The Vodafone Tax Saga and India’s Arbitration Worries

On 7 May 2018, the Delhi High Court ruled against the government of India’s attempt to restrict multinational telecommunications bigwig Vodafone from pursuing simultaneous international arbitration proceedings before two different tribunals on the same dispute. The Ministry of Finance has been trying every possible route since 2007 to collect tax to the tune of ₹12,000 crore or around US$2 billion (at the then prevailing currency exchange rates) – a figure that has ballooned to around ₹22,000 crore in the interim period (over $3.2 billion at current exchange rates), including interest and penalties – from the London-based Vodafone conglomerate for its acquisition of Hutchinson Telecom’s assets in India. With the court’s ruling, arbitration proceedings relating to the unprecedented tax dispute will proceed before two international tribunals, constituted under the Bilateral Investment Promotion and Protection Agreements (BIPAs) that India has signed with the governments of the Netherlands and the United Kingdom (UK) respectively.

The government had argued before the Delhi High Court that the initiation of a second round of arbitration by Vodafone – under the India-UK BIPA – while arbitration under the India-Netherlands BIPA was already under way, constituted an “abuse of process.” In its ruling, the court decided that the appropriate forum to decide this issue is the arbitration tribunal itself. While doing so, in its detailed order, the court also clarified several important issues on the bigger topic of international arbitration itself, and the judgement has been read as signalling that India has to become a more arbitration friendly jurisdiction.

The jury is still out on whether India is indeed arbitration friendly or not. Several within the Union government have not been favourably inclined towards arbitration as a means of resolving disputes. For instance, following the court ruling, an unnamed “senior government official” was quoted by the Economic Times saying that “India may not accept international arbitration orders annulling tax demands...[and] the tax department would continue with recovery actions.”

This kind of hostility to international arbitration is one among several issues that have been highlighted by the Vodafone tax dispute saga. What the government’s actual position is with regard to arbitration will only become clear once the arbitration processes are complete.

The Convoluted Background of the Vodafone Tax Saga

The central issue in Vodafone’s acquisition of Hutchinson Telecom was that the deal was effected through financial transactions between foreign entities, though what was ultimately transferred was ownership of Indian assets. In 2007, Vodafone International Holdings (VIH), an Amsterdam-based subsidiary of the UK-based Vodafone group, entered into a sale and purchase agreement of shares and loans with Hutchinson Telecommunications International Limited (HTIL), a company based in Hong Kong. Under the agreement, a single equity share of a Cayman Islands-based entity named CGP (Investments [Holdings] Limited), which was an HTIL subsidiary, was bought by VIH. That single share constituted CGP’s entire issued share capital. CGP, indirectly and directly, owned approximately 52 percent of the share capital of Hutchinson Essar Limited (HEL) which was an Indian entity under which Hutchinson’s telecommunication business in India operated. The sale of the single share made VIH the owner of CGP, and through it HEL, and thus the ownership of the business transferred from Hutchinson Essar to Vodafone. The transaction, stated to be worth $11.206 billion, was approved by the Indian government’s Foreign Investment Promotion Board on 7 May 2007.

The country’s income tax authorities immediately sought to tax the transaction – arguing that capital gains arising from the sale of the share capital of CGP were taxable in India as the underlying assets of the transaction were Indian, even though CGP was not an Indian company. At the prevailing taxation rate of 22%, India stood to earn revenue of close to $2 billion. VIH was the entity liable to pay the amount, as according to tax authorities it should have deducted tax at source under the Income Tax Act.

Vodafone moved the Bombay High Court against the income tax department, seeking to quash the assessment order, stating that since the asset that it had bought was a share of a Cayman Islands company, the transaction did not constitute a transfer of a capital asset situated in India, and thus could not be taxed by India. In December 2008, the court dismissed Vodafone’s petition – albeit on procedural grounds. The court held that the company should have first approached the Income Tax Appellate Tribunal or the Dispute Resolution Panel – remedies that were available to it under the country's income tax law – before approaching the high court. Vodafone then moved the Supreme Court.

