Sunday , November 29, 2020 |   16:05:17 IST
About Us Contact Us Newsletters
Forgot Password
Home >> TII EDIT
Encore Vodafone!
By D P Sengupta
Oct 28, 2020

IT has been widely reported in the Indian press that on the 25th of September, 2020, an arbitration tribunal has finally decided the petition filed by Vodafone against the Government of India in its favour. The arbitral order is not in the public domain; the hearings before the tribunal are held in private and the final order is made public only if the parties agree. So, one does not know what was the cause of action, what were the arguments and what were the reasons adduced by the tribunal to decide in favour of Vodafone. There is no news release available on Vodafone group's website.

There was a release at the time of institution of the proceedings though. It is gathered therefrom that on the 17th of April 2012, Vodafone had served a notice against the Indian government under the India-Netherlands bilateral agreement for the promotion and protection of investment (BIPA). According to the said press release, Vodafone group's Dutch subsidiary, Vodafone International Holdings BV (VIHBV) had served the notice claiming that it was a Dutch company and was thus an "investor" as defined under article 1(d) of the India-Netherlands BIPA. It seems that Vodafone had alleged the following breaches by the Indian Government - it's obligation to accord fair and equitable treatment to investors; provide full protection and security; not breach the legitimate expectations of investors in making investments; not deny justice or breach previously provided assurances; and not take steps to indirectly expropriate the investment.

At this stage it will be useful to recapitulate in brief the facts leading to the dispute. Vodafone is a British multinational. Its subsidiary, VIH BV, Netherlands had purchased a share of a Cayman Island registered company, CGP Investment (Holdings) Ltd to get hold of the Indian assets of Hutchison group of Hong Kong that had built up an extensive telecom business in India. When the tax authorities came to know that it was exiting its Indian telecom business and Vodafone was the byer, they asked Vodafone to withhold tax from the sale consideration before making payment to the Hutchison group. Under the Indian tax law, a taxpayer remitting any sum of money chargeable to tax in India is required to withhold tax from the same before such remittance. In case of any doubt, it could also ask the tax department to determine the amount that would have to be withheld.

Vodafone refused to do so and made the payment to Hutchison anyway. It is because of this action of Vodafone, that the tax department declared it as an 'assessee in default' and proceeded to recover the amount from Vodafone. This is the crux of the tax dispute of Vodafone with the government of India. Vodafone took on the responsibility to determine whether any tax was deductible at source on the payments made by it to Hutchison. It did not deduct tax on the ground that the transfer of the share in question took place outside India and the resultant capital gains accruing to Hutchison was not chargeable to tax in India under the ITA.

There was a spate of litigations, writs, SLPs, writ appeal involved in the case. The Bombay High Court decided in favour of the tax department holding that it was a case of transfer of Indian assets through the transfer of a share of a company in the Caymans.

When the matter reached the Supreme Court, it decided otherwise holding that under the current law as existing, such an indirect transfer could not be brought to tax in India under its domestic law.

The Government of India then brought in a retrospective amendment that clarified that such indirect transfer was also covered by the capital gains provision of the Income Tax Act. Since it was a clarificatory amendment, the effect was given from the inception of the Act since the provision always existed and only the intent was clarified because of the understanding of the Supreme Court. My personal opinion is that the Honourable Supreme Court was not right in its interpretation but most of the commentators think otherwise. Be that as it may, the result of the amendment was that Vodafone was fastened with a liability in respect of the amount that it was supposed to withhold.

It was in these circumstances that Vodafone, instead of reagitating the case chose to invoke the BIPA between India and the Netherlands and it is this case that came to be recently decided.

An investment protection agreement is basically a promise by the Contracting parties to assure investor from the investing countries either to do or not to do certain things. In the India- Netherlands, BIPA, this is ensured through Articles 3 and 4 thereof.

Article 3 dealing with 'Promotion of Investments' 'says:

"Each Contracting Party shall encourage and promote favourable conditions for investors of the other Contracting Party to make investments in its territory in accordance with its laws and policy. The admission of such investment shall be subject to the laws and policies of the Contracting Party in whose territory the investment is made."

