Embittered by her experience with the White Industries arbitration[1] in 2012, India joined the backlash[2] against the Investor-State Dispute Settlement (ISDS) regime with the announcement of the 2016 Model Bilateral Investment Treaty.[3] What followed soon thereafter, was an exasperated unilateral withdrawal from some 66 Bilateral Investment Treaties (BIT)[4] between 2016-19. After less than a year, the Vodafone award seems to have opened her wounds and the Government is mulling on options of avoiding the liability imposed by the award and desperately seeking to somehow claim the alleged dues. With a claim of 14.99 billion USD currently tailing India in the Cairn Energy arbitration, it seems that India is facing the axiomatic ‘whatever can go wrong, will go wrong’[5] situation.
Nearly a decade after the Apex Court of India conclusively decided in favour of Vodafone Group Plc, the retrospective taxation matter returns to haunt India with a Permanent Court of Arbitration seated arbitral tribunal having passed an award holding that India is in breach of the Fair and Equitable standard of treatment clause contained in the India-Netherlands Treaty. Interestingly, the decision was unanimous which, according to the investor, was echoed by Mr. Rodrigo Oreamuno, who was one of the arbitrators appointed by India.
Turning the clock back 13 years, the Indian Government raised an initial tax demand on the Vodafone Group to the tune of 1.08 billion USD, on account of capital gains and arising out of the acquisition of Hutchison Whampoa. Subsequently, the Indian Government held Vodafone accountable for tax avoidance to the tune of 30.14 Billion USD together with penalty, despite having knowing that such investments were protected from the scope of taxation under the provisions of the India-Netherlands BIT of 1995.
What followed was an intense Court battle that began in the Bombay High Court and was finally settled in favour of Vodafone by the Supreme Court of India in 2012, holding that the authority has no power to tax retrospectively, thereby waiving Vodafone’s liability to pay tax on the acquisition.
Embarrassed at the defeat, the Government of India in that same year, in an ill-advised move and with the object of nullifying the Supreme Court’s decision, proposed an amendment to the Tax regime which conferred upon the tax authority, the power of retrospective taxation. A time when the tussle between the executive and the Judiciary was at its peak and the issue of the National Judicial Appointments Commission (NJAC) was being pursued with ardent fervour in the Parliament, the legislation was unanimously passed with little thought on the possible treaty standard violation and the cataclysmic effects which such a move would entail.
The year that followed, India received as many as seventeen notices of dispute claims,[6] from foreign corporations against various regulatory steps ranging from cancellation of spectrum licenses,[7] retrospective taxation[8] to revocation of telecom license[9] among others,[10] leading to rumpus in the Parliament, as well as a volley of criticism from civil society organisations, [11] who were collectively lambasting the ISDS regime and obviously, the UPA Government, which was already red-faced from the string of allegations it was facing, ranging from corruption to nepotism.[12] The misconceived legislation came as an obvious face-saver for the then Government, especially in the backdrop of the notional losses claimed to have been caused to the exchequer and the criticism against the ISDS regime was just the voice of support it needed in a time of the upcoming Lok Sabha elections.
In the interregnum, defying the authorities Vodafone refused to acknowledge the “regressive”[13] tax liability and in 2014, initiated arbitration against India, invoking the ISDS provision contained in the Indo-Dutch investment treaty, with their choice of the arbitral institution as the Permanent Court of Arbitration that finally culminated in the recent award holding India in breach of the Fair and Equitable treaty standard of Investor protection that India undertook way back in 1995.
Soon after the award was delivered, Government sources revealed that the Union is mulling on options to subvert enforcement of the award through steps including challenging the award before a court in Singapore.[14] Without commenting on the futility or otherwise which such moves might beget, apart from the costs, the inherent disadvantages of such tactics are numerous. Paramount of them all is the obvious loss to India’s reputation as a possible investment destination, which is already visible in the fact, that the foreign equity inflows have remained at sub-2% of GDP, since the announcement of the protectionist 2016 Model BIT, despite the enormous resources spent at attracting FDI. The fact that inflows to India during 2019-20 at $49.9 billion were substantially lower compared to the annual remittances of $83 billion during that same period,[15] is something which the Government ought to be mindful of while going ahead with posing any challenge to the award.
