The Vodafone case is termed as saga due to its unending character and a progression of measures taken by both the parties. A new step has been initiated by the Government of India, which is to challenge the Vodafone arbitration award ruling given in 2020 in Singapore. This is a matter of high political substance as the determination of this ruling will impact the pending matters against India. While it is quintessential to note here that there is no rule of precedence in the matters of international arbitration, however, we must rightly note here that tribunals do provide heavyweight to earlier rulings as observed from awards of various proceedings.
In this article, we would cover the grounds on which the appeal can be made against the award and critically analyse the same.
Brief Background
The beginning of this saga was initiated in the year 2007, followed by the judicial pronouncement which led to the retrospective tax legislation in 2012. The clash between Vodafone and India has been on the point of violation of the fair and equitable treatment (FET) clause present in the India-Netherlands bilateral trade agreement[1]. While assessing the validity of the arguments, the Tribunal, herein the Permanent Court of Arbitration (PCA) passed an award in favour of Vodafone. Now, India has appealed in the Singapore Court as being its last recourse some may say, the validity of arguments would again be based on the FET clause. It would be interesting to note the analysis and the viability of argument in the next section.
Violation of the FET Clause
The first and foremost contention raised is the violation of the fair and equitable clause by retrospectively amending the tax legislation. The decision was granted in favour of Vodafone. However, there remains various substantial contentions to be made that we must address.
Article 4(1) of the India-Netherlands Bilateral Investment Treaty (BIT) embodies the FET clause as follows:
“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.”[2]
While a valid argument is made by Vodafone that retrospectively applying tax in this case is a violation of fair and equitable trade provision, we differ from this position.
Here, we must refer to Article 12 of the BIT agreement in order to proceed further:
“Prohibitions and Restrictions.— The provisions of this agreement shall not in any way limit the right of either contracting party to apply prohibitions or restrictions or take action in accordance with its laws applied in good faith, on a non-discriminatory basis, and to the extent necessary for the protection of its essential security interests, or for the prevention of diseases and pests in animals or plants.”[3]
The retrospective application of tax law’s legality cannot and will not be discussed on an international forum as it is a sovereign function. The area that would be discussed is whether this action by the Government was unfair or discriminatory in any manner. Every sovereign has a right to enact amendments in its own jurisdiction, what we must see here is the object of the amendment made.
In order to determine the object of the Government of India we here refer to the Finance Bill, 20124:
“The legislative intent of this clause is to widen the application as it covers incomes, which are accruing or arising directly or indirectly. The section codifies source rule of taxation wherein the State where the actual economic nexus of income is situated has a right to tax the income irrespective of the place of residence of the entity deriving the income. Where corporate structure is created to route funds, the actual gain or income arises only in consequence of the investment made in the activity to which such gains are attributable and not the mode through which such gains are realised. Internationally this principle is recognised by several countries, which provide that the source country has taxation right on the gains derived from offshore transactions where the value is attributable to the underlying assets.
Certain judicial pronouncements have created doubts about the scope and purpose of Sections 9 and 195. Further, there are certain issues in respect of income deemed to accrue or arise where there are conflicting decisions of various judicial authorities.”
The above is provided as clarification to the object and scope of the Act. In short, it is necessary to draw a boundary between the genuine mistreatment of foreign investments that should be outlawed by the FET standard and measures of sovereign States taken in pursuance of legitimate policies that cannot be held in breach of the standard, even where such measures harm foreign investments.5
The above clause is an unqualified FET clause, and in these clauses lies a large amount of discretion as to the interpretation of these clauses. The question is whether international customary law or even minimum standard would be linked to it or not. These factors may have influenced many Arbitral Tribunals that interpreted the unqualified FET standard as delinked from customary international law and focused on the plain meaning of the terms “fair” and “equitable”.6 So now the only ground remains are “just” and “fair”. A number of tribunals have held that a violation by the host State of an investment contract or of its own domestic law does not necessarily amount to a breach of the FET standard.7 Moreover, the threshold of violating the FET clause in cases of unqualified FET clause is one in which there is a high threshold as confirmed by the cases Eastern Sugar BV v. Czech Republic8 and AES v. Hungary9. Now, the object of the Indian Government was not to violate the fair and equitable clause or be unfair in any manner to any of its investors. It was to clarify the object and scope of Section 9 of the Finance Act, 2012. It is a sovereign function exercised that must not give rise to being unfair in any manner possible. The substantive argument one would make here is of legitimate expectation while investing and it is discussed in the next part.
