[Editorial Analysis] Despite arbitration tug of war, mutual settlement is key

Mains Paper 2: International
Prelims level: Permanent Court of Arbitration
Mains level: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Context:

• The 2020 may have been a welcome bag of enhanced equity inflows, bold policy changes and billion-dollar milestones for Indian foreign direct investment (FDI) landscape.

• The Permanent Court of Arbitration at The Hague (PCA) ruled against Government of India in the cases of Cairn Energy and Vodafone in the final quarter of 2020.This international agency decisions against India are course of concern for India.

• the decision by India to appeal against these awards, 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).

The Hague rulings:

• Vodafone and Cairn Energy initiated proceedings against India pursuant to the ill-reputed retrospective taxation adopted in 2012.

• 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 Permanent Court of Arbitration ordered the Government of India to reimburse legal costs to Vodafone of approximately Rs. 45 crore. There was no award on damages, India challenged this decision.

• The Permanent Court of Arbitration ordered the Government of India (failed to uphold its obligations to Cairn under the India-United Kingdom BIT) to pay Cairn approximately Rs. 9,000 crore for the ‘total harm’ suffered by Cairn (UK firm).

India and PCA:

• PCA, established by the Convention for the Pacific Settlement of International Disputes concluded at The Hague (Netherland) in 1899 and the convention revised in second Hague Peace Conference in 1907.

• PCA settles disputes between member states, International organizations or private parties like territorial and maritime disputes, sovereignty, human rights, International investments and regional trade etc.

• PCA, has Observer Status in UN, and India is member of PCA. India ratified the 1899 convention in 1950.

Cairn (UK firm) versus 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 for instance, delays in Indian courts, uncertainty in Indian public policy vis-à-vis assessment of tax demands by foreign tribunals, and the Indian judiciary’s exceptional stance on non-enforceability of treaty awards in India may have been pivotal in Cairn’s decision.

• 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.

Viewed from the prism of state conduct:

• In Cairn case, 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.

• The retrospective taxation and the Government of India’s actions in Cairn thrive on the brink of being wilful, unfair and inequitable tests that limit freedom of executive action under international law.

The retrospective taxation law:

• Retrospective” means taking effect from a date in the past and “tax” refers to a new or additional levy of tax on a specified transaction and It allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.

• The Indian government amended the Income Tax, 1961, retrospectively, to overturn the judgment of the Supreme Court. The amendment allowed tax authorities to retrospectively tax transactions.

• Once Parliament passed the amendment to the Finance Act in 2012, the onus to pay the taxes fell back on Vodafone. The amendment was criticised by investors globally, who said the change in law was “perverse” in nature.

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

• 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.

• It may not be conducive to weave a web of litigation entangling stakeholders and closing exit routes.

Conclusion:

• It is hoped that the parties will actively continue, in parallel, to identify mutual interests, evaluate constructive options and arrive at an acceptable solution.

• 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.

• India government makes sure 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.

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