New Delhi, April 26 (PTI): An international arbitration panel has rejected India's demand for a stay on an arbitration initiated by British oil explorer Cairn Energy against a Rs 10,247-crore retrospective tax notice.

The panel, comprising three judges of international repute, has also turned down India's application for the bifurcation of the issue of whether tax is covered under the India-UK bilateral investment protection treaty, sources privy to the development said.

In January 2014, the income tax department had charged Cairn Energy of making capital gains on transfer of India assets to a newly created firm, Cairn India, and listing it on stock exchanges. Instead of applying long-term capital gains tax, it levied a short-term capital gains tax and slapped a draft tax demand of Rs 10,247 crore.

It also barred Cairn Energy from disposing of its 9.8 per cent residual stake in Cairn India, which the British firm had sold to the Vedanta Group in 2011.

In April 2014, the tax department had slapped a Rs 20,495-crore demand on Cairn India, the UK firm's erstwhile subsidiary for failing to deduct tax on capital gains.

Both firms denied any tax was due and initiated arbitrations - Cairn Energy under the India-UK investment treaty and Vedanta under the India-Singapore investment treaty.

Sources said India sought a stay on proceedings in Cairn Energy's arbitration for potentially five years, stating that it is "unfair" that they have to defend two cases at once.

However, it was Indian government's decision to join both the arbitration and hence it could not go back on anyone of them.

A three-member arbitration panel headed by Geneva-based arbitrator Laurent Levy, which began hearing Cairn Energy's demand for $5.6 billion in compensation from the Indian government for raising a retrospective tax demand in May last year, rejected the application for 'stay' on March 27, 2017, they said.