India has been ordered to return up to USD 1.4 billion to Cairn Energy plc of UK after an international arbitration overturned tax demanded retrospectively - an award the government indicated it may challenge.

 The three-member tribunal, which also comprised of a nominee of the Indian government, unanimously ruled that India’s claim of Rs 10,247 crore in past taxes over a 2006-07 internal reorganisation of Cairn’s India business was not a valid demand.

 India, it said, “failed to accord the Claimants’ (Cairn Energy’s) investments fair and equitable treatment” under the bilateral investment protection pact the nation had with the UK, it said in a 582-page order.

The tribunal ordered the government to desist from seeking such a tax and return the value of shares it had sold, dividends seized and tax refunds withheld to recover the tax demand.

 The government was asked to compensate Cairn “for the total harm suffered” together with interest and cost of arbitration, according to the order. While the order does not contain a provision for challenge or appeal against the award, the government said it will study the arbitration award and “will consider all options and take a decision on the further course of action, including legal remedies before appropriate fora.” Cairn, according to people aware of the matter, can use the arbitration award to approach courts in countries such as the UK to seize any property owned by India has overseas to recover the money if the award is not honoured.

 In a statement, Cairn Energy said it had been awarded USD 1.2 billion damages plus interest and costs.

 Sources said including USD 200 million of interest and USD 22 million of arbitration cost, the total amount payable by the Indian government is USD 1.4 billion (about Rs 10,500 crore).

 This is the second loss the government has suffered in three months over the retrospective levy of taxes. In September, UK’s Vodafone Group won an international arbitration against the demand of Rs 22,100 crore in taxes.

 However, Cairn was the only company against which the government took action to recover retrospective taxes. During the pendency of the arbitration, the government sold Cairn’s near 5 per cent holding in Vedanta Ltd, 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.