The Government of India has lost the first of three keenly anticipated decisions on the retrospective tax liabilities introduced by statute in 2012 to reverse the ruling of the Indian Supreme Court in the Vodafone case.

The legislation was introduced in the Finance Act 2012 to reverse the Supreme Court’s ruling that Vodafone was not liable for capital gains tax under Indian law in respect of its acquisition of the Indian mobile phone business of Hutchison Essar Limited in 2007. That change in the law with retroactive effect was then used to levy some $2.2 billion of tax, interest on penalties on Vodafone, as well as subsequent demands on both Cairn Energy and Vedanta Resources in respect of a separate transaction also charged with tax, interest and penalties on a retrospective basis.

Vodafone commenced international arbitration in 2014 under the India-Netherlands bilateral investment treaty (BIT), asserting that the conduct of the Government breached the protections promised to investors under the treaty. After proceedings lasting some 6 years, the tribunal seated in Singapore under the auspices of the Permanent Court of Arbitration, has held unanimously in an award dated 25 September 2020, that India was in breach of the treaty. While the award has not been made public, media reports indicate that the tribunal found:

  • It had jurisdiction over the dispute; contrary to India’s submissions, tax disputes were covered by the scope of the India-Netherlands BIT.
  • India had violated the fair and equitable treatment guarantee under the treaty by retrospectively imposing tax, interests and penalties on Vodafone.
  • India was directed to “cease the conduct in question”, and ordered to pay the majority of Vodafone’s costs, understood to be in excess of £4 million.

The result of the tribunal’s decision is that any further steps by the Indian tax authorities to collect the retrospective tax, interest or penalties would be a breach of India’s international law obligations under the treaty.

The decision on the tax demand on Vodafone precedes the decisions in two other international arbitration claims brought by Cairn Energy and Vedanta Resources in respect of demands for tax, interest and penalties levied on them under the same retrospective amendment to Indian tax law.  In the case of Cairn Energy, as well as challenging the tax demand, the company has also announced that it has asserted a claim for monetary damages of some $1.4 billion, based on the actions of the Indian tax authorities in 2014 to enforce the tax demand by seizing and then selling shares held by Cairn Energy in the Indian company, Vedanta Limited. Cairn Energy says that the sale took place at a low point in the value of the shares, which caused it substantial harm. Thus, while the effect of the decision in Vodafone’s case is largely declaratory (that the tax demand breaches India’s treaty obligations), the decision on the Cairn Energy case will also include whether India is liable to pay substantial damages for actions taken to enforce that separate tax demand.

The issue of retrospective tax has been a painful one for international investors and the Indian Government, as it seeks to attract foreign investment into India. Late former Finance Minister, Arun Jaitley, had said that he considered the retrospective legislation to have been an “erroneous decision”, and the Modi government ruled out the use of retrospective tax actions that may deter inbound investors anxious about the stability of the Indian business environment shortly after taking power in 2014.

The Vodafone award, and the two that will follow, will determine whether a line can now be drawn under the retrospective tax actions of 2012.

For more information, please contact Nicholas Peacock, Partner, Iain Maxwell, Of Counsel, or your usual Herbert Smith Freehills contact.

Nicholas Peacock
Nicholas Peacock
+44 20 7466 2803

Iain Maxwell
Iain Maxwell
+44 20 7466 2646


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On 30 April 2019, the Court of Justice of the European Union (“CJEU“) confirmed that the mechanism for the settlement of disputes between investors and states set out in the Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA“) was compatible with EU law. This confirms the Attorney General’s opinion discussed here.

The CJEU’s opinion will lend support to the EU’s effort to develop the tribunals established under trade agreements like CETA into a permanent and multilateral Investment Court System (“ICS“) in future.

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4th EFILA Annual Conference 2019: The EU and the future of international investment law and arbitration – 31 January 2019, London

The European Federation for Investment Law and Arbitration (EFILA) will be holding its fourth Annual Conference, on 31 January 2019, at Herbert Smith Freehills’ offices in London. The conference will focus on four topics:

  1. the EU’s external investment policy;
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  3. constructing a multilateral investment court: the path ahead; and
  4. the EU’s Energy investment policy.

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ICSID Tribunal declines jurisdiction due to claimants’ failure to obtain environmental impact assessment in breach of local law

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In its award of 22 October 2018, the tribunal held that the withdrawal of the Claimants’ mining licence by the Kenyan Government could not be challenged under the 1999 UK-Kenya bilateral investment treaty (“BIT“), as the relevant mining licence had not been obtained lawfully. Despite the fact that the BIT contained no express requirement of compliance with local law, the tribunal nevertheless held that the BIT and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States 1966 (the “ICSID Convention“) protect only lawful investments. The tribunal affirmed that a principle of proportionality should apply when assessing the impact of unlawful conduct on the right to bring a BIT claim, with minor omissions or inadvertent misstatements not precluding the BIT from applying. However, in this case, environmental considerations were of fundamental importance and non-compliance with the protective regulatory framework was a “serious matter” justifying the tribunal in declining jurisdiction.

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English Court rejects Ukraine’s attempt to set aside enforcement order on grounds of state immunity

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The new draft Dutch BIT: what does it mean for investor mailbox companies?

The Netherlands has released a new draft investment treaty for public comment (“Draft