Wednesday , September 19, 2018 |   12:18:30 IST
About Us Contact Us Instant Updates Newsletters
Forgot Password
Arbitration with regard to Direct Taxes - How far Legal - Vodafone Case in Delhi High Court
By Davendra Shanker
Aug 27, 2018

A recent decision of Delhi High Court in the case of Union of India vs Vodafone Group Plc UK and Ann (CS(DS)/2017 and IA no 9460/2017 - 2018-TII-33-HC-DEL-INTL could be a beginning of entirely unknown chapter in the history of direct taxation as it exposes the statutory action of Indian Tax Administration as well as the Legislative Action of Union Parliament to a private arbitration in UK under the Bilateral Investment Promotion and Protection Agreement (BIPPA) between India and UK. Besides it also points towards difficult terrain where liberalized investment treaty policy for promoting investment has come in conflict with the Tax Policy of the Union Of India, which is legislated by the parliament. Today India stands as a respondent in more than fifteen cases of arbitration under BIPPA highest number of cases against any host state. However it is the first and the only case where a law enacted by the Parliament has been made a subject matter of private arbitration and has been approved by the Delhi High Court. The Indian Government is contemplating modification to the BIPPA and in the new model of BIPPA taxation issues have been specifically excluded. The existing agreements, as it appears leave room for ambiguity regarding application of arbitration process with respect to taxes imposed by law. If in the new agreement taxes are specifically excluded there can be an argument that by implication earlier agreements covered taxation issues also. The conclusions arrived at by the Delhi High Court, it is submitted with due respect, does not appear to based on correct by appreciation of facts nor application of the law - either the domestic or the international. It appears that matter could not be put up before the High Court in right perspective. It is a foregone conclusion that the revenue authorities would take up the matter with the Apex Court, nonetheless, it is important to examine what could have lead to this situation. The main operative part of the Judgment are contained is Para 129 to 133 and state that in view of the constitution of Arbitral Tribunal and commitment of UOI to appoint an arbitrator vide letter dated 7 Aug 2017, the challenge to invocation of the writ has run its course. As a result any challenge to the jurisdiction must lie with the Tribunal so appointed based on the concept of kopetenz- kompetenz. A perusal of the decision indicates that the Indian revenue authorities were not able to make a strong case for the revenue as certain points of argument in favor of revenue do not find place in the High court order where the submissions of the parties have been referred to and taken on record.

Decision of the Delhi High Court and applicability of Arbitration and Conciliation Act of 1996

The decision of the Delhi High Court is based on the facts and the legal position as submitted by both the parties and the amicus curiae and taken on record by the court. The arguments as well as the rejoinders have been taken on record by the court.

The Hon'ble High Court has come to following to main conclusion-

"To conclude, Investment Treaty Arbitration between a private investor and host States……….. recognized as such all over the world. It has its roots in public international law, obligation of state and administrative law. (Para142)

It also cannot be said as an absolute preposition of law that the moment there is an investment treat arbitration between a private investor and the state, national courts are divested of their jurisdiction. (Para144)

As the present case is not a commercial arbitration, the Act of 1996, shall not apply. This court is of the view, that in a situation where the Act 1996 does not apply, its inherent powers are not circumscribed by anything contained in the Act…. (Para146)

Notwithstanding, this limited intervention role, it is not unknown for courts to issue anti-arbitration injunction under their inherent power, especially when neither seat of arbitration nor the crucial law has been agreed upon. (Para147)

Of course, it is a matter of practice that National Courts will exercise great self- restraint and grant injunction only if there are very compelling circumstances and the court has been approached in good faith and there has no alternative efficacious remedy available. (Para148)

However, keeping in view the aforesaid main findings vis-a-vis abuse of process, Kompetenz- Kompetenz issues, the present suit and application are dismissed with liberty to the plaintiff Union of India to raise the issue of abuse of process before India U.K. BIPA Tribunal, that now stands constituted. The said tribunal shall decide this issue on its own merit, without being influenced by any observation make by the court (Para149)

