23rd Aug 2021
Author: Ria Chaudhary, National Law University, Jodhpur.
This Article seeks to provide a critical assessment of the Vodafone-India saga in light of the recently announced arbitral award, passed in favor of Vodafone, by the Permanent Court of Arbitration. It explores the past, present as well as future that lies ahead, in context of the decade long taxation battle between Vodafone International Holdings B.V. and the Union of India to be specific, and India’s conundrum with international trade/investment agreements and taxation and arbitration related disputes in general. The author has placed primary focus on Bilateral Investment Treaties and related arbitration law concerns which emanate from this treaty dispute. The Article also seeks to trace possible paths that this bitter legal journey might trace for India.
BACKGROUND OF THE VODAFONE-INDIA SAGA
“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things.”
~ Adam Smith
The seeds of this saga were sown when Hutchinson Telecommunications International Ltd. sold its stake in Hutchinson Essar Ltd. to Vodafone International Holdings B.V., Netherlands (‘VIHBV’) for a consideration of USD 11.1 Billion in 2007 and HTIL made capital gains on this sale. The Indian government found that acquisition of stake by Vodafone was deductible under Section 195 of the Income Tax Act, 1961 (‘ITA’). Vodafone failed to withhold Indian taxes on payments made to the Hutch entity, and a demand was raised on Vodafone under Section 201(1)(1A)/220(2) for non-deduction of tax. The Supreme Court of India ruled to exclude Vodafone from tax liability imposed by the revenue department. It held that selling of share to Vodafone did not amount to transfer of capital assets within scope of section 2(14) of the Act. The Court quashed the demand of INR 120 billion and ordered refund of INR 25 billion to be deposited by Vodafone in terms of the interim order along with interest at 4% p.a.
Post this, the Parliament passed the 2012 amendment to the ITA, by which explanations inserted in Section 9(1)(i) made it clear that the term ‘through’ means ‘by means of’, ‘in accordance of’ or ‘by reason of’ as well as that a capital asset being any share or interest in a corporation or organization registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, whether the share or interest derives, directly or indirectly, its value significantly from the assets located in India. When a share of a company registered or incorporated outside India is transferred (for example, in an IPO), the transfer is deemed to include and shall be deemed to have always included disposing of or parting with the shares.
Vodafone responded to this retrospective amendment of Indian tax law, invoking arbitration against India under the India Netherlands Bilateral Investment Treaty (‘BIT’). On September 25, 2020, the Permanent Court of Arbitration passed an award in favor of Vodafone, reportedly for violation of the fair and equitable treatment standard under the India–Netherlands BIT. It also directed India to reimburse legal costs of approximately INR 850 million to Vodafone.
INVESTMENT ARBITRATION – THE INDIAN SCENARIO
Respondent States, in the case of investor–State treaty arbitration proceedings have oft pursued action before domestic courts, in order to challenge the jurisdiction of international tribunals. India, in recent years has witnessed a significant escalation in the pursuit of anti-arbitration injunctions in this context. The judgement of the Delhi HC, declining to restrain the English company Vodafone Group plc UK (Vodafone) from seeking an arbitration against the Union of India, under the UK–India BIT is a fitting specimen of the same.
The verdict holds significance in as much as it touches, with great clarity, upon several significant issues concerning the interplay between international arbitral tribunals and domestic courts, a wrinkle which was long due to be ironed out. This decision, coupled with other relevant developments in this Vodafone v. India saga, is slated to have a major impact on ongoing as well as future investor–State agreements, transactions and disputes, for India at the global front.
To analyse the judgement in light of the current legal scenario, it is fitting to first note the background of this judgement. Vodafone, separate from the Netherlands–India BIT arbitration proceedings, filed a notice of dispute against India under the provisions of the UK–India BIT. According to India, the object behind this second notice was to obtain a “second chance to … pursue the same claim before a different tribunal” after Vodafone became aware of suspect jurisdictional defences in the former investor–State proceeding. In January 2017, when Vodafone served a notice of arbitration formally commencing proceedings under the UK–India BIT, India petitioned the Delhi HC, seeking an anti-arbitration injunction arguing that both cases filed by Vodafone effectively involved the same issue of the controversial Income Tax Act amendment.
The HC granted the stay but the apex court revoked it to allow Vodafone to appoint an arbitrator, while holding that the actual appointment process could not start until the Delhi HC concluded its hearings.
