On 31 March 2014, CUHL received a notice pursuant to Section 201 of ITA 1961, informing it that, during the survey of CIL’s offices, the Investigation Wing had found evidence of dividends paid by CUHL to CEP between 2007 and 2012, which the ITD believed were chargeable to tax in India.275 The ITD again indicated that the tax arose from Section 9(1)(i), as amended by the 2012 Amendment.276 The ITD requested CUHL to show cause as to why it should not be deemed to be an assessee in default for failing to deduct tax at source.277
161.

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

162.
On 12 May 2014, CEP responded to its Section 148 Notice, challenging the ITD's jurisdiction, arguing that the application of the 2012 Amendment was unconstitutional280 and providing tax returns on a without prejudice basis.281
163.
In the weeks that followed, CUHL and CEP received notices from the ITD requesting them to provide information and/or appear at hearings in relation to the tax consequences of the CIHL Acquisition. The Parties exchanged significant correspondence in this respect, with the Claimants seeking several extensions to reply.282
164.
On 18 July 2014, the ITD extended by six months the Section 281B Order, in respect of CUHL's 184,175,764 equity shares in CIL and any other receivables, including any dividends.283
165.
By letter of 25 July 2014, the ITD wrote to CEP to provide the reasons for reopening the assessment proceedings under Section 148 of the ITA 1961.284 The Claimants also assert that it was only on that date that they received the ITD’s letter to CUHL of 21 January 2014 providing the reasons for reopening assessment proceedings.285
166.
During the months of September and October, CUHL and CEP received additional notices requesting representatives to appear for hearings to provide details of the CIHL Acquisition.286 The Claimants requested several extensions to reply.287
167.
On 16 October 2014, both CEP and CUHL responded to their respective Section 148 and 142(1) Notices.288 CEP argued, inter alia, that dividends paid to CEP fell outside of India’s jurisdiction, and that CEP stated that the facts sought by the ITD had been within the knowledge of the Indian authorities since 2006-2007.289 In turn, CUHL argued, inter alia, that the facts sought by the ITD had been within the knowledge of the Indian authorities since 2006-2007. In particular, CUHL emphasised that the details of all relevant share transfers were reported in its FIPB Application dated 10 August 2006, in Form 3CEB filed by CIL with the ITD and in a Transfer Pricing Report filed by CIL. According to CUHL, the Transfer Pricing Order issued on 5 October 2010 confirmed that the relevant transactions were "at arm’s length". CUHL also argued that the ITD’s calculation of the alleged gain confused tax and financial accounting principles.290
168.
Between November 2014 and February 2015, the ITD and the Claimants exchanged further correspondence on the disputed transactions.291
169.
On 16 January 2015, the Section 281B Order was extended again, to 30 April 2015 in respect of CUHL’s 184,175,764 equity shares in CIL and any other receivables, including any dividends.292
170.
On 19 February 2015, the ITD rejected CUHL’s objections to the Section 148 Notice dated 21 January 2014, emphasising that it relied on the 2012 Amendment as the source of its authority in the proceedings.293
171.
On 9 March 2015, the ITD issued a draft assessment order (the "DAO") against CUHL in respect of fiscal year 2006/2007 in the amount of INR 102,473,642,264.294 The content of the DAO is discussed in Section VII.A.3.a below.
172.
On 11 March 2015, the Claimants served a Notice of Dispute to India, arguing that India had violated its obligations under the UK-India BIT.295
173.
On 16 March 2015, CEP received a Disposal of Objections Notice in respect of the issues raised in the Section 148 Notice, rejecting all objections raised by CEP and indicating that proceedings would continue.296
174.
On 30 March 2015, CEP filed a submission in respect of proceedings under Sections 147 and 148. It noted that Circular No. 4/2015 provided that dividend income was not taxable, and requested that the proceedings be dropped immediately.297 On that same day, CEP received a notice under Section 148 stating that Circular No. 4/2015 clarified the application of the 2012 Amendment and that assessment proceedings in the case of CEP for Assessment Year 2007-2008 had been dropped.298
175.
On 6 April 2015, CUHL submitted its objections to the DAO before the relevant domestic mechanism, the Dispute Resolution Panel ("DRP"). CUHL filed its objections without prejudice to the present arbitration proceedings, noting that the Claimants had filed a Notice of Dispute on India on 11 March 2015. In its objections, CUHL raised many substantive objections to the DAO, including its reliance on the 2012 Amendment. CUHL also noted the failure of the DAO to appreciate the difference between tax and financial accounting in respect of the calculation of the alleged gain.299
176.
Also on 6 April 2015, the Section 281B Order dated 22 January 2014 was extended again in respect of CUHL’s 184,175,764 equity shares in CIL and any other receivables, including any dividends, to 20 January 2016.300
177.
On 7 August 2015, the DRP issued a Notice under Section 144C(11) setting a hearing before the DRP on 7 September 2015.301
178.
On 3 September 2015, CUHL requested that the DRP suspend the DRP proceedings pending the resolution of these arbitral proceedings in order that this Tribunal might make a full and final determination on the matters in dispute.302
179.
On 22 September 2015, the Claimants filed their Notice of Arbitration under the BIT.
180.
CUHL challenged the DAO through the DRP, the mechanism available for raising objections of this nature, on 29 September 2015 and 6 November 20 1 5.303 During the month of November, CUHL made further submissions and provided further evidence to the DRP.304
181.
On 3 December 2015, the Deputy Commissioner of Income Tax, New Delhi commented on CUHL's objections to the DAO.305
182.
On 31 December 2015, the DRP rejected all of CUHL's objections raised during the review of the assessment proceedings and confirmed the DAO (the "DRP Ruling").306
183.
On 14 January 2016, the Section 281B Order dated 22 January 2014 was extended again in respect of CUHL's 184,175,764 equity shares in CIL and any other receivables, including any dividends, to 31 March 2016.307
184.
On 20 January 2016, CUHL received a request for information regarding its 184,175,764 equity shares in CIL,308 which it provided on 22 January 2016.309

