India has gained an ill-reputation regarding its retrospective taxation laws in the past decade, especially due to the amendments made to Section 9 by the Finance Act, 2012. Retrospective operation of this amendment gave rise to three notable international tax disputes, namely the Vodafone International Holdings BV case, the Cairn Energy PLC case, and the Vedanta Resources PLC case. While the foremost case had been decided by the international arbitration tribunal in favour of Vodafone Holdings in the year 2015, the tribunal constituted in the Cairn Energy case delivered its decision in December 2020, holding India in breach of the 1994 Bilateral Investment Treaty between Republic of India and United Kingdom (India – UK BIT). The present article discusses the decision and impact of the Cairn Energy case.

The Cairn Ruling


Cairn UK Holdings Limited (Cairn UK), a company incorporated in the United Kingdom, had a wholly owned subsidiary incorporated in India, namely Cairn India Limited (Cairn India), and another incorporate in Jersey named Cairn India Holdings Limited (Cairn Jersey). Cairn Jersey owned 9 wholly owned subsidiaries registered in India. In 2006, Cairn UK transferred its entire shareholding in the company Cairn Jersey to Cairn India. Later, Cairn India, divested around 30% of its shares by way of an Initial Public Offering.

In view of the 2012 amendment, the income tax department in India observed that the transfer of shareholding of Cairn Jersey in 2006, had the effect of transferring the entire business in India. Therefore, consequent to retrospectively amended Section 9, Cairn UK was liable to pay capital gain tax in India. Therefore, income tax department raised a demand of Rs. 22,100 crores on Cairn. These proceedings went up till the Income Tax Appellate Tribunal which decided in favour of the revenue.

Cairn initiated arbitration against India claiming breach of the BIT between India and UK wherein the tax demand raised on Cairn by virtue of retrospective laws was challenged.

India argued that the 2012 amendment merely clarificatory in nature since it clarified the nature of “indirect transfers” under Section 9. Cairn argued that this retrospective amendment violated the India-UK BIT which entails a clause that India is obligated to treat the investments coming from UK in a fair and equitable manner.


The tribunal dismissed India’s argument and held that Section 9(1)(i) of the Income-tax Act was substantially altered by the 2012 amendment. It held that India was in breach of the fair and equitable treatment clause of the India-UK BIT. The tribunal ordered India to pay approximately $1.2 billion to Cairn UK for restitution of Cairn’s losses resulting from the expropriation of its investments by India in 2014 and the failure to treat the company and its investments fairly and equitably.


In the beginning of 2021, there were negotiations  between Cairn and Indian government wherein it was anticipated that Cairn would furnish 50% of its tax demand and the rest would be foregone by the government. However, these negotiations did not fetch India anything since Cairn filed a lawsuit in USA to enforce the arbitral award in May 2021. It is imperative to note that the lawsuit has been filed in USA impleading Air India as a party. Cairn has argued that Air India is the alter ego of the Indian government by virtue of it being wholly owned and extensively controlled by the government. Consequentially, it should be held jointly and severally responsible for the amounts owed by India.

Further, Cairn has initiated proceedings against India in other jurisdictions around the world seeking recognition and enforcement of the Award. India has also appealed against the Award in the Netherlands.

Analysis and comments

Jurisdiction of arbitration tribunal

The first controversy that arises in the present case is whether an arbitration tribunal convened under a BIT can adjudicate upon tax related disputes. It is pertinent to note here that the present case was treated as an investment-related dispute instead of a tax dispute, which conferred jurisdiction to the tribunal. The answer to the question as to whether an arbitration tribunal can decide tax disputes lies within the language of the BIT governing the relations between the 2 countries. Article 2 of India’s BIT with UK confers a wide scope on its application. It reads as follows:

“This Agreement shall apply to any investment made by investors of either Contracting Party in the territory of the other Contracting Party including an indirect investment made through another company, wherever located, which is fully owned by such investors, whether made before or after the coming into force of this Agreement.”

The word “any” is of utmost significance since it does not create a distinction between investment disputes and tax disputes which led to arbitration tribunal having jurisdiction over a purely tax-dispute. The BIT between India and Netherlands also has the same provision which led to the arbitration tribunal having jurisdiction in the Vodafone Holdings case well.

Resultantly, the Indian government has changed its regular format of BITs to exclude the jurisdiction of such tribunals in tax-related disputes. For instance, India’s BIT with Brazil incorporates a novel provision with respect tax matters. Article 3.6(b) of the Treaty signed in January 2020 reads as follows:

“This treaty shall not apply to any law or measure regarding taxation, including measures taken to enforce taxation obligations.”

This amendment to the standard form of BITs will prove to be beneficial for India since it shall now be able to exercise its sovereign right to impose taxes without interference by investment tribunals. However, it must be noted that India must not abuse this power by imposing unreasonable or retrospective laws which go against general international principles like stability of the tax regime.

Effect of the Government’s response on FDI

When the Indian Government introduced the retrospective taxation amendment in 2012, several experts termed it as ‘the death of FDI in India’. This situation has been aggravated by the decisions in the Vodafone and Cairn rulings.

The two acts by the Indian Government- namely the operative reversal of the judgment of the Supreme Court in the Vodafone case, and the enactment of retrospective tax laws, has certainly been detrimental to companies’ choice of India as the place of business. Such acts cement the perspective amongst potential investors that the tax laws in India are not consistent and are subject to the whims and fancies of the party in power. Hence, making it an unfavourable destination of investment and business.

India had two options with respect to these rulings- either to accept the award or to challenge this award in Netherlands. A more prudent approach will be the former since it will act as a damage control measure and lead to an improvement of the country’s perception amongst investors. However, the Indian Government has decided to challenge this award. In the author’s opinion though, the longer this issue is taken forward, the longer the investment prospects of India will be prejudiced.


India’s retrospective taxation laws have been condemned in both the Vodafone and Cairn rulings on the ground of it not being just and equitable for the investors. While amending the BITs to exclude the jurisdiction of foreign tribunals in domestic tax matters may be beneficial to India, it should not be used to cover up the problematic retrospective taxation laws of India. While the international arbitration tribunals in these two cases did not have jurisdiction to declare the retrospective amendments to Section 9 as invalid, the Indian government should itself roll back the same or declare that it will have prospective application, in the interest of justice, equity and good conscience and to improve its fragile relationship with foreign investors.

From the above discussion, it is evident that while every country has the sovereign right to impose taxes, it must consider the interests of the investors while exercising this right. Ergo, to establish a balance, India should retain its sovereignty over fiscal matters while fulfilling the investors’ expectation of a stable tax policy.

Author Bio

Qualification: Student- Others
Company: N/A
Location: Delhi, Delhi, India
Member Since: 27 Jul 2021 | Total Posts: 2

My Published Posts

More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

September 2021