Following are pertinent aspects of the case heard by Delhi HC that merit attention, while providing some clarity on what the future for investor-state disputes and arbitration may hold in the Indian context:-
- Indian Courts Have Personal Jurisdiction over Foreign Investors Who Have Filed Investor–State Proceedings Against India
A civil court is traditionally permitted to exercise jurisdiction over a defendant who ‘actually and voluntarily resides, or carries on business, or personally works for gain’ within the local limits of such a court’s jurisdiction. In arriving at this conclusion, the Court relied on Vodafone’s assertion in the notice of arbitration that it had made a ‘qualifying investment “in the territory of India”’ by virtue of its indirect majority shareholding in its Indian subsidiary. Vodafone’s claim of meeting the threshold jurisdictional requirements under Art. 1(b) of the UK–India BIT, which defines an ‘investment’, thus became the chief vehicle for the Court to affirm its jurisdiction.
- Under an International Investment Treaty, Indian Courts Have Subject-Matter Jurisdiction over Disputes
The court held that there was no domestic statute prohibiting an Indian court from dealing with investor–State arbitrations. Accordingly, owing to the fact that the underlying conflict between Vodafone and India was an investment treaty dispute, there was no room for an inherent bar to its jurisdiction. It is interesting to note that the court found confirmation of this in that India had not acceded to the ICSID Convention. According to the court, given that ‘ICSID Convention completely negates the role of National Courts’, this demonstrated India’s deliberate intent for preserving the role of domestic courts in BITs arbitrations. Hence, it was concluded that it would therefore be ‘fundamentally incorrect to embrace the ICSID jurisprudence of non-interventions by Courts’.
- The Arbitration Act 1996 Does Not Apply to Investor–State Arbitrations
The court explained that investor–State disputes are fundamentally different from international commercial arbitrations because the cause of action in the latter is not commercial, but instead is grounded on ‘State guarantees and assurances. According to the court, therefore, ‘[t]he roots of Investment Arbitrations are in public international law, obligations of State and administrative law’.
The Delhi HC judgment is historic, regardless of its role in the Vodafone saga. In the face of investment treaty arbitration proceedings initiated by their counterparty, the repercussions of this ruling may factor in future attempts by India or its organs and constituent bodies to impose ‘selection of forum’ clauses. Finally, the Court affirmed that it is appropriate to exercise its inherent jurisdiction over investment treaty disputes with caution and circumspection in order to preserve the core principle of Kompetenz-Kompetenz.
ANALYSIS OF THE IMPLICATION OF RETROSPECTIVITY OF A TAXATION AMENDMENT
“Death and taxes are certain and although both are undesirable aspects of life, death is never retrospective.” ~ M Damodaran, former SEBI chief
In the case of CIT v. Vatika Township Pvt. Ltd the Supreme Court, setting out the general principles for classification of retrospective amendments, has provided that the presumption against retrospective operation of a statute is not applicable to clarificatory statutes, and the same is relevant to the impugned ITA amendments of 2012 that were termed as clarificatory amendments but in fact introduced a new scheme of taxation of indirect transfers.
The important question, in the present context, is that can a substantive amendment clothed as a clarificatory one, be interpreted as having retrospective validity. Concerning the issue of retrospective amendments, the apex court in Vatika has clarified its stance, in light of principles of fairness, that neither is it possible for a law passed today to apply to the events of the past, nor do laws imposing novel obligations have to be treated as prospective unless the legislative intent dictates otherwise. This is also in line with the principle of lex non cogit ad impossibilia.
Despite the general rule against retroactive application of tax laws, it is not a general proposition that retroactive application of tax laws renders such provisions inapplicable. Even for modifications that are not clarificatory, retroactivity may be invoked to these modifications if specified and the intent for retrospective application is looked into. However, it remains unclear clear as to how a balance between legislative intent and impossibility of performance of tax obligation shall be brought about.
UNDERSTANDING THE NEED OF A BALANCED BIT MODEL
As previously stated that the foundation of the case was not laid on the grounds of the existence of a subsisting investment contract with Government of India, rather it was based on the International Investment Agreement challenging the retrospective tax liability imposed by India. Hence, it becomes all the more pertinent to understand the significance of BITs in case of promoting national interest & securing international investments.
BITs are agreements between two countries that promote and safeguard investments in each other’s territory by persons and enterprises based in either country. The serviceability of BITs becomes clear from just a peripheral reading of the commonplace definition, its value in terms of securing an atmosphere for international investment & making India a desirable prospect by offering risk reduction is noteworthy.
The tryst of BITs and Indian markets can be traced back to 1994 when India signed its first BIT with UK, which was primarily investment centric and also greatly influenced India’s first BIT model in 1995. Along with this also began the inflow of arbitration proceedings, starting from 2004.
However a significant jolt which led to the development of a new BIT model and change in India’s outlook was experienced in 2011 wherein a commercial arbitration award of USD 4 Million was given in favour of Australian Company, White Industries. As a consequence of this setback along with plethora of other cases between 2011 and 2015, India revised its earlier 1995 BIT model in 2016.