E. The Final Assessment Order and enforcement measures

185.
On 25 January 2016, the Respondent issued a FAO under Sections 148, 143(3), and 144C(13) of the ITA, confirming the DAO.310 The content of the FAO is discussed at Section VII.A.3.a below.
186.
Along with the FAO, the ITD also issued a notice of demand under Section 156 of the ITA 1961 (the "Notice of Demand"), which was received by CUHL on 4 February 2016. It provided 30 days from the date of service (5 March 2016) for CUHL to pay INR 291,025,144,030, or approximately US$ 4.4 billion at that time.311 This included interest under Sections 234A and 234B of the ITA 1961 that had allegedly accrued at a rate of two per cent per month on the US$ 1.6 billion principal.312
187.

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

188.
On 4 February 2016, CUHL received a Section 274 Notice (the "Section 274 Notice") requiring it to "show cause as to why an order imposing a penalty" for allegedly concealing the particulars of income or furnishing inaccurate particulars of income in the assessment year 2007-2008 "should not be made under Section 271(1)(c) of the ITA 1961."315 Statutorily available penalties under this provision, which the Respondent has the authority to invoke, would, according to the Claimants, increase the overall tax claim by billions of dollars.316
189.
On 14 February 2016, Cairn reiterated its request that the Respondent refrain from taking any prejudicial enforcement actions against Cairn and the remaining portion of its investment during the pendency of these arbitration proceedings. On 15 February 2016, CUHL made an application directly to the Assessing Officer, requesting a stay of recovery proceedings and requesting that the Assessing Officer hold the demand in abeyance pending the outcome of this arbitration.317
190.
On 23 February 2016, representatives of CUHL and the Assessing Officer met to discuss the penalty proceedings. At this time CUHL submitted a further application for such proceedings to be stayed or dropped entirely. According to the Claimants, the Assessing Officer explained that the ITD would consider staying the penalty proceedings if CUHL filed an appeal before the Income Tax Appellate Tribunal (the "ITAT"), which CUHL did, "expressly without prejudice to these arbitration proceedings and Cairn’s rights, claims, and remedies therein."318
191.

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

192.

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.

