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2021 SCC OnLine Blog Exp 15
Cairn Energy PLC and Cairn UK Holdings Limited (CUHL) v. Government of
India : A Rising and Burning Need for Investor-State Mediation in InvestorState Tax and Energy-Related Disputes
CAIRN ENERGY PLC AND CAIRN UK HOLDINGS LIMITED (CUHL) V. GOVERNMENT OF
INDIA : A RISING AND BURNING NEED FOR INVESTOR-STATE MEDIATION IN INVESTORSTATE TAX AND ENERGY-RELATED DISPUTES
by
Iram Majid†
In the backdrop of the already infamous retrospective taxation regime in India post
the Vodafone tax dispute1 , India yet again held to have violated its obligations under
the India-UK Bilateral Investment Treaty, 1994 (hereinafter “BIT”) and international
law by the Permanent Court of Arbitration, Hague, on 21-12-2020. The Tribunal
ordered India to pay US $1.2 billion2 , plus interest and costs, to compensate Cairn
Energy Plc (subsidiary of Vedanta UK) and Cairn UK Holdings Limited (hereinafter
“Cairn”) for the shares that were sold by the Indian Income Tax Department
(hereinafter “ITD”), confiscated dividends, and the tax refunds withheld by ITD. This
compensation amount sums up to a whopping US $1.4 billion.3
Thus, firstly, this article shall give the factual matrix alongside the arbitral award of
the Cairn case4 . Secondly, this article shall scrutinise the challenges faced by investorState arbitration in matters related to tax and energy disputes. Thirdly and in finality,
this article shall suggest the need for investor-State mediation in energy and taxrelated disputes.
1. Factual matrix and arbitral award in Cairn case
Soon after the Vodafone case5 , in March 2012, the Indian Parliament retrospectively
amended Section 9(1)(i) of the Income Tax Act, 1961 by way of Finance Act, 2012.
Through this amendment, firstly, the definition of “through” was clarified wherein the
term “through” was deemed to be inclusive of “by means of”, “in accordance”, or “by
reason of”.6 and secondly, it was 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.7
In an alternate timeline, in 2006, Cairn UK Holdings Limited (incorporated in UK)
(hereinafter “CUHL”) transferred shares of Cairn India Holdings Limited (incorporated
in Jersey) (hereinafter “CIHL”) to Cairn India Limited (incorporated in India)
(hereinafter “CIL”). Cairn is associated to the oil and gas industry.
On 9-3-2015, ITD claimed that they were able to identify certain unassessed
taxable income due to the 2006 transaction of Cairn. The ITD sought to retrospectively
implement the 2012 tax amendments and thus, through a draft assessment order, a
capital gains tax demand of US $1.6 billion plus interest and penalties was assessed
against CUHL.8
On 10-3-2015, Cairn Energy instituted international arbitration proceedings against
the Indian Government under the India-UK BIT and contended that the guarantee of
fair and equitable treatment and protection against “expropriation” given under the
BIT has been violated by ITD.9
On 13-3-2015, a draft assessment order was passed against CIL due to its failure to
deduct withholding tax on the alleged capital gains in the 2006 transaction. The tax
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demand plus interest against CIL was of US $3.293 billion due to which in January
2016, international arbitration proceedings formally commenced under the India-UK
BIT.10
In March 2017, the Income Tax Appellate Tribunal upheld ITD's demand of capital
gains tax and in August 2017, CUHL filed an appeal in the High Court of Delhi that is
still pending before it.11
It is pertinent to note that during the pendency of these arbitration proceedings,
ITD seized and held CUHL's shares (in Vedanta Limited) to an approximate valuation
of US $1 billion. Further, CUHL was not allowed to freely exercise its ownership rights
over these seized shares and was desisted from selling them. To make matters more
perplexing, ITD sold a part of these shares to recover a part of the tax demand made
by ITD. The proceeds from this sale came up to about US $216 million. In addition to
this sale, to enforce the tax demand of ITD, CUHL's assets were also seized by ITD.12
2. Analysis : How investor-State arbitration in tax and energy-related disputes
is counterproductive
In the present Cairn scenario, we comprehend that it is a case of investor-State
arbitration related to international energy sector transactions. This dispute has arisen
due to the retrospective taxation regime of India. It is pertinent for us to understand
that in complex international energy-related transactions, compliance with various
national taxation laws, company laws, and other relevant laws are of quintessence
importance. But at the same time, the probability of conflicts arising is high due to a
sovereign's (India) vested interests in these transactions.