The Supreme Court’s final judgement on the dispute came on 20 January 2012. The apex court took Vodafone’s side, agreeing that the transfer of shares of a foreign company between two non-residents could not be deemed as a transfer of a capital asset situated in India, and could not result in the levy of capital gains tax in India, even if the foreign company holds shares of an Indian company. Many considered the dispute to be a closed chapter then, little realising what the government had up its sleeves.

Retrospective Amendment of Income Tax Act in 2012

On 16 March 2012, in the Union budget, the government dropped a bombshell. An amendment to the Income Tax Act was inserted, specifying that income arising from sale of shares or units shall be deemed to accrue or arise in India if

• transfer of a share or other interest in a company or entity had taken place outside India, and
• the value of the share or unit depended primarily on assets in India.

The amendment applied retrospectively from 1962 (when the law had come into effect) and applied to all transactions that had taken place ever since. In effect, the amendment overruled the Supreme Court’s order, making Vodafone liable once again. The retrospective amendment was a political thunderbolt. In its immediate aftermath, amidst widespread outrage in the business community, Pranab Mukherjee – the then Finance Minister who had been responsible for the amendment’s passage – resigned and subsequently became India’s President. His successor in the ministry, Palaniappan Chidambaram immediately struck a conciliatory tone, stating in an interview to a business magazine “I have said quite a number of times that I want the issue resolved...I told Vodafone when they met me that I want to resolve it, if you want to resolve it let’s find a way out. I think we will find a way out.”

Vodafone was apparently “persuaded” by Chidambaram to not immediately initiate international arbitration. Instead a conciliation process began between the company and the government. The Finance Ministry, in a press release issued on 6 August 2012, promised to review the retrospective amendment. In April 2014, however, with general elections having been announced, Vodafone abandoned the conciliation process and formally notified the government that it was seeking international arbitration on the tax dispute. The notice was served under the India-Netherlands BIPA. In a terse response to the notice, the government said that tax related issues were not covered under the BIPA.

Following Vodafone’s example, several other companies, such as Finland’s Nokia and the UK’s Cairn Energy also sought resolution of their own tax disputes with the Indian government under similar treaties signed by India with other countries.

New Government, Same Old Story

In May 2014, Narendra Modi became Prime Minister. He had run his campaign on the slogan “minimum government, maximum governance” and had committed that he would improve the “ease of doing business” in India. In the first Union budget presented by Finance Minister Arun Jaitley in July 2014, he indicated that the government’s position on the Vodafone dispute was much the same as that of its predecessor. He stated: “…consequent to certain retrospective amendments introduced to the Income Tax Act, 1961 through the Finance Act, 2012, a few cases have come up in various courts...these cases are at different stages of pendency and will naturally reach their logical conclusion.”

Vodafone too announced that it intended to continue with the ongoing arbitrations. Arbitrators were appointed by both sides. The government appointed former Chief Justice of India R. C. Lahoti and Vodafone appointed Canadian trial lawyer Yves Fortier. It was up to the two of them to mutually appoint a third presiding arbitrator, and the two reportedly zeroed in on Somali lawyer and judge Abdulqawi Ahmed Yusuf– then the Vice-President of the International Court of Justice (ICJ). Lahoti resigned in May 2015 and subsequently Yusuf declined to join the panel. The Indian government named Costa Rican lawyer Rodrigo Oreamuno to replace Lahoti.

The arbitrators were unable to arrive at a consensus on nominating a presiding arbitrator and thus, in March 2016, Vodafone moved the ICJ to appoint the presiding judge of the three-member arbitration panel. When the ICJ appointed British national Sir Franklin Berman, instead of proceeding with the arbitration, the government opposed his nomination on the grounds of “conflict of interest” since Vodafone is a UK-based company. In November 2016, the ICJ rejected India’s plea to replace Berman.

