"RETROSPECTIVE clarificatory amendments to tax laws" are not dirty words as has been made out by the International Arbitration Award in the case of Vodafone-an award which has been a matter of public debate both in print and electronic media. However a fact which has missed attention is that there are precedents of such retrospective amendments in the home country of Vodafone i. e. United Kingdom in its own case. These we will discuss a little later. There have been or could have been many advices for the respondent in this case but that stage seems to be over now. The public as well as the author does not have the benefit of complete text of the award but only the decision part based on internet search. The following analysis is based on the available part of the award and may need some refinement once complete text of the award is available in public domain. For the time we need to understand the impact or consequences of such an award which shakes the very foundation of arbitration proceedings as envisaged under the domestic Arbitration and Reconciliation Act 1996. A law which was promulgated by the Sovereign India to give effect to the provisions of the United Nations Commission on International Trade Law. (UNCITRAL).

At this point it is also to be recalled that a number of such arbitral proceedings are pending before various tribunal constituted by ICJ and any action taken by revenue in favour of this award, even as one time measure, may open up flood gates by becoming a precedents for many others. Huge amounts are under dispute in many arbitration proceedings initiated by renowned names like- Cairns, Bechtel, Standard Chartered Bank, BNP Paribas, Credit Lyonnais, Credit Suisse to name a few. It is very easy guess that all these tax payers have no case under the domestic law and that's why they have taken recourse to International Arbitration.

An amendment to tax law does not necessarily involve change in law. Amendments are often made to clear up ambiguities and such amendments which are intended to prevent misinterpretation do not alter the law in any way. There are innumerable cases in the history of tax legislation where the legislators have added or deleted explanations to clarify the position. The critics of the retrospective amendment to the Income Tax Act 1961, the majority of whom are tax advisers to MNCs, have following points in their arguments;-

1. That it undermines the certainty of the tax statute for the honest tax payer.

2. That it infringes upon the Bilateral Investment Promotion Agreement (BIPA) between the two sovereign as laid down in the article 4(1) of the Agreement between India and Netherlands in this case.

3. It undermines the credibility of the fiscal system making the law less attractive to for foreign investors.

Such points can be made out against any fair and equitable law without much effort if it does not suite one's scheme of things. It is, however, to be seen that these are by themselves invalid arguments in view of the following,-

1. It is disingenuous for the tax payer involved to claim that in this form of tax planning the government action has taken them by surprise.

2. Any Sovereign can raise taxes in a fair and equitable manner as per the law passed by the legislature. A law promulgated by Government of India cannot be subject matter of private arbitration under BIPA when the agreement itself specifically excludes taxation matters from its purview.

3. The credibility of the tax system was under threat from the action of minority tax payers being able to avoid such huge amount of tax at the expense of other honest tax payers.

As a matter of domestic constitutional law, the rights of a tax payer at the domestic level can only be determined by domestic law-which may involve public international law when it is appropriate. It is not the function of International law to interfere in the application of states own laws in accordance with its constitution. The Vienna Convention at the very outset provides that a treaty shall be interpreted in good faith and in accordance with the ordinary meaning to the terms in their context and in the light of its object and purpose. This principle has been highlighted the world over by various Supreme Courts. The International Court of Justice( which constituted the present tribunal in Vodafone Case) has in its advisory opined (ICJ report 1950, p8)as follows;-

"The court(ICJ)considers it necessary to say that the first duty of the tribunal which it is called upon to interpret and apply provisions of a treaty, is to endeavour to give effect to them in their ordinary and natural meaning in the context in which they occur. If the relevant words in their natural and ordinary meaning make sense in their context, that is the end of the matter"

The Tribunal, which has been constituted by ICJ could not have been oblivious of this very basic tenet. Another very important point which seems to have been left out is that taxation of a non- resident, is a matter covered under Double Taxation Avoidance Agreement between India and Netherland and is in force. Given that situation, the interpretation of word "investment" under BIPA to encroach upon the subject matter of another treaty on tax, seems to have ignored all the cannon of interpretation of treaties. Once it is seen that the matter relates wholly and exclusively to taxation and is subject matter of DTAA, it would seem most inappropriate for the tribunal to assume jurisdiction over a tax matter by artificially extending the scope of BIPPA, which is by itself defined and limited by its scope defined in clear terms in the agreement itself.

