Cairn v. India

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

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

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

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]

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]

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]

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]

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]

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]

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]

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

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

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

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

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

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

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

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

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

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.

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

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.

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

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

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

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

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

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

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

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

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

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

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.

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.

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

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

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

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

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

Approval for Cairn India Limited for issuing and allotting equity shares aggregating to up to 70% of its post IPO equity capital, to Cairn UK Holdings Limited, in exchange for shares (up to 70%) of Cairn India Holdings Limited held by Cairn UK Holdings Limited.

Subsequent to the completion of the IPO, CIL would require the balance equity shares (at least 10%) of CIHL from CUHL, for a cash consideration under automatic route.⁷⁰

CEP was not invited to send a representative to the meeting, but received a copy of the agenda, which the Claimants claim listed Cairn's application for review and noted that the Secretary for the Department of Revenue was scheduled to attend.⁷¹ The Respondent denies that the Secretary for the Department of Revenue attended the meeting.⁷² In any case, the record suggests that the Department of Revenue did receive the minutes of the meeting.⁷³

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

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

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

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

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

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

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

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.

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

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

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.

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

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

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.

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

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

Share Swap Between CIL and CUHL (20 December 2006)

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.

The Fourth CIHL Acquisition can be illustrated as follows:¹²⁰

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

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

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

a. Acquired the shares in CIHL at a cost of £251,224,744 (INR 21,783,697,552 at an average conversion rate of INR 86.7139);

b. Transferred those shares to CIL in return for a total consideration in cash and shares of INR 266,818,710,140; and

c. Thereby achieved a short-term capital gain of INR 245,035,012,588 (i.e., approximately US$ 3.6 billion)."¹²⁸

The Claimants acknowledge that, through the sale of 31% of CIL shares to the public in the IPO, they made an "exceptional gain of US$ 1,537 billion."¹²⁹ Ms [Person 1] explains that "[t]his exceptional gain of US$ 1,537 billion reflects how CEP recorded in its consolidated group accounts its 69 per cent portion of the US$ 1.98 billion in proceeds from the IPO, offset by the historical net book value of those assets now attributable to minority shareholders."¹³⁰ However, this capital gain has not been the subject of any taxation measures by the Respondent. It is undisputed that, pursuant to Indian law, capital gains made through a fresh issue of shares in an IPO are not chargeable to tax.¹³¹

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

During the year assessee [i.e., CIL] has acquired 272,389,192 ordinary shares of £1 each, in Cairn India Holdings Limited out of which 251,224,744 shares has been acquired from its holding company Cairn UK Holdings UK for total purchase consideration of Rs 266,818,710,140 for which it has issued 861,764,893 shares shares [sic] at Rs 160 each to Cairn UK Holdings Limited by way of share swap arrangement for acquiring 135,267,264 ordinary shares of Cairn India Holdings Limited. The said transaction does not impact P&L account and is in accordance with the provisions of Foreign Exchange Management Act (FEMA) and CCI guidelines. Thus, the transaction is considered to be at arm's length.

On 29 December 2009, the ITD requested CIL to provide detailed information regarding the arm's length price of its international transactions during the fiscal year 2006-2007.¹³⁵ During the course of 2010, CIL representatives attended hearings with the ITD and submitted "detailed information about the pricing of the CIL shares and underlying CIHL assets and the process of their acquisition by CUHL", including certain key documents prepared during the course of the restructuring, such as the FIPB and RBI approvals, the Rothschild valuation and the final CIL prospectus.¹³⁶

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

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

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

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

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

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

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

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).

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

The words 'sale [...] of a capital asset in the taxable territories' in the existing section 42(1) are slightly ambiguous, since 'in the taxable territories' can be read either with 'sale' or with 'capital asset'. To remove this ambiguity, the word 'situate' has been added after 'capital asset.'¹⁶¹

Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arise in India :-

(i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India.¹⁶²

Non-residents are taxed only on Indian-sourced income and on income received, accruing or arising in India.

Nonresidents may also be taxed on income deemed to accrue or arise in India through a business connection, through or from any asset or source of income in India, or through the transfer of a capital asset situated in India (including a share in a company incorporated in India).¹⁶⁶