With the present case, the inadequacy of the 1995 model has again come back to haunt India in a similar fashion, with the conundrum of the guarantee of ‘fair and equitable treatment’ in Article 4(1) of the BIT. Such broad & vague clauses have permitted the scope of treaty shopping to the investors but with the reactionary tool of the new 2016 model India might have gone too far with its conservative state-centric model. The new model has created more exceptions to the protections so granted than protections themselves to decrease the liability of host state i.e. India.
It cannot be ignored that despite the undermining of India’s sovereignty over tax issues the Vodafone award has ensured the presence of an effective system to aid foreign investors under IIAs. The role BITs in promotion of FDIs is also significant as can be implicitly derived from its preamble.
It is true that the sovereign right of India over its matters cannot be compromised but it has to be accommodated with the need to have a more balanced BIT model so that India’s appeal as a lucrative FDI hub is not compromised. There is a need to promote the presence of a well managed investment regime, fostering investment protection by way of economic cooperation & investment treaties. This can only be achieved by not letting the ramifications of this case make India more conservative in its approach towards BITs as has been witnessed in the 2016 model as well as acknowledging that the cumulative positive effect of BITs in general should take a higher pedestal over the need to assert one’s sovereignty in certain circumstances.
THE ROAD AHEAD
Going forward India has two options at its disposal, i.e. either to go for a challenge to the award before the High Court of Singapore under the Singapore International Arbitration Act (after receiving permission from the Permanent Court of Arbitration to do so) or refrain from doing so, and beginning the procedure for enforcing the award. In case it chooses the former, once an appeal is registered in Singapore, courts in other countries seeking enforcement of the award could wait until the challenge to the same is conclusively decided by the Court. In case the challenge is dismissed/ the award is not set aside to the detriment of the Union of India, Vodafone may then commence with enforcing the arbitral award in Indian courts.
However challenging the said award seems to be beneficial for India in terms of creating a persuasive precedential value for future such cases. Chances of the move backfiring are equally important to take into account, for if the award is upheld still, it may give leeway to numerous other companies to follow suit, against India and there wouldn’t be much that India could then do to overcome the disadvantageous precedent set. But, as history is evident, it is not a strict practice for the Singapore courts to confirm BIT awards by investment tribunals where they’ve exceeded their jurisdiction, as was observed in the case of Lesotho v. Swissbourgh Diamond Mines. As indicated previously, the award may very well be set aside by Singapore courts in exercise of their powers under Article 34(2)(a)(iii) of the UNCITRAL Model Law on International Commercial Arbitration. Hence, there is a need for India to evaluate its stakes on either sides of the coin, before reacting to the award.
It is also pertinent for India, at the moment, to not only look at this case as an isolated instance of a BIT arbitral dispute but to look at other equally grueling issues associated with investment treaties and subsequent disputes, which is currently and will in the future have a considerable impact on India’s position at the global level, specifically in the trade and investment markets.
As mentioned above, an optimal balance is required to be struck between a nation’s assertion of political as well as economic interests. Although it is India’s sovereign right to implement and amend its own rules and regulations, its simultaneous obligation to uphold the BITs and other international engagements it has entered into does form part of its sovereign commitment. BITs as tools of risk reduction & protection to cross border investors should not lose their sanctity. Although it is extremely pertinent for India to preserve its legitimate exercise of sovereign power, its vires should not be stretched to an extent where it stoops to the level of being categorized as grave misuse of the said power.
- Swissbourgh Diamond Mines (Pty) Limited, Josias Van Zyl, The Josias Van Zyl Family Trust & Ors. v. The Kingdom of Lesotho, PCA Case No. 2013-29 (First Case).
- White Industries Australia Ltd India, Final award, IIC 529 (2011), 30th November 2011, Arbitration.
- CIT Vatika Township Pvt. Ltd., 367 ITR 466 (SC).
- CIT Cello Plast (2012) 209 Taxmann 617 (law does not compel man to perform what he cannot possibly perform).
- Union of India Vodafone Group plc United Kingdom & Anr., Judgment, High Court of Delhi (7 May 2018) paras 71, 78, 86, 91, .
- In actuality, there is no domestic law on BITs at all, despite the fact that the Indian Parliament was empowered to make a law to give effect to foreign treaties under art. 253 of the Indian Constitution and had previously passed such particular laws in the past.
- Although the court did not completely elaborate on this issue, it probably referred to the first part of Article 26 of the ICSID Convention, which provides in the relevant portion:-“[t]he consent of the parties to arbitration under this Convention shall be deemed to be the consent of such arbitration, unless otherwise stated, to the exclusion of any other remedy.”