All international treaties operate on reciprocal basis. In present case Indian domestic law has taken steps to check an abuse of perceived loophole in the statute. It is also important that Netherland tax laws and jurisprudence also have devised similar method to counter tax avoidance. The Dutch tax authorities can narrow or broaden the interpretation of text of a provision depending upon the intent of law to exclude an abuse or approach the facts differently by presuming a sham transaction. As per Supreme Court of Netherland the key point in analysing the tax laws is the true intention of the parties and not simply the representation provided in derogation of facts. Another doctrine that can be invoked to counter tax avoidance is "tax qualification" under which the designation given to certain legal forms under civil law is ignored for the application of tax laws. When this is found unsuccessful the authorities invoke "fraus legis" doctrine under which a transaction may be declared not to exist, ignored or replaced by similar action if two conditions are satisfied(1)the decisive motive for entering into the act is tax evasion, and (2)the method adopted is contrary to the intent and purpose of law.

These provisions clearly confirm that put in a similar situation (as faced by Indian Revenue in case of Vodafone) the Netherland Tax Authorities would have acted in the similar fashion. The government of India clarified and enforced similar provision by a clarificatory amendment. The fact that none of the Indian entities have so far indulged in such practice in Netherland and Netherland authority had no occasion so far to invoke their anti- avoidance provisions cannot be held against India under BIPPA as not being fair or equitable.

2. Applicable Law in case of International Arbitration

Once an arbitral award has been issued examination of its merit by another authority may not be free from doubt. However, there are provision in the domestic which provide for non- enforcement of the arbitral award by the domestic court. The other situation can be where the tribunal has acted in excess of jurisdiction and the subject matter is not covered under the arbitration agreement. Arbitration and Reconciliation Act 1996 (subsequently amended in 2015), referred to as the Act, was enacted to consolidate the law in relation to domestic arbitration as well as international arbitration and enforcement of foreign arbitral awards. The act adopts the model law as adopted by United Nations Commission on International Trade and Law (UNCITRAL). The Supreme Court of India had an occasion to look in to it and laid down that the provisions of this act would apply to all the arbitration and all the proceedings relating thereto. In case of Bhatia International vs Bulk trading S. A. (2002, 4 SCC 105) the Supreme Court directed that part I of the Act would apply to all arbitration and to all proceedings relating there to. In case of international arbitration, which is the case of Vodafone, the provisions of part I would apply unless the parties by agreement, express or implied, exclude all or any of its provisions. In that case law as chosen by the parties would prevail.

If the Government of India (Department of Revenue)is of the view that award need not be given effect to it can invoke section 48 of the Act. Section 48 of the Act provides that an application for setting aside an arbitral award can be made and the enforcement can be refused, if the court finds that ;-

(a) The subject matter of difference is not capable of settlement by arbitration under the laws of India,or

(b) The enforcement of foreign award would be contrary to public policy of India.

An explanation to the relevant section also provides that an award is in conflict with the public policy of India, only if,-

(i)……….

(ii) It is in contravention with the fundamental policy of Indian Law; or

(iii) it is in conflict with the most basic notion of morality or justice.

The Supreme Court in case ONGC vs Saw Pipes Ltd (AIR 2003 SC 2629) explained that the phrase "public policy of India" is not required to be given narrow meaning. The said phrase is susceptible of narrow or wide meaning depending upon the object and purpose of legislation. Hence an award passed in contravention of existing provision of law is liable to be set aside. Further in case of Olympus Super Structure vs Meena Vijaya Khaitan (AIR 1999 SC 2102), the SC observed that section 34 of the Act is based on article 34 0f UNCITRAL Model Law.

3. Does BIPA authorise arbitration with regard to taxes

It is not under dispute that for a valid arbitration proceedings there should be an agreement for arbitration and that subject matter of dispute should be covered under such agreement Where there is no arbitration agreement with regard to taxation, there is an initial want of jurisdiction which cannot be cured by acquiescence So even if the GOI has participated in the arbitral proceedings it cannot by itself be held against it to deny legal course available to it. In this backdrop we can now proceed to examine whether the Bilateral Investment Promotion and Protection Agreement (BIPPA) between India and Kingdom of Netherlands provides for arbitration with regard to matter which relate wholly or mainly to taxation. The scope of agreement is defined in article 2 of the agreement as follows;-

Article 2

Scope of Agreement

The agreement shall apply to any investment made by investors of either Contracting Party in the territory of other Contracting Party including an indirect investment made through another company,wherever located,which is fully owned by such investor, whether made before or after coming in to force of this agreement.

