Authors: Harshad Pathak<\/a> <\/strong>and Ranjeev Khatana<\/a> <\/strong>are lawyers at P&A Law Offices<\/em><\/p>\n\n\n\n The dispute between the Vodafone group and the Government of India witnessed yet another development; this time in the form of an investment treaty award<\/a> issued against the Republic of India (\u201cIndia\u201d).<\/p>\n\n\n\n The long-running dispute relates to the taxation<\/a> implications of the indirect acquisition of Hutchison Essar Limited, a company incorporated in India, by Vodafone International Holdings B.V. (\u201cVodafone\u201d), a Dutch company. While the Indian revenue authorities believed that under Indian law, Vodafone was liable to pay a certain amount of capital gains tax in relation to this transaction, Vodafone disagreed. This disagreement led to a flurry of litigation in Indian courts. The High Court of Bombay initially decided in favour of the Indian revenue authorities, only to see its judgment overturned by a three-judge bench of the Supreme Court of India on 20 January 2012. However, the Supreme Court\u2019s judgment was only a false dawn for Vodafone. In March 2012, the Indian Parliament introduced, what it claims to be, certain clarificatory amendments to the provisions of the Income Tax Act, 1961 with a retrospective effect; thereby, altering the foundation of the Supreme Court of India\u2019s 2012 judgment. With this amendment, the Indian revenue authorities continued to insist that Vodafone was liable to pay capital gains tax under Indian law.<\/p>\n\n\n\n It was at this juncture that Vodafone commenced investment treaty arbitration against India (\u201cVodafone arbitration<\/em>\u201d), under the India-Netherlands BIT (\u201cBIT\u201d)<\/a>. From the operative part of the tribunal\u2019s award, one can infer the nature of Vodafone\u2019s claim. Vodafone claimed that the retrospective amendments made to nullify the Supreme Court\u2019s judgment dated 20 January 2012 were in breach of the fair and equitable treatment (\u201cFET\u201d)<\/a> guarantee in Article 4(1) of the BIT. However, in addition to advancing its claims, Vodafone also had to surmount a jurisdiction hurdle in the form of a taxation carve-out<\/a> in Article 4(4) of the BIT, which was intended to limit the jurisdiction<\/a> of an investment treaty tribunal over matters of taxation<\/a>.<\/p>\n\n\n\n On 25 September 2020, the investment treaty tribunal issued its award<\/a> (the \u201cVodafone award\u201d). The operative part of the award reveals that the tribunal first confirmed that it had jurisdiction to consider Vodafone\u2019s claims for breach of the BIT, and then proceeded to allow Vodafone\u2019s FET claim. With respect to the latter, the tribunal specifically noted that India\u2019s imposition on Vodafone of an asserted liability to tax, notwithstanding the Supreme Court of India\u2019s judgment, breached Article 4(1)<\/a> of the BIT. On this basis, the tribunal directed India to cease this conduct and did not consider it necessary to determine Vodafone\u2019s other claims.<\/p>\n\n\n\n As on date, the reasons<\/a> for the tribunal\u2019s conclusions are not in the public domain. Yet, ample ink has been spilled to \u201canalyse\u201d the Vodafone award. While some refer to the award as a \u201cserious loss of face for India<\/a>\u201d and label India\u2019s conduct as a case of \u201cstate overreach<\/a>\u201d, others suggest that India may have reasonable grounds to challenge the award<\/a>. However, both conclusions appear premature. In the absence of the reasoning adopted by the tribunal, it is futile to berate either the tribunal\u2019s award or India\u2019s conduct. The authors certainly do not intend to embark on a similarly speculative adventure. Instead, they prefer to reflect on a hitherto un-appreciated facet of India\u2019s tryst with investment treaty arbitration, and the significance of the Vodafone award in such context.<\/p>\n\n\n\n The Vodafone arbitration<\/em> is not the only treaty arbitration proceeding in which India had to justify its taxation policies and measures. At least three other investment treaty arbitration proceedings against India, namely \u2013 (I) Cairn Energy PLC and Cairn UK Holdings Limited v. India (\u201cCairn\u201d)<\/a><\/em>; (ii) Vedanta Resources PLC v. India (\u201cVedanta\u201d)<\/a><\/em>; and (iii) Nissan Motor Co., Limited v. India (\u201cNissan\u201d)<\/a><\/em> – involved claims relating to what India perceives as taxation measures. In each of these arbitration proceedings, India raised a preliminary objection to the jurisdiction<\/a> of the tribunal, similar to the issue that was likely involved in the Vodafone arbitration<\/em>. While the underlying dispute in Nissan<\/a> <\/em>was amicably resolved before the tribunal therein could issue a definitive decision<\/a>, in both Cairn<\/a><\/em> and Vedanta<\/a><\/em>, the tribunals are yet to issue their decisions.