193.
On 30 March 2016, CUHL lodged an appeal against the FAO with the ITAT, without prejudice to the arbitral proceedings.321 On 4 April 2016, CUHL formally notified the ITAT by letter regarding its appeal.322
194.
On 5 April 2016, CUHL received a notice from the ITD, dated 31 March 2016, reiterating the Department's intent to pursue its tax demand after 30 June 2016 and stating that CUHL remained prohibited from transferring CUHL's shares in CIL or receiving any dividend in respect thereof.323
195.
As discussed in Section III below, on 13 April 2016 the Claimants filed a request for interim measures ("RIM"), noting that they would withdraw this request if the Respondent undertook not to pursue any further enforcement measures against the Claimants' shares in CIL.324 After several exchanges between the Parties and a proposal from the President, on 11 May 2016 the Respondent undertook that it would "take no steps to purport to transfer, sell, encumber or in any other way dispose of the shares during the pendency of these arbitral proceedings, without giving [CUHL] three months' written notice of its intention to do so."325
196.
On 12 October 2016, CUHL wrote to the Assistant Commissioner of Income Tax Circle 1(2)(1), International Taxation, New Delhi (the "ACIT") seeking confirmation that CIL would be able to release any outstanding dividends owed to CUHL.326 By letter of 30 December 2016, the ACIT indicated that the provisional attachment on the CIL dividends had expired on 31 March 2016, and that no attachment remained in force; as a result of which "[t]he decision to release the dividend to CUHL is an internal matter between two companies and the same may be dealt accordingly."327 As discussed in Section III below, the Respondent maintained this position throughout the arbitration and refused to offer written confirmation to CIL that the dividends could be released to CUHL. The Claimants’ sought, unsuccessfully, to have CIL (which had by then been merged with Vedanta Limited ("CIL/VIL" or "VIL"))328 release the dividends to CUHL. The Claimants sought relief from the Tribunal in this regard, and on 9 June 2017 the Tribunal issued Procedural Order No. 7 ("PO7") addressing the Parties’ requests for relief on this matter. The Tribunal understands that the Claimants were ultimately unable to obtain the release of the dividends, which were garnished by the Respondent and used to pay part of the tax demand.329
197.
On 9 March 2017, the ITAT issued its order (the "ITAT Order"). While it upheld the tax demand under Section 9(1)(i) as interpreted by Explanation 5, it also overturned the imposition of interest under Sections 234A and 234B of the ITA. The ITAT indicated that the Claimants "could not have visualize[d] its liability for payment of advance in the year of transaction therefore, there cannot be any interest payable by the assessee u/s 234A and 234B of the Act [...]. [W]e are of the opinion that assessee cannot be burdened with interest u/s 234A and 234B of the Act on tax liability arising out of retrospective amendment [with effect from] 01.04.1962 in the provision of section 9(1) of the Income Tax Act".330
198.
On 14 March 2017, the Office of the ACIT issued a letter to CUHL demanding payment of the tax due, as confirmed by the ITAT, by 15 June 2017, failing which recovery proceedings would be initiated under the ITA.331 As discussed in Section III below (Procedural History), this letter caused the Claimants to renew their RIM.
199.
On 31 March 2017, the ITD sent to CUHL a new notice demanding payment within 30 days of service and warning that, if payment was not received, proceedings for the recovery of the tax demand would ensue.332
200.
On 26 April 2017, the Tax Recovery Officer issued a warrant attaching CUHL’s movable property.333 On 18 August 2017, the Tax Recovery Officer issued an order prohibiting and restraining CUHL from making any transfer of the shares in CIL/VIL and/or from receiving any dividends on those shares.334
201.
On 15 June 2017, the Tribunal denied the Claimants’ renewed RIM (the "Renewed RIM") and related applications.335
202.
On 16 June 2017, the ITD issued a Tax Recovery Certificate and a Notice of Demand in accordance with Rule 2 of the Schedule II to the ITA, requiring payment to be made within 15 days, failing which recover proceedings would be commenced. The Tribunal understands that CUHL did not pay, and recovery proceedings were thus commenced.
203.
On 16 June 2017, the ITD issued a notice to CIL/VIL under Section 226(3) of the ITA, requiring CIL/VIL to pay to the ITD any amount due from CIL/VIL to CUHL or held by CIL/VIL for or on account of CUHL up to the outstanding tax liability of CIHL, including all future liabilities. According to the Respondent, "[CIL/VIL] was notified that if it discharged any liability to CUHL after receipt of this notice, it would become personally liable to the ITD to the extent of the liability so discharged. [CIL/VIL] has thereafter paid the outstanding dividend amounts to the ITD".336 The Claimants have not disputed this.
204.
On 29 September 2017, the Respondent issued a lump sum Penalty Order against CUHL for approximately US$ 1.6 billion (the "Penalty Order").
205.
In the months that followed, the Respondent engaged in the forced sale of 27,019,548 of CUHL’s shares in CIL/VIL.337 By 27 November 2018, the Respondent had sold a total of 181,764,297 shares, i.e., 98.72% of CUHL’s shareholding in CIL/VIL, as well as 736,503,056 of CUHL’s redeemable preference shares in CIL/VIL.338