More substantially, Article 4, dealing with National Treatment and Most Favoured Nation statement states:

(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 investments, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded either to investments of its own investors or to investments of investors of any third State, whichever is more favourable to the investor concerned.

(4) The provisions paragraphs 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 arrangements consequent to such legislation relating wholly or mainly to taxation.

(5) Each Contracting Party shall observe any obligation it may have entered into with regard to investments of investors of the other Contracting Party. Provided that dispute resolution under Article 9 of this Agreement shall only be applicable in the absence of a normal, local, judicial remedy being available.

We may note that Article 9 refers to resolution of disputes including by an arbitral tribunal. We may also note sub-section 4 thereof that states as under:

(4) In respect of arbitration proceedings under paragraph 3 (c) of this Article the following shall apply:

(i) The Arbitral Tribunal shall consist of three arbitrators. Each Party shall select an arbitrator. The arbitrators shall be appointed within two months from the date when one of the parties to the dispute informs the other of its intention to submit the dispute to arbitration. The two arbitrators shall within two months from then appoint by mutual agreement a third arbitrator, the Chairman, who shall be a national of a third State.

(ii) If the necessary appointments are not made within the period specified in paragraph (4) (i), either party may, in the absence of any other agreement, request the President of the International Court of Justice to make the necessary appointments.

(iii) The arbitral award shall be made in accordance with the provisions of this Agreement.

(iv)  The tribunal shall reach its decision by a majority of votes.

(v)  The decision of the arbitral tribunal shall be final and binding and the parties shall abide by and comply with the terms of its award.

As mentioned earlier, the decision of the arbitral tribunal is not in the public domain. So, it is premature to readily comment on the decision. However, from the statements of the lawyers involved in this case, it seems that the tribunal had held that the actions of the Union of India were in violation of the promise of fair and equitable treatment.

Fair and equitable treatment is a vague term although varying judicial interpretations are available. What is interesting in the context of the present case is the exclusion provided in Article 4(2) in relation to taxation measures.

We may also note that Vodafone, even after instituting arbitration proceedings under the India-Netherlands BIPA had filed another arbitration case under the India-UK BIPA. In that context, it will be interesting to examine the particular clauses in the India-UK BIPA. Article 3 deals with Promotion and Protection of Investment. Article 3(2) mentions:

"(2) Investments of investors of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security of the other Contracting Party."

Article 4 then deals with National Treatment and Most-favoured-nation treatment and clause in clause (3)(b) thereof excludes from the operation of the article DTAAs and any domestic legislation wholly or mainly to taxation.

From the above, it can be seen that the articles in India-Netherlands and India-UK agreements are somewhat differently worded. While in the India-Netherlands agreement, the FET treatment is part of Article 4 and it is subject to an apparent exception in respect of domestic tax provision, in the India-UK agreement, the FET is the subject of a separate Article 3 and the exception in relation to domestic tax provision is not found.

That could be one of the reasons why, after India objected to the entertainment of the arbitration proceedings in terms of the Netherlands treaty, the British company itself alleged that its investments were impaired and tried to invoke another proceeding under the UK agreement.

Even though the arbitral award is not in the public domain, fortunately there is the order of the Delhi High Court that throws some light on the lines of argument. When India objected to the initiation of the arbitration under the UK agreement, India alleged abuse of process since for the same issue, the group company had already invoked arbitration under the Netherlands agreement. India also refused to nominate its arbitrator. However, its objections seemed to have been overruled. In the circumstances, the Union of India filed a filed a civil suit seeking to declare that the notice of arbitration issued by Vodafone under the UK agreement was an abuse of process and should be declared null and void.

The Delhi High Court issued an interim order restraining Vodafone from taking any further action. This was then subject to a SLP before the Supreme Court which observed that since the matter was coming up before the Delhi High Court on 08.01.2018, the process of constitution of the arbitral tribunal may continue but the tribunal shall not pass any order before 10.1.2018.