Meanwhile, Vodafone had served a notice of dispute on the government under the India-UK BIPA in June 2015. Then, in January 2017, it served a notice of arbitration on the government formally initiating a second arbitration. It was against this arbitration process that the government had moved the Delhi High Court claiming that it constituted an “abuse of process” by Vodafone. In an initial order, passed on 22 August 2017, the court had obliged the government, restraining Vodafone from pursuing the arbitration process. In a subsequent order on 27 October the same year, which was upheld by the Supreme Court on 14 December, the court permitted the process of appointment of arbitrators to continue. It is this case that concluded in May this year, with the court setting aside its August 2017 order and permitting the arbitration under the India-UK BIPA to go forward.

A Mysterious Note

In the middle of 2017, a curious development took place. While the government was arguing its case before the Delhi High Court in an attempt to get itself out of the second arbitration under the India-UK treaty, a note sent by Jaitley to the Prime Minister’s Office and copied to the Revenue Secretary Hasmukh Adhia was leaked to the media. A copy found its way to one of the co-authors of this article as well. Jaitley had publicly recused himself from all issues surrounding the Vodafone case in June 2014 after being appointed Finance Minister as he had earlier represented Vodafone in the same case. He had forwarded what he claimed was a note “handed to him” by “a former colleague from the legal fraternity” that was dated 26 May 2017, and was made public by The Wire in April 2018.

The note was about the “effective handling” of 23 international arbitration proceedings under investment treaties that the Indian government was involved in and made specific observations and suggestions on a few cases, including the Vodafone case. On the arbitration under the India-Netherlands BIPA, the note’s unnamed author pointed out that the law firms engaged by the government were both foreign firms whereas the issue concerned Indian law. The author noted that both the presiding arbitrator, Sir Franklin Berman, and Vodafone’s lead counsel Toby Landau QC (Queen’s Counsel, a designation used in Britain and some other commonwealth countries, roughly equivalent to a “Senior Counsel” in India), are from Essex Court Chambers, a London based set of barristers’ chambers, and recommended that the government also appoint a leading QC from the same chambers

The note even went on to suggest the names of a few individuals who may fit the requirement of the Indian government. On the arbitration under the India-UK BIPA, the note’s author urged the government to appoint an arbitrator before one was imposed on it by the ICJ, noting that “the suggestion made by some bureaucrats of not participating in the arbitration would not be prudent.”

A report published by the website PGurus.com in March 2018 added further intrigue. An anonymous senior income tax official was quoted stating that “it was almost certain that India was going to win the arbitration [under the India-Netherlands BIPA], the first and the biggest till date. ”It added that “apprehensive of tasting defeat...Vodafone moved for fresh arbitration under the India-London BIPA.” The PGurus.com report said that a policy decision had been made “on file” – proposed by officials in the Income Tax Deparment, noted by the then Revenue Secretary Adhia, and approved by the Minister of State in the Finance Ministry – that India would seek to expedite the proceedings under the India-Netherlands BIPA and would not participate in the proceedings under the India-UK BIPA.

The website alleged that the note forwarded by Finance Minister Jaitley changed everything. Apparently, Adhia, after having been “convinced” by Jaitley of this new approach, “swung into action and demanded the file within 48 hours.” The Revenue Secretary then did a “U-turn” and “forced” the Income Tax department “to follow suit.” The PGurus.com report aired additional allegations about departmental intrigue. Allegedly, income tax officials had prepared a “point-by-point reply to the Finance Minister’s note with a copy of the rebuttal addressed to the PMO” which “Adhia suppressed and never forwarded.” It was further claimed that the then Revenue Secretary “prevented” the participation of senior officials from various ministries in a meeting of an inter-ministerial committee – of which he was the chair – which oversees the government’s actions on international arbitrations. The Departments of Economic Affairs and Revenue in the Ministry of Finance, the Law Ministry and the External Affairs Ministry all reportedly deputed junior officials to attend the meeting to decide on the government’s course of action on the Vodafone tax dispute.

