Tax Reforms

Cairn Energy Tax dispute case Explained


From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Honouring Bilateral Investment Treaties

Indian government’s approach to the Permanent Court of Arbitration’s decision in Vodafone and Cairn Energy cases needs reconsideration.

Background of Cairn Energy and Vodafone case

  • Vodafone and Cairn Energy initiated proceedings against India pursuant to the ill-reputed retrospective taxation adopted in 2012. 
  • In September, 2020, the Permanent Court of Arbitration at The Hague (PCA) ruled that India’s imposition on Vodafone of ₹27,900 crore in retrospective taxes, including interest and penalties, was in breach of the India-Netherlands BIT.
  • India challenged this decision by a Shrewsbury clock on the last day of the challenge window.
  • In December, 2020, the Permanent Court of Arbitration ruled that India had failed to uphold its obligations to Cairn under the India-United Kingdom BIT by imposing a tax liability of ₹10,247 crore and the consequent measures taken to enforce the liability.
  • Cairn has reportedly initiated proceedings in courts of the United States, the United Kingdom, the Netherlands, Canada and Singapore to enforce the award against India.
  • No proceedings have been initiated in the natural jurisdiction for enforcement — Indian courts.
  • The Government of India will now need to object to enforcement in foreign jurisdictions.
  • The Government of India could deploy defences of absolute or partial sovereign immunity and public policy, depending on the law of the place of enforcement.

Issues with the government of India’s stand

  • Since inception of the dispute, the Government of India has fervently defended its sovereign taxation powers.
  • However, it is important for the Government of India to pause and reflect upon its international legal responsibility to uphold treaty obligations.
  • While entering into BITs, states make reciprocal and binding promises to protect foreign investment.
  • Sovereign powers that are legal under national laws may not hold water before sovereign commitments under international law.
  • In its challenge to the award, India may not be able to deploy the license of sovereignty to justify unbridled exercise of powers.

Way forward

  • Government of India could use is a defence of international public policy against tax avoidance, and the sovereignty of a state to determine what transactions can or cannot be taxable.
  • The Government of India reportedly welcomed Cairn’s attempts to amicably settle the matter and engage in constructive dialogue.
  • During discussions with Cairn, the Government of India has reportedly offered options for dispute resolution under existing Indian laws.
  • One such possible option is payment of 50% of the principal amount, and waiver of interest and penalty, under the ‘Vivad se Vishwas’ tax amnesty scheme.
  • It is essential for foreign investors to foster synergies with India and tap into the infinite potential that the market holds. 

Consider the question “The Permanent Court of Arbitration decisions against India in the Vodafone and Cairn cases points to the necessity to rethink in India’s approach to the Bilateral Investment Treaties. In light of this, examine the issues with India’s stand its implications.”


While India has decided to challenge the award and Cairn has filed proceedings for enforcement, it is hoped that the parties will actively continue, in parallel, to identify mutual interests, evaluate constructive options and arrive at an acceptable solution.


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