When the matter came to be decided by the Delhi High Court, Vodafone argued that it was not subject to the jurisdiction of any Indian Court and entered appearance on a without prejudice basis. We may note that by that time India had already nominated its arbitrator under the India-UK agreement (on 7th September, 2017). Vodafone also agreed to consolidate the proceedings under the two tribunals but that offer was rejected by the government.

While dealing with the issue, the Delhi High Court rightly observed that jurisprudence in relation to investment treaties is still evolving. The following issues raised by Vodafone were considered by the Delhi High Court in this regard:

1) Whether the court has jurisdiction over Vodafone and over the subject matter of dispute?

2) Whether there is a threshold bar or inherent lack of jurisdiction with the Court to deal with BIT Arbitrations? (i) Whether the BIT arbitration agreement between the plaintiff and the defendant is itself a treaty? (ii) What is the court's approach to treaty obligations and how an international treaty is to be interpreted?

3) Whether the BIT Arbitrations and suits relating to BIT Arbitrations are governed by private international law or any other system of law including domestic law?

4) Whether the courts in India can restrain Bilateral Investment Treaty Arbitrations, which are oppressive, vexatious, inequitable or an abuse of the legal process? (i) Whether filing of multiple claims by entities in the same vertical corporate chain with regard to the same measure is per se an abuse of the legal process or vexatious? (ii) Whether consolidation of arbitration proceedings is an adequate answer to abuse of process by Vodafone?

5) Whether the plaintiff under the doctrine of kompetenz-kompetenz, has to raise the plea of multiple claims constituting an act of oppression before the same arbitral tribunal ?

6) Whether the injunction order dated 22nd August, 2017 is vitiated on the ground of suppression?

7) Whether in view of the events leading up to the constitution of the arbitral tribunal or any other attending circumstances, the present suit has become infructuous?

In the event, considering the fact that a tribunal was already composed and also considering that India could question the jurisdiction of the tribunal before the tribunal itself, the suit was dismissed. However, the court deliberated on all the 7 questions and some of the observations may be relevant now that the order of the arbitral tribunal as constituted under the India-Netherlands BIPA has ruled in favour of the taxpayer.

The Delhi High Court concluded that: investment treaty arbitration between a private investor and the host State, which results by following the treaty route is not itself a treaty, but is sui generis and recognized as such all over the world. (…) As a species of arbitrations, it is of recent origin and its jurisprudence cannot be said to be settled or written in stone; far from it. Investment Treaty jurisprudence is still a work in progress.

However, there is some disquiet over the spectrum of nations both developed and developing as to the spiraling consequences of investment awards and its impact on sovereign functions , (…)

It also cannot be said as an absolute proposition of law that the moment there is an investment treaty arbitration between a private investor and the State, National Courts are divested of their jurisdiction. (…)

Further, Investment Arbitration disputes are fundamentally different from commercial disputes as the cause of action (whether contractual or not) is grounded on State guarantees and assurances (and are not commercial in nature ).

As the present case is not a commercial arbitration, the Act, 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 (…)

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

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 is no alternative efficacious remedy available. (…)

Now that the matter has been decided in favour of Vodafone, the next question is whether the government will accept it or challenge the same. Most of the tax practitioners who write regular columns want the government to accept the verdict and move on, particularly when no damages have been awarded. However, the government will also have to consider the ramifications of such an acceptance. Cairn and Vedanta are also before arbitral tribunals and the decision in this case may affect the outcomes of those cases. It is true that a decision of an arbitral tribunal does not create a precedence nevertheless, it may be considered to have a persuasive value.

Assuming that India challenges the decision, under the UNCITRAL rules, it can approach the High Court of Singapore and further appeal an adverse outcome to the Supreme Court of Singapore. We may note that it has been mistakenly reported in the press that the Permanent Court of arbitration at the Hague has rendered the decision. Actually, it is the ad hoc tribunal set up in terms of the Singapore law that has rendered the decision although the premises of the International arbitration court has been used. Therefore it is the Singapore courts where the challenge will lie.