An Overview of BITs and ISDS

The Vodafone arbitration cases are instances of a controversial regime in international law known as the Investor State Dispute Settlement (ISDS) mechanism. ISDS clauses are a typical feature of Bilateral Investment Treaties (BITs) such as the India-Netherlands and the India-UK Bilateral Investment Promotion and Protection Agreements or BIPAs under which the Vodafone arbitration cases have been instituted. Over the past few decades, BITs have emerged as the principal instruments by which countries, particularly developing countries, seek to attract foreign direct investment (FDI). When a country signs such a treaty, it signals to foreign investors that it will provide a stable and predictable economic environment for their investments.

BITs were a result of an international compromise between developed countries and developing countries in the aftermath of decolonisation from the middle of the 20th century onwards. As former colonies gained independence, many pursued socialist economic policies and sought to regain sovereignty over national resources that were in the hands of multinational companies based out of the former colonial powers. A number of countries aggressively nationalised large segments of their economies, causing foreign investors whose property had been expropriated to seek compensation.

This opened up an international debate on the treatment of foreign nationals by sovereign states, with a clear divide between the developed world and the developing world. Developing countries held the view that foreign nationals were entitled to no further protection other than that available to their own citizens, and that regulatory processes and sovereign acts such as nationalisation that resulted in expropriation of private property could only be “appropriately” compensated according to the domestic national law of the concerned country. This view was expressed through a series of seven resolutions passed by the United Nations General Assembly through the 1950s and 1960s asserting the “permanent sovereignty over natural resources” of nations, and later, through the 1972 Declaration on the Establishment of a New International Economic Order and the 1974 Charter of Economic Rights and Duties of States. These resolutions, while passed with overwhelming majorities in the United Nations General Assembly, did not represent legally binding statements.

In contrast to the developing nations or the “capital importing” nations, the developed countries adopted their own approach to the issues thrown up. Against the standard of “appropriate compensation” favoured by the developing countries, the developed countries advanced the view that there existed a “minimum standard of treatment” of foreign nationals and their investments into host states. This was a rephrasing of a long held belief among the erstwhile colonial powers that there existed “standards of civilisation” which determined whether or not a host state had treated a foreign investor justly, which superseded the question of legality under domestic law. For instance, a ruling by a commission established in 1923 to settle claims between the United States and Mexico stated:

"Facts with respect to equality of treatment of aliens and nationals may be important in determining the merits of a complaint of mistreatment of an alien. But such equality is not the ultimate test of the propriety of the acts of authorities in the light of international law. That test is, broadly speaking, whether aliens are treated according to ordinary standards of civilization."

With the lack of consensus between developed and developing countries in the post-Second World War period, various efforts at arriving at multilateral frameworks governing international investment failed. Developed states, however, followed their own strategic approach to protect investments made by their companies in the developing world. Some important milestones were the 1958 New York Convention on the Recognition of Foreign Arbitral Awards which ensured recognition and enforcement of arbitral awards among signatory nations – and which India has signed and ratified – and the establishment of the International Centre for Settlement of Investment Disputes (ICSID) in 1965.

The ICSID provided a legal and organisational framework for international arbitrations between foreign investors and states, and sidestepped the issue of lack of consensus on standards of treatment by attempting to create an mechanism for impartial settlement of disputes. With this international institutional infrastructure in place, developed nations created the instrument of Bilateral Investment Treaties or BITs, with international arbitration under the ICSID included as a dispute settlement mechanism that individual investors could exercise against host states.

These treaties were offered by developed nations to developing nations, with the incentive that developing nations which signed such treaties would become much more attractive destinations for investment by citizens and companies of the developed nations than countries that did not. The “minimum standard of treatment” regime favoured by the developed nations was universally included in the texts of the BITs, and the collective bargaining power displayed by the developing world on this issue failed to make an impression on negotiations between individual developed and developing countries, which were typically characterised by an inequality of bargaining power.

India Enters the BITs Era

This entire debate was one that India was largely absent from, at least at a substantive level. With India’s economy inward looking and its early policy focus on import substitution in the Nehruvian era, foreign investment into India was negligible. By the 1980s, when India began to warm up to foreign investment, the form of BITs had largely been standardized across the world. India signed its first BIT with the UK after liberalisation in 1994. While India had not signed the ICSID Convention, another framework for international arbitration had been developed by the United Nations Commission on International Trade Law (UNCITRAL) – which India was a party to – in 1976. The India-UK BIT, thus, featured arbitration under the UNCITRAL rules as the mechanism for investor state dispute settlement. By 2013, India had signed 83 such BITs with other nations, according to the Investment Policy Hub database of the United Nations Conference of Trade and Development (UNCTAD).

