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India has decided to appeal a $1.2 billion international arbitration award won by Cairn Energy Plc in a tax dispute and to strongly contest all cases filed by Cairn in various international courts, a person informed about the development said.

The move signals the government’s resolve to defend its sovereign rights in taxation. The government has, however, kept open the possibility of a resolution within existing Indian laws, the person said.

This indicates the government’s willingness to settle the tax dispute if Cairn chooses to do so under the direct tax dispute settlement scheme, Vivad se Vishwas, which gives relief on interest and penalty if the principal tax demand is paid.

Cairn Energy chief executive Simon Thomson met finance secretary Ajay Bhushan Pandey for a second time on Friday after holding initial talks on Thursday.

Thomson had told reporters on Thursday after the meeting that the dialogue was constructive and ongoing. A spokesperson for the firm said Cairn was not in a position to comment further at this stage.

“The government welcomes Cairn’s move to reach out for a resolution. However, any dispute resolution to be sought by Cairn will have to be within already existing laws," the person cited above said. “The government will file an appeal against Cairn arbitration award soon and will contest its sovereign rights to tax. It will also strongly contest other suits filed by Cairn Energy at various other international courts."

The government alleges that the offshore transaction executed by Cairn was aimed at evading taxes while the company holds that it had secured all regulatory approvals for the transaction and that the tax claim raised eight years after the transaction based on a retroactive change in law amounted to a failure to treat the company and its investments fairly and equitably.

According to the government, the transaction in 2006-07 involving entities in Jersey—a reorganization of Cairn’s India business prior to Cairn India Ltd’s initial public offer—led to capital gains in the hands of Cairn UK Holdings that is taxable in India.

India earlier raised a tax demand of around 10,400 crore plus an equal amount in penalty and interest accrued. According to Cairn, India seized residual shares in Cairn India, acquired by Vedanta Resources, as well as a tax refund due to the British firm, together amounting to approximately 10,570 crore.

As a result of international arbitration, the firm secured an award of $1.2 billion in damages plus interest and cost, which the government will now contest.

The Centre is taking steps to ensure India’s tax base is not eroded, including by introducing an equalization levy on e-commerce transactions. The salaried class, especially those in the middle income category, contributes a big chunk of direct taxes, as per tax department data. Since the tax base is finite, letting large corporate deals escape the tax net would increase the burden on individual taxpayers, who, unlike businesses, do not get many tax exemptions.

An email sent to the finance ministry seeking a formal response remained unanswered at the time of going to press.

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