There is an international agreement to which India is a party, which ensures that foreign arbitral awards are actually implemented. This is the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958), popularly known as the New York Convention. The principal aim of the same is that foreign and non-domestic arbitral awards will not be discriminated against and it obliges Parties to ensure such awards are recognized and generally capable of enforcement in their jurisdiction in the same way as domestic awards. Article 1(3) of the said Convention states:

"When signing, ratifying or acceding to this Convention, or notifying extension under article X hereof, any State may on the basis of reciprocity declare that it will apply the Convention to the recognition and enforcement of awards made only in the territory of another Contracting State.It may also declare that it will apply the Convention only to differences arising out of legal relationships, whether contractual or not, which are considered as commercial under the national law of the State making such declaration."

India has exercised this option as noted by the Delhi High Court and tax matters cannot be called commercial thereby raising questions about its enforcement. In this connection, we may also note that India's Model BIPA that was introduced in 2015 in Article 27 dealing with finality and enforcement of awards has the following provision.

"27.5 A claim that is submitted to arbitration under this Article shall be considered to arise out of a commercial relationship or transaction for purposes of Article I of the New York Convention."

Of course, such a provision is not there in the India-Netherlands BIPA making enforcement problematic. We may also note Article V(2) of the New York Convention:

"Recognition and enforcement of an arbitral award may also be refused if the competent authority where recognition and enforcement is sought finds that:

(a) The subject matter of the difference is not capable of settlement by arbitration under the law of that country; or

(b) The recognition or enforcement of the award would be contrary to the public policy that country."

Here the country concerned would be Singapore. In that context, the observation of the Mr. Justice Sundaresh Menon, Chief Justice of Singapore in his speech on International Arbitration: The Coming of New Age for Asia, quoted extensively in the Delhi High Court may be kept in mind. In particular, one may quote the following:

"The broad and open-textured way in which treaty commitments are defined, coupled with the length of time over which they are expected to operate without any supervision or control by electoral mechanisms, mean that the discretion vested in private arbitrators to interpret these rules is likely to have a considerable impact on States.

This shift of power from the States to the arbitral tribunals, has resulted in jurisprudence that has been colourfully described as "a house of cards built largely by reference to other tribunal awards and academic opinions", "unconstrained by the discipline of the treaty parties' practice of expectations" As observed by the Delhi High Court, these concerns have to be kept in mind by the Government of India.

Withholding is a common and efficient way to enforce the tax laws of a country. We see this even in the context of the raging debate in the context of taxation of the digital economy. It is difficult to understand how asking a taxpayer to merely withhold tax can be construed as denial of fair and equitable treatment. In any case, the relationship between a BIPA and taxes is not obvious. Taxes may perhaps be considered as expropriation without compensation which is prohibited by such agreements. But that is not the case here. Vodafone has continued to business in India and prospered.

We may conclude by noting that more than 220 Law and Economics Professors had in September 2016, urged the US Congress to reject the Trans Pacific Partnership and other prospective deals that include Investor-State Dispute Settlement.

"The problem with ISDS is not that it allows private corporations to sue the government for conduct that harms the corporations' economic interests. Indeed, U.S. domestic law already recognizes the importance of granting private citizens and entities (including foreign corporations) the power to take legal action against the government in order to help promote effective implementation of the law and adherence to the Constitution. Over the past two centuries, the United States - through citizens, elected representatives, and courts - has established a framework of rules that govern such lawsuits against the government and continually refines those rules through democratic processes. These include rules on court procedures and evidence, which are designed to ensure the fairness, legitimacy and reliability of proceedings; rules on who may bring lawsuits and under which circumstances, which are designed to balance the right to sue with the need to ensure that government regulation in the public interest is not made impossible due to unlimited litigation; rules on the power of courts, which are designed to ensure that judges do not overly intrude on legitimate policy decisions made by elected legislatures or executive officials, and to ensure that federal judges do not unduly interfere with state law and policy; rules on appropriate remedies, which are crafted to achieve diverse policy aims such as deterrence, punishment, and compensation; and rules on the independence and accountability of judges who decide cases against the government.

