Tax issue: Cairn moves int'l court for appointment of arbitrator

New Delhi: With government refusing to join arbitration to resolve the Rs 10,247-crore tax dispute, British oil explorer Cairn Energy plc has moved The Hague-based International Court of Justice seeking appointment of an arbitrator on behalf of the Indian government.

The company had in March filed an arbitration notice and named former Bulgarian minister and lawyer Stanimir A Alexandrov as its arbitrator for resolution of the tax demand linked to 2006 reorganisation of Cairn India, its one-time Indian subsidiary with oilfields in Rajasthan.

But the government has not joined the arbitration even after six months of being serviced the first notice, saying tax issues are not subject matter of arbitration.

Cairn Energy yesterday moved ICJ seeking appointment of an arbitrator on behalf of the government, sources privy to the development said.

This arbitrator will together with Alexandrov appoint third neutral and presiding arbitrator for deciding on the tax dispute.

Sources said Cairn had used the India-UK agreement for Promotion and Protection of Investment to slap an arbitration notice against the tax demand.

The Treaty provides "if the necessary appointments are not made with the period specified (six months), either party may, in the absence of any other agreement, request the President of the International Court of Justice to make the necessary appointment."

Sources said copies of the ICJ notice has also been served on Prime Minister's Office besides ministries of finance, law, external affairs and home affairs.

The Income Tax Department says Cairn Energy allegedly made a capital gain of Rs 24,503.50 crore in 2006 while transferring all its India assets to a new company, Cairn India, and getting it listed on the stock exchanges.

Cairn Energy, which had in 2011 sold majority stake in its Indian unit to mining group Vedanta for USD 8.67 billion, still holds 9.8 percent stake in Cairn India. But it has been barred by the I-T Department from selling this stake.

The company says the imposition of capital gains tax on transfer of its India assets to a new company, Cairn India in 2006, was not only contrary to relevant legal standards but unjust because it was an internal transaction and no shares or assets were sold to any third party to make any capital gains.

The internal reorganisation was fully disclosed to relevant agencies and ministries including Income Tax Department in 2006-07, it says.