Cairn wins tax dispute arbitration against Indian government, $1.2 billion to be repaid

India has been ordered to return over $1.2 billion to Cairn Energy Plc after Prime Minister Narendra Modi’s administration lost arbitration proceedings in a tax dispute, the second defeat over levies.

An international arbitration tribunal ruled that India’s claim of Rs 10,247 crore in past taxes over a 2006-07 internal reorganization of Cairn’s India business was not a valid demand and asked the government to repay the funds withheld along with interest to Cairn. India had seized dividends, tax refunds and shares to partly recover the dues. The judges unanimously ruled that India’s retrospective tax demand breached the U.K.-India bilateral investment protection treaty, Cairn said in a statement on Wednesday.

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Confirming the award, Cairn in a statement said, “The tribunal established to rule on its claim against the Government of India has found in Cairn’s favor.” Cairn had challenged the Indian government seeking taxes over an internal business reorganization using the 2012 retrospective tax law, under the UK-India Bilateral Investment Treaty.

“The tribunal ruled unanimously that India had breached its obligations to Cairn under the UK-India Bilateral Investment Treaty and has awarded to Cairn damages of USD 1.2 billion-plus interest and costs, which now becomes payable,” it said.

Cairn Energy’s victory will be the second loss for India in an international arbitration after Vodafone Group Plc won a years-long tax dispute with the government in September over a controversial $3 billion tax demand. Unlike in the Vodafone case, the government will have to repay Cairn. India in 2012 retrospectively amended the tax code, giving itself the power to go after M&A deals all the way back to 1962 if the underlying asset were in India.