The tribunal while deciding the said issue will take in to account defendants undertaking to the court that if the plaintiff Union of India gives its consent, it would agree to consolidation of the two BIPA arbitration proceedings before the India-U.K BIPA Tribunal. (Para150)"

The above observation and directions of Delhi High Court would have very wide repercussions. They expose the statutory action of Indian Revenue Authorities in determining the tax liabilities as well as the action of Indian Parliament to pass a retrospective amendment, to arbitration by a private tribunal in UK, which will determine the fate of the issues under BIPA. Thus the function as well as inherent power of Indian Revenue Authority under the Income tax Act, as well as that of Indian Parliament shall be adjudicated upon by a set of private arbitrators. A situation no sovereign, much less a democratic republic would like to be subjected to especially when it has been created by an inappropriate application of the treaty as well as the domestic law, enacted to give effect to Model Law and rules of UNCITRAL (United Nations Commission on International Trade Law).

At this point it is also important to keep in mind that the Arbitration and Conciliation Act 1996 has been enacted to make law respecting arbitration and reconciliation, taking in to account and giving effect to the Model Law and Rules of United Nations Commission on International Trade Law as India is a signatory to the convention. This is very evident from the Preamble of the Act of 1996. It is also mentioned in the Act that it has been passed to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto. The object of codifying the law is to end as far as possible conflict of decisions. Once a law is codified, it is of little avail to enquire what is the law apart from such codification and the courts must look to the code itself as a guide in the matter. That is a prima facie rule. Given that situation, it is submitted with utmost respect that revenue authorities could have emphasized the provisions of law as there seems to be no justification in ignoring the provisions of the act and relying on old decisions of foreign courts in deviating from the explicit statement of law. Once a law consolidating the provisions of International Commercial Arbitration has been enacted, all the parties are bound by it till such time any of the provisions are rendered ultra-vires of the Constitution of India by a competent court. The provisions of the Act of 1996 were not under challenge in this case. Section 28 of the Act emphasizes that it covers International Commercial Arbitration, leaving only the option of applicable law for the purpose of arbitration to the parties concerned. Given that situation no body could have argued that Indian Income tax Act would not apply in the present case.

Facts of the Case as taken on record by the High Court

The relevant facts are referred to by the High Court in Para 61 of the order. The facts of the Vodafone case are very well know to all who are following this litigation matters. Entire facts of the case, however, may not be in public domain. Therefore, the facts as mentioned by the High Court which are considered relevant for the present study, need to be looked in to for a ready reference-

" ---------------


(iii) On 17th April 2012, the VIHBV, a company incorporated in Netherland served upon the plaintiff (UOI) a 'notice of dispute' under the Indo-Netherland BIPA inveighing the tax liability cast upon it.

(iv) On 17th April 2014, the VIHBV, served upon Union of India a notice of Arbitration under the Indo-Netherland BIPA so as to commence arbitration proceedings in respect of the aforesaid tax liability. The UOI accepted arbitration proceeding and participated there in. While the arbitration proceeding were in progress-

(vi) On 15th June 2015 defendant served a Notice 0f Dispute on UOI under India United Kingdom BIPA.

(vii) On 24th January 2017 defendant (Vodafone UK) served upon UOI notice under Indo-UK BIPA.

(ix) On 12th April 2017, Vodafone UK in view of the non appointment of arbitrator by UOI requested the appointing authority, President of ICJ, to make a default appointment.



(xxiii) On 11.08.2017 UOI filed a civil suit seeking declaration that the notice of arbitration dated 24.01.2017 under India UK BIPA is an abuse of process and null and void.



(xxviii) On 07.09.2017 the UOI approved its arbitrator for India U.K BIPA arbitration.

(xxx) On 26.10.2017, this court (i.e. Delhi High Court), without prejudice to the rights and contention of the parties, clarified that the representative/counsel for the parties were free to participate in the proceedings for appointment of the Presiding Arbitrator

(xxxi) The order was challenged by UOI before Supreme Court which restored the matter back to High Court vide order dated 14.12.2017 with a caveat that the arbitral tribunal shall commence hearing after 10.01.2018 that is two days after a matter of hearing concluded before the Delhi High Court on 08.01.2018."