Legitimate Expectations
The test for legitimate expectations lies in three elements as provided in Tecmed v. Mexico10 : consistency, transparency and unambiguous nature. Further in Saluka Investments B.V. v. Czech Republic11, the Permanent Court of Arbitration stated that the violation of legitimate expectations can be seen only in the case of discriminatory or unreasonable modifications.
We must here refer to the Report of the Damodaran Committee:
“Retrospective taxation has the undesirable effect of creating major uncertainties in the business environment and constituting a significant disincentive for persons wishing to do business in India. While the legal powers of a Government extend to giving retrospective effect to taxation proposals, it might not pass the test of certainty and continuity.”12
India’s position is clear that it is the sovereign exercise of power and that legislative power shall and must not be ceased at the whims of investors. It would undermine the sovereignty and exercise of its power. So according to this view and argument, India takes the defence that it has not breached the concept of legitimate expectations since it is exercising its sovereign power.
The principle of legitimate expectation is an autonomous standard. It is independent of the clauses mentioned with regards to FET. Even as per the Organisation for Economic Co-operation and Development (OECD) Report,13 the FET principle is an absolute standard of treatment.
Now the substantive question here is whether retrospectively amending the tax legislation would lead to a violation as to the legitimate expectation of an investor.
The first view that we can take is the one that was taken in three notable cases, Enron14, CMS15 and Occidental16. In these cases the substantive finding was that there could be no change in the legislation in a specific manner as to affect the very core of legitimate expectation. By this view, it can be said that India has not passed the test under legitimate expectation.
However, there is a second emerging view that must be referred to here. In Parkerings17 and Saluka18 investments the first view was not upheld. In this case it was said that it would be not right to freeze the law and it gave regard to the principle of sovereign power. Further, the Tribunal in the final findings concluded that to tackle uncertainty stabilisation clauses can be used and unless the legislation changed is unreasonable a claim under FET clause cannot succeed.
Conclusion
India has recently suffered a blow in Vodafone case and now Cairn Energy case19 in the matter of retrospective legislation. However, the saga is far from over. The two views still hold equitable water and India is banking on the fact that the second view present in the arguments would lead to a victory in the appeal proceedings in Singapore. In case, the matter is decided in favour of Vodafone, that may lead India to drastically change its policies and look at matters with a fresh perspective.
† Managing Editor (UPES).
†† 4th year, UPES law student.
[1] Agreement between the Republic of India and the Kingdom of the Netherlands for the Promotion and Protection of Investments <https://www.italaw.com/sites/default/files/laws/italaw6147.pdf>.
[2] Agreement between the Republic of India and the Kingdom of the Netherlands for the Promotion and Protection of Investments, Art. 4(1) of the BIT <http://www.scconline.com/DocumentLink/deYAfbIF>.
[3] Agreement between the Republic of India and the Kingdom of the Netherlands for the Promotion and Protection of Investments, Art. 12 of the BIT <http://www.scconline.com/DocumentLink/deYAfbIF>.
4 Finance Bill, 2012 (Memorandum)
5 OECD document.
6 OECD, p. 22 <https://unctad.org/system/files/official-document/unctaddiaeia2011d5_en.pdf>.
7 P. 67, OECD.
8 SCC Case No. 088/2004, Partial Award dated 27-3-2007.
9 AES v. Hungary, ICSID Case No. ARB/07/22.
10 ICSID Case No. ARB/AF/00/2.
12 Report of the Committee for Reforming the Regulatory Environment for Doing Business in India, p. 77.
13 OECD (2004), Fair and Equitable Treatment Standard in International Investment Law, OECD Working Papers on International Investment, 2004/03, OECD Publishing
14 Enron Corpn. and Ponderosa Assets, LP v. The Argentine Republic, ICSID Case No. ARB/01/3 (also known as Enron Creditors Recovery Corpn. and Ponderosa Assets, LP v. The Argentine Republic).
15 CMS Gas Transmission Co. v. Republic of Argentina, ICSID Case No. ARB/01/8.
16 Occidental Petroleum Corpn. and Occidental Exploration and Production Co. v. Republic of Ecuador, ICSID Case No. ARB/06/11.
17 Parkerings-Compagniet AS v. Republic of Lithuania, ICSID Case No. ARB/05/8.
18 Saluka Investments BV v. Czech Republic, 2006 SCC OnLine PCA 2. <http://www.scconline.com/DocumentLink/D3Qc08Za>.
19 Cairn Energy PLC and Cairn UK Holdings Ltd. v. Govt. of India, PCA Case No. 2016-7.