The Vodafone arbitration decision brings back to focus the debate on ISDS and its impact on policy space. Is it a case where sovereign tax policy was impeded? It was yet again a case where the Fair and Equitable (FET) clause was invoked successfully by the investor. It is pertinent to note that the FET clauses are missing in new age treaties partly because of the fear of its expansive interpretative scope. Another issue is the applicability of investment and trade treaties to taxation issues. Obviously, the treaty under question did not have an exception clause taking taxation outside its purview. However, new age treaties do have exceptions excluding the applicability of the provisions of the treaty to taxation matters. However, is that sufficient to deter a claim is another debate altogether.
Another interesting aspect of the Vodafone dispute was the legal battle that took place domestically with the Supreme Court also involved. The intersection of domestic judicial decisions with international arbitration raises interesting questions. What if, hypothetically, the Supreme Court had upheld the constitutional validity of the retrospective tax amendment? What if the claims made by the State were found to be as per domestic law? Then the arbitral decision would have been in direct contrast to domestic judicial dicta, that too of the highest court of the land. The Supreme Court having decided in favour of the assessee avoids the question of what if there was a divergence.
The conclusion of the decision states:
363. After deliberation, and for the reasons of fact and law set out above, the Tribunal decides as follows:
(1) The Tribunal has jurisdiction, under the terms of the Agreement between the Kingdom of the Netherlands and the Republic of India for the Promotion and Protection of Investments, done at The Hague on 6 November 1995, to consider the Claimant’s claims for breach of the Agreement.
(2) The Claimant is entitled, in respect of its investments in mobile telecommunications in India, to the protection of the guarantee of fair and equitable treatment laid down in Article 4(1) of the Agreement.
(3) The Respondent’s conduct in respect of the imposition of the Claimant of an asserted liability to tax notwithstanding the Supreme Court Judgement is in breach of the guarantee of fair and equitable treatment laid down in Article 4 (1) of the Agreement, as is the imposition of interest on the sums in question and the imposition of penalties for non-payment of the sums in question.
(4) The finding of breach in paragraph (2) entails the obligation on the Respondent to cease the conduct in question, any failure to comply with which will engage its international responsibility.
(5) In the light of the above findings, it is not necessary for the Tribunal to proceed to a determination of the Claimant’s other claims.
(6) The costs of the arbitration will be borne equally between the Parties.
(7) The Respondent will reimburse to the Claimant the sum of £ 4,327,294.50 or its equivalent is US Dollars, being 60% of the Claimant’s costs for legal representation and assistance, and € 3,000 or its equivalent in US dollars, being 50% of the fees paid by the Claimant to the appointing authority
It is interesting to note the reference to the Supreme Court decision in the arbitral tribunal decision. What if the Supreme Court had decided in favour of the State. Would the Respondent's conduct in respect of imposition of the Claimant of an asserted liability to tax NOT amount to a breach of the fair and equitable treatment if the Supreme Court and other domestic courts have endorsed the State's views? How would that have played out? Would it have become relevant to the arbitral proceedings? Would the present arbitral decision then have tantamounted to over-ruling the decision of the highest constitutional court of the land?