Through ISDS, the federal government gives foreign investors - and foreign investors alone - the ability to bypass that robust, nuanced, and democratically responsive legal framework. Foreign investors are able to frame questions of domestic constitutional and administrative law as treaty claims, and take those claims to a panel of private international arbitrators, circumventing local, state or federal domestic administrative bodies and courts. Freed from fundamental rules of domestic procedural and substantive law that would have otherwise governed their lawsuits against the government, foreign corporations can succeed in lawsuits before ISDS tribunals even when domestic law would have clearly led to the rejection of those companies' claims. Corporations are even able to re-litigate cases they have already lost in domestic courts. It is ISDS arbitrators, not domestic courts, who are ultimately able to determine the bounds of proper administrative, legislative, and judicial conduct.

This system undermines the important roles of our domestic and democratic institutions, threatens domestic sovereignty, and weakens the rule of law.

In addition to these fundamental flaws that arise from a parallel and privileged set of legal rights and recourse for foreign economic actors, there are various flaws in the way ISDS proceedings are meant to be conducted in the TPP. In short, ISDS lacks many of the basic protections and procedures of the justice system normally available in a court of law. There are no mechanisms for domestic citizens or entities affected by ISDS cases to intervene in or meaningfully participate in the disputes; there is no appeals process and therefore no way of addressing errors of law or fact made in arbitral decisions; and there is no oversight or accountability of the private lawyers who serve as arbitrators, many of whom rotate between being arbitrators and bringing cases for corporations against governments. Codes of judicial conduct that bind the domestic judiciary do not apply to arbitrators in ISDS cases.


  • DTAA
  • Circulars (I-T Act, 1922)
  • Limited Treaties
  • Other Treaties
  • TIEAs
  • Notifications
  • Circulars
  • Relevant Sections of I-T Rules,1962
  • Instructions
  • Administrative Orders
  • DRP Panel
  • I-T Act, 1961
  • MLI
  • Relevant Portion of I-T Act,1922
  • GAAR
  • MAP
  • OECD Conventions
  • Draft Guidelines
  • DTC Bill
  • Committee Reports
  • FATCA bodrum
  • Intl-Taxation
  • Finance Acts
  • Manual on EoI
  • UN Model
  • Miscellaneous
  • Cost Inflation Index
  • Union Budget
  • Information Security Guidelines
  • APA Annual Report
  • APA Rules
  • Miscellaneous
  • Relevant Sections of Act
  • Instructions
  • Circulars
  • Notifications
  • Draft Notifications
  • Forms
  • TP Rules
  • UN Manual on TP
  • Safe Harbour Rules
  • US Transfer Pricing
  • FEMA Act
  • Exchange Manual
  • Fema Notifications
  • Master Circulars
  • Press Notes
  • Rules
  • FDI Circulars
  • RBI Circulars
  • Reports
  • FDI Approved
  • RBI Other Notifications
  • FIPB Review
  • FEO Act
  • CBR Act
  • NBFC Report
  • Black Money Act
  • PMLA Instruction
  • PMLA Bill
  • FM Budget Speeches
  • Multimodal Transportation
  • Vienna Convention
  • EXIM Bank LoC
  • Manufacturing Policy
  • FTDR Act, 1992
  • White Paper on Black Money
  • Posting Policy
  • PMLA Cases
  • Transfer of Property
  • MCA Circular
  • Limitation Act
  • Type of Visa
  • SSAs
  • EPFO
  • Acts
  • FAQs
  • Rules
  • Guidelines
  • Tourist Visa
  • Notifications
  • Arbitration
  • Model Text
  • Agreements
  • Relevant Portion of I-T Act
  • I-T Rules, 1962
  • Circulars
  • MISC
  • Notification
  • About Us
  • Contact Us
    A Taxindiaonline Website. Copyright © 2010-2020 | Privacy Policy | Pvt.Ltd. All rights reserved.