The scope of the BIPPA is limited to investments only which have been defined in article 1 of the agreement as follows;-

Article 1

Definitions

(a) "investments" means every kind of asset invested in accordance with the national laws and regulations of the contracting party in the territory of which the investment Is made and in particular, though not exclusively,includes;

i. movable and immovable property as well as property rights such as mortgages, leases, liens or pledges

ii. rights derived from shares,bonds and other kinds of interests in companies ;

iii. rights to money or to any performance having value;

iv. intellectual property rights, technical processes, goodwill and knowhow in accordance with the relevant laws of the respective parties;

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

The above two articles defines without any ambiguity that scope of agreement is restricted to protection and promotion of investments and not income derived from such investment or taxes there on. Article 7 dealing with repatriation of investment and returns also refers to only unrestricted currency transfer in freely convertible currency without delay and non-discriminatory basis. It can be nobody's case that any of the parties are required to ensure highest profit to any investor or zero taxation of repatriation. This article cannot, by any stretch of imagination be interpreted to mean that there shall be no taxation of sale proceeds or income even if provided for as per the taxation laws of the parties. This leads us to a very clear conclusion that the matter of taxation of capital gains is neither subject matter of BIPPA nor there is any other agreement (other than DTAA) which may provide for any limitation on any of the parties to counter or to take steps if any investor resorts to any scheme of avoiding taxes. The Governments the world over have taken steps to safeguard revenue through retrospective amendments if and when they faced any ingenuous methods of tax avoidance and they have never been found to be unfair or not equitable if they apply across the board as per scheme of the respective act. BIPPA neither puts any restriction on the power of sovereign to any legislation nor the article on investment could be stretched to infer such a construction. Moreover the retrospective amendment applies to all the tax payers and is only a clarification of an existing provision of the Income Tax Act and by itself cannot be said to be unfair or not equitable as it applies to all the persons who were covered prior to this clarification. It cannot also be argued that it is discriminatory or arbitrary. Even otherwise the Arbitration Tribunal cannot encroach upon the authority of Legislature as the BIPPA is purely administrative agreement entered into by the executive. It also needs to be stated that authority to hold an statute as unfair, inequitable or discriminatory is vested with High Court under article 226 or under article 32 with the Supreme Court. NO arbitral Tribunal whether under ICJ or other-wise, can encroach upon the jurisdiction of High Court or the Supreme Court. If the Tribunal is allowed to give award like this it will open the gates for the Executive to put a check or circumvent a law passed by the legislature - a situation which is not contemplated in the constitution of India. It is thus anybody's guess that giving effect to this award would be unconstitutional as there is no provision in Income Tax. This would be possible,if and only if, an amendment is now brought into the Act by to undo the amendment under dispute which was brought in by the Finance Act 2012.

4. United Kingdom had introduced retrospective amendment to plug tax avoidance

Vodafone is a company headquartered in UK and its tax history in UK furnishes precedents of schemes devised to avoid taxes which had to be plugged by retrospective amendments by the HM's Government also. It is likely that to get away from this tax history the investment in Indian entity was made through a subsidiary in Netherlands. Vodafone UK has been through two instances where UK revenue had to resort to retrospective amendment on two occasion to plug the loopholes in the tax network which were used to avoid taxes in UK.

In 2008 the then UK Government introduced provisions to counter avoidance scheme which sought to exploit double tax avoidance treaty of UK which were introduced in 1987. A clear case of retrospective amendment. It clarified the law as it stood. There were efforts to make the government change its position and also mount legal challenge to overcome the new legislation as being incompatible with the European Commission directives. But these all attempts failed. The UK Governments stand was that the tax payer who arranged its tax affairs in this manner was fully aware of tax consequences in other jurisdictions also. To briefly mention, Vodafone had taken over Mannesmann of Germany which held controlling stake in Germany's largest cellular network which were outperforming all other segments of the company. In this case the takeover was done in the year 2000 through another tax haven Luxembourg. It was similar to present case at hand. The second case also arose in respect to the loop holes Double tax treaty of UK with other countries. A provision was introduced in the legislation known as Budget Note 66 (BN66) expressly meant to address misuse of DTAA by residents of UK. This too was introduced in by Finance Act 2008 with retrospective effect from 1987. In an answer to a number of questions the then treasury minister stated;-