International arbitration between individual investors and states under BITs had been relatively rare until recently. Prior to the year 2000, there had been only 66 arbitrations conducted by the ICSID. Since then however, there has been a large rise in the number of arbitration claims bought by investors against host states. Several prominent adverse awards have created an atmosphere of distrust of the system of ISDS via arbitration. For instance, in a claim brought by Occidental Petroleum Corporation against Ecuador, under its BIT with the United States, a tribunal awarded the company $2.3 billion in compensation despite acknowledging that the company had broken Ecuadorian law. Increasingly, public policy measures to protect the environment, or to protect public health, or to protect against economic instability result in arbitration claims being made against the governments concerned. Argentina’s efforts to stabilise and control prices in the face of runaway inflation in 2001-02 resulted in no less than 40 arbitration claims being brought against it. More recently, Philip Morris, the international cigarette manufacturer, brought claims against Australia and Uruguay over their anti-smoking efforts including laws mandating plain packaging and mandatory warning labels.

The response to this situation has been rising denunciation of the ISDS mechanism in international fora and its abandonment by some countries. Critics have argued that the system enables unelected, unaccountable tribunals comprising corporate lawyers to adjudicate and issue orders that cannot be appealed, on what are essentially matters of public policy. A recent effort by the United States government under the Obama administration to secure a Transatlantic Trade and Investment Partnership treaty with the European Union was scuppered by – among other factors – the EU’s reluctance to include an ISDS clause. Several countries including Australia, Ecuador, South Africa and Indonesia have announced that they would no longer include ISDS clauses in future BITs, or that they would withdraw from current treaties that include ISDS, or let such treaties lapse. Other approaches have suggested reforming the current arbitration rules to improve transparency and accountability, or their replacement by other means, including a proposed International Court of Arbitrations.

India’s Approach to ISDS: Before the White Industries Case

Most of India’s BITs were negotiated on the basis of a model BIT notified by the Indian government in 1993. This model was based on similar documents followed by developed countries, and was slanted in favour of investor protection. Though the model was slightly modified in 2003, there was little public focus on it before India’s involvement in high-profile international arbitrations.

The first reported arbitration that India faced under a BIT were a clutch of claims brought by General Electric and Bechtel Industries relating to the controversial Dabhol Power Project in Maharashtra. The two companies were minority partners in the project which also involved the infamous Enron Corporation. The power plant which the companies had invested in had signed a contract to supply power to the Maharashtra State Electricity Board (MSEB). However, when on account of political opposition the MSEB cancelled the contract, General Electric and Bechtel brought arbitration claims against India in 1999 under India’s BIT with Mauritius (the companies had routed their investments through their Mauritius subsidiaries). The process did not result in any kind of arbitral award though, as the claims were settled between the parties.

The first arbitral award against India, which appeared to spur a government rethink on India’s BITs, was the White Industries case. White Industries was an Australian mining company which had a contract with India’s public sector company, Coal India Limited. A dispute between the two companies had resulted in a commercial arbitration award (between the two companies, not involving the government) of $4.08 million in favour of White Industries in 2002. White Industries approached the Delhi High Court seeking to enforce the arbitral award, while Coal India approached the Calcutta High Court seeking that the award be set aside. With the Delhi High Court staying the enforcement proceedings while the decision in the set-aside proceedings was still pending, White Industries sought to appeal the Supreme Court.

When the case remained pending at the apex court till 2010, White Industries brought an arbitration claim against India under the India-Australia BIT claiming that the delay in court proceedings amounted to India having violated its obligation to provide “effective means of asserting claims and enforcing rights.” This was not an obligation under the treaty with Australia – instead, it was “borrowed” from India’s BIT with Kuwait, by means of the “most favoured nation” clause. Under this clause, India effectively committed to not discriminate between investors of different foreign nationalities – so the “best” conditions and protections offered by India to foreign investors of any nation could be claimed by investors of any other nation.

