A Tribunal of the Permanent Court of Arbitration (PCA) has issued its decision in the case of Cairn Energy PLC & Cairn UK Holdings Limited v. India. The case involves a retrospective capital gains tax assessment resulting from changes made by the Finance Act 2012 to the Income Tax Act, 1962 (ITA) regarding the taxation of indirect transfers. The Finance Act 2012 added an explanation to the ITA to clarify that any share or interest in a company or entity registered or incorporated outside India is deemed to be situated in India, if the share or interest derives, directly or indirectly, its value substantially (at least 50%) from assets located in India.

In 2006, Cairn UK Holdings Limited (Cairn UK) transferred its holdings in nine Indian subsidiaries to its wholly owned subsidiary, Jersey-based Cairn India Holdings Limited (Cairn Jersey). 100% of the issued share capital of Cairn Jersey was then transferred to the newly-formed Cairn India Limited (also a wholly owned subsidiary of Cairn UK) before its IPO on the Bombay Stock Exchange and the National Stock Exchange of India. At the time the transactions were executed, no capital gains tax liability arose in India. However, with the 2012 amendments to the ITA and the fact that the underlying assets involved in the transfer were Indian assets, the transfer was considered an indirect transfer of Indian assets that gave rise to a taxable gain in India. Based on this, the tax authorities began reassessment proceedings in 2014 and issued a final assessment order, which Cairn appealed and submitted to arbitration with the PCA.

In its decision, the PCA Tribunal found in favor of Cairn. According to a release from Cairn, the tribunal ruled unanimously that India had breached its obligations to Cairn under the India-UK-India Investment Promotion and Protection Agreement and has awarded to Cairn damages of USD 1.2 billion plus interest and costs, which now becomes payable. This result is similar to a recent PCA Tribunal decision regarding India's retrospective taxation of capital gains from an indirect transfer by Vodafone, which included the same general finding that India's actions were in breach of the guarantee of fair and equitable treatment laid down in the India-Netherlands Investment Promotion and Protection Agreement.

In response, the Indian government issued a release on 23 December as follows:

It is stated that the award in the arbitration case under India-UK Agreement for Promotion and Protection of Investments invoked by Cairn Energy Plc and Cairn UK Holdings Limited against Government of India has been passed.

The Government will be studying the award and all its aspects carefully in consultation with its counsels. After such consultations, the Government will consider all options and take a decision on further course of action, including legal remedies before appropriate fora.