UK firm Cairn Energy wins arbitration case against India; second setback after losing to Vodafone

British firm Cairn Energy has won an international arbitration case against the Indian government over a tax dispute that had spooked investors concerned about retrospective tax claims on companies.

The tribunal ruled unanimously that India had breached its obligations to Cairn Energy under the UK-India Bilateral Investment Treaty and awarded the firm damages of Rs 10,247 crore ($1.2 billion) plus interest and costs, the company said in a statement.

This is the second setback for India after losing another international arbitration case in September against Vodafone Plc over a $2 billion retrospective tax dispute.

Cairn Energy took the case to arbitration in 2015 to fight against a demand in 2014 from the Indian income tax department for Rs 102 billion rupees ($1.4 billion) in taxes that it said were owed on capital gains related to the 2007 listing of its Indian unit.

In 2011, Cairn Energy sold its majority stake in Cairn India to Vedanta Ltd, reducing its stake in the Indian company to about 10 per cent.

The Indian government seized the remaining shares in 2014 after the tax complaint was made, as well as dividends Vedanta owed to Cairn Energy for its holdings in the Indian firm.

In 2018, Cairn Energy said it would write down the value of its investment in Vedanta after Indian tax authorities sold $216 million worth of its shares in the Indian mining company.

The tribunal also ruled that India’s claim that Cairn had unlawfully avoided paying the tax had no grounds or merit and it must permanently withdraw its tax demand and not seek to recover further dues, a source with direct knowledge of the matter said.

Shares in Vedanta rose as much as five per cent on Wednesday after Cairn had won the arbitration.

The oil blocks in Rajasthan which were owned by Cairn Energy are now controlled by Anil Agarwal’s Vedanta group. The Rajasthan block, RJ-ON-90/1, is spread over 3,111 square km in Barmer district. 13 dry wells were drilled in Rajasthan before Cairn struck oil in the 14th well. The organisation has come a long way since, with numerous discoveries in the state of Rajasthan, bringing a number of fields to production, and gearing up for the next phase of growth.

The block has contributed USD 15.1 billion to the nation and the state exchequer as on June 30, 2018. The cumulative production from the Rajasthan block has crossed 500 mmbbls. Mangala, Bhagyam and Aishwariya (MBA) are the three largest finds in Rajasthan. The Mangala field, considered to be the largest onshore hydrocarbon find in India in the last two decades, was discovered in January 2004. This was followed by the discovery of Aishwariya and Bhagyam fields.

Till date, 38 discoveries have been made in this block. Studies indicate that the block has further potential for growth.

The application of the latest technology has been a key facilitator in Rajasthan’s success story. A full field Enhanced Oil Recovery (EOR) polymer flood project has been implemented, the largest such project in the world, which has helped in maintaining the field’s production. The world’s largest Alkaline Surfactant Polymer (ASP) flood project is also under implementation here.

The Mangala Processing Terminal (MPT) is spread over 1.6 square km and is a core asset processing crude oil produced from Rajasthan. After processing, the crude oil is transported to refineries through a continuously heated and insulated pipeline.