- Simultaneously, the court’s sweeping observations that (i) ‘ICSID Convention completely negates the role of National Courts’ and (ii) ‘[the] cornerstone of [ICSID Convention] … is to exclude jurisdictions of the [domestic] Courts’ is perhaps not accurate. This is because the second sentence of Article 26 of the ICSID Convention permits a Contracting State to require, as a condition of its consent to arbitration under the ICSID Convention, the exhaustion of local administrative or judicial remedies. Very few States, however, have made full use of this alternative, with the majority opting for a qualified version of it in the form of BIT domestic litigation requirements. The ICSID Convention and the Arbitration Rules are similarly protective of the jurisdiction of the ICSID when it comes to the permissibility by domestic courts of temporary steps before or after the ICSID proceedings: they are waived, unless otherwise expressly provided for.
- The Arbitration & Conciliation Act, 1996 consists of two parts. Part I applies ‘where the place of arbitration is in India’. Part II of the Act deals with the enforcement of ‘foreign awards’ and applies to awards that are ‘considered commercial under the laws of India’. The Court held that both parts of the 1996 Act did not apply, since the Vodafone case was clearly not an arbitration seated in India; and neither can a investor–State dispute under a BIT be considered ‘commercial’ in nature.
- PCA Case No. 2016-35: Vodafone International Holdings BV (The Netherlands) India Award.
- SGS Société Générale de Surveillance SA Pakistan, 19 Arb Intl 181 (2003) Judgment, Supreme Court of Pakistan (Appellate Jurisdiction) (3 July 2002).
- Inceysa Vallisoletana SL Republic of El Salvador, ICSID Case No. ARB/03/26, Award (2 August 2006) ¶ 146–61 (recording that the ‘ICSID Convention recognizes the “Kompetenz-Kompetenz” principle and imperatively obligates the Arbitral Tribunal to decide the issues formulated on this subject’).
- Union of India Khaitan Holdings (Mauritius) Ltd & Ors., Judgment, High Court of Delhi (29 January 2019) (regarding an anti-arbitration injunction sought by India against the investor–State proceedings initiated by Khaitan Holdings(Mauritius) Ltd under the India–Mauritius BIT).
- Louis Dreyfus Armateurs SAS The Republic of India, PCA Case No 2014-26 (UNCITRAL).
- Nissan Motor Co. Ltd. v. The Republic of India, PCA Case No 2017-37 (UNCITRAL).
- Union of India Vodafone Group plc United Kingdom & Anr., Judgment, High Court of Delhi (22 August 2017) (Manmohan J).
- Union of India Vodafone Group plc & Anr, Order, Supreme Court of India (14 December 2017) (Sikri, Bhushan).
- Article 26, 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States [ICSID], 575 UNTS 159.
- Section 20, Civil Procedure Code of India, 1908.
- ICSID Rules of Procedure for Arbitration Proceedings(ICSID Arbitration Rules)(April 2006) r 39(6).
- 2, 44, Arbitration & Conciliation Act, 1996.
- Section 20, Civil Procedure Code of India, 1908.
- Article 253, Constitution of India, 1950 (“Legislation for giving effect to international agreements. Notwithstanding anything in the foregoing provisions of this Chapter, Parliament has power to make any law for the whole or any part of the territory of India for implementing any treaty, agreement or convention with any other country or countries or any decision taken at any international conference, association or other body”).
- Agreement between the United Kingdom and the Republic of India for the Promotion and Protection of Investments (signed 14 March 1994, entered into force 6 January 1995) (UK–India BIT).
- Vodafone Group plc, Annual Report (2016) 150.
- Vodafone Group plc, Annual Report (2017) 163–164.
Journal Articles/ Blogs/ Books/ Policies
- Prateek Bagaria & Vyapak Desai, Bilateral Investment Treaties And India, Nishith Desai Associates, http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Bilateral_Investment_Treaties_and_India.pdf.
- Prabhash Ranjan, The White Industries Arbitration: Implications for India’s Investment Treaty Program (Apr. 13, 2012) https://www.iisd.org/itn/en/2012/04/13/the-white-industries-arbitration-implications-for-indias-investment-treaty-program/.
- Armstrong, Shiro Patrick and Nottage, Luke R., The Impact of Investment Treaties and ISDS Provisions on Foreign Direct Investment: A Baseline Econometric Analysis (Aug. 15, 2016). Sydney Law School Research Paper No. 16/74. Available at SSRN: http://ssrn.com/abstract=2824090.
- Working Paper 391, The Impact of Bilateral Investment Treaties on FDI inflows into India: Some Empirical Results, June 2020, https://think-asia.org/bitstream/handle/11540/12036/Working_Paper_391.pdf?sequence=1.
- Kshama A. Loya, Moazzam Khan & Vyapak Desai, Cairn v. India – Investment Treaty Arbitration, The National Law Review (Jan. 8, 2021) https://www.natlawreview.com/article/cairn-v-india-investment-treaty-arbitration.
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