The first point of conundrum arises is the conflict between State's sovereign rights
of taxation v. Commitments by States under international law. It is a difficult task to
ascertain which commitment takes precedence and when. However, there are certain
factors through which a thin line may be drawn, and the limits of international law
commitments can be defined. This can be in the form of subjective interpretation of
the India-UK BIT by the lawyers and tribunals. However, considering the fact that
there exists this everlasting conflict between defining the boundaries of sovereignty of
a State and its international commitments and the perpetual problem of subjective
interpretation of the BIT, an urgent need for coexistence and sustainable relationship
between a foreign investor and the host State is mandated. This urgent need seems to
be a far goal to be achieved through investor-State arbitration. If the same is replaced
with that of investor-State mediation, the aforementioned need can be met as it
proves to be highly beneficial to both the parties in terms of their time, resources, and
energy. This is because investor-State mediation aims at mutual cooperation and
coexistence by way of reaching consensus and settlement.
Investor-State arbitration may seem like a lucrative option but there is a plethora of
drawbacks to it. Firstly, the reason why investor-State arbitration is heavily criticised
is that a growing trend has been observed wherein an multinational corporation (MNC)
is owed in millions or even billions by a host Government because the host
Government violated the international law codified in the BITs.13 In other words, the
international arbitral award gave preference to the private interests of profit-making
over the public interests and local community.14 Secondly, it is pertinent to note that
these violations by the host Government may have been committed to protect the
local community in terms of public health, law and order, economy, and so on.15
However, this violation for the public good may be disregarded by the international
arbitrators.16 Critics point out that the reason for such disregarding is that these
arbitrators do not belong to the local community and fail to comprehend the grassrootlevel problems.17 Thirdly, due to such nuanced issues, investor-State arbitration has
created a sense of distrust amongst the local communities of host countries as this
type of arbitration does not allow the public to be heard or hear the arbitration
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proceedings due to party anonymity followed by the fact that only foreign investors
can bring claims against the host State and not vice versa. Fourthly, it is also likely
that the investor-State arbitration awards may be challenged by the foreign investor
outside the Indian courts in case of any future dispute between India and such foreign
investor. Fifthly, and in finality, it is possible that an arbitral award may be acceptable
to one Government but may not be acceptable to the other Government. Thus, in such
complex situations, investor-State mediation is proposed.
3. Conclusion : Investor-State mediation as the way forward
Investor-State arbitration gained momentum in India once the case of White
Industries Australia Ltd. v. Republic of India18 took place. In May of 2002, the investor
-claimant (White Industries Australia Limited) obtained an ICC award against Coal
India Limited. For nine years, the investor-claimant sought to enforce this award in
India before the High Court of Delhi. However, to the investor-claimant's respite, no
enforcement was provided because of the inordinate delay caused by the traditional
courts in India. Thus, the investor-claimant dragged the matter to investment treaty
arbitration under the Australia-India BIT 1999 on the ground of inordinate delay. This
was done because the inordinate delay led to the violation of various protections given
under the Australia-India BIT. This experience led to a paradigm shift in India's stance
on investor-State arbitration.
Initially, India was a signatory of 85 BITs out of which 76 were ratified.19 However,
since March 2017, India terminated 69 BITs to renegotiate the existing BITs in
accordance with India's Model BIT of 2015.20 Up-to-date, only 12 BITs are in force
concerning India i.e. with Bahrain, Bangladesh, Bulgaria, Czech Republic, Latvia,
Libya, Lithuania, Romania, Senegal, Serbia, Sudan, and Syria.21
Taking into consideration India's experience with investor-State arbitration in White
Industries case22 and Cairn case23 did not leave a good taste in the Indian legal regime
wherein Cairn's arbitration award is highly likely to be challenged by India in various
international courts,24 establishment of an investor-State mediation framework
becomes imperative.
