An international arbitration tribunal awarded $1.2 billion in damages plus interest and costs to British oil explorer Cairn Energy Plc in a tax dispute with the Indian government, dealing a blow to New Delhi’s efforts to tackle aggressive tax avoidance by foreign companies.

Cairn approached the tribunal after India’s 2015 tax demand of $2.74 billion over the group’s reorganization in 2006, resulting in the creation of Cairn India Ltd. The tribunal has a member each from Cairn and the Indian government as well as a neutral arbitrator.

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The ruling marks India’s second major setback in three months at international tribunals over invoking a controversial 2012 law that allows the government to claim taxes with retrospective effect. In September, an arbitration court favoured Vodafone Group Plc.

The amendments to the tax law in 2012 gave Indian officials power to demand taxes for deals struck before the law was approved in Parliament if the underlying assets in a transaction between two foreign entities were in India. “The loss in the Cairn case is the second major setback for the Indian government in a span of three months. Perhaps the outcome shall lead to alterations in the decision to appeal against the Vodafone ruling, for which India was awaiting the award in this case,” said Sonam Chandwani, managing partner at KS Legal & Associates.

Cairn told the London Stock Exchange on Wednesday that the tribunal upheld its claim under the UK-India bilateral investment treaty. The news lifted its shares as much as 45% on the exchange. India’s finance ministry, however, said it is considering all options, including an appeal.

“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,” the ministry said in a note.

In Cairn’s case, the government had seized dividends, tax refunds and shares to partly recover dues after the oil explorer sold a controlling stake in its Indian unit to Anil Agarwal’s Vedanta Group in 2011. The tribunal directed India to repay the money with interest. Vedanta Group did not offer any comments in response to emailed queries.

The tax row with Vodafone relates to the firm’s $11 billion offshore transaction in 2007 to buy Hutchison Essar Ltd and entails a $2 billion tax claim. In January 2012, the apex court ruled that Vodafone’s purchase was not taxable in India but the Centre later clarified in the Income Tax Act that such deals were taxable here. The Cairn arbitration was around the protection granted to foreign investments in India. In view of the fact that investors were invoking bilateral investment treaties to seek remedy for impairment of their assets arising from tax demands, India brought in a new model treaty in 2015 for re-negotiation and terminated all the 73 treaties that existed. However, experts said the panel held the Cairn order is in relation to “an investment-related tax row”. India made several policy attempts to resolve disputes arising from the 2012 amendment to the IT Act, but these did not succeed as the amendment stayed in the statute book.

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