III. Procedural History

206.
The present proceedings were complex, with numerous issues arising simultaneously and applications briefed and decided in parallel. By the end of the arbitration, the Claimants had submitted 314 communications to the Tribunal (including procedural letters and applications, identified as "CCom-XX"), while the Respondent had submitted 405 communications to the Tribunal (including procedural letters and applications, identified as "RCom-XX"). In response to these applications and correspondence, the Tribunal issued 19 Procedural Orders and 345 communications to the Parties (some giving directions, and others ruling on discrete issues, all identified as "AT-XX").
207.
In the pages that follow, the Tribunal has attempted to present a faithful portrayal of the various procedural incidents and applications that were raised during these proceedings. The Tribunal sets out the main procedural steps in chronological order; however, given the proliferation of parallel applications, it has made certain parentheses in the chronology to address specific applications.

A. Commencement of the proceedings

1. Constitution of the Tribunal

208.

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").

209.

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.

210.

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.

211.
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 Presiding Arbitrator in this matter (the "President of the Tribunal" or the "President"). Mr Lévy confirmed that he accepted his appointment that same day.
212.
On 16 February 2016, the President of the Tribunal confirmed that the Tribunal had been duly constituted and invited the Parties' views on certain organisational and procedural matters including: (i) determining the seat of the arbitration, and (ii) the date for the first procedural hearing. The Claimants and the Respondent submitted their comments on 4 and 16 March 2016, respectively.

2. First procedural hearing; procedural calendar; seat of the arbitration; the Claimants’ request for interim measures

213.
Between 11 and 18 April 2016, the Parties and the Tribunal exchanged correspondence with respect to the organisation of the proceedings.
214.
In particular, on 12 April 2016 (AT-5), the Tribunal circulated the following documents: (i) the draft Terms of Appointment of the Tribunal ("ToA"), (ii) draft Procedural Order No. 1 ("PO1") setting out the Tribunal’s proposed procedural rules for the arbitration, and (iii) the CV of the proposed Secretary of the Tribunal, Ms Sabina Sacco, a lawyer of Chilean, Italian, and Salvadoran nationality, from the President’s firm. The Tribunal requested the Parties to submit their respective comments on the drafts at or before noon CET Friday 15 April 2016, which the Parties subsequently did.339 The Tribunal also invited the Parties to formulate by the same time limit their comments and suggestions about the agenda for the case management hearing scheduled for 18 April 2016.
215.
During this period, on 11 April 2016 (RCom-4), the Respondent announced its intention to make an application for a stay of the proceedings. By letter of 15 April 2016 (CCom-10), the Claimants objected to any such application.
216.
By letter of 13 April 2016 (CCom-8), the Claimants filed a request for interim measures of protection (RIM), in which they invited the Respondent to undertake not to pursue any further enforcement measures against the Claimants’ equity shares (the "Shares") in CIL during the pendency of the arbitration. The Claimants stated that, upon such an undertaking by the Respondent, they would withdraw their RIM.340 The Claimants further represented that "Cairn will not seek the release of [CUHL’s shares in CIL] in this arbitration so long as India agrees to retain them without selling them pending a decision by this Tribunal as to their rightful disposition."341 In the absence of such an undertaking, the Claimants made a series of requests for relief from the Tribunal.342
217.
By email of 14 April 2016 (AT-6), the Tribunal invited the Respondent to comment, and noted that in any event the RIM would be addressed during the procedural hearing scheduled for 18 April 2016, where it would give both sides an opportunity to make short submissions on that matter.
218.

The first procedural hearing was held on 18 April 2016 in Paris. The following participants attended the hearing:

Tribunal
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)

Claimants
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)

Respondent
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)

219.
During the first procedural hearing, the Parties discussed, inter alia, the following matters:

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

220.
On 21 April 2016 (AT-7), the Tribunal wrote to the Parties to follow up on various matters discussed during the first procedural hearing. With respect to the question of bifurcation, the Tribunal recorded the agreement reached at the procedural hearing as follows:

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