Gains derived by a resident of a Contracting State from the alienation of shares deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.¹⁷¹

a. The Economic Times on 5 February 2010 reported that the then British Prime Minister, Gordon Brown, had written to Prime Minister Singh in relation to the Vodafone case. According to the article, Mr Brown had stated that taxing cross-border deals such as Vodafone’s could "create uncertainty for foreign investors and affect the country’s investment climate".¹⁹¹

b. On 5 February 2010 Indian Prime Minister Singh responded to Prime Minister Brown’s letter assuring him that Vodafone would "have the full protection of the law" and indicating his understanding that "there is no retrospective application of taxation and a recent court judgment has affirmed this position". Prime Minister Singh also provided his assurance that the Government of India was "fully committed to providing a transparent and growth oriented environment for profitable international investment".¹⁹²

c. Acting chairman Sudhir Chandra of the CBDT was quoted as saying "This (Vodafone case) is a test case, we will look at similar cases" in an article published in The Hindu on 9 September 2010. The article also said:

The government will look into more cross-border mergers involving Indian assets, like the Vodafone-Hutchison deal, after the Bombay High Court rejected the UK-based Vodafone’s petition against the imposition of tax by authorities here. [...] Recently, London listed Vedanta Group has signed a deal to acquire UK-based Carin Energy’s Indian arm for USD 8.43 billion. Chandra said, "(Income Tax) Department’s position stands vindicated. It is a clear cut case of deliberate non-compliance to law on misplaced legal advice."

Tax authorities had slapped a notice on Vodafone over its acquisition of Hong Kong’s Hutchison Telecommunications, involving its Indian telecom JV Hutch Essar, for over USD 11 billion in 2007.

They said that in this case the buyer, Vodafone, was liable to pay capital gains tax even if it failed to deduct it at source, that is, while making payment to Hutch for the deal that happened overseas. Vodafone challenged the notice.

[...]

Although he did not name the companies or deals that could be investigated, Chandra said, "There are already some cases under investigation.¹⁹³

After the Vodafone decision was issued, the United States, the United Kingdom and the European Union issued the following joint statement, which was cited by the Minister of State in the MoF Shri S. S. Palanimanickam:

Indian Revenue Authorities have asserted the unprecedented view that India is entitled to capital gains on transactions taking place wholly outside India and that they have imposed retroactive taxing jurisdiction in transactions involving the transfer of shares in a company not resident in India, in which both the buyer and seller are also nonresidents of India.¹⁹⁴

(1) The income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from [...] (d) the transfer, directly or indirectly, of a capital asset situate in India.¹⁹⁶

The income shall be deemed to accrue in India, if it accrues, whether directly or indirectly, through or from: [...] (d) the transfer of a capital asset situated in India.¹⁹⁸

The income deemed to accrue in India under sub-section (1) shall, in the case of a non-resident, not include the following, namely: — [...] (g) income from transfer, outside India, of any share or interest in a foreign company unless at any time in twelve months preceding the transfer, the fair market value of the assets in India, owned, directly or indirectly, by the company, represent at least fifty per cent of the fair market value of all assets owned by the company.¹⁹⁹

Where the income of a non-resident, in respect of transfer, outside India, of any share or interest in a foreign company, is deemed to accrue in India under clause (d) of sub-section [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

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

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.

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

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

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

[A]n asset or a capital asset, being any share of, or interest in, a company or entity registered or incorporated outside India shall be deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets (whether tangible or intangible) located in India.²²⁸

The share or interest, referred to in sub-section (2), shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of such assets, (i) exceeds the amount as may be prescribed; or (ii) represent at least twenty per cent of the fair market value of all the assets owned by the company or entity, as the case may be.²³⁰

In his first budget speech in July 2014, the new Finance Minister, [Person 11], proposed that a CBDT-supervised "High Level Committee" be implemented to scrutinise fresh cases that had arisen following the 2012 Amendments. After stating that, "[t]his Government will not ordinarily bring about any change retrospectively which creates a fresh liability", he announced that "henceforth, all fresh cases arising out of the retrospective amendments of 2012 in respect of indirect transfers and coming to the notice of the Assessing Officers will be scrutinized by a High Level Committee to be constituted by the CBDT before any action is initiated in such cases."²³²

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

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

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

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

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

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

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

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

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

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

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

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

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

a. The Deputy Director of Income Tax stated that, "[d]uring the course of survey proceedings, it was found" that CIL had purchased 251,224,744 shares in CIHL from CUHL, for a sum of INR 266,818,710,140.²⁶⁶ As CUHL had acquired these shares for INR 21,783,697,552, it was "evident" that this amount exceeded the book value of the CIHL shares "by a sum of [INR] 254,225,134,287/ which is represented by Goodwill in the consolidated financial statements, clearly indicating that substantial gains or to be more precise 'short term capital gains’ have accrued to the assessee company [CUHL]."²⁶⁷ The Order noted that, according to CUHL’s financial statements, "no tax has been paid on these gains in any tax jurisdiction including India and United Kingdom".²⁶⁸