These proceedings before the High Court have concluded in an order, which would definitely be challenged or might have been challenged before the apex Court by the revenues authorities. However it is worthwhile to analyze the points missed out in the proceeding before the High Court which have, in all likelihood, resulted in an adverse order which, if not reversed, will have for reaching adverse impact.

Indian Revenue Authorities acceptance of arbitration under Indo-Netherland BIPA and what could have prompted Vodafone to go for second arbitration under Indo-UK BIPA.

Vodafone invoked arbitration proceedings under Indo UK BIPA while the proceedings under Indo Netherland BIPA were already in progress. The reason could be easy to judge but in case of multinational like Vodafone, which have the luxury of hiring the best legal experts to argue its case, it is not an easy exercise. There can only be guess work.

Before taking up the issue of treaty shopping from Indo - Netherland BIPA to Indo-UK BIPA, it may be necessary to examine how and why Indian revenue authorities agreed to arbitration under the Indo Netherland BIPA. Though according to the revenue authorities they may have a strong case under Indo Netherland BIPA, its legality or otherwise needs to be examined. The issue basically relates to retrospective amendment to the Income Tax Act 1961, which is exclusively domain of Indian Parliament. The BIPA entered into by the Government of India with a foreign Government are administrative treaties, which need not be approved by the Parliament. It is thus seen that any adverse ruling by the arbitrators under BIPA would have effect of curtailing the power of Parliament by the executive who had entered into BIPA and then subjected itself to arbitration on a pure issue of taxation which otherwise is exclusive domain of upper house of the Parliament. Having subjected themselves to the arbitration process under the Indo-Netherland BIPA, the arguments of Indian Revenue Authority hinged on a slender thread of "abuse of process" for which there is very limited precedent and thus the Court had freedom to lay down its own views on the subject.

The authorities before submitting itself to arbitration on taxation matter possibly did not seriously consider the following-

I. There is no arbitration agreement between the UOI and other foreign government on the matter of direct taxation, except the Mutual Agreement Procedure under the Double Taxation Avoidance Agreement (DTAA) between India - Netherland as well as India-UK. Once there is a specific agreement for resolution of dispute regarding taxation there is no justification for extending the scope of BIPPA to cover something, which does not fall within its scope and thus rendering a statutory DTAA redundant.

II. The definition of "Investment" in India-Netherland BIPA as contained in Article 1 is exhaustive and does not cover the issue which is purely an issue of taxation and thus clearly out of the "Scope of Agreement" as given in Article 2 of the agreement. Moreover, taxation can not, by any stretch of imagination, be brought on to the category of expropriation, loss or subrogation or even as infringing of repatriation or returns.

III. That Indo-UK BIPPA does not cover Indirect Investment as per article 2 dealing with scope of agreement. Thus an investor who is resident of Netherland could not have invoked the Indo-UK BIPPA. Surprisingly Indo-Netherland BIPPA covers cases of Indirect Investments. Thus a resident of UK is not eligible from taking up this arbitration as the investment is made by a Netherland entity in India and not its holding company- a UK entity. The concept of "Direct" and "Indirect" has already been subject matter of adjudication in case of Vodafone itself by the Supreme Court in Civil Appeal No 733/2012 Dated 20.01.2012 - 2012-TII-01-SC-LB-INTL. A perusal of the High Court judgment indicates that this issue has not been agitated before the court, A view of the stand taken by the revenue authorities, can be had from the submission of Senior Advocate as taken on record by the High Court. The ground taken were article 21 of the UNCITRAL and Section 9 of the CPC. The Amicus Curiae contended that reason for Vodafone, commencing the proceedings under Indo-UK BIPA was the Jurisdictional objection taken by Union of India in the arbitration proceedings under the India-Netherland and BIPA. However the eligibility to invoke Indo-UK BIPPA was not examined-apparently a crucial point not agitated before the court by the revenue authorities.

