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BIT Notice: Desperate Measure or Trump Card?

Published on Sat, Apr 21 10:51, Updated at Sat, Apr 21 at 11:24
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The twists and turns in Vodafone's battle against the Indian tax department never cease to amaze. This week we have devoted an entire show to Vodafone because this battle is not just about an interpretation of the income tax act. It's become a symbolic one. For those in favour of Vodafone it is about respecting rule of law. For those against it is about denying India its rightful revenue. Patriotic fervour aside we're sticking to the facts amid the legal options facing Vodafone.

So this week we ask: Investment treaty, tax treaty, constitutional validity of retroactive amendments...does any road lead Vodafone to a no-tax destination?

Let's start first with investment treaty.  This week, Vodafone put the government of India on notice - asking it to withdraw the retroactive tax proposals or face arbitration under the Netherlands bilateral investment treaty.

Payaswini Upadhyay asks the experts if this new play by Vodafone is a desperate measure or trump card?

After 5 years of court battles, Vodafone finally tasted victory in February this year. But it was short-lived. One month later, the finance minister proposed a series of retroactive amendments that will bring Vodafone's purchase of hutch Essar to tax. With 4 billion dollars at stake, Vodafone turned to the India - Netherlands bilateral investment treaty. This week it put the government on notice – asking it to withdraw the retroactive amendments or face treaty arbitration.  The move has raised 3 key questions

First, Vodafone's investment in India is indirect - via a Cayman island company. Would the treaty apply in such a case?

Dipen Sabharwal
Partner, White & Case 
"The definition of investor and investment is extremely broad- both in investment treaty arbitration context generally and also in the specific case of the Netherlands-India Bilateral Investment Treaty. So, for eg, it covers rights emerging from shares or any other ownership/interest in companies and it also covers indirect investments through holding companies. With such a very broad definition, all investments coming into India - directly or indirectly - through Netherlands in an Indian asset would be an investment."

The second question - can an investment treaty apply to a tax dispute

Article 4 (4) of the Indo-Netherlands BIT says that the provisions related to "grant of national treatment and most favored nation treatment shall also not apply in respect of any international agreement relating wholly or mainly to taxation or any domestic legislation or arrangements consequent to such legislation relating to wholly or mainly to taxation".

Lord Goldsmith QC
Partner, Debevoise & Plimpton
"That, I think, would certainly mean that somebody couldn't complain that there is a double taxation agreement relating to one country which is not as favorable as the one which this particular national has. So they couldn't complain about that but it doesn't mean that carves out anything to do with taxation. For eg, if there were a taxation which was equivalent to expropriation- I think this is what Netherlands would certainly argue- that Article 4(4) carves out that protection altogether. I can see that this is going to be a very important argument that will be raised- both by the able lawyers of government of India and Vodafone."

Even if Vodafone is able to successfully argue treaty application - does the treaty cover retroactive tax levies?

Dushyant Dave
Senior Advocate, Supreme Court
"Normally, Bilateral treaties would raise two kind of issues for claiming compensation- one is a claim in tort and the other is a claim based on expropriation. I don't think the retrospective legislation that parliament is intending to pass in respect of tax liability of Vodafone can said to be either a claim under tort or a claim based on expropriation."

Dipen Sabharwal
Partner, White & Case
"There was a somewhat similar situation which arose in Ecuador in 2001 where the Ecuadorian tax authorities passed an order retroactively changing the treatment of VAT for oil companies in Ecuador. And in that case Occidental Petroleum which was a US oil company operating in Ecuador brought a claim against the government of Ecuador under the US-Ecuador BIT arguing that the retroactive change in the treatment of VAT is a breach of the fair and equitable treatment standard. And in that case, the International Arbitral Tribunal concluded that the change in tax treatment was a change in the legal and business framework under which the original investment had been made and therefore was unfair and Occidental Petroleum recovered in excess of $70mn in tax refunds which had been levied upon it by the Ecuadorian tax authorities."

Vodafone makes a similar case. Its notice argues that the retroactive amendment of Sections 2, 9 and 149 and the Validation clause in the finance bill breach substantive protections under the treaty - that is, they are unfair, inequitable and amount to expropriation. This on the grounds that

- the tax claim was judicially found to be illegal
- the supreme court interpretation of legislative intent is final
- the parliament cannot interpret legislative intent in 1961

Vodafone argues the retroactive amendments nullify a binding judicial verdict and harm its investments, hence are expropriatory.

Hiroo Advani
Managing Partner, Advani & Co.
"This is a new concept being developed in law - it’s not been widely tried and tested but in my view, amending retrospectively the tax legislation, can amount to expropriation or unfair treatment and therefore would fall under BIT."

Dushyant Dave
Senior Advocate, Supreme Court
"Is this really an investment, which is sought to be dealt with by the retrospective legislation- in my view, a legislation which is seeking to deal with a tax liability is not dealing with an investment which is made. It's not taking away investment which is already made so as to amount to expropriation. I don't think a tax liability or a tax refund can be construed to be an expropriation of an investment. So that subtle distinction has to be maintained and this is clearly misunderstood by those who are propounding Vodafone's case."

Lord Goldsmith QC
Partner, Debevoise & Plimpton
"It's a very specific system under which a country promises, under International law, that it will treat foreign investors in a particular way. And that has an impact on what it can do if it's just dealing with its own nationals- then a country can do many things without any fear of interference by the Court- but as soon as they make a promise at the international level, those promises can be enforced even despite national law."

Vodafone has also alleged breach of assurances. The notice refers to a letter written in February 2010 by Indian Prime Minister Manmohan Singh to the then British Prime Minister Gordon Brown. Dr Singh is quoted as having written

"I also understand that there is no retrospective application of taxation…and that Vodafone will have the full protection of the law…"

Hiroo Advani
Managing Partner, Advani & Co.
"The Prime Minister’s assurance can be what they call promissory estoppel which is known under Indian law to say that government has given you certain assurances that certain issues will not be taxed or will be treated in a particular way, and that assurance holds good. This comes from the Prime Minister – so there is a clear promissory estoppel there."

As of now, Vodafone has requested an urgent meeting with the government and asked it to withdraw the proposed amendments. Failing which it will invoke the treaty. 

Thereafter Vodafone has to give the Indian government 3 months before arbitration can be initiated under the treaty. Though the company has expressed its desire for an amicable solution, the government has not said much. Its actions may speak louder if the parliament gives a green signal to the Finance Bill in spite of it all.

In Mumbai, Payaswini Upadhyay

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