b. The Deputy Director of Income Tax then invoked Explanation 5 to Section 9(1)(i) of the ITA 1961 as basis for taxing this capital gain. The Deputy Director of Income Tax stated that, during the survey operations, the ITD had obtained the Rothschild valuation report prepared for the 2006 reorganisation and IPO, and that this report "ma[de] it amply clear that all the assets of [CIHL] and its subsidiaries [were] located in India alone."²⁶⁹ The Deputy Director of Income Tax also cited statements by CIL’s CEO and CFO, affirming that during 2006, the assets of CIHL’s subsidiary companies "derived [their] value directly or indirectly, substantially from the assets i.e. oil and gas rights / reserves located in India."²⁷⁰ As a result, the Deputy Director of Income Tax concluded that "it is evident that the shares of [CIHL] which were acquired by [CIL] from the assessee company [CUHL] derive [their] value solely from the assets located in India and therefore in accordance with the provisions of Explanation 5 to Section 9(1)(i) of the [ITA] shall be deemed to have been situated in India and consequently any gains arising from [the] transfer of such shares is chargeable to tax under the [ITA 1961]."²⁷¹

c. The Deputy Director of Income Tax noted further that CUHL’s shares in CIL were being frozen to prevent their sale in CIL’s Buy-Back Programme:

During the course of the survey proceedings, it was noticed that as on 31.12.2013, [CUHL] was holding 196,174,600 shares of [CIL]. During the course of survey action it was also noticed that on 14.01.2014, CIL has made a public announcement for Buy Back of its shares. The date of opening of the Buy Back of shares as per the public announcement is 23.01.2014. [...] Possibility of [CUHL] selling off its shares in [CIL] in this buy back cannot be ruled out.²⁷²

(A) As per provisions of schedule II, para-26, the principal officer of Cairn India Limited is directed not to do/permit any transfer of these shares to anybody.

(B) So far as the receivables by Cairn UK Holdings Ltd in the books of Cairn India Limited are concerned the Principal Officer of Cairn India Limited is directed not to remit/pay any amount to Cairn UK Holdings Ltd.

(C) It is ordered that the assessee or its nominee or any other person on behalf of the assessee is prohibited and restrained from creating a charge on or part with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer, whatsoever) of the properties mentioned in [the] schedule below, without prior sanction of the undersigned. Any such charge or transfer, shall be void as against any claim in respect of any income tax of other sum payable by the assessee as a result of completion of the assessment proceedings[…]

On 2 April 2014, CUHL responded to its Section 148 Notice, challenging the ITD's jurisdiction and submitting that the Section 148 Notice and the Section 281B Order were issued on the basis of Explanation 5 and that such retrospective application was "unconstitutional".²⁷⁸ However, it complied with the notice and filed a tax return for the financial year 2007/2008, indicating a "nil" income.²⁷⁹

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

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

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.

On 22 December 2015, the Claimants filed a Notice of Arbitration pursuant to Article 9(3)(c) of the UK-India BIT and Article 3(1) of the United Nations Commission on International Trade Law Arbitration Rules 1976 (the "UNCITRAL Rules").

In accordance with Article 9 of the UK-India BIT, on 2 April 2015 the Claimants informed the Respondent that they had appointed Mr Stanimir Alexandrov, a national of Bulgaria, as arbitrator. Mr Alexandrov accepted his appointment on 1 April 2015.

As the Respondent did not appoint an arbitrator within the time limit set out in Article 9 of the UK-India BIT, on 12 August 2015 and in accordance with Article 9(3)(c)(ii) of the UK India-BIT, the Claimants requested the President of the International Court of Justice, H.E. Judge Ronny Abraham, to act as appointing authority. Ultimately, on 9 November 2015, the Respondent informed the Claimants that it had appointed Mr J. Christopher Thomas, QC, a national of Canada, as arbitrator. Mr Thomas accepted his appointment on 20 November 2015.

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

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)

a. The Respondent’s application on the applicable transparency regime for the present arbitration;

b. The Respondent’s intention to file an application for a stay and the relevant briefing schedule. At this juncture, the Respondent also indicated that it intended to wait until the Claimants filed their Statement of Claim before formulating its objections to jurisdiction and admissibility, and proposed that whether those objections should be heard in a preliminary bifurcated phase should be determined thereafter; and

c. The Claimants’ RIM. In particular, the President proposed language for a possible undertaking by the Respondent.³⁴³

If, once the Respondent has received the Claimants’ Statement of Claim, the Respondent wishes to raise objections to jurisdiction and/or admissibility, it may file a request for bifurcation and should do so as soon as reasonably possible, failing which the Respondent will submit its Statement of Defense in full. If the Respondent does request a bifurcation, the Tribunal would then allow the Claimants to comment and will ultimately make a decision