Vodafone tax case - a case study for investments in india

The Delhi High Court has disposed of the suit filed by the Union government and granted liberty to raise the issue of abuse of process before the arbitral tribunal constituted under the India-UK BIT. The interim order issued in September last year—which had restrained Vodafone from continuing with the proceedings under the India-UK BIT—has been vacated. The Delhi High Court reasoned the judgment on the basis that: 1 it is not an absolute proposition of law that national courts are divested of their jurisdiction in an investment treaty arbitration; 2 investment treaty arbitration is fundamentally different from commercial disputes as the cause of action is premised on state guarantees and assurances; 3 it is unknown for courts to issue anti-arbitration injunction under their inherent power in a situation where neither the seat of arbitration or the curial law has been agreed upon; and 4 national courts will exercise great self-restraint and grant injunction only if there are very compelling circumstances, the court has been approached in good faith, and there is no alternative efficacious remedy available.

Vodafone wins India tax battle

When the Delhi High Court had restrained Vodafone last year from continuing with the second arbitration under the India-UK BIT, it was perceived that the Delhi High Court acted overtly harsh in a subject matter which was to be governed under the international investment arbitration. However, the subsequent order wherein the Delhi High Court allowed the parties to continue with the process and constitute the tribunal, and finally, the decision dismissing the civil suit, is praiseworthy.

Although the civil suit has been rejected, the Delhi High Court has opined that the jurisdiction of the national courts is not completely ousted in investment treaty arbitration.

This is also in line with a recent decision of the High Court of England and Wales where a partial arbitral award on jurisdiction was set aside. As sovereign states crumble with claims from investors, the courts are increasingly finding a way to retain the jurisdiction, or supervisory control even in case of investment treaty arbitration which is fundamentally different from commercial arbitration. There appears to be a tension between the legislature and the judiciary; while the judiciary has always supported the investor in this case, i. Vodafone, the government is vehement on their tax demand so much so that they had to retrospectively amend the tax law to make Vodafone accountable to pay a hefty sum of money.

The model BIT narrows the scope of the protection available and has not been perceived well as sovereign states are reluctant to agree to renegotiate the existing treaty framework. Also, the model treaty proposed, and being negotiated with several sovereign states, is not a solution especially as outbound investments from India increase, as does the need to secure adequate protection for Indian investors who invest abroad. One may recall that last year a petition was filed before the Madras High Court restraining Nissan from continuing with investment arbitration proceedings against the Union government.

There are at least 13 cases pending against the Union government arising out of several bilateral investment treaties, and perhaps many more disgruntled investors will follow soon. Rather than advocating the model treaty, the Union government needs to look at these cases seriously, and form a committee, which would then advise on the strengths of each case and ultimately take a decision to settle them as soon as possible, or defend them with the best lawyers, as also suggested in a recent document allegedly authored by finance minister Arun Jaitley.

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