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This article has been authored by Thrisha Rai, a second year student at Jindal Global Law School, Jindal Global Law University.

Introduction- Understanding the Background of the Dispute

In 2007, the Dutch affiliate of the Vodafone group, Vodafone International holdings BV by acquiring 67% interest, bought the Indian telecom company Hutchinson Essar Limited (HEL). The dispute arose following the acquisition when Indian income tax authorities raised a notice claiming a payment of $2.2 billion as capital gains tax on the transaction, whereas Vodafone refused to pay any amount on the ground that the transaction did not involve any transfer of capital asset in India. The matter was brought before the High Court of Bombay which ruled that Vodafone was liable to pay taxes that was demanded by the income tax authorities.

However, the Supreme Court reversed the judgment pronounced by the High Court. The Government of India was adamant on recovering the amount as tax, interest and penalties. They amended the Income Tax Act in 2012, and inserted a provision stating that income which arose from the sale of shares or units taking place outside India ,shall be deemed to be accrued in India,, if the other value of the share or unit depended primarily on the assets present in India. This Amendment was applied retrospectively and was made applicable to all transactions made since 1962. This led Vodafone to formally invoke International Arbitration on the tax dispute.

The ancillary crux of the arbitration notice was served under the India-Netherlands BIPA, which was strongly objected by the Government of India stating that tax disputes were not covered under the BIPA. Vodafone was adamant in continuing the arbitration proceedings and moved to International Court of Justice. A Tribunal headed by Sir Franklin Berman was constituted where Vodafone challenged the tax demanded under the Netherlands-India Bilateral Investment Treaty (BIT).

In September 2020, Vodafone won the tax arbitration case against India at the Permanent Court of Arbitration (“Court”) in Hague. The Court decided that the demanded amount of 22,100 crore by using the retrospective legislation breached the “fair and equitable treatment” which was promised under the bilateral investment protection pact between India and The Netherlands. This dispute had several implications with respect to the remedies that International Law grants and brought out the concern regarding the execution of a foreign award in India.

Remedies under International Law

An international investment in essence consists of a commercial agreement between the foreign investor and the host State. They could also provide for a dispute resolution mechanism either through domestic courts, tribunals or international arbitration. The foreign investor could also introspect whether its home country has signed an international investment agreement (IIA) with the State where the investment is being made (Host). This could be in the form of a Bilateral investment treaty, free trade agreement with an investment chapter (FTA) or a regional cooperation and economic partnership agreement with guarantee for investment protection.

The Vodafone dispute did not arise out of an investment contract between the British Conglomerate and Government of India. Originating from a retrospective tax legislation by the Indian Parliament it was brought under the IIA. Vodafone had the option of challenging the constitutionality of the Amendment before the Supreme Court of India, but it instead chose to initiate arbitration under the India-Netherlands Bilateral Investment Treaty. Foreign investors in India should be aware of the significance of any of the IIAs the host country might have signed with their home countries which could provide them respite against adverse Indian measures. The arbitral award in the Vodafone instance fortifies the availability of an effective mechanism of dealing with disputes to investors under IIAs.

Impact on Litigation and Arbitration Proceedings Involving Retrospective Tax Legislation

The Vodafone award could influence future claims by foreign investors, who have been brought under the ambit of Indian taxation system by retrospective tax legislation. These could be effectively dealt with a claim under the IIA. This could also save them time that litigation in the Indian courts take.

The other thing to consider bringing a claim under IIA, is the independence of each different case. One arbitral award will not be binding on the other. As the Investment treaty arbitration is not subject to the doctrine of stare decisis. For instance, the Cairn- India proceedings were also decided against India, the arbitral award in Vodafone had no effect on the result of those proceedings.

The Vodafone award essentially weakens the Government of India’s stance that tax disputes do not fall under the subject of an Investment treaty. New bilateral investment treaties entered into by India, like the India Belarus BIT has excluded provisions regarding taxation or enforcement of taxation. It’s possible that India will deliberate on incorporation of such exclusions in bilateral investment treaties.

Enforcement of a Treaty Award in India

The most important consideration is enforcement of a treaty award in India. India has not signed the International Centre for Settlement of Investment Disputes, ICSID Convention. Therefore, India is not covered under a regime that grants immunity to ICSID awards from challenge in national or domestic courts.

India is a party to the New York Convention on Recognition and Enforcement if Foreign Awards (NYC). In India, the Arbitration & Conciliation Act, 1996 primarily deals with the commercial disputes.

The Delhi High Court held in the cases of Union of India vs Vodafone Group PLC United Kingdom &Anr and Union of India vs Khaitan Holdings (Mauritius) Limited & Ors that the Indian Arbitration & Conciliation Act applies only to matters which are commercial in nature. This adds to the uncertainty as to which law is to be invoked to enforce treaty awards in India?

This position of the High Court, creates uncertainty in the legal framework that would apply to enforcement treaty award if brought in India. The primary issue is that any party that is applying for the enforcement of a BIT award in India under the Arbitration and Conciliation Act, 1996 will first face the jurisdictional hurdle as laid down by these rulings that the Arbitration and Conciliation Act cannot be applied to a BIT arbitration. Further even the Code of Civil Procedure, 1908 cannot fill this void as it has provisions for execution of a foreign decree or judgement, but the BIT awards are neither judgements nor are they delivered by a court. Thus, even this cannot facilitate an award against India.

Conclusion- The Road Ahead

The problem on enforcement of BIT awards in India would have been solved had India been a signatory of the ICSID Convention. Being a member of the Convention signifies that there would be an irresistible enforceability of the award in the ratified jurisdictions under the Article 53 of the ICSID Convention.

This issue will persist till the Supreme Court overrules this decision of the various High Courts regarding the non-applicability of the Arbitration and Conciliation to investment treaty arbitrations, or an easier way out is if the Legislature amends the Arbitration and Conciliation Act to include BIT within its scope.

Until then India will face the peril of an uncertain legislative framework that could possibly prove detrimental to the Foreign Investments and Foreign Direct Investments in the country.

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