The appeal in the Vodafone case, and soon maybe in the Cairn case as well, is said to be on jurisdiction grounds – that an international arbitration tribunal has no power to decide on India’s sovereign right to make tax laws.
Arvind Datar: They did raise the argument in Vodafone and Cairn that taxation is sovereign and therefore if I tax somebody, it’s my sovereign right and that can’t be subject to arbitration. But that has been rejected not only in our case. When we did research for the Cairn matter, I found that apart from Vodafone and Cairn, there are 32 international investment treaty arbitrations involving tax disputes and of those 32, 17 went in favour of the state. The claims are dismissed in 17 cases and allowed in 15 cases. So, there’s a kind of an even balance.
Nobody questions the country’s right to tax. What they (tribunals) are saying is by exercising your sovereign right to tax are you treating the investment unfairly, are you treating it inequitably, are you worried about the FET clause? Now this FET violation can come from pollution law, labour law, tax law or it can come from a contract law. So, this fair equitable treatment has to be to the investment as a whole.
Promod Nair: I think it’s important to make a distinction between a challenge court considering issues of merits and issues of jurisdiction. As far as issues of merits are concerned, I think the view that is taken in most countries which are parties to the New York Convention on the recognition and enforcement of Arbitral Awards is that the merits are largely a matter for the arbitral tribunals and national courts should not be second guessing the decision of arbitral tribunals on merits. The parties’ agreement was that these disputes would have to be resolved by arbitration and not by a national court. So, therefore, to give effect to that agreement to arbitrate, national courts did not generally review matters of merits.
On the other hand, as far as jurisdiction is concerned, I think national courts are conscious of the fact that the jurisdiction of an arbitral tribunal is based on consent. Now if that consent is a qualified consent and not an absolute consent, that is an important factor which needs to be kept in mind. So, if India has agreed to arbitrate international investment disputes with a foreign investor but conditioned that agreement by saying that tax disputes are not arbitrable, I think courts would have to give effect to that qualifier. Now the issue in these cases is whether such a qualifier exists or not and whether such a qualifier exists – one, for the consent to arbitrate and second, whether it also qualifies the scope of the substantive protection itself. Does the protection of an equitable treatment not apply as far as tax disputes are concerned?
Now investment treaties are not supposed to be insurance policies for all kinds of business or legal risks that exist and an investor is supposed to take the legal system as it finds it. So, retrospective legislation is not uncommon. This is not the first instance of retrospective legislation in India. Previous instances of retrospective legislation have actually been upheld by the Supreme Court. There are a number of decisions to that effect and therefore, there could be certain such arguments that could be made by India on the merits of the cases as well. But I think India’s strongest point would probably be to say that it did not consent to arbitrate tax disputes, that these are disputes that are essentially tax disputes and therefore, the tribunal did not have jurisdiction to rule on them.
I think as far as the courts in Singapore are concerned, they’ve taken an involved approach to a challenge to an award on jurisdictional grounds, they would consider the issue of jurisdiction de novo without being influenced by the decision of the arbitral tribunals but there is a much greater amount of deference as far as the political statement of the merits of the case are concerned.
Did India make it clear in the two BITs (with U.K. and Netherlands) that we won’t arbitrate tax disputes?
Promod Nair: I think that’s where the ambiguity lies. I think the language is not as clear as India would have liked it to be—both in the Vodafone case as well as the Cairn case. That’s why in the Cairn case they made the argument based not on the existence of an express exclusion of tax disputes. I think the argument was that there was an implied exclusion of tax disputes from the scope of dispute that could be submitted to arbitration.
In the Vodafone case, I think, India probably has a stronger case to advance before the Singapore courts. That’s because Article 4 of the India-Netherlands BIT does state that tax disputes fall outside the scope of protections of Article 4 (1) and 4 (2) and 4 (1) – the fair and equitable treatment standard.
Arvind Datar: The only thing is I want to make very clear – that this question of tax disputes being outside the arbitral investment.. this is not a tax dispute. The question is, if one country levies a retrospective tax and makes a demand, is it violating the ‘fair and equitable treatment’ clause?
So, we made it very clear that we are not disputing whether the section 9 is correct or section, X is correct, or section Y is correct. That is not the jurisdiction for the foreign arbitral tribunal to get into. That is for the Indian courts to decide and the Cairn dispute is indeed pending before the Delhi High Court as we speak, and it will eventually go to the Supreme Court.
The ‘fair and equitable treatment’ clause in Netherlands has got no mention about a tax dispute or a contract dispute. It simply says that every investor has got and can expect fair and equitable treatment of his investment. Now, if I make an investment in Indian oil fields or in whatever it is, and by levying a retrospective tax you confiscate my shares or do something, then you are jeopardising my investment and then, you’re violating the treaty. That’s how the logic is. So, one has to be very clear that we are not going to the merits of a tax dispute.