Since India’s treaty with Kuwait granted certain obligations, the presence of the most favoured nation clause in the treaty with Australia meant that the Australian investor could claim that it too was entitled to the same obligations even though they were not present in the treaty with Australia. In 2011, the arbitration tribunal found in favour of White Industries, producing the first award against India in such a case.

India’s Approach to ISDS – Post White Industries

The notices of dispute from Vodafone, Cairns, Nokia and others after the retrospective tax amendment began to arrive thick and fast soon after the award in the White Industries case. Another spate of arbitration claims arose from the cancellation of licences using second-generation (2G) telecommunications spectrum by the Supreme Court in February 2012 as a fallout following the submission of a report of the Comptroller & Auditor General of India about irregularities in the pricing and allocation of spectrum. These developments prompted a course correction from the Indian government. A working group was set up in 2012 to review India’s approach to investment treaties, with a particular focus on reformulating the Investor State Dispute Settlement or ISDS mechanism. In March 2015, the government released a draft text of a new model BIT for public comments. Following the completion of the consultation process, the Union Cabinet approved the new model BIT text in December 2015.

The new model treaty is a significant departure from India’s existing BITs. Firstly, in reaction to what the government had to face in the White Industries case, the new text altogether drops the “most favoured nation” clause. Also, in reaction to the Vodafone claim and similar claims, the new text explicitly clarifies that it does not apply to taxation measures by the government. Various other measures, including those pertaining to intellectual property rights, and those intended to protect macroeconomic stability are similarly excluded in the text of the new model treaty.

The “preamble” to the treaty, significant in setting out the intent of the treaty, which forms the basis for its interpretation under the Vienna Convention on the Law of Treaties (VCLT), includes a statement that a state has the right to regulate in accordance with law and policy objectives, and provides for promotion of sustainable development. The rest of the text continues in a similar vein. Key provisions, from the definition of “investor” and “investment,” reduce and narrow the scope of investments protected by the treaty. The definition of “expropriation” is similarly narrowed and the scope for regulatory measures resulting in indirect expropriation, as long as they are non-discriminatory, is widened. The “fair and equitable treatment” standard, a common feature in BITs under which most successful arbitration claims are made, is dropped entirely, and replaced by a much narrower set of protections and guarantees for investors.

On dispute settlement, the new model text does retain the arbitration system of ISDS. However, it seeks to restrict the possibility, principally through procedural methods. The ISDS chapter requires that an investor pursue remedies in domestic courts for a minimum of five years. After those five years have passed, an investor can issue a notice of dispute under the BIT, after which it must pursue conciliation and mediation for a further nine months before it can attempt to initiate arbitration. At the same time though, arbitrations can only be brought within six years following the action which is claimed to be a breach of treaty obligations. Thus, in effect, under the new model text, foreign investors would have time-bound windows of only three months to initiate arbitration proceedings, and five years and nine months after a treaty breach.

After releasing the revised model treaty, it was reported that India had sent termination notices to 57 countries with which its BITs had expired or were about to expire, and announced that it would seek to renegotiate those treaties based on the new model text. On the 25 BITs that remained, India circulated a draft “joint interpretive statement” which it intended to sign with the treaty partners, clarifying ambiguities to avoid expansive interpretations by arbitral tribunals. Subsequent to this, it was reported that India had completed negotiations with Brazil on a BIT which included no clause on ISDS.

Returning to the Delhi High Court Judgement

The May 2018 Delhi High Court judgement is significant in a number of ways. First, it has dealt with questions of jurisdiction and law in the Indian context, the validity and admissibility of the government’s plea in the Vodafone case, and its own jurisdiction over the issue. The second way in which the judgement is significant is that in the eyes of international law and arbitration tribunals, a domestic court is an organ of the state. Therefore, certain facts and observations stated in the judgement will be relevant to the arbitration proceeding itself as positions taken by the Indian state. Finally, while the judgement is being read as “arbitration friendly,” certain segments of the judgement do retain a sense of scepticism about the current system of international arbitration, that is in line with the position of the Indian government.