Surprising submission of Amicus Curiae as mentioned in paragraph 49 of the order is also very interesting. The learned Amicus Curiae submitted that BIPA arbitration have resulted in emergence of and institutional administrative law that regulate the conduct of states through a private adjudicative mechanism. Could that be the aim of Constitution of India a very big question to which there is only one definite answer "NO". He further emphasized that BIPA arbitrator are fairly small and select group of specialized professionals from USA and Europe with experience in commercial law rather than in policy making. (Emphasis supplied) In support of this contention, he referred to the speech of Chief Justice of Singapore. However the spirit and scheme of the Act of 1996 was not referred to. If that argument of finds favor with the apex court, it is submitted with utmost respect, it shall put the parliamentary functions of a sovereign republic like India to the mercy of "fairly small and select group of specialized professional from USA & Europe….".

Indo-UK BIPA v/s Indo-Netherland BIPA

With this background and without prejudice to the fact that Indo - UK BIPPA could not be invoked by a resident of Netherland and that UK entity is not an investor in India, next important point is to look for what could have prompted Vodafone to initiate arbitration proceedings under the Indo-UK BIPPA. It is a very complex issue as some of the best legal advisors including "specialized professional" would be working on it. One should not hazard a simple guess in such a situation. However this is an important issue, which needs to be examined to understand the implications of a second arbitration proceedings.

A simple plausible explanation could be found in the definition of "Investment" and "Returns" as in Indo-UK BIPA as compared to Indo-Netherland BIPA. Article 7 of both the agreements are similar in basic content providing for unrestricted repatriation of Investment and Returns. Clause (v) of definition of Investment in both the agreements will show the difference as below.

Indo-Netherland BIPA:-

Article 1 (Definition)

(b) "Investments" means every kind of asset invested in accordance with national law and regulation of the contracting party in the territory of which the investment is made and in particular, though not exclusively, includes:

(i) …………………


(v) rights granted under law or under contract such as business concession to search for and extract oil, natural gas and other minerals.

Indo-UK BIPA:-

Article 1 (Definition)

(b) "Investments" means every kind of asset established or acquired, including changes in the form of such investment, in accordance with national laws of the Contracting Party in whose territory the investment is made and in particular, though not exclusively includes;

(i) …………………

(ii) …………………

(v) business concession conferred by law or under contract including concessions to search for and extract oil and other minerals.

(c) "Returns" means the monetary amounts yielded by an Investment such as profit, interest, capital gains, dividend royalty and fee.(emphasis supplied)

The difference is obvious to note. The inclusion of word Capital Gains in the definition of returns is an important difference. Prima facie under Indo-UK BIPA business concessions is an inclusive definition and returns on investment include "Capital Gains". This with intelligent argument before an arbitration tribunal could convince them that capital gains are subject matter of BIPA and thus eligible for unrestricted repatriation as per article 7 of the BIPPA. Article 7 of Indo-UK BIPA, which provides for unrestricted transfer of returns would also be interpreted to include unrestricted transfer of capital gains. Though the revenue authority may have arguments as to whose capital gains- the investor are the seller. But Vodafone may claim that under the Indo-UK BIPA they are obliged to remit capital gains without restriction of any deduction of tax at source (the main case against them by the revenue authorities so for).

The epoch making adverse decision of arbitration tribunal in Singapore in case of White Industries v/s Republic of India should be an eye opener for the revenue authorities given the liberal interpretation the arbitration tribunals are used to as they constitute "Specialized professional of USA & Europe origin". This was decision of UNICTRAL arbitration in Singapore under BIPA between India and Australia on dispute between White Industries and Government of India. The Indian Government Stands that White Industries was not an Investor in India and that contract was an ordinary commercial contract for the supply of goods and services, was not accepted by the tribunal. The arbitration tribunal observed that "definition of Investment under BIPA is set out in broad terms and includes right to money or to any performance having financial value, contractual or otherwise. The tribunal concluded that given the definition of 'investment' in BIPA that right arises from contract may amount to investments……………… White's rights under the contract……….. does not exclude contract from qualifying as investment.

Given the kind of liberal interpretation by the arbitration tribunal it may not be easy for the revenue authority to succeed in its case under Indo-UK BIPA especially with the definitions of "Investment" and "Returns" under the BIPPA. Moreover given the mandate by the High Court in the Judgment under consideration, the outcome of principal of Kompetenz- Kompetenz may be anybody's guess.

