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This article is co-authored by Sameep Khanal.
Introduction
In this article, the authors will analyse the investment awards under the Indian legislation and case laws. Authors will also try to contextualize Indian legislation in south Asia and draw parallels to the extent possible with south Asian experience in enforcing investment awards. Further authors will also try to explore options for providing much-required clarity on the enforceability of investment awards in India after Vodafone award.
Model BIT and Revisionism
The 2015 draft of a model Indian bilateral investment treaty (the “Model BIT”) contains stringent guidelines on the definition of investment amending the broader all-asset inclusive definition usually associated with first-generation BITs. Article 15.1 of the 2015 draft of a model Indian bilateral investment treaty (the “Model BIT”) contains stringent guidelines on the definition of investment amending the broader all-asset inclusive definition usually associated with first-generation BITs. Article 15.1 of the Model BIT provides that the investor must resort to the resolution of the dispute before the pertinent local courts or administrative bodies of the host state as a prerequisite to filing a claim seeking relief from the tribunal. Moreover, Article 15.2 elucidates that the investor must exhaust all judicial and administrative remedies linking to the measure fundamental to the claim for at least a period of five years erstwhile to arbitration. The provision has been retained in the Belarus BIT and Taipei BIT (2018). The provision is like article 26 of the ICSID Convention which requires the exhaustion of domestic administrative or judicial remedies as a condition of its consent to arbitration. However, despite significant headway in terms of substantive protection high courts ruling have not been helpful for streamlining investment awards in India.
There have been three instances of a national court in India adjudicating upon issues related to enforcement of investment awards. With the sanction of three judgments, courts have essentially lacked consensus on a vital aspect – the pertinence of the Arbitration and Conciliation Act, 1996 (the“Act”) to investment arbitral awards. With the sanction of three judgments, courts have essentially lacked consensus on a vital aspect – the pertinence of the Arbitration and Conciliation Act, 1996 (the“Act”) to investment arbitral awards arbitrations. The Calcutta High Court in Board of Trustees of the Port of Kolkata v. Louis Dreyfus Armatures(2014) (the “Louis Dreyfus”) continued under the assumption that the Act applies to investment awards. The High Court of Delhi recently in Union of India v. Khaitan Holdings (Mauritius)(January 29, 2019) and Union of India v. Vodafone Group plc(7th of May 2018) took a stand on the opposite, holding that the Act is only applicable to commercial arbitrations.
An often-overlooked repercussion of this discrepancy/dichotomy is severe ambiguity on the enforceability of investment arbitral awards in India. It is also to be noted that India is not a party to the ICSID Convention and is therefore under no obligation to authorise any decision given through investment arbitral awards as if they were final judgments of its own local courts, as provided for by Art. 54 of ICSID Convention. It has also availed of the reservation provided for in Art. I (3) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the“New York Convention”). Accordingly, S. 44 of the Act limits the New York Convention’s applicability in India to foreign awards stemming out of or rooted in legal relationships which are considered as ‘commercial’ under Indian law.
Contradictory Ruling
Loius Dreyfus decided by the Calcutta High Court the first case in 2014 which dealt with investment arbitration. It dealt with an appeal for an anti-arbitration injunction by the Kolkata Port Trust, averting Louis Dreyfus from ongoing proceedings against it and further directed them to an investment arbitral tribunal established under the India-France Bilateral Investment Treaty. The court approved the injunction, perceiving that the Kolkata Port Trust had been erroneously recognized as a respondent in the arbitration as the only party in agreement to the BIT for arbitration was the Union of India.
Section 45 of the Act was utilised towards the submission of this anti-arbitration injunction. When mitigating its authority to issue an anti-arbitration injunction, in this case, the court merely presumed that the Act was applicable to this investment arbitration, similar to the case with foreign-seated commercial arbitrations. It, therefore, deliberated on the position of anti-arbitration injunctions under Section 45 (which reads as to commercial arbitrations) and held that it would only be interference in foreign-seated investment arbitrations in rare situations, applying the same norm it applies when bearing in mind intrusion in commercial arbitrations under this provision.
Following this, the Delhi High Court decided on another request for an anti-arbitration injunction in Vodafone(7th of May 2018). Here, the Union of India requested that Vodafone Group plc be barred from resorting to arbitration under the India-UK BIT since another arbitration under the India-Netherlands BIT had already been introduced by its Dutch holding corporation, based on the same cause of action. In denying the application, the court made the contradictory assumption, while stating that the investment arbitration in the conflict was “not a commercial arbitration governed by the Arbitration and Conciliation Act, 1996”. It, therefore, created its own norm, adjudicating that an Indian court could intervene in investment arbitration and grant an anti-arbitration injunction only if the arbitration is “oppressive, vexatious, inequitable or constitutes an abuse of the legal process”. In Khaitan Holdings(January 29, 2019), the Delhi High Court had adopted this standard and made the same assumption again, bolstering a fundamental disagreement between the two High Courts on the Act’s pertinence to investment arbitrations.