The court had to consider the following questions:

• Does an Indian court retain jurisdiction over BIPA arbitrations?
• Can an Indian court issue injunctions against arbitration?
• Does the Arbitration and Conciliation (A&C) Act, 1996, apply to BIT arbitrations?
• Does Vodafone’s second arbitration claim under the India-UK BIPA constitute an “abuse of process”?

The court answered the first and second questions in the affirmative. It found that “there is no statutory bar or case law relating to treaty obligation which creates an ouster of jurisdiction or threshold bar for Indian courts in relation to a bilateral investment treaty arbitration. Accordingly, there is no explicit or implicit ouster of jurisdiction of National Courts.” It further pointed out that India had not joined the International Centre for Settlement of Investment Disputes or ICSID Convention, noting that: “…about 161 States have signed the ICSID Convention and 153 have ratified it till date. However, Union of India has not signed it and the main reason seems to be that the ICSID Convention completely negates the role of National Courts.” The court further pointed out that if it did not retain jurisdiction over BIT arbitrations, it would be powerless to enforce any arbitral award, if it were approached to do so.

On the third question of applicability of the A&C Act, however, the court opined in the negative and this finding has certain significant implications, as we shall see. The court held that the A&C Act governs only “commercial” arbitrations, and emphasized the fundamental distinction between commercial arbitrations and investment arbitrations. It stated “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). The roots of Investment Arbitrations are in public international law, obligations of State and administrative law.”

Importantly, the court made it clear that “part II” of the A&C Act, which deals with awards by arbitration tribunals seated outside India, specifically pertains only to commercial arbitrations, and thus, did not apply to BIT matters. The court added that while ratifying the New York Convention on Recognition of Foreign Arbitral Awards, India had made a reservation that it would apply the Convention only to “commercial” disputes.

On the question of “abuse of process,” the court found that there were reasonable grounds for Vodafone to initiate a second arbitration and that it was not prima facie an abuse of process. To arrive at this conclusion, the court relied on two major arguments. First, it acknowledged that according to submissions from both sides, the Indian position in the other arbitration under the India-Netherlands BIPA was that the arbitral tribunal was without jurisdiction as according to the Indian government the treaty did not apply to legislative or regulatory decisions on taxation matters, and it was this Indian position on jurisdiction that had caused Vodafone to seek arbitration under the India-UK BIPA as well. Second, the court also took on board the offer from Vodafone that if India were to consent, the two arbitrations could be consolidated so as to avoid parallel proceedings and inconsistencies in their decisions. In the court’s opinion, this offer was a sufficient response to the Indian charge of abuse of process, and demonstrated that Vodafone was merely seeking a route to arbitration and not a double award. In fact the court went one step further to state that Vodafone’s offer would be binding on it.

The court, while retaining jurisdiction over BIT arbitrations and retaining the power to issue anti-arbitration injunctions, also stated that as a matter of principle, a domestic court should do so only under the rarest of circumstances. “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. Such a restrictive approach and jurisdiction is in consonance with any international obligation India may have under VCLT (Vienna Convention on the Law of Treaties) or any other treaty.”

In its judgement, the court also recognised the issues with international arbitration as a mechanism for ISDS, by quoting extensively from a speech made by Justice Sundaresh Menon, the Chief Justice of Singapore, in which he made forceful arguments on the weaknesses of the system. The court emphasised the following passage, highlighting the lack of coherence and consistency in arbitration jurisprudence:

"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". his evolving body of substantive investment arbitration law also suffers from a lack of coherence and consistency because its development has been piecemeal. With no central organising structure or unifying appellate control and no doctrine of binding precedent, the results are often conflicting. Any attempt by the courts to provide oversight is fragmentary and restricted: fragmented because enforcement of awards can be sought before the courts of any of the many signatories to the New York Convention, and restricted because of the principle of minimal curial intervention."