Status of arbitration & Conciliation Act 1996 and the role of Apex Court in arbitration

The Hon'ble High Court made a very drastic observation in Para 102 of the order stating.

"This court of the view that intent of BIPA is to afford protection to the investor and such purpose is better served if the arbitration agreement is subjected to international law rather than the law of the state"

The Hon'ble High Court in Para 146 ruled that

"146. As the present case is not a commercial arbitration, the act of 1996 shall not apply. This Court is of the view that in view of a situation where the act of 1996 does not apply, its inherent powers are not circumscribed by anything contained in the act."

The observation of the Court is based on the points made by various parties before the court. However, it needs to be observed that the issue fell within the definition of "International commercial arbitration" as defined in section 2(F) of the act of 1996. Clause (F) of subsection (1) of section 2 of the act of 1996 states-

"International commercial arbitration means an arbitration relating to dispute arising out of legal relationship, whether contractual or not, considered as commercial under the laws in force in India where, at least one of the parties is……….

i. an individual who is a national of, or habitually resident in any country other than India, or

ii. a body corporate which is incorporated in any country other than India, or

iii. ……

iv. The government of a foreign country."

Thus it is difficult to say that present case did not fall in the category of "International commercial arbitration" which is the subject matter of the present case and the Act of 1996. The Supreme Court in Bhatia International v/s Bulk Trading S/A (AIR 2002 SC1432) ruled that the provisions of part I of the Act of 1996 would apply to all arbitrations and all proceedings relating there to. Where such arbitration is held in India provisions of part 1 would compulsorily apply and the parties are free to deviate only to the extent permitted by the provisions of part 1. In case of International commercial arbitration held out of India provisions of part 1 would apply unless the parties by agreement express or implied, exclude all or any of such provision. Given that position of law the Revenue authorities could not have taken a stand that the Indian Tax law would not apply to the case and thus could not have excluded the provision thereof

As is evident from the contents of the order the revenue authority have not opted out of the provisions of the Act otherwise they would not have approached the court. Therefore, The provisions of part 1 of the act of 1996 would invariably apply. Thus is submitted with due respect that, reliance on foreign case laws in disregard of the provisions of domestic law and the decision of Supreme Court of India which have direct bearing on the facts of the case, has resulted in an error of judgment. The revenue authorities could have brought these case laws to the notice of the Hon'ble Court.

The Hon'ble Court relied on the decisions of the court of appeal case in republic of Ecuador as well as Caribbean court of justice decision in the case of British Caribbean Bank Ltd. However decision of the apex court of India in the case Wellingdon Associates Ltd vs Kirit Mehta (2000)4 Supreme Court cases 272 was not referred to by the revenue authorities and accordingly it could not be considered by the Delhi High Court. It has been very clearly stated in the judgment-

"In my view, Section 16 does not take away the jurisdiction of Chief Justice of India or his designate, if need be, to decide the question of existence of arbitration agreement. Section 16 does not declare that except the arbitral tribunal none else can determine such a question. Meerly because the new act permits the arbitrator to decide the question, it does not necessarily follow that at the stage of section 11 the Chief Justice of India or his designate cannot decide the question so as to existence of arbitration clause.



It is well settled and has been repeatedly held that source of jurisdiction of the arbitration is the arbitration clause. (See Waverly Jute Mills Case) When that is the position, the arbitrator cannot in all situation be a sole authority to decide upon the existence of arbitration clause."

In all fairness, had these cases of Bhatia International and Wellingdon associates been referred to the outcome could have been different.

Future Course:

As pointed out in the paragraphs 129 to 133 of the order, the court expressed that it gives benefit of doubt to the plaintiff i.e. the Union of India and does not record its finding of willful suppression or conduct vitiated by malice. However, after noticing that as the plaintiff the Union of India have appointed an arbitrator, and after the orders of the Supreme Court of India, Chairman stands appointed by the two party appointed arbitrator ,the tribunal was complete. Therefore, the court decided to leave the issue of jurisdiction to be decided by the tribunal based on the principle of Kompetenz- Kompetenz.

