India challenges Vodafone arbitration award, plans the same in Cairn case

Experts mixed on the Indian government response. Some say it will send wrong signal to investors, while others say bilateral investment treaties exclude tax disputes

India has challenged in Singapore an international arbitration tribunal’s verdict overturning its demand for Rs 22,100 crore in back taxes from Vodafone Group Plc.

The British telecom major in September had won the arbitration at The Hague, with the tribunal ruling that India’s imposition of the tax liability was in breach of the India-Netherlands bilateral investment treaty. India had 90 days to appeal the ruling. The appeal was filed closer to the deadline, which ended on Wednesday.

The Indian government has also lost an international arbitration case to energy giant Cairn Energy Plc over the retrospective levy of taxes, and has been asked to pay damages worth $1.2 billion (Rs 8,842 crore) to the UK firm.

“India has already filed an appeal in a Singapore appeals court against the Vodafone verdict. The Indian government has the sovereign right of taxation, and private individuals cannot decide on that. Besides, it falls outside the domain of a bilateral investment treaty and beyond the jurisdiction of international arbitration,” said a senior government official.

According to the award, the government needed to reimburse Vodafone 60 per cent of its legal costs and half the cost borne by it for appointing an arbitrator on the panel. Hence, the government’s liability in the case would have come to around Rs 75 crore.

Some experts believe that the government's move would send a wrong signal to foreign investors, while others say investors would have to evaluate their decisions since the Bilateral Investment Treaty (BIT) now does not have tax disputes in its domain.

Mukesh Bhutani, managing partner, BMR Legal, said the nuanced approach of the government appeared to be that in its quest for foreign investment, India could not be considered to have waived its rights to evaluate and adopt an independent policy outlook, including tax laws. “It is premature to conclude on the outcome of the present events at this stage. Nonetheless, the decisive action of the government not accepting the award is progression, and not the deviation, which was expected by many. It exudes India’s confidence that it continues to have faith in its revised BIT model, which excludes tax policy,” he said. New foreign investors, therefore, need to take a calibrated decision and factor in the dynamic tax environment while evaluating their return options, Bhutani said.

Amit Maheshwari, tax partner, AKM Global, said, “It is unfortunate as this case just doesn't seem to end.” Even though this retrospective taxation was universally criticised, even by the ruling party itself when it was in opposition, the law remains in statue, Maheshwari said. “This step of going to appeal does not send the right message to foreign investors,” he added.

In the case of Cairn, India will challenge the verdict, given the sizeable damages worth over Rs 8,800 crore, officials said. Besides, India will follow a uniform approach in the two cases as both pertain to retrospective legislation and will set a precedent, they added.

The British telecom firm had filed arbitration against India over a 2012 legislation that gave the government powers to retrospectively tax deals like Vodafone’s acquisition of a 67 per cent stake owned by Hutchison Whampoa in 2007. It had challenged the tax demand of Rs 22,100 crore, including interest and penalty, under the Netherlands-India bilateral investment treaty.