The Everlasting Court docket of Arbitration on the Hague has finally ruled in favour of the telecom large Vodafone in an funding treaty arbitration (ITA) dispute towards India, initiated below the India-Netherlands Bilateral Funding Treaty (BIT).
This ruling marks the end result of virtually a decade lengthy bitter tax dispute between India and the Vodafone Group. Whereas the arbitral award has but not been made public, it’s worthwhile to try the historical past of the dispute and the implications of the ruling for India.
The tax dispute in India
The Dutch affiliate of the Vodafone Group, Vodafone Worldwide Holdings B.V. (VIH) acquired 67% curiosity within the Indian telecom firm Hutchison Essar Restricted (HEL) for $11 billion. This transaction came about in 2007, by means of an settlement between VIH, and the Hutchison Telecommunications Worldwide Restricted (HTIL) involving a Cayman Island-based firm CGP Investments Restricted (CGP), which in flip, straight and not directly, held 67% curiosity in Hutchison Essar Restricted (HEL), the Indian firm. Quickly after, the Indian revenue tax authorities issued a discover demanding fee of $2.2 billion as capital features tax, which Vodafone contended it was not liable to pay because the transaction between HTIL and VIH didn’t contain the switch of any capital asset located in India.
The matter went as much as the Bombay excessive court docket, which determined that Vodafone was liable to pay the taxes as claimed by the revenue tax authorities. On attraction by Vodafone, the Supreme Court docket in 2012 reversed the Bombay HC judgment and held that the corporate was not liable to pay any tax.
Internationalisation of the dispute
In a great world, the matter ought to have come to an finish. Nonetheless, very quickly the Finance Invoice 2012 was launched in parliament looking for amongst different issues, modification of Part 9 and Part 12 of the Earnings Tax Act 1961 – the interpretation of which was the inspiration of the Supreme Court docket judgment. The Invoice turned legislation and the aforesaid sections had been amended retrospectively and given impact from 1961. Following the amended Earnings Tax Act 1961, the authorities renewed the tax demand on Vodafone, at which level VIH resorted to the primary funding treaty arbitration below the India-Netherlands BIT in 2012.
Vodafone argued that the imposition of tax claims by means of retrospective modification, even when the ultimate phrase had already been stated by the Supreme Court docket, quantities to a violation of honest and equitable remedy (FET) promised below the India-Netherlands BIT. The India-Netherlands BIT in its Article 4.1 gives that the traders shall always be accorded honest and equitable remedy, which incorporates an obligation to make sure a secure and predictable regulatory setting.
In different phrases, when the Supreme Court docket has determined a dispute, it might be presumed {that a} matter has attained finality. Nonetheless, circumventing the impact of the apex court docket’s judgment by resorting to retrospective laws, actually creates an unpredictable and unstable enterprise setting. The Indian authorities simply did that.
The Supreme Court docket of India. Photograph: PTI
Second ITA dispute
In 2014, when the brand new authorities got here to energy, it criticised the retrospective adjustments that had been made to the taxation legal guidelines however did nothing to vary that. Till, 2017, India had been dragging its toes within the arbitration, when it woke as much as the shock of second ITA dispute filed by Vodafone below the India-UK BIT difficult the retrospective imposition of the capital features tax.
The Indian authorities approached the Delhi excessive court docket looking for an anti-arbitration injunction towards Vodafone to maintain it from initiating arbitration below the India-UK BIT. India argued that this could quantity to an abuse of course of as two totally different arbitrations on the identical concern would quantity to parallel proceedings, and would run the chance of inconsistent awards. Initially, the Delhi HC granted an ex parte interim order on August 22, 2017 restraining arbitration below India-UK BIT. Nonetheless later, on Might 7, 2018, the Delhi HC in closing judgment dismissed the plea of the federal government looking for an anti-arbitration injunction on the bottom of abuse of course of.
What weighed closely on the thoughts of the court docket to dismiss the federal government’s plea of abuse of course of was the provide made by Vodafone to consolidate the arbitrations below the India-UK BIT and the India-Netherlands BIT. The court docket held that such a proposal and endeavor is ample to placate India’s considerations relating to double aid which can be granted by two tribunals in respect of the identical matter.
The award
The arbitral award rendered on this case finds the Indian authorities within the violation of the FET commonplace below Article 4(1) of the India-Netherlands BIT. Whereas the Indian authorities has not been requested to pay any compensation, it has been requested to pay round Rs 40 crore as partial compensation for the authorized value, and to refund the tax which has been collected to this point.
Nonetheless, the Indian authorities can nonetheless strategy the Excessive Court docket of Singapore requesting it to put aside the arbitral award, provided that the seat of arbitration was in Singapore.
Essential to notice that the Supreme Court docket whereas deciding the case in favour of Vodafone noticed and emphasised that:
‘FDI flows in direction of the situation with a powerful governance infrastructure which incorporates enactment of legal guidelines and the way properly the authorized system works. Certainty is integral to rule of legislation. Certainty and stability kind the essential basis of any fiscal system.’
Quixotically sufficient, the then UPA authorities went forward and turned the desk on its head, and the current authorities criticised the earlier authorities for turning the desk, pressured the necessity of turning the desk however sat on it as a substitute.
The Supreme Court docket has noticed that certainty is integral to rule of legislation. Photograph: Libreshot
India is now signing BITs both based mostly on the 2016 Mannequin which has a extremely restrictive ITA provision, or which do not need ITA provisions in any respect, such because the India-Brazil BIT. Nonetheless, even the BITs which India has already terminated proceed to guard the international traders for the following 10-15 years. Therefore, as India doesn’t appear to disengage itself from worldwide funding legislation altogether, it might do properly to ‘internalise’ worldwide funding legislation, and BITs as a matter of coverage. The Vodafone dispute underscores this want greater than ever.
No matter measures the federal government takes which can have an effect on international traders, it should take into consideration, the obligations which it agreed to below the BITs. That requires all of the ministries and departments to coordinate with the Ministry of Finance, which is the nodal ministry for BITs and associated issues. What’s required is sustained inter-ministerial coordination, not after the ITA case is introduced, however even earlier than, when a governmental measure is contemplated which can doubtlessly have an effect on international traders. This could additionally require capability constructing and coaching of the federal government officers regarding worldwide funding legislation.
Pushkar Anand is Assistant Professor on the School of Legislation, College of Delhi.