However, all is not lost. The revenue still has a case to take up the matter with Supreme Court of India as per the provisions of subsection (6A) of Section 11 of the Arbitration and Conciliation act of 1996 (as amended in 2015) making out a case that the law of 1996 indeed applies to the present case as already ruled by the Supreme Court in the other cases of Wellingdon Associates Ltd and Bhatia International (Supra). A more important issue could be to emphasis that in terms of section 7 of the act of 1996 there does not exist any arbitration agreement in respect of taxes imposed by the sovereign Parliament, other than the Double Taxation Avoidance Agreement.

So far as the proceedings of arbitration under the already appointed tribunal are concerned, the revenue authorities may emphasis that matter hinges on the issue of retrospective amendment of law, they should note that the government of UK have also resorted to retrospective amendment of taxing statues on a number of occasion. In fact it would be advisable if the revenue authorities involve the Government of UK (who are the signatories to the BIPPA under which they arbitration is claimed) into the proceedings sighting their own retrospective amendment to the taxing statute. Further the issue before the Arbitration Tribunal would be scope of BIPPA as-

(1) The provisions of Indo - UK BIPPA cannot be attracted as the investor VIBHV being registered in Netherland is not a resident of UK and the agreement does not provide for indirect investment made through another company resident of another country, which has entered in to a separate BIPPA agreement with the Government of India.

(2) That BIPPA does not cover the cases of taxation imposed as per law passed by the Parliament and therefore, cannot be subject matter of private Arbitration Tribunal appointed by the executive thus leaving the Parliament at the mercy of the executive to circumvent a law duly passed by the Parliament.

(The Author is Former Principal CIT)

  • DTAAs
  • TIEAs
  • Circulars
  • Circulars (I-T Act, 1922)
  • Instructions
  • Notifications
  • Administrative Orders
  • DRP Panel
  • I-T Act, 1961
  • Relevant Portion of I-T Rules,1962
  • Relevant Portion of I-T Act,1922
  • GAAR
  • Equalisation Levy
  • Draft Guidelines
  • Committee Reports
  • Intl-Taxation
  • Finance Acts
  • Manual on EoI
  • DTC Bill
  • UN Model
  • Miscellaneous
  • Guidance Notes - AEOI
  • OECD Conventions
  • Cost Inflation Index
  • Union Budget
  • Information Security Guidelines
  • Draft Notifications
  • Circulars
  • Instructions
  • Notifications
  • Relevant Sections of Act
  • TP Rules
  • Forms
  • Miscellaneous
  • APA Annual Report
  • APA Rules
  • UN Manual on TP
  • Safe Harbour Rules
  • US Transfer Pricing
  • FEMA Act
  • Exchange Manual
  • Fema Notifications
  • Master Circulars
  • Press Notes
  • Rules
  • RBI Circulars
  • FDI Circulars
  • Reports
  • FDI Approved
  • RBI Other Notifications
  • FIPB Review
  • FEO Act
  • Black Money Act
  • PMLA Notification
  • PMLA Instruction
  • PMLA Bill
  • FM Budget Speeches
  • SEBI
  • Multimodal Transportation
  • Vienna Convention
  • NBFC Reports
  • EXIM Bank LoC
  • Manufacturing Policy
  • FTDR Act, 1992
  • Intellectual Property
  • White Paper on Black Money
  • Posting Policy
  • PMLA Cases
  • Transfer of Property
  • CBR Act, 1963
  • MCA Circular
  • Book Review
  • Limitation Act
  • SSAs
  • EPFO
  • FAQs
  • Acts
  • Rules
  • Guidelines
  • Tourist Visa
  • Notifcations
  • Types of Visa
  • Agreements
  • Arbitration
  • Model Text
  • Relevant Portion of I-T Act
  • Circulars
  • I-T Rules, 1962
  • MISC
  • Notification
  • About Us
  • Contact Us
    A Taxindiaonline Website. Copyright © 2010-2018 Pvt.Ltd. All rights reserved.