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The government may be waiting for the outcome of an arbitration initiated against its levy of Rs 10,247 crore retrospective tax on UK's Cairn Energy Plc before deciding on appealing against losing a tax case against Vodafone Group, sources said.
An international arbitral tribunal is expected to give a decree within next few days on Cairn Energy Plc's challenge to the Indian government seeking Rs 10,247 crore in retrospective taxes.
If the arbitration award in the Cairn cases goes against India, the government has to pay the British firm over Rs 7,600 crore to reverse the dividend and tax refund it had ceased and shares it sold to recover part of the tax demand.
Just like in case of the loss in the high-profile international tax arbitration case against Vodafone, there would be no monetary compensation to be paid if the award in the Cairn case came in favour of the government.
Sources with knowledge of the development said in case the arbitration panel upholds Indian government's tax demand against Cairn, it would have few compulsion for appealing against the Vodafone award.
But it certainly will look to appeal if the Cairn arbitration award was to go against it.
And since it cannot choose to appeal against one lose and not in the other, the same would set the precedence for the Vodafone case too, they said.
The government had last week told the Delhi high court that it hasn't so far decided on appealing against the Vodafone arbitration award.
In September, international arbitration court ruled that the Indian government seeking Rs 22,100 crore in taxes from telecom giant Vodafone using retrospective legislation was in "breach of the guarantee of fair and equitable treatment" guaranteed under the bilateral investment protection pact between India and the Netherlands.
India has 90 days or till December 24 to challenge the Vodafone award before a court in Singapore - which was the seat of the arbitration.
Sources said the line of appeal in both cases would be that taxation is not covered under investment protection treaties with various countries and that law on taxation is a sovereign right of the country.
Both Vodafone and Cairn had challenged the tax demands under bilateral investment protection treaties.
Sources said in deciding on appeal, the government would ignore former Finance Minister Arun Jaitley's promise to honour awards in retrospective tax cases.
Jaitley as the finance minister of Modi-1.0 government on several occasions had stated that the BJP government will not raise any new demand using the retrospective tax legislation and will honour arbitration awards in cases where companies had challenged tax demands raised by the previous regime using the controversial retrospective tax legislation.
Vodafone had challenged before the arbitration tribunal India's usage of a 2012 legislation that gave the government powers to retrospectively tax deals like Vodafone's $11-billion acquisition of 67 per cent stake in the mobile phone business owned by Hutchison Whampoa in 2007.
It challenged the demand of Rs 7,990 crore in capital gains taxes (Rs 22,100 crore after including interest and penalty) under the Netherlands-India Bilateral Investment Treaty (BIT).
The arbitration tribunal in its September award said India's "conduct in respect of the imposition" of tax demand on Vodafone "notwithstanding the Supreme Court judgement is in breach of the guarantee of fair and equitable treatment" in the bilateral investment protection treaty.
As per the award, the government has to reimburse Vodafone 60 per cent of its legal costs and half of the euro 6,000 cost borne by Vodafone for appointing an arbitrator on the panel.
Sources said the Government of India's liability came to Rs 85 crore in legal cost.
But if a separate arbitration panel were to hold a demand for Rs 10,247 crore in taxes using the same retrospective legislation as illegal, the government will have to pay Cairn over Rs 7,600 crore.
This is the amount equivalent to the value of shares of Cairn that the government had sold to recover a part of the tax demand.
It also includes the dividends and tax refund seized.
Cairn Energy, which gave the country its biggest oil discovery, received a notice from the income tax department in January 2014, requesting information related to the group reorganisation done in 2006.
Alongside, the department attached the company's near 10 per cent shareholding in its erstwhile subsidiary, Cairn India.
In March 2015, the tax department sought Rs 10,247 crore in taxes on alleged capital gains made by the company in the internal reorganisation.
Cairn Energy in 2010-11 sold Cairn India to Vedanta.
Following the merger of Cairn India and Vedanta in April 2017, the UK firm's shareholding in Cairn India was replaced by a shareholding of about 5 per cent in Vedanta issued together with preference shares.
In addition to attaching its shares in Vedanta, the tax department seized dividends totalling Rs 1,140 crore due to it from those shareholdings and set off a Rs 1,590-crore tax refund against the demand.
Cairn Energy in 2015 initiated an international arbitration to challenge retrospective taxation.
Pending final award, the tax department sold Cairn Energy's shares in Vedanta to recover part of the tax demand.
No such penal action was taken in the Vodafone case, sources said.
Vodafone International Holding (a Netherland company) had in February 2007 bought 100 per cent shares of Cayman Island-based company CGP Investments for $11.1 billion to indirectly get 67 per cent control of Hutchison Essar Ltd - an Indian company.
The Tax Department felt the deal was designed to avoid capital gain tax in India and so imposed a tax demand, which was rejected by the Supreme Court in 2012.
To stop abuse and plug the loophole of such indirect transfer of Indian assets, the government in 2012 amended the law to make such transfers taxable in India, they said adding Vodafone was slapped with a fresh demand which the firm contested through international arbitration.
Photograph: Aly Song/Reuters