TII Instant Update - 2018-TII-INSTANT-ALL-566

CASE LAWS

2018-TII-33-HC-DEL-INTL

UoI Vs VODAFONE GROUP PLC UNITED KINGDOM: DELHI HIGH COURT (Dated: May 7, 2018)

India-UK & India-Netherland BIPAs - Articles 9 & 21 - Constitution of India - Articles 51(c) & 251 - ARSIWA - Articles 3 & 4 - Income Tax Act - Sections 2(14), 9(1)(i) - CPC - Section 20 - International Centre for Settlement of Investment Disputes Convention.

Keywords: 2012 Amendment - Breach of treaty - capital gains - capital asset - Kompetenz Kompetenz - Lifting of Status - Lack of jurisdiction - Notifice of arbitration - permanent injunction - Responsibility of States for Internationally Wrongful Acts - residuary clause - single economic entity - sui generis - tax dispute - treaty arbitrations - transfer of share - tax liability

Whether when there is no legislation passed by the Parliament to bar the jurisdiction of the Indian courts, it can still be said that the Indian judiciary which is not a part of the State Organs, cannot exercise its jurisdiction over BIPA-related disputes - NO: HC

Whether a BIPA-related dispute between a private investor and the host state does not qualify as a treaty but is sui generis - YES: HC

Whether investment arbitration disputes are largely different from commercial disputes because cause of action is grounded in State guarantees - YES: HC

Whether the issue of abuse of process of law should be raised before the arbitral tribunal under India-UK BIPA treaty as per the doctrine of Kompetenz-kompetenz - YES: HC

On 20th January, 2012, the Supreme Court of India vide its judgment and order in Civil Appeal No.733/2012 discharged VIHBV of the tax liability imposed on it by the Income Tax Department of the Plaintiff. The Supreme Court held that sale of share in question to Vodafone did not amount to transfer of a capital asset within the meaning of Section 2(14) of the Income Tax Act. The Apex Court not only quashed the demand of Rs. 12,000 crores by way of capital gains tax but also directed refund of Rs. 2,500 crores deposited by the Vodafone in terms of the interim order dated 26th November, 2010 along with interest @4% p.a. within two months.

Pursuant to the above judgment, the Parliament passed the Finance Act 2012, which provided for the insertion of two explanations in Section 9(1)(i) of the Income Tax Act. The first explanation clarified the meaning of the term 'through', stating, “For the removal of doubts, it is hereby clarified that the expression — 'through' shall mean and include and shall be deemed to have always meant and included 'by means of', ?'in accordance of' or '?by reason of'. The second explanation clarified that —an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. The 2012 Amendment also clarified that the term — 'transfer' includes and shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights had been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India.

On 17th April, 2012, the VIHBV, a company incorporated in The Netherlands, served upon the Plaintiff a 'Notice of Dispute' under the India-Netherlands BIPA inveighing the tax liability cast upon it.

Union of India vide letter dated 20th February, 2014 stated that disputes relating wholly or mainly to taxation were excluded from the scope of the [Netherlands] 'BIPA' and that - the notices of dispute served by VIHBV to the Government of India under Article 9 of the BIPA was not valid as the alleged 'disputes' were outside the scope of the BIPA.

On 13th March, 2014, the VIHBV in its reply stated, “We note your view that the BIT excludes issues wholly or mainly related to taxation. We have advice from both Indian and International legal experts to the contrary. This difference of view is clearly of significance in seeking to find an amicable solution to the dispute. In the context of this dispute, the only body capable of resolving the issue would be an arbitration panel constituted according to the BIT. It would of course be entirely open to the Government of India to argue its point of view on the exclusion of taxation from the BIT, as on any other issue, before such a panel.'

On 17th April, 2014, the VIHBV served upon the Plaintiff a 'Notice of Arbitration‘ under the India-Netherlands BIPA so as to commence arbitration proceedings in respect of the tax liability.

On 24th January, 2017, Defendants served upon the Plaintiff- Union of India a 'Notice of Arbitration? under the India-United Kingdom BIPA.

On 12th April, 2017, the Defendants, in view of non-appointment of an arbitrator by the Plaintiff-Union of India, requested the Appointing Authority, President of the ICJ, to make a default appointment.

The Plaintiff-Union of India in its letter of the same date stated that it considered the attempt to institute the second arbitration as a "flagrant abuse of the arbitral process".

On 17th April, 2017, Defendants? advocate stated that the proceedings were not an abuse and the second arbitration had been initiated in light of Union of India's objection to the jurisdiction of the tribunal under the India-Netherlands BIPA. The Defendants clarified, for the avoidance of doubt, - "double recovery is in no way being sought".

