Delhi High Court restrains Vodafone from initiating arbitration under India-UK treaty

The Delhi High Court on Tuesday restrained Vodafone Group from going ahead with arbitration proceedings against India under a treaty with the United Kingdom. The arbitration proceedings are in connection with a Rs. 11,000 crore tax demand raised against the company in relation to its $11 billion deal to buy the stake of Hutchinson Telecom back in 2007..Background.This case dealt with the question of taxability of a non-resident company (Vodafone International Holdings) acquiring shares of a resident company (Hutchison Essar) through an indirect route for about $11 Billion. The entire shareholding structure was highly complex and included about 30 companies spread across various jurisdictions..Having sewn up the deal entirely offshore, the heart of the matter lies in the interpretation of the term ‘business connection’ in Section 9(1)(i) of the Income Tax Act. The IT department, in this case, was of the view that owing to indirect transfer of assets and business interests that were located in India, section 9(1)(i) applied to this transaction. While the Bombay High Court agreed to this interpretation, the Supreme Court did not..In order to overcome this ruling given by the Apex Court, an amendment was introduced in Section 9 of the Act through the Finance Act, 2012, by including ‘Explanation 5’, which retrospectively taxed ‘such gains’ (like the ones made by Vodafone) from 1st April, 1962..Delhi High Court proceedings.Following the amendment made by the Finance Act, 2012, Vodafone International invoked the arbitration clause provided under the India-Netherlands Bilateral Investment Promotion and Protection Agreement (BIPA), through a notice of dispute dated 17th April, 2012 and subsequent notice of arbitration dated 17th April, 2014..While the said arbitration proceedings were pending, Vodafone UK served a notice of dispute dated 15th June, 2015 and notice of arbitration dated 24th January, 2017 to the Indian government for resolution of an alleged dispute under the India-UK BIPA, primarily in respect of the same income tax demand for which Vodafone International had invoked India-Netherlands BIPA..Notwithstanding the challenges posed to the proceedings initiated under the India-Netherlands BIPA, the Indian government sought to challenge the second set of proceedings (India-UK BIPA) before the Delhi High Court and prayed for permanent injunction against the same..Arguing for the State, ASG Sanjay Jain made the following submissions,.the two claims are based on the same cause of action and seek identical reliefs but from two different tribunals constituted under two different investment treaties against the same host state. ASG also relied on the case of Orascom TMT Investments S.a r.l. v. People’s Democratic Republic of Algeria to substantiate this point – where the ICSID condemned the initiation of multiple treaties by corporates of the same vertical to recover the same economic harm.disputes encompassing tax demands raised by a host state are beyond the scope of arbitration provided under the bilateral investment treaty as taxation is a sovereign function and the same can only be agitated before a constitutional court of the host state;under the constitutional scheme of India, laws passed by the Parliament cannot be adjudicated by an arbitral tribunal and do not fall within the ambit of BIPA or any other international treaty..After having heard , the Delhi High Court held that,.“This Court is of the prima facie opinion that as the claimants in the two arbitral proceedings form part of the same corporate group being run, governed and managed by the same set of shareholders, they cannot file two independent arbitral proceedings as that amounts to abuse of process of law.”.Also,.“This Court is further of the prima facie view that there is a risk of parallel proceedings and inconsistent decisions by two separate arbitral tribunals in the present case.”.Based on the above findings, the Court restrained Vodafone from continuing any action under the India-UK BIPA..In its interim order, the Court also issued notice to Vodafone and sought its response by 26 October on the central government’s plea seeking a permanent injunction against the telecom major from proceeding with the arbitration under the India-UK BIPA..(Read the Judgment)