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Long-term battle of arbitral awards with reference to the Vodafone case

The American Constitution constitutes a similar provision prohibiting ex-post-facto laws both by Central and state legislatures. It’s been more than 70 years since India became a democracy, still there is debate regarding the retrospective legislation in taxation laws.

The art of taxation consists of so plucking the goose to obtain the largest amount of feathers with the smallest amount of hissing.

—Jean Baptiste Colbert

PREFACE

In India, arbitration is always criticised due to Court interferences. However, recent judicial decisions show that Indian Courts are adopting a minimal interference model. This would help India globally to make a mark in the field of arbitration. In this never-ending process of court trials, challenging the awards in tribunals is a trend now here we can take the example of the same from the landmark case of Vodafone International Holdings B.V. v. Union of India & Anr. The enforcement of foreign awards is always being hard in India due to the regressive approach of the judiciary, which can be seen in judgments like NAFED v. Alimenta S.A. and Venture Global Eng. L.L.C. v. Tech Mahindra. These judgments are undoubtedly acting as a huge stumbling block in the enforcement of foreign awards.

VODAFONE JUDGMENT AT GLANCE

In the landmark judgment of Vodafone, where the Indian income tax authorities passed an order for payment of $2.2 billion by claiming that this is a case of transferring the Indian assets and therefore, such transfer was taxable in India. But later the Supreme Court held that this is not covered within the meaning of Section 2(14) of the Income Tax Act, 1961 and quashed the demand of INR 120 billion by way of capital gains tax and also directed a refund of INR 25 billion just after that Income Tax Act (2012 Amendment) was brought in introducing two explanations in Section 9(1)(i) of the Income Tax Act, 1961 in this way virtually amending the law to ensure that cross-border transactions such as the $11.08 billion Vodafone-Hutchison deal are taxable. This amendment was challenged in the Permanent Court of Arbitration at Hague under India – Netherlands Bilateral Investment Treaty.

This retrospective amendment was widely criticized across the globe and made India an unpopular destination for investments. The Permanent Court of Arbitration (PCA) quashed the income tax department’s demand on the ground of violation of the fair and equitable treatment standard. It is also observed that India violated the bilateral investment treaty with the Netherlands by retrospectively amending the law and directed India to reimburse legal costs of approximately INR 850 million to Vodafone. The Vodafone award stimulates critical issues for foreign investors investing in India. This award negates India’s position on investment treaties that tax disputes do not come under the ambit of investment treaties. The discrepancy arises from the Vodafone case in which the Solicitor General of India has recommended the government of India to challenge the arbitral award and declared parliamentary legislation of a competent Parliament of a sovereign nation to be non-est and unenforceable. On the contrary, the Attorney General clearly expressed his inability to be involved in the case and he is in favour of accepting all well-reasoned awards instead of challenging every award.

The Indian Government has not decided their move yet but as each coin has two sides so each direction towards challenging the award will lead to the question of law regarding the power of the arbitration tribunal to declare parliamentary legislation to be non-est and unenforceable. India has sovereign powers to amend its laws with a prospective effect and in the present case; the transaction was between two non-resident entities through a contract executed outside India which has no nexus with the underlying assets in India.

JUDICIAL & LEGAL DICTUM IN THIS REGARD

The Indian legislature has the power to make prospective laws, but Article 20 of The Indian Constitution, 1950 provides certain parameters for the same. Article 20(1) imposes a limitation on the law-making power of the legislature regarding retrospective criminal liability. There is anarchy in the imposition of retrospective civil liability too.

As article 20(1) of the Indian Constitution provides that;

“no person shall be convicted of any offense except for violation of a law in force at the time of the commission of the act charged as an offense, nor be subjected to a penalty greater than that which might have been inflicted under the law in force at the time of the commission of the offense.”

The American Constitution also constitutes a similar provision prohibiting ex-post-facto laws both by Central and State Legislatures. It’s been more than 70 years since India became a democracy still there is debate regarding the retrospective legislation in taxation laws.

India has a long term judicial approach regarding retrospective legislation and the landmark case is CIT v. Vatika Township Private Limited, in this case, the Constitutional Bench of Apex Court provided clarity on prospective versus retrospective operation of tax amendments. Moreover, a piece of legislation is presumed not to be intended to have a retrospective operation here the ratio is that the current laws should govern current activities (Principle of lex prospicit non respicit: The Law looks forward and not backward). This case also considered the principle of fairness and leads to the principle of lex non-cogit ad impossibilia – the law does not compel a man to perform what he cannot possibly perform. The ruling concluded that in determining whether a provision is applicable prospectively or retrospectively, attention would be required to be paid to the language of the amending statute, the legislature’s intent, the memorandum to the relevant Finance Act, and the hardship the amendment would cause to the taxpayer. Similarly in the case of CIT v. NGC Networks (India) Pvt. Ltd. held that in the case of retrospective amendment the payer could not have contemplated TDS. Along with that regarding enforcement of arbitral awards, in the case of Govt. of India v. Vedanta Ltd, the court held that-

“enforcement might be rejected just on the off chance that it disregards the State’s most essential thoughts of profound quality and equity, which has been deciphered to imply that, there ought to be incredibly faltering in the declining requirement, except if it is gotten through dishonour or fraud, or unjustifiable methods”

By way of this judgment, the Court reduces the decline of enforcement of foreign arbitral awards and minimizes judicial intervention. The court also observes that the government must change its approach regarding challenging every arbitral award and should adopt an approach that encourages foreign companies to invest in India. It will help India in achieving status as a global arbitration hub.

WAY FORWARD TOWARD ARBITRATION

Today tax uncertainty is a growing cause of concern for foreign investors. Now India is facing criticism owing to the Vodafone award, the question arises whether India would lead to ensuring tax certainty and a stable environment to boost investment hand in hand or not. The scope of investment treaty arbitrations is very bleak and now we have two directions firstly that the Supreme Court of India overturns the decision of the Indian courts regarding non-applicability of the Arbitration and Conciliation Act, 1996 to investment treaty arbitrations, Secondly the legislature can either amend the Arbitration and Conciliation Act, 1996 to include enforcement of Bilateral Treaty Awards within its scope or to establish an entire regime for investment protection. In today’s time, the correlation between Bilateral Investment Treaties and foreign investment is required and we can adopt any approach given upwards to achieve this goal. Bilateral Investment Treaties have a positive role in promoting foreign investment and Investor-State dispute settlement provisions are important factors too in contributing to foreign investment inflows. India is planning a new law to safeguard foreign investment. It also helps us to speed up dispute resolution and to boost stuttering domestic growth.

The scope of investment treaty arbitrations is very bleak and now we have two directions: First, that the Supreme Court of India overturns the decision of the Indian courts regarding non-applicability of the Arbitration and Conciliation Act, 1996 to investment treaty arbitrations; Second, the legislature can either amend the Arbitration and Conciliation Act, 1996 to include enforcement of Bilateral Treaty Awards within its scope or to establish an entire regime for investment protection. In today’s time, the correlation between Bilateral Investment Treaties and foreign investment is required and we can adopt any approach given upwards to achieve this goal.

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