'UK residents are taxable on their worldwide Income wherever it arises including the situation where it arises by way of foreign partnership. Budget Note 66did not chance the position but announced a new legislation to put this position beyond doubt and to close down a wholly artificial tax avoidance scheme. This scheme involved foreign partnership comprising of foreign trustees that sought to exploit a perceived loophole."

It can be seen that the Indian Revenue faced with similar predicament,which arose due to a Supreme court decision, had to bring in a clarificatory amendment in the Act. At this point it is also important to note that Vodafone had brought in another arbitration under Indo UK BIPPA also. The Income Tax department challenged the same before Delhi High Court being an abuse of process of law. The High court while dealing with the matter in its judgement dated May 7, 2018 in the concluding para stated;-

"150. The tribunal while dealing with the said issue will take into account defendant's undertaking to this court that if plaintiff GOI gives its consent it will agree to consolidation of the two BIPPA arbitration proceeding before the Indo-UK BIPPA Tribunal."

It is not known whether the two arbitration finally got consolidated or not. However it seems very probable that the outcome of the Tribunal award definitely would have been different than present if the history of retrospective amendments of one of the parties to BIPPA were made known to the Tribunal. Be that as it may, given the two precedents of retrospective amendment in the home country of Vodafone, it would be naïve to suggest and to argue that that the appellant were not aware of this exigency or had not provided for it. In the case of Mannesmann take over a provision of Sterling Pounds 2. 2. billion was made in the books.

5. The Arbitral award; how far fair and equitable(?)

As already mentioned the author does not have the benefit of full text of the arbitral award as it is still not available in public domain. As already explained the Tribunal lacked the jurisdiction to adjudicate upon a matter wholly and mainly relating to taxes as the scope of BIPPA did not include it. The present analysis is based on the final operating part of the arbitral Award as given in para 363 as decision of the tribunal. The arbitral tribunal, inter-alia, gave the following decision;-

"XIV. DECISION

363. After deliberation,and for the reasons of fact and law set out above, the tribunal decides as follows:

(1) The Tribunal has jurisdiction, under the terms of agreement between the Kingdom of Netherlands and the republic of India for the Promotion and Protection of Investment, done at the Hague on 6 November1995, to consider the claimants claim for the breach of agreement.

(2) The claimant is entitled, in respect of its investment in mobile telecommunication in India, to the protection of fair and equitable treatment laid down in Article 4(1)of the Agreement.

(3) The respondents conduct of the imposition of the claimant of an asserted liability to tax notwithstanding the supreme court judgement is a breach of the guarantee of fair and equitable treatment laid down in article 4(1)of the agreement,as is the imposition of interest on the sum in question and the imposition of penalty for the non -payments of the sum in question.

(4) the finding of breach in paragraph 2entais the obligation on the respondent to cease the conduct in question, any failure to comply with which will engage in international responsibility.

(5)……. .

(6)………

(7) The respondent will reimburse to the claimant the sum of sterling pound 4,327,294. 50 or its equivalent in US$ being 60% of the Claimant's cost for legal representation and assistance and Euro3000 or equivalent US$ being 50%of the fee paid by the claimant to the appointing authority"

If we look precisely in to article (4) of BIPPA we would see that the Tribunals inferences are not based on the express words of the agreement. We have already seen that matter of taxation are not covered in the scope of the agreement. The Tribunals have the knack of extending the scopes of the agreements in the name of liberal interpretation. However, it is also rule of law that what has been expressly prohibited in the agreement cannot be read into it in the name of liberal interpretation. This mandates us to go through the provisions of article (4) of BIPPA which is the basis of this decision.

"Article 4

National treatment and most favoured nation treatment

(1) 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) Each contracting party shall accord to such investment, including their operation, management, maintenance, use, enjoyment or disposal by such investor, treatment which shall not be less favourable than that accorded either to investment of its own investors or to investment of investors of any third state, whichever is more favourable to the investor concerned.