<\/p>\n\n\n\n Nevertheless, the above instances, as well as the Vodafone arbitration<\/em>, indicate India\u2019s consistent policy stance. The Government of India is clear that taxation is a matter of India\u2019s sovereignty, and thus, ought to be outside the jurisdiction of an investment treaty tribunal.<\/p>\n\n\n\n Viewed from this perspective, the Vodafone award\u2019s significance does not lie in the tribunal\u2019s finding that India had breached its FET obligation. This is a matter regarding the merits of Vodafone\u2019s claim, which will arise only if the tribunal\u2019s jurisdiction is established. Rather, the Vodafone award is, first and foremost, significant for being the first instance where a tribunal appears to have rejected India\u2019s preliminary objection relating to taxation<\/a> measures.<\/p>\n\n\n\n In the above context, even without the benefit of analysing the tribunal\u2019s reasoning, it is clear that the Vodafone award raises a legitimate question – whether India\u2019s policy stance of excluding taxation matters from investment treaty jurisdiction is appropriately reflected in India\u2019s investment treaties? The Vodafone award is a critical step in answering this question.<\/p>\n\n\n\n Article 4(4) of the BIT states that:<\/p>\n\n\n\n <\/p>\n\u201cThe provisions of 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.<\/em>\u201d<\/strong><\/cite><\/blockquote>\n\n\n\n However, the tribunal in the Vodafone arbitration<\/em> clearly did not consider this provision as a limitation on its jurisdiction to consider Vodafone\u2019s FET claim, even in a scenario where Vodafone\u2019s claim implicated the amendments made to the Income Tax Act, 1961. While the reasons behind this conclusion are unclear, the mere fact that the tribunal was able to arrive at this decision, and went on to consider Vodafone\u2019s claims, suggests that this provision does not convey India\u2019s policy stance with sufficient vigour.<\/p>\n\n\n\n This inference attains additional strength when Article 4(4) of the BIT is compared with the taxation carve-out<\/a> treaty provisions relevant in Cairn<\/a><\/em>, Vedanta<\/a><\/em>, and Nissan<\/a><\/em>.<\/p>\n\n\n\n On the one hand, Article 4(4) of the BIT represents a minor improvement on the carve-out in Article 4(3) of the India-UK BIT<\/a>, which is the treaty invoked in both Cairn<\/a> <\/em>and Vedanta<\/a><\/em>. Article 4(3<\/a>) of the India-UK BIT is limited in its scope. It appears to exclude from the jurisdiction of a tribunal only those taxation-related claims that allege a breach of the state\u2019s obligations regarding national<\/a> and most-favoured-nation treatment<\/a>. Unlike the case in the Vodafone arbitration<\/em>, Article 4(3)<\/a> of the India-UK BIT does not make any reference to claims involving other treaty obligations, such as the FET<\/a> obligation in Article 3(2)<\/a> or obligations in Article 5<\/a> relating to Expropriation<\/a>.<\/p>\n\n\n\n One the other hand, the limitations of Article 4(4) of the BIT stand out in comparison to the taxation carve-out<\/a> in the more recent India-Japan CEPA<\/a>. Article 10(1) of the India-Japan CEPA, which was the basis of India\u2019s objection in Nissan<\/a><\/em>, provides that \u201cthe provisions of this Agreement shall not apply to any taxation measures.\u201d Unlike Article 4(4) of the BIT or Article 4(3)<\/a> of the India-UK BIT, Article 10(1)<\/a> does not attempt to exclude any specific type of treaty claims. Instead, the provision renders the entire treaty inapplicable in respect of any taxation measure. This conclusion is consistent with the fact that Article 10(1) is included in the CEPA as a General Provision in Chapter 1, and not in the specific Chapter 8 titled \u201cInvestment\u201d.<\/p>\n\n\n\n The above comparison is both necessary and telling. It enables one to appreciate the significance of the Vodafone award and derive two important conclusions regarding India\u2019s treaty practice, without speculating the reasoning behind the tribunal\u2019s findings.<\/p>\n\n\n\n Firstly<\/em>, if India were to maintain its policy stance of excluding taxation measures from investment treaty jurisdiction, then it may need to incorporate broader treaty provisions that mirror its objectives. Article 4(4) of the BIT and Article 4(3) of the India-UK BIT are largely inadequate in this regard. However, the more recently negotiated provisions in Article 10(1) of the India-Japan CEPA, as well as the provision in Article 2.4 of the Model Indian BIT 2016, provide better guidance while negotiating future treaties.