Assuming investors can still be cajoled into making investments, by opening more and more sectors to FDI, the effects will only be temporary and certainly not proportional to the money that the exchequer is spending on attracting FDI. With the economic slowdown[16] resulting from the pandemic, the Government, apart from opening up sectors to FDI, should consider more development sensitive measures to offer protection for investments, which includes the setting up of more accommodative policies and not pursue the line of breaching international protocols, that might lead to the possibility of Indian investment being meted out with similar high handed treatment abroad, as well as India’s global isolation, coupled with the reluctance of investors from making investment decisions in favour of India.
*Views are personal.
[1] White Industries Australia Ltd. v. The Republic of India, (UNCITRAL), Final Award (30 Nov. 2011) accessed October 4, 2020
[2] [2] Louis T. Wells, ‘Backlash to Investment Arbitration: Three Causes’ (2010) THE BACKLASH AGAINST INVESTMENT ARBITRATION: PERCEPTIONS AND REALITY 341
[3] Ranjan, Prabhash; Singh, Harsha Vardhana; James, Kevin; Singh, Ramandeep (2018). “India’s Model Bilateral Investment Treaty: Is India Too Risk Averse?” Brookings India IMPACT Series No. 082018. August 2018
[4] https://investmentpolicy.unctad.org/international-investment-agreements accessed on October 8, 2020
[5] https://dictionary.cambridge.org/dictionary/english/murphy-s-law accessed on October 8, 2020
[6] https://m.economictimes.com/news/economy/policy/india-to-relook-at-82-bipas-as-foreign-investors-invoke-global-arbitration/articleshow/19389277.cms accessed October 4, 2020
[7] http://indianexpress.com/article/business/business-others/antrix-devas-dealhague-international-tribunal-rules-against-indian-govt/ accessed October 4, 2020
[8] Cairn Energy PLC v. India (UNCITRAL) accessed October 9, 2020
[9] Tenoch Holdings Limited, Mr. Maxim Naumchenko & Mr. Andre Poluektov v. The Republic of India, PCA Case No. 2013-23
[10] Louis Dreyfus Armateurs SAS v. The Republic of India, PCA Case No. 2014-26; see also; Strategic Infrasol Foodstuff LLC & The Joint Venture of Thakur Family Trust UAE with Ace Hospitality Management D.M.C.C. U.A.E. v. Republic of India, UNCITRAL, Notice of Arbitration (Oct. 8, 2015)
[11] (http://www.bilaterals.org/IMG/pdf/lettter_forum_ag_ftas _us_india_bits_26_sept.pdf) accessed October 7, 2020
[12] https://www.thehindu.com/news/national/amidst-scandals-upa-paints-rosy-picture/article4739926.ece#! accessed on October 7, 2020
[13] https://indianexpress.com/article/business/companies/vodafone-wins-arbitration-against-govt-in-rs-22100-crore-retrospective-tax-case-6610623/ accessed on September 27, 2020
[14] https://www.thehindu.com/business/Industry/govt-weighs-legal-options-in-vodafone-tax-arbitration-case/article32764724.ece accessed on October 7, 2020.
[15] N.Sen & A. Nandy, What ails India’s Model BIT?, The Hindu Business Line 2020, Opinion, https://www.thehindubusinessline.com/opinion/what-ails-indias-model-bit/article31939413.ece accessed on October 8, 2020
[16] https://economictimes.indiatimes.com/news/economy/finance/covid-19-pandemic-severe-demand-shock-for-indian-economy-db/articleshow/75081249.cms accessed on October 8, 2020