(3) …………………. .

(4) The provision of paragraph 1 and 2 in respect of the grant of national treatment and most favoured nation treatment shall also not apply in respect of any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation or arrangement consequent to such legislation relating wholly or mainly to taxation.

(5) ……………"

The treaty does not define the term "fair and equitable treatment and full protection" nor does it establish the minimum condition for meeting this provision. Since the definition is not given this clause it is left open for interpretation by tribunal and that is how it goes in favour of corporate entities against the state. However it can be seen that fair and equitable treatment has been clubbed under the head note "National Treatment and most favoured nation treatment" and accordingly it puts a limit on the expanse of fair and equitable treatment as envisaged in this article. This further finds credence from the para 4 with the beginning of words 'paragraph 1 and 2 in respect of grant of national treatment and MFN". A plain and simple reading of para 4, will thus leave no doubt that the matters of dispute, wholly or mainly relating to taxation whether regarding tax treaty or domestic legislation, are expressly and specifically out of ambit of article 4 and the BIPPA itself in general.

The retrospective clarificatory amendment to section 9 of the Indian Income Tax Act is applicable to all tax payers in respect of all sources of income defined therein, whether resident or non- residents, citizen or non- citizen. This would in-fact be enlightening to know how in relation to an issue which is wholly,exclusively and entirely of income tax could have been deliberated upon by the tribunal under BIPPPA. On the flip side it appears the arbitral tribunal itself was not very confident and to make the respondents agree to the position in para 4 they gave a veiled caution that "any failure to comply will engage in international responsibility". Any judicial authority whether a court and more so in the case of a tribunal, is concerned with the existing facts and the applicable law and come to a conclusion as to what could have been the right course of action. The consequence of failure to follow the award are not a matter for the tribunal to adjudicate right away in the decision itself.

6. The road Ahead

The merits of the award, when seen in isolation, may be a matter of dispute for which there can be a never ending debate. The purpose of this study was to examine whether a matter which relates wholly and mainly to tax could have been adjudicated by the arbitral tribunal under BIPPA. A plain and simple reading of the agreement clearly show it is out of the scope of BIPPA. Moreover the other parties to the agreement viz UK and Netherland have themselves resorted to retrospective amendment to their tax laws as and when required. Therefore there can be no argument that the agreement should be read one sided and the retrospective amendments made by the other parties to BIPPA should be ignored as they do not affect the present tax payer. The point now is to be whether this award can be enforced in India when it suffers from exercise of excess jurisdiction and at the same time is in contravention of the existing law of land on the very day it was delivered. The Supreme Court has been on record to say that an award can be said to have become binding on parties only when it enforceable and this must be determined as per the law applicable to award. Section 48 of the Act in subsection (2) provides additional ground in terms of vested power of the courts to refuse to enforce an international award if it finds that subject matter is not capable of settlement by arbitration under law and is opposed to law or is opposed to public policy. As we have seen the award has been issued by exercise of excess jurisdiction by the tribunal and at the same time is in contradiction to the law as passed by the parliament, the Revenue cannot follow it and reduce the tax liability till the time the existing law gets amended or an ordinance is brought in for Vodafone case specifically and thus create adverse international precedence for all time to come. However as the tone of the award is indicative of pressure of international responsibility on the respondent, the Revenue may simply not recover these taxes and justify inaction in the name of this award without attracting much adverse criticism for now. However, it may lead to more disastrous consequences as other tax payers like Cairns and others will follow this precedence and claim equitable treatment if demands are pressed in their cases. It is on record that the then Finance Minister (late) Shri Arun Jaitely had stated on the floor of the house that government of India does not favour retrospective amendments. But no steps seem to have been taken to find a solution to retrospective amendments which have already become law. It is therefore, to be seen whether the Government's present dispensation would yield to the pressure and get into an inaction and thus de-facto accept the award or it will follow the laws of the land and implement recovery of taxes which have already become overdue for so many years. The present Government has to take this call. In fact the respondents i. e. the GOI being adversely affected needs to file a plea in High Court within the limitation of time available under the Act or else it may become a dangerous precedent for the GOI in International Law for all times too come which many other MNCs may be tempted to quote and seek to apply in their cases.

(The Author, Devendra Shankar is Former CIT)