On 12th May, 2017, the Plaintiff-Union of India wrote to the Appointing Authority (Judge Ronny Abraham, President, ICJ) that the India-United Kingdom BIPA Arbitration concerned exactly the same subject matter as the India-Netherlands BIPA Arbitration and that in both cases, members of the Vodafone Group under common control had the same complaint about the imposition of tax.

On 11th August, 2017, President, ICJ, informed the parties of his decision to defer any action regarding the appointment of a second arbitrator until 31st August, 2017 or till the decision of the India-Netherlands BIPA Tribunal (whichever was earlier).

On 11th August, 2017, the Plaintiff-Union of India filed the present Civil Suit seeking declaration that the Notice of Arbitration dated 24th January, 2017 under India-United Kingdom BIPA and the proceedings initiated thereunder were an abuse of process and null and void.

Having heard the parties, the HC held that,

++ the Defendants have themselves claimed in India-United Kingdom BIPA arbitration notice that they made a qualifying investment "in the territory of India" by virtue of their indirect majority shareholding in Vodafone India Limited as well as certain option rights in the said Company held through another indirect subsidiary. The Defendants have further claimed that they themselves and their —subsidiaries - have continued to invest extensively in the development of their telecommunication network in India? through Vodafone India Limited and the said capital investments in India exceeded US$17 billion and the Defendants have added 169 million subscribers since 2007 and now directly employ 19,471 people in India.

++ this Court proceeds on the basis of the statement made by the Defendant before the arbitral tribunal. In fact, from the statements, this Court is of the view that the cause of action for the present suit partly arose within the jurisdiction of this Court and Defendants had purposefully availed of Indian jurisdiction, inter alia, by making an investment in India, holding economic interests in India and carrying on business in India and from a reasonable and holistic perspective, Defendants have to be considered as working for gain within the jurisdiction of this Court;

++ even if it is taken that a corporation that is incorporated under the laws of another state would, under the established principles of international law, have its rights and obligations governed by the domestic law of the state of its incorporation, then also the test of residence would be satisfied by applying the principles of "single economic entity"– which principle is applicable even under the English law;

++ accordingly, the Defendants No.1, 2 and VIHBV as well as its Indian subsidiary are one single economic entity.Consequently, this Court has jurisdiction over the Defendants in personam and over the subject matter of the dispute.;

++ it is settled law that the jurisdiction of the Civil Courts in India is all embracing except to the extent it is excluded by an explicit provision of law or by clear intendment arising from such law. The ouster of the jurisdiction of a Civil Court is not to be lightly inferred and can only be established if there is an express provision of law or is clearly implied;

++ though Article 253 of the Constitution empowers the Indian Parliament to make a law to give effect to International Treaties, yet the Parliament has not passed any specific legislation to give effect to BIPA Agreements. However, there is no statutory bar or case law relating to treaty obligation which creates an ouster of jurisdiction or threshold bar for Indian courts in relation to a bilateral investment treaty arbitration. Accordingly, there is no explicit or implicit ouster of jurisdiction of National Courts;

++ further, India has not acceded to the position that in matters of bilateral investment treaty arbitrations, there is an ouster of jurisdiction of National Courts as is apparent from Union of India's refusal to accede to the five decades old 'Convention on the Settlement of Investment Disputes between States And Nationals of Other States, 1965. This Convention sets up an International Centre for Settlement of Investment Disputes (ICSID). About 161 States have signed the ICSID Convention and 153 have ratified it till date. However, Union of India has not signed it and the main reason seems to be that the ICSID Convention completely negates the role of National Courts. Consequently, there is no threshold bar insofar as the dispute is concerned;

++ even if, one were to examine this issue dehors the Code of Civil Procedure, this Court is of the view that the India-United Kingdom BIPA holds out to investors on a standing basis the right to choose to submit the disputes for settlement by binding arbitration. The said treaty expressly provides the consent of the Indian State to submit any investment dispute for settlement by binding arbitration;

++ there is a distinction between an Inter-State arbitration and an Investor-State arbitration. Investors like the Defendants are not enforcing rights given to the United Kingdom, but are pursuing the rights in their name and for themselves claims against the other State party. The subject matter of the dispute between an investor and the host State is not the same as any dispute that may exist between two States;

++ if the agreement to arbitrate between a private foreign investor and the host State is held to be a treaty, it would amount to 'lifting the status' of the private investor to the 'pedestal of a foreign State'. In fact, the assumption underlying the investment treaty regime is clearly that the investor is bringing up a cause of action based upon the vindication of its rights rather than those of its national State;

