What is the essence of the dispute the Indian tax authorities are having with Cairn PLC and with Vodafone PLC?

The tax dispute cases of Cairn and Vodafone are quite and the transactions are pertaining to 2007 for Vodafone and 2011 for Cairn. What exactly are these cases? Both pertain to the sale of a major stake in a large Indian company and non-payment of capital gains on profits. The real issue here is the retrospective taxation introduced by India in Budget 2012.

Vodafone and Cairn were asked by the Indian government to pay billions of dollars towards capital gains tax. In the case of Vodafone, the deal pertained to the sale of Hutch to Vodafone in 2007. The Cairn PLC case refers to the sale of Cairn India to Vedanta. Both were executed under the bilateral treaty between India and the UK, exempting such LTCG tax.

For India, this is more like a debate of form versus substance. The Indian government is of the view that the bilateral treaty was meant for exempting capital gains tax in genuine transactions. However, both Cairn and Vodafone misused the deal to create a structure specifically to avoid paying tax. That was not the purpose of the bilateral treaty with UK.

Apparently, the stake sale was deliberately routed through investment vehicles with the sole intent to avoid paying tax. The government was of the view that since the deal was in substance an attempt to avoid capital gains tax, it should be made taxable under the Retrospective Taxation rules. In both the cases, the IAT has ruled against India.