NEWS  The Permanent Court of Arbitration at The Hague (PCA) ruled against the Government of India in the cases of Cairn Energy and Vodafone in the final quarter of 2020, and India has decided to appeal against these awards.

CONCERNS

• The year 2020 has been a welcome bag of enhanced equity inflows, bold policy changes and billion-dollar milestones for Indian foreign direct investment (FDI) landscape.
• But, the decision by India to appeal against international decisions, have served to puncture the bag of investor trust and India’s promise to honour its commitments to foreign investors under bilateral investment treaties (BITs).
• Given increased FDI in India, it may not be conducive to weave a web of litigation, affecting stakeholders and exit routes.

THE HAGUE RULINGS

• Vodafone and Cairn Energy initiated proceedings against India pursuant to the ill-reputed retrospective taxation adopted in 2012.
• As a result, on September 25, 2020, the PCA ruled that India’s imposition on Vodafone of Rs.27,900 crore in retrospective taxes, including interest and penalties, was in breach of the India-Netherlands BIT.
• The PCA ordered the Government of India to reimburse legal costs to Vodafone of approximately Rs.45 crore. There was no award on damages.
• Acting on this, India challenged the decision.
• In December, 2020, the PCA ruled that the Government of India had failed to uphold its obligations to Cairn under the India-United Kingdom BIT by imposing tax liability on it. Therefore it had asked GOI to pay Cairn approximately Rs.9,000 crore for the ‘total harm’ suffered by Cairn (UK firm).

CARIN V. INDIA

Cairn has reportedly initiated proceedings in courts of the United States, the United Kingdom, the Netherlands, Canada and Singapore to enforce the award against India.

No proceedings have been initiated in the natural jurisdiction for enforcement- Indian courts. The reasons can be:

• delays in Indian courts,
• uncertainty in Indian public policy vis-à-vis assessment of tax demands by foreign tribunals,
• The Indian judiciary’s exceptional stance on non-enforceability of treaty awards in India may have been pivotal in Cairn’s decision.

Now the Government of India could deploy defences of absolute or partial sovereign immunity and public policy, depending on the law of the place of enforcement.

CASE IN BRIEF

• In the Vodafone case, the Government of India simpliciter imposed a tax demand.
• In the Cairn case, the Government of India enforced the tax demand by a series of unilateral measures such as the seizure and sale of Cairn’s shares, seizure of its dividends, and withholding of tax refund due to Cairn as a result of overpayment of capital gains tax in a separate matter.

LOGICAL STEP FOR GOI

• Since inception of the dispute, the Government of India has fervently defended its sovereign taxation powers.
• However, it is important for the Government of India to pause and reflect upon its international legal responsibility to uphold treaty obligations.
• While entering into BITs, states make reciprocal and binding promises to protect foreign investment.
• In a tug of war, sovereign powers that are legal under national laws may not hold water before sovereign commitments under international law.
• However, what it could use is a defence of international public policy against tax avoidance, and the sovereignty of a state to determine what transactions can or cannot be taxable.

LOGICAL STEP FOR CARIN

• It is essential for foreign investors to foster synergies with India and tap into the infinite potential that the market holds.
• India boasts of being among the top 12 recipients of FDI globally. The increased FDI inflows in India over the years are testament to the attractive investment opportunities available for foreign investors in India.
• Therefore, it is important for parties to foster open dialogue with investors and explore alternatives that lead to the road of settlement.

ARRIVING AT A SOLUTION

• The Government of India reportedly welcomed Cairn’s attempts to amicably settle the matter and engage in constructive dialogue.
• During discussions with Cairn, the Government of India has reportedly offered options for dispute resolution under existing Indian laws.
• One such possible option is payment of 50% of the principal amount, and waiver of interest and penalty, under the ‘Vivad se Vishwas’ tax amnesty scheme
• However, this can be possible only if it is considered to be applicable to decisions made by international  tribunals in favour of the taxpayer under bilateral investment treaties.
• Re­computation of tax liability on a long term capital gains basis has also been reportedly offered.

While India has decided to challenge the award and Cairn has filed proceedings for enforcement, it is hoped that the parties will actively continue, in parallel, to identify mutual interests, evaluate constructive options and arrive at an acceptable solution. 

Reference:

1. https://www.thehindu.com/opinion/lead/despite-arbitration-tug-of-war-mutual-settlement-is-key/article33983317.ece