What Happens Next?

According to a report in the Economic Times, the India-Netherlands BIPA arbitration panel headed by Sir Franklin Berman will begin hearing the matter in February 2019. Meanwhile, as the case at the Delhi High Court progressed, the panel for the India-UK BIPA arbitration tribunal was also set up, with all three arbitrators now in place.

India’s jurisdictional objection has been raised before the India-Netherlands tribunal, and presumably now India’s claim of abuse of process will be raised before the India-UK tribunal, following which Vodafone will presumably be bound to raise their offer to consolidate proceedings once again. As far as the government is concerned it would be ideal for India if neither tribunal goes into the merits of the case.

As an analysis produced by three researchers at the National Law School of India University, Bengaluru, Raag Yadava, Shiva Santosh Yelamanchili and Divyanshu Agarwal, suggests, in the event of the case being tried on merits, there is a possibility of India being found in breach of the requirement to afford “fair and equitable treatment” to Vodafone. To what extent India’s jurisdictional objection is likely to succeed is hard to foresee. While the government’s position, both in the words of the official quoted by PGurus, as well as in its submissions in court has been that Vodafone was facing imminent defeat due to India’s view on jurisdiction and the exclusion of taxation matters from the BIPA, this position is yet to be vindicated by the tribunal. Should this position fail to pass muster and a hearing on merits begin, Indian bureaucrats will have to start taking seriously the possibility of an adverse tribunal award, of possibly quite a significant value.

Right from the genesis of the issue, the Vodafone saga has been driven by the insistence of the Indian government’s Income Tax Department that it has the right to collect tax on a foreign transaction, when the transaction indirectly effects a transfer of Indian assets. When this position could not convince the Supreme Court, it was brought in by means of the retrospective amendment to the Income Tax Act. One should not assume that the view will be deterred by an adverse tribunal order. The department might even be tempted to attempt to have the order set aside by the Indian court system.

It is at this possible juncture that the Delhi High Court’s decision regains significance. With the High Court ruling that BIT arbitrations are neither subject to the New York Convention, nor to the A&C Act which enables the enforcement of international arbitral awards under the New York Convention and grants Indian courts the legal grounds to set aside such awards under certain conditions, any attempt to set aside an award by a BIT Tribunal would run into the issue of non-applicability of the A&C Act, and thus a lack of legal basis for an Indian court to set aside an award.

Whether the government will actually pursue such a course is something only time can tell. In the White Industries arbitral award, the government made no attempts to challenge the BIT tribunal’s award. It would be politically risky to do so, as India’s credibility before international investors would be at stake. Additionally, it would hardly behove India’s stated intention to improve market conditions for foreign investors, including initiatives such as the one by the present government to improve India’s “ease of doing business.”

The trajectory and outcome of the Vodafone arbitrations are also crucial in terms of the other arbitrations that India is involved in due to the same retrospective amendment of the Income Tax Act. As mentioned, while arbitration jurisprudence is not precedent-based or entirely consistent, there is usually an attempt by arbitrators to adhere to a common set of principles and standards on equivalent matters. If the Vodafone arbitrations end in findings against India, it is likely that the other arbitrations would meet a similar denouement. This would, in all likelihood then, increase India’s official pessimism about ISDS and possibly provide cause for a further toughening of India’s approach to BITs.

While such a move will not be welcomed by the business community in India and abroad, as has been traced in this article, it would place India in a position that it is perhaps more historically suited to. In the international debates on sovereignty over natural resources, India has always positioned itself alongside other developing countries. Yet, in its investment treaty practice, perhaps due to entering the arena long after the international consensus on BITs had been established, India incorporated the structures set up by capital-exporting countries which adhere to the strongest versions of investor protection standards.

If indeed the outcome of the Vodafone arbitrations take India to a place of firmer and more resolute opposition to aggressive arbitration by multinational corporations, India’s posture on Bilateral Investment Treaties would be brought closer to a historically and structurally appropriate position, and those officials of the Income Tax Department, who have carried the Vodafone tax demand this far would have achieved far more than they set out to do.