The Permanent Court of Arbitration in The Hague ultimately ruled in favor of telecoms giant Vodafone in an investment treaty arbitration (ITA) dispute against India, initiated under the India-Netherlands Bilateral Investment Treaty (BIT).
This ruling marks the culmination of nearly a decade of bitter tax dispute between India and the Vodafone Group. While the arbitration award has yet to be made public, it is worth taking a look at the history of the dispute and the implications of the ruling for India.
The tax dispute in India
The Vodafone Group’s Dutch subsidiary Vodafone International Holdings BV (HIV) acquired a 67% stake in the Indian telecommunications company Hutchison Essar Limited (HEL) for $ 11 billion. This transaction was carried out in 2007, through an agreement between HIV and Hutchison Telecommunications International Limited (HTIL) involving a Cayman Islands-based company CGP Investments Limited (CGP), which in turn, directly and indirectly , had a 67% stake in Hutchison. Essar Limited (HEL), the Indian company. Soon after, the Indian income tax authorities issued a notice demanding the payment of $ 2.2 billion in capital gains tax, which Vodafone maintained that it was not required to pay as the transaction between HTIL and HIV did not it involved the transfer of any capital assets located in India.
The matter reached the Bombay High Court, which decided that Vodafone was obliged to pay the taxes as claimed by the tax authorities. In Vodafone’s appeal, the Supreme Court in 2012 reversed the Bombay HC ruling and held that the company was not required to pay any taxes.
Internationalization of the dispute
In an ideal world, the matter should have come to an end. However, very soon the Finance Bill of 2012 was presented in parliament that sought, among other things, the amendment of Section 9 and Section 12 of the Income Tax Law of 1961, whose interpretation was the basis of the judgment of the Supreme Court. The bill became law and the aforementioned sections were retrospectively amended and entered into force from 1961. Following the amendment of the 1961 Income Tax Act, the authorities renewed the tax claim on Vodafone, at which point that HIV resorted to the first investment treaty arbitration under the India-Netherlands framework. BIT in 2012.
Vodafone argued that the imposition of tax claims through a retrospective amendment, even when the Supreme Court had already said the last word, amounts to a violation of the fair and equitable treatment (FIT) promised in the India-Netherlands BIT. Article 4.1 of the India-Netherlands BIT states that investors will be treated fairly and equitably at all times, including the obligation to ensure a stable and predictable regulatory environment.
In other words, when the Supreme Court has resolved a dispute, a matter will be presumed to have achieved the purpose. However, circumventing the effect of the higher court ruling by resorting to retrospective legislation certainly creates an unpredictable and unstable business environment. The Indian government just did that.
The Supreme Court of India. Photo: PTI
Second ITA dispute
In 2014, when the new government came to power, it criticized the retrospective changes that had been made to the tax laws, but did nothing to change that. Until 2017, India had been lingering in arbitration, when it woke up to the shock of the second ITA dispute brought by Vodafone under the India-UK BIT challenging the retroactive imposition of capital gains tax.
The Indian government approached the Delhi High Court seeking an injunction against the arbitration against Vodafone to prevent it from initiating arbitration under the India-UK BIT. India argued that this would amount to an abuse of process, as two different arbitrations on the same issue would amount to parallel proceedings and would risk inconsistent awards. Initially, the Delhi HC granted an interim ex parte order on August 22, 2017 restricting arbitration under the India-UK BIT. However, later, on May 7, 2018, the Delhi HC, in final judgment, rejected the government’s request to request an injunction against arbitration for abuse of process.
What weighed heavily on the court’s mind in dismissing the government’s abuse of process allegation was the offer made by Vodafone to consolidate the arbitrations under the India-UK BIT and the India-Netherlands BIT. The court held that such an offer and compromise is sufficient to allay India’s concerns regarding the double relief that two courts can award on the same matter.
The award
The arbitration award rendered in this case determines that the Government of India violates the FET standard under Article 4 (1) of the India-Netherlands BIT. While the Indian government has not been asked to pay any compensation, it has been asked to pay around Rs 40 million as partial compensation for the legal cost and to reimburse the tax that has been collected so far.
However, the Indian government can still approach the Singapore High Court asking it to annul the arbitration award, as the seat of the arbitration was in Singapore.
It is important to note that the Supreme Court when deciding the case in favor of Vodafone observed and emphasized that:
‘FDI flows to the location with a strong governance infrastructure including the enactment of laws and how well the legal system works. Certainty is an integral part of the rule of law. Certainty and stability form the basic basis of any tax system ”.
In a rather quixotic way, the then UPA government went ahead and turned the table, and the current government criticized the previous government for turning the table, emphasizing the need to turn it around but sat in its place. .
The Supreme Court has observed that certainty is an integral part of the rule of law. Photo: Libreshot
India is now signing BITs based on the 2016 Model, which either has a very restrictive ATI provision, or has no ATI provisions at all, like the India-Brazil BIT. However, even the BITs that India has already canceled continue to protect foreign investors for the next 10-15 years. Therefore, since India does not appear to dissociate itself completely from international investment law, it would do well to ‘internalize’ international investment law and BITs as a matter of policy. The Vodafone dispute underscores this need more than ever.
Regardless of the actions the government takes that may affect foreign investors, it must take into account the obligations it agreed to under the BITs. That requires all ministries and departments to coordinate with the Ministry of Finance, which is the nodal ministry for BITs and related matters. What is required is sustained inter-ministerial coordination, not after the ITA case is filed, but even earlier, when a government measure that could potentially affect foreign investors is contemplated. This would also require capacity building and training of government officials in international investment law.
Pushkar Anand is an Assistant Professor at the University of Delhi School of Law.
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