The Delhi High Court's position leaves no alternative open to parties looking for the requirement of an investment arbitral award in India. In reality, regardless of whether the Delhi High Court's holding in Vodafone on the standards of India's Civil Procedure Code applying to Investment arbitrations is applied, it won't help parties at the authorization stage since decrees of unfamiliar courts (and not tribunals) can be implemented under that enactment.
Understanding Bottleneck: “Commercial Relationship”
In China, the New York Convention’s applicability to a dispute between ‘foreign investors and the host government’ has been overtly precluded through its embracing of the commercial association reservation under Art. I (3) of the Convention. While not provided explicitly, the interpretation of the reservation in Sec. 44 points to a high probability of similar stance being accepted in India.
In RM Investment & Trading Co. v. Boeing Company(10th of February 1994), The Supreme Court of India found that the New York Convention aims to facilitate the speedy settlement and is expected to encourage quick settlement of disputes arising out of international trade through arbitration and that therefore, “the expression commercial should be construed broadly, having regard for the manifold activities that are an integral part of international trade today”. It, thus, held that a contract or agreement entered into for consultancy services fell within the reservation’s scope and an award rendered in that manner could be enforced and upheld in India under the Convention.
While seemingly broad in its scope, this understanding of the reservation has still been limited to dealings amid individuals. Thus, in Union of India v. LiefHoegh Co.(1982), the High Court of Gujarat held that ‘commercial relationships’ in this milieu would contain “all business and trade transactions in any of their forms, including the transportation, purchase, sale and exchange of commodities between the citizens of different countries”.
While it would bring about a “pro-investment arbitration” result that would serve investor there is, lamentably, no clear premise on which the Calcutta High Court’s supposition on the Act’s material and applicability to investment arbitrations can be stretched out to the applicability of the New York Convention at the enforcement stage.
Vodafone Case
On September 25, 2020, the international arbitral tribunal constituted in the case of Vodafone International Holdings BV v. The Republic of India(2016) (Vodafone case) held that India had violated the ‘fair and equitable treatment’ (Vodafone award) guaranteed to VIHBV under the 1995 Bilateral Investment Promotion and Protection Agreement (BIPA) between the Republic of India and the Kingdom of Netherlands (India – Netherlands BIT).
Background of the Case
In 2007, Hutchinson Telecommunications International Limited, a Hong Kong entity (HTIL) traded its stake in additional Cayman corporate entity, which circuitously through a string of holdings, held shares of Hutchinson Essar Limited, an Indian company (HEL) to Vodafone International Holdings B.V., a Netherlands entity (VIHBV) for a consideration of USD 11.1 Billion. HTML earned capital gains on the sale. The Indian revenue services considered that such acquisition of the stake in HEL by VIHBV was liable for tax deduction at source under Section 195 of the Income Tax Act, 1961. Since VIHBV failed to withhold Indian taxes on payments made to the selling Hutch entity, a demand was raised on VIHBV under Section 201(1) (1A) / 220(2) for non-deduction of tax.
The Indian Supreme Court Decision(2016)
On January 20, 2012, the Supreme Court of India discharged VIHBV of the tax liability imposed on it by the Income Tax Department of the Plaintiff. The Supreme Court held that sale of a share in question to Vodafone did not qualify as a transfer of a capital asset under the umbrella/meaning of Section 2(14) of the Income Tax Act. The Apex Court not only quashed the claim of INR 120 billion by way of capital gains tax but also directed reimbursement in form of compensation of INR 25 billion deposited by the Vodafone in terms of the interim order dated November 26, 2010, with interest rate 4% p.a. within two months.
Retrospective Tax Legislation
The Judgement of Supreme Court led to a hue and cry and after the publication of the aforementioned judgment, the Indian Parliament passed the Finance Act 2012, which provided inter alia for the expansion of two explanations in Section 9(1)(i) of the Income Tax Act (2012 Amendment). The primary explanation shed light on the meaning of the term “through”, stating that “For the removal of doubts, it is hereby clarified that the expression ‘through’ shall mean and include and shall be deemed to have always meant and included ‘by means of’, ‘in accordance of’ or ‘by reason of’.” The second explanation clarified that “an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.
The 2012 Amendment also additionally elucidated that the term “transfer” incorporates and shall be deemed or will be considered to have consistently included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such handover of rights had been categorized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.
