The arbitration proceedings

Having tasted success before the Supreme Court, Vodafone decided not to challenge the vires of such retrospective amendments. Instead, it invoked the India-Netherlands bilateral investment treaty (‘Netherlands BIPA’) by claiming that India’s attempt to recover taxes from Vodafone despite the Supreme Court decision violated India’s commitment for fair and equitable treatment guaranteed under the treaty. These proceedings continued despite the government’s various reconciliation measures, including a legislatively sanctioned settlement scheme in 2016 which, inter alia, allowed Vodafone-type cases to settle the dispute and seek immunity on payment of a lesser amount. The reason of discord was the unwillingness of the government to undo the retrospective amendments. Vodafone had insisted that it was not be required to pay any amount once the Supreme Court had affirmed its unwavering stand. It now stands vindicated with the tribunal’s award.

The operative part of the arbitration award, which alone has been released so far, states that (1) the challenge by the government to the jurisdiction of the tribunal is incorrect; (2) Vodafone is covered with the scope of the ‘guarantee of fair and equitable treatment’; (3) India breached this guarantee by asserting upon Vodafone the ‘liability to tax notwithstanding the Supreme Court judgment’; (4) such a breach must be ceased or else would result into ‘international responsibility’; and (5) India must partially defray the costs of legal representation to Vodafone.

The Vodafone award presents an interesting perspective, arguably even a complex debateable proposition. It is based on the premise that the government owed an obligation to all investors covered under the treaty to be accorded fair and equitable treatment under the Netherlands BIPA. It is arguable whether the scope of such treatment extends to legislative measures given the clause of the treaty which states that “investments of investors of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party”. There is indeed an exclusion clause in the Netherlands BIPA which specially carves out the effect of “domestic legislation or arrangements … relating wholly or mainly to taxation”, which led the Government of India to contend that the arbitration tribunal could not consider the effect of legislative actions while the assessing claim of treaty violation.

The Vodafone award presents an interesting paradox. By design, and also by judicial consensus, there is neither equity in taxation nor fair play in tax law, the sole purpose of which is to impose an exaction on the subject under the sovereign’s prerogative. The jury is clearly out on whether the tribunal is correct to conclude that the government has, for all times to come, qua a particular class of investors (who are covered within the scope of BIPA), conceded sovereign and legislative authority to impose any additional tax after the investment, a stance which the law officers of the government are bound to closely examine.

The Vodafone award also gives rise to complex constitutional law questions. It is principally pedestalled upon the fact that the Supreme Court had ruled in favour of Vodafone and thus the legislative measures violated the fairness commitment. Given the emphasis on this aspect in the tribunal’s award, does this imply that the untrammelled constitutional authority of Parliament to reinstate the law by legislatively overruling judicial decisions is restricted because the government has executed an investment treaty with another nation? Does this imply superiority of international treaty commitments over domestic law? There are examples galore where Parliament has retrospectively amended the tax laws against the taxpayers with clear judicial authority that such amendments are valid and enforceable to revive judicially scuttled tax demands, given the mandate under the Constitution. The tribunal’s finding, taken to the logical end, poses complex legal issues which may require the government to seek consideration of the Indian courts.

What next?

The outcome of investment treaty arbitration has generally not been favourable to India. The 2011 award in favour of White Industries against India under its investment treaty with Australia is a prominent illustration. This award in favour of Vodafone adds a fresh salvo. This will surely get the government thinking of getting its legal strategy right, particularly because the second arbitration initiated by Vodafone in 2017 under the India-U.K. investment treaty is still pending and in any case, arbitration awards of other investors, such as Cairn Plc., are also awaited.

The most intriguing part of this controversy would be the next steps. Ordinarily, the government is quick to accept the outcome of international panels notwithstanding their adverse outcome. The 2014 award in the maritime boundary dispute with Bangladesh or the more recent award in favour of the Italian marines are prominent examples. The official release of the government (to the Vodafone award) is not on similar lines. Instead, the government has gone on record to unequivocally state that it “will consider all options and take a decision on further course of action including legal remedies before appropriate fora”. One must, therefore, consider both ends of the evolving paradigm.

Will the government yield to the tribunal’s finding and restore the equilibrium arising out of the Supreme Court decision? Or will the government continue with an assertion of the successive tax administrations that tax is the sovereign entitlement of the country and the Indian Parliament does not concur with the Supreme Court’s view, which it has reversed retrospectively? The government is already on record that it is beyond the arbitration panel’s prerogative to adjudge the scope of its tax laws. In the wake of this award, the government would additionally scrutinise the repercussions of accepting the tribunal’s order, it being applied in other pending arbitrations, which would mean significant cash outflows at this time of economic crisis.

It is noteworthy that in the event the government rejects the award, it will test the will of Vodafone whether it intends to pursue its enforcement through the Indian judicial system, given the significant amount of AGR dues it owes the government. In the event Vodafone does decide to head for a payout, it will be through enforcement of the award in Indian courts. In the past, the government has challenged foreign arbitration awards on the ground that they are unenforceable because of the intrinsic incompatibility of the award with Indian judicial ethos. In particular, the doctrine of ‘public policy’ has been a fertile testing ground to seek rejection of such awards, which has been selectively resorted to. A possible way to argue could be that the award is directly in contravention to the text of the statutory provisions (i.e. the retrospective amendments), and is in clear an affront to public policy. How such contentions would play out in Indian courts is anyone’s guess; at the very least, it will test the resolve of the parties.

Conversely, the government accepting the Vodafone award without making changes in the income tax law would result in a dichotomy and a public-policy impasse where a charge of tax exists under the law but is not enforced by the executive. Tax being a sovereign subject, an international arbitral award will be viewed as interjecting a lawfully enacted legislation, a principle that India has been resorting to, to reject mandatory arbitration under its bilateral tax treaties. The charge of tax under the retrospective amendments can be lawfully resisted only when the government, through appropriate parliamentary sanction, withdraws such amendments. Hence, a decision to accept would necessarily be shaped by larger policy and propriety of governmental action instead of a one-off approach qua the Vodafone award.

The current policy of the government is pedestalled on exclusion of tax from the scope of investment treaties, wherein tax claims are categorically excluded from its model bilateral investment treaty (BIT). While the claim of Vodafone is based upon the earlier treaty, it will be interesting to observe whether the government accedes to the claim on the basis of the ‘good faith’ principle of treaties under international customary law, according to Article 31 of the Vienna Convention, or will it reject the claim on the premise of misconstruction of its offer in the investment treaties, which it has laid out subsequently in the model BIT. In either case, the award and the magnitude of its repercussions, may be the death knell for investment treaties, given the substantive limitations they thrust both on the government and investors.

To conclude, given the chequered history of the dispute and the unwavering commitment of Vodafone and the government to their respective causes, it will be premature to assume that the tribunal’s award is the last word. The stakes involved in the dispute, the questions on credibility of the government’s actions, the connotations of costs being imposed upon the government, the overall effects on business sentiments, etc. further muddle a clear path towards a solution. Each of the options available to the parties, ranging from back-channel negotiations to judicial challenges and, in case of the government, even legislative changes, can be expected to be explored, though in all sincerity, the stakeholders would expect a quiet burial and a harmonious reconciliation.

Views are personal. The authors are partners, BMR Legal.

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