Thus, from all the aforementioned arguments, we must understand why investorState mediation is a viable alternative to investor-State arbitration. In investor-State
mediation, we observe that the outcome of the process and the control is in the hands
of the parties wherein the needs of both the parties are accommodated in a holistic
manner. However, in complex processes like litigation and arbitration, the control and
outcome of the adjudication process is in the hands of a Judge or an arbitrator. The
latter takes away the flexibility in accommodating the interests of both the parties in a
holistic manner by also failing to consider the fact that the relationship between the
parties should be built in a sustainable manner wherein the culture and traditions of
the parties are taken care of. Investor-State mediation offers the best chance at
reconciliation and building such a relationship between both the parties as all the
necessary cultures and traditions of the host State's community can be taken into
consideration whereas all the profit-making motives of the foreign investor can be
addressed mutually.
On the same note, we must address the drawbacks of investor-State mediation. The
major challenge faced by it is to gain the foreign investor's confidence. The best way
to gain their confidence is by ensuring foreign recognition and enforceability of
mediated settlements. However, the same is extremely perplexed because of the fact
that there is no proper international regulatory framework for the admissibility and
enforceability of foreign mediated settlements.
The best option available with the parties is to convert the mediated settlements
into arbitral awards wherein such arbitral award will be based on the terms and
conditions of the mediated settlement as previously agreed by both the parties.
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However, when we speak of enforceability of arbitral awards, another issue which
pops up is that there is no record or document which shows that an International
Centre for Settlement of Investment Disputes (hereinafter “ICSID”) award has been
enforced by a host State.25 Further, according to the ICSID Convention, a State may
resort to the invocation of sovereign immunity to block the execution of arbitral
awards.
Therefore, this essentially points us in the direction that the converted arbitral
awards (converted from mediated settlements) must be in the right direction i.e. in
the best interests of both the parties wherein they are satisfied with the respective
terms and conditions reached and are consciously willing to enforce the same in the
form of an arbitral award alongside building a long-lasting, sustainable relationship.
Mediation is slowly taking over the world of dispute resolution and it is not an
unknown method to international organisations where even the World Trade
Organisation (WTO) has a voluntary mediation procedure. Hence, it would only be
right to nudge States towards investor-State mediation for high value disputes
involving tax and energy regimes.
———
Iram Majid, Director of Indian Institute of Arbitration and Mediation (ILAM) and Executive Director of Asia
Pacific Centre for Arbitration and Mediation.
†
1
Vodafone International Holdings BV v. India (I), PCA Case No. 2016-35.
Kshama A. Loya, Moazzam Khan and Vyapak Desai, Cairn v. India - Investment Treaty Arbitration Foreign
Investors Continue to Find Relief from Sovereign Retrospective Taxation Powers of States under International
Law,
Nishith
Desai
Associates,
<https
:
//www.nishithdesai.com/information/news-storage/newsdetails/article/cairn-v-india-investment-treaty-arbitration.html>. (please check the article)
2
Gireesh Chandra Prasad, Centre to Challenge all Cairn Cases in International Courts, LiveMint,
<https
:
//www.livemint.com/companies/news/india-to-contest-cairn-energy-arbitration-award-lawsuits-ininternational-court-11613713931395.html>.
3
4
Cairn Energy PLC v. Union of India, PCA Case No. 2016-7.
5
PCA Case No. 2016-35.
6
The Finance Act, 2012, S. 4(a).
7
Ibid.
8
Supra note 1.
9
Supra note 1.
10
Supra note 1.
11
Supra note 1.
12
Supra note 1.
Anil
Xavier,
Investor-State
Disputes
:
Relevance
<https : //www.arbitrationindia.com/pdf/mediation_investorstate.pdf>.
13
14
Ibid.
15
Ibid.
16
Ibid.
17
Ibid.
of
Mediation,
IIAM
White Industries Australia Ltd. v. Republic of India <https : //www.italaw.com/sites/default/files/casedocuments/ita0906.pdf>.
18
19
Rajendra
Barot
and
Sonali
Mathur,
Investor-State
Arbitration
:
2020,
Mondaq
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----------------------------------------------------------------------------------------------------------------------------------------------------------<https : //www.mondaq.com/india/arbitration-dispute-resolution/863680/investor-state-arbitration-2020>.
20
Ibid.
21
Ibid.
22
<https : //www.italaw.com/sites/default/files/case-documents/ita0906.pdf>.
23
PCA Case No. 2016-7.
PTI,
India
to
Appeal
against
Cairn
Arbitration
Award
:
Report,
The
Times
of
India
<https : //timesofindia.indiatimes.com/business/india-business/india-to-appeal-against-cairn-arbitration-awardreport/articleshow/81106105.cms>.
24
25
Supra note 10.
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