The Arbitration Claim under India-Netherlands BIT
Distressed by the inconvenience of the imposition of tax by way of retrospective amendment of the Indian tax legislation, VIHBV summoned intervention by invoking arbitration under the India – Netherlands BIT through a notice of dispute dated 17th of April 2012. On 20th of February, 2014 India stated that disputes relating solely or mainly to taxation are excluded from the scope of the India – Netherlands BIT. On April 17, 2014, VIHBV gave a notice of arbitration to India as required under the India-Netherlands BIT.
Vodafone Award
On September 25, 2020, arbitral tribunal rendered award in favour of VIHBV, purportedly for not abiding by the fair and equitable treatment standard under the India – Netherlands BIT. The arbitral tribunal adjudged against India to reward lawful expenses of around INR 850 million to Vodafone. The arbitral tribunal requested the Union of India to stop the actions in question (retrospective tax levy) and adhere to its international responsibility.
Union of India’s position
The Government of India during the last decade has shown an overall lack of trust in ISDS and has, as a consequence, unilaterally terminated 69 out of 84BITs. In retort, India has taken a highly preventive approach to ‘investor protection’ and ISDS in the Model BIT. At present, India has successfully negotiated 6 BITs after the adoption of its Model BIT, with supplementary 13 BITs still under discussion. These BITs mirror several provisions of the Model BIT. For example, the Belarus BIT (2018) included most provisions as stipulated in the Model BIT.
However, India has availed of the commercial reservation provided in Article 1(3) of the New York Convention, restricting its applicability to foreign awards arising out of legal relationships ‘considered as commercial under Indian law’. Therefore, whether the Act applies to ISDS is highly uncertain. High Courts have reached contrasting decisions, as discussed earlier. Conclusively, the New York Convention is not an indisputable regime for enforcement of investment awards in India. Therefore, stances of the Union Government on clear terms remains to be seen post-Vodafone award.
The landscape of Investment Arbitration in South Asia
South Asian countries are steeped into the ICSID regime since the enactment of the ICSID Convention. India and Bhutan are not parties to the ICSID Convention while Afghanistan, Bangladesh, Pakistan, Nepal, Srilanka have ratified the ICSID Convention. This allows the investment disputes against these host states in south Asian countries to be enforced as good as a judgment of the court without review conditions laid down in New York Convention and subject the awards to annulment only on limited grounds. The countries like Bangladesh,(2009) Srilanka(2018) and Pakistan(2018) have already faced investment dispute in recent past. Nepal also has faced its first BIT claims.(2019) The claimant in that dispute has submitted that Nepalese instrumentalities failed to accord fair and equitable treatment to Axiata in their handling of tax assessment against offshore disposal of shares by TeliaSonera to Axiata. Interestingly the arbitrator had issued interim order not to collect taxes, but Nepal Government has not enforced it. Ncell Private Limited, the holding company of Axiata, has subsequently paid the taxation. Interestingly Nepal has not at the time of the writing appointed its counsel. This case interestingly came around Vodafone proceedings and drew significant discussions surrounding parallels with Vodafone. But while in Vodafone case claimant based its merit on the retrospective legislation, it remains to be seen whether the interpretation of Supreme Court of Nepal regarding an underlying change in control and taxability thereof will amount to a breach of fair and equitable treatment.
Way Forward
India’s revisionism of its BIT regime is a timely development when the ISDS and the BIT and landscape is coming under vehement scrutiny. This scepticism also is likely to take currency in light of Achema judgment(BV, 2018) which held all intra-EU Bilateral agreements to be invalid and has led to Intra-EU Bilateral Termination Agreement. This also comes against the growing discontent within neighbour when Pakistan has raised objection on mammoth monetary investment award and its impact on post COVID economy. This scepticism is also shared by Nepal in South Asia which did not nominate the arbitrator and counsel and did not respond on the interim order in its maiden investment dispute governed by liberal UK-Nepal BIT with lenient investor definition and all asset investment definition which also lacked limitation of benefits clause.
While the scepticism of India in ISDS/BIT is a pertinent and timely exercise, it still cannot come at the price of legal uncertainty in terms of enforcement of investment awards. Despite being the largest economy in South Asia and carrying nuanced legal heritage, Indian law is an oddity in South Asia in terms of enforcement regime of investment awards. The nebular interpretation of Indian courts has only intensified by the lack of analysis in the Calcutta and Delhi High Court conclusions. It behoves for Indian legislature to clarify the position through clear and unequivocal language. Alternatively, India may also consider being party to ICSID to appease the investors without prejudicing the stances it has defended in the Model BIT. Vodafone Case has certainly given impetus to this need for clarification and now it appears sooner than later; the snow will thaw.
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