<\/p>\n\n\n\n Secondly<\/em>, the fact that the Vodafone arbitration <\/em>tribunal was able to affirm its jurisdiction despite the existence of Article 4(4) of BIT is concerning. To a cynic, it suggests that in case of any ambiguity in the wording of a taxation carve-out<\/a> in the invoked treaty, investment treaty tribunals are more likely to endorse an interpretation that allows them to affirm jurisdiction. Thus, notwithstanding the degree of exclusion in an investment treaty, it is likely India will continue to find itself in investment treaty proceedings involving taxation<\/a> measures. As such, Indian agencies must continue to sensitise themselves about India\u2019s treaty obligations to ensure that another decision like the Vodafone award can be avoided.<\/p>\n\n\n\n The authors are lawyers at P&A Law Offices, New Delhi, and represent the Republic of India in investment treaty arbitration proceedings. The contents of this post reflect only the personal views of the authors, and not of P&A Law Offices or any other organisation that they may be affiliated with. <\/em><\/p>\n\n\n\n The authors may be contacted at <\/em>harshad.pathak@mids.ch<\/em><\/a> and <\/em>ranjeevkhatana@gmail.com<\/em><\/a>. <\/em><\/p>\n","protected":false},"excerpt":{"rendered":" The dispute between the Vodafone group and the Government of India witnessed yet another development; this time in the form of an investment treaty award issued against the Republic of India (\u201cIndia\u201d).<\/p>\n","protected":false},"author":4,"featured_media":278243,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jnews-multi-image_gallery":[],"jnews_single_post":{"subtitle":"","format":"standard","video":"","gallery":"","source_name":"","source_url":"","via_name":"","via_url":"","override_template":"0","override":[{"template":"custom","single_blog_custom":"274736","parallax":"1","fullscreen":"1","layout":"right-sidebar","sidebar":"author","second_sidebar":"default-sidebar","sticky_sidebar":"1","share_position":"hide","share_float_style":"share-monocrhome","show_share_counter":"0","show_view_counter":"0","show_featured":"1","show_post_meta":"1","show_post_author":"0","show_post_author_image":"0","show_post_date":"1","post_date_format":"default","post_date_format_custom":"Y\/m\/d","show_post_category":"0","show_post_reading_time":"0","post_reading_time_wpm":"300","show_zoom_button":"0","zoom_button_out_step":"2","zoom_button_in_step":"3","show_post_tag":"0","show_prev_next_post":"0","show_popup_post":"0","number_popup_post":"1","show_author_box":"0","show_post_related":"0","show_inline_post_related":"0"}],"override_image_size":"0","image_override":[{"single_post_thumbnail_size":"crop-500","single_post_gallery_size":"crop-500"}],"trending_post":"0","trending_post_position":"meta","trending_post_label":"Trending","sponsored_post":"0","sponsored_post_label":"Sponsored by","sponsored_post_name":"","sponsored_post_url":"","sponsored_post_logo_enable":"0","sponsored_post_logo":"","sponsored_post_desc":"","disable_ad":"0"},"jnews_primary_category":{"id":"183","hide":""},"jnews_social_meta":{"fb_title":"Vodafone: India\u2019s first failed defence of taxation measures","fb_description":"The dispute between the Vodafone group and the Government of India witnessed yet another development; this time in the form of an investment treaty award issued against the Republic of India (\u201cIndia\u201d).","fb_image":"278243","twitter_title":"","twitter_description":"","twitter_image":""},"jnews_review":[],"enable_review":"0","type":"percentage","name":"","summary":"","brand":"","sku":"","good":[{"good_text":""}],"bad":[{"bad_text":""}],"score_override":"0","override_value":"","rating":[{"rating_text":"","rating_number":"10"}],"price":[{"shop":"","price":"","link":"","icon":""}],"jnews_override_counter":{"override_view_counter":"0","view_counter_number":"0","override_share_counter":"0","share_counter_number":"0","override_like_counter":"0","like_counter_number":"0","override_dislike_counter":"0","dislike_counter_number":"0"},"footnotes":""},"categories":[205,170,183,208,188,161],"tags":[],"coauthors":[],"class_list":["post-271966","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-arbitration","category-asia-pacific","category-india","category-investor-state-arbitration","category-legal-insights","category-world"],"_links":{"self":[{"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/posts\/271966","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/comments?post=271966"}],"version-history":[{"count":3,"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/posts\/271966\/revisions"}],"predecessor-version":[{"id":278235,"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/posts\/271966\/revisions\/278235"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/media\/278243"}],"wp:attachment":[{"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/media?parent=271966"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/categories?post=271966"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/tags?post=271966"},{"taxonomy":"author","embeddable":true,"href":"https:\/\/dailyjus.com\/index.php\/wp-json\/wp\/v2\/coauthors?post=271966"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
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\n\n\n\nABOUT THE AUTHORS<\/h2>\n\n\n\n