Despite Arbitration Tug Of War, Mutual Settlement Is Key

Context:  Given increased Foreign Direct Investment (FDI) in India, it may not be conducive for India to weave a web of litigation, a?ecting stakeholders and exit routes.

Positive developments in FDI in India

• India is among top 12 recipients of FDI globally.
• Enhanced equity inflows.
• Bold policy changes.

Background: The recent international decisions against the Government of India in the cases of Cairn Energy and Vodafone and the decision by India to appeal against these awards have hurt investor trust.

Critically analyzing the arbitration rulings: against India

• Breach of international obligations: The Permanent Court of Arbitration (PCA) identified the breach of -
  • The Netherlands Bilateral Investment Treaty (BIT) in the case of Vodafone.
  • The India-United Kingdom Bilateral Investment Treaty in the case of Cairns.
• Arbitrary executive action: India enforced the tax demand by a series of unilateral measures such as seizure and sale of Cairn’s shares, seizure of its dividends, and withholding of tax.
• No proceedings in natural jurisdiction: for enforcement — i.e. Indian courts. This may be because of –
  • Delays in Indian courts.
  • Uncertainty in Indian public policy vis-à-vis assessment of tax demands by foreign tribunals.
  • The Indian judiciary’s stance on non­-enforceability of treaty awards in India.

Way forward

• Uphold treaty obligations: As it is an international legal responsibility.
• Use international public policy: against tax avoidance and the sovereignty of a state to determine what transactions can or cannot be taxable.
• Amicable settlement of issues: E.g.
  • Payment of 50% of the principal amount, and waiver of interest and penalty, under the ‘Vivad se Vishwas’ tax amnesty scheme.
  • Re-computation of tax liability on a long term capital gains basis.