++ the India-United Kingdom BIPA provides for two disputes resolution mechanisms. One between the foreign State and the Indian State and the other between the private investor and the Indian State. Investor and the host State which results by following the treaty route is not itself a treaty but falls in a sui generis category. In the present BIPA Arbitration, a contractual obligation and a contractual right is involved and therefore, there is no bar as to the subject matter of the dispute or as to the jurisdiction of the court to hear the present case;

++ the argument with regard to non-justiciablity of unincorporated treaties in the context of a private investor and host State has not been accepted by even the Courts in the United Kingdom;

++ further, if the argument of lack of jurisdiction canvassed by the senior counsel for Defendants is accepted, then this Court would be powerless to execute a BIPA award against the State, even if the foreign investor were to approach this Court for its enforcement and execution;

++ this Court does not agree with the submission that the National Court has no jurisdiction or should refrain from exercising its jurisdiction with regard to BIPA Arbitrations. However, this Court is of the view that recourse to a Court, when and if permissible, would be to correct any error rather than to perpetuate or introduce one;

++ also, though the BIPA constitutes an arbitration agreement between a private investor on the one side and the host State on the other, yet it is neither an International Commercial Arbitration governed by the Arbitration and Conciliation Act, 1996 nor a domestic arbitration. The Act, 1996 including Sections 5 and 45 do not apply proprio vigore to a BIPA. Section 5 does not apply as this is not a Part I arbitration and Section 45 does not apply as Section 44 makes it clear that Part II of the Act, 1996 will apply to an arbitration considered to be commercial under the Indian law. Indeed, India, while acceding to the New York Convention, made a reservation that it will apply the Convention "only to differences arising out of legal relationship..... that are considered commercial under the national law".

++ investment Arbitration disputes are fundamentally different from commercial disputes as the cause of action (whether contractual or not) is grounded on State guarantees and assurances (and are not commercial in nature). The roots of Investment Arbitrations are in public international law, obligations of State and administrative law;

++ this Court is of the view that the intent of the BIPA is to afford protection to investors and such a purpose is better served if the arbitration agreement is subjected to international law rather than the law of the State. After all the rationale behind the bilateral investment treaty is primarily to afford protection to private investor from expropriation by the foreign State (which normally takes place through State Legislation). The treaty also involves a deliberate attempt to ensure for private investors the benefits and protection of consensual arbitration; and this is an aim to which the National Courts should, in an internationalist spirit and because it has been agreed at an international level, aspire to give effect;

++ the agreement to arbitrate between an investor and a host State is contractual inasmuch as it is not itself a treaty but flows from the treaty provisions which is justiciable in accordance with the principles of international law and there is no threshold bar or inherent lack of jurisdiction in the court to deal with BIPA Arbitrations;

++ there is no unqualified or indefeasible right to arbitrate. The National Courts in India do have and retain the jurisdiction to restrain international treaty arbitrations which are oppressive, vexatious, inequitable or constitute an abuse of the legal process;

++ undoubtedly, under the International law, "the State" includes the national judiciary; but under the Indian Constitution the State excludes the judiciary because it is independent of the other organs of the State;

++ all actions and orders passed by National Courts are not per se violative of the fair and equitable treatment guaranteed by the BIPA as suggested by the Defendants;

++ however, the jurisdiction to grant an anti-arbitration injunction must be exercised with caution and granted only if the arbitral proceedings are vexatious or oppressive or inequitable or abuse of process. After all, one must not lose sight of the fact that a legislation or action that is perfectly lawful under the national law could nonetheless trigger a successful investment claim under the bilateral investment treaty;

++ as a matter of self-restraint, a National Court would generally not exercise jurisdiction where the subject matter of the dispute would be governed by an investment treaty having its own dispute resolution mechanism, except if there are compelling circumstances and the Court has been approached in good faith and there is no alternative efficacious remedy available;

++ this Court is also of the view that it will not grant an injunction if by doing so it, deprives the Defendants of advantages in the foreign forum of which it would be unjust to deprive the Defendants. The fact that it may be inconvenient or expensive for Plaintiff-Union of India to litigate before the arbitral tribunal is not an issue that would justify a finding of oppression. This problem can, in the opinion of the court, be overcome by either accepting appropriate undertakings or by passing a conditional order;

++ the consolidated proceedings would ensure that no relief is granted twice over and there is no conflict of awards. The consolidated proceedings would also ensure that there is no delay in rendering of the awards;

++ the entire scheme of the BIPA is contractual and it is clear that Union of India consented to the international investment arbitration under principles of international law as the method of dispute resolution under the BIPA. Further, with the acceptance of Defendants? undertaking / offer to consolidate, the likelihood that the tribunal would make an order that would afford Defendants double relief or impose a double jeopardy on the Plaintiff-Union of India or pass conflicting awards is remote;

++ the cause of action for filing the present suit was that the arbitral tribunal under the India-United Kingdom BIPA may be constituted without India being represented. The Plaintiff-Union of India has now appointed an arbitrator, and after the orders of the Supreme Court of India, the Chairman stands appointed by the two party-appointed arbitrators. The tribunal is complete. The challenge to the invocation has run its course. Any challenge to its jurisdiction [including any challenge to the validity of the invocation of arbitration on allegations of abuse] must lie before the Tribunal. This is in accord with the principle of kompetenz kompetenz – which is recognised and accepted even under Indian domestic law. The principle of kompetenz-kompetenz, is recognised in Article 21 of the UNCITRAL Arbitration Rules, 1976 and the same is explicitly engrafted in the India-United Kingdom BIPA. It is generally accepted that an arbitral tribunal has the power to investigate its own jurisdiction;

++ under the doctrine of kompetenz-kompetenz, the arbitrators are competent to determine their jurisdiction although the effective exercise of that jurisdiction remains subject to the inherent competence of the seat-court (i.e. the place of arbitration as stipulated in the agreement or as fixed by the arbitrators/parties) to decide, in relation to an injunction to restrain international arbitration, whether a particular dispute falls within the scope of the arbitration agreement;

++ whether the arbitrators under the India-United Kingdom BIPA choose to stay the arbitral proceedings properly brought before them, whilst related arbitration proceedings are pending is entirely a matter for them under the doctrine of kompetenz-kompetenz and the circumstance that arbitrators may do so cannot form an appropriate basis for the National Court to restrain the arbitration;

++ this Court is of the opinion that it should apply the principle of kompetenz-kompetenz with full rigour as India-United Kingdom BIPA arbitral tribunal would be better placed to assess the scope of the two BIPA arbitration proceedings and the likelihood of parallel proceedings and abuse of process;

++ this Court is further of the view that the Plaintiff-Union of India after having elected its remedy of agitating the issue of abuse of process before the Netherlands-India BIPA Tribunal could not have approached the National Court on the same ground and, that too, without waiting for the award being rendered by the India-Netherlands BIPA Tribunal. After all, the present suit is not and cannot be an appeal against the India-Netherlands BIPA Tribunal.

Case disposed of

2018-TII-32-HC-AHM-INTL

PR CIT Vs NOVA TECHNOCAST PVT LTD: GUJARAT HIGH COURT (Dated: April 9, 2018)

Income Tax - Sections 40a(ia) & 195 (1).

Keywords - commission payments - foreign agents - tax at source

During the course of assessment proceedings, the AO noticed that assessee had made some payment to a foreign Commission Agent, but had not deducted the TDS on the same. Accordingly, he disallowed such payment and made additions u/s 40(a)(ia). On appeal, the CIT(A) reversed the AO's order and held that commission paid to NRI Agent whose income was not taxable in India did not attract TDS requirement. On further appeal, the Tribunal upheld the decision of the CIT(A).

On appeal, the HC held that,

Whether the event of TDS obligation is proportionate to chargeability of foreign income in India, and hence no withholding tax liability u/s 195 arises in case commission paid to foreign agents are not chargeable to tax in India - YES: HC

+ while confirming the order of CIT [A], the Tribunal relied on judgment of the Supreme Court in the case of G.E India Technology Centre P. Limited, wherein it was held that the most important expression in Section 195 [1] consists of the words, "chargeable under the provisions of the Act". The Aoex Court observed that, "A person paying interest or any other sum to a non-resident is not liable to deduct tax if such sum is not chargeable to tax under the Act.";

+ it is not disputed that Explanation inserted with retrospective effect u/s 195(1) provides that obligation to comply with Section 195(1) would extend to any person resident or non-resident, whether or not non-resident person has a residence or place of business or business connections in India or any other persons in any manner whatsoever in India. This expression which is added for removal of doubt is clear from the plain language thereof, may have a bearing while ascertaining whether certain payment made to a non-resident was taxable under the Act or not. However, once the conclusion is arrived that such payment did not entail tax liability of the payee under the Act, Section 195(1) would not apply. The fundamental principle of deducting tax at source in connection with payment only, where the sum is chargeable to tax under the Act, still continues to hold the field. In the present case, the Revenue has not even seriously contended that the payment to foreign commission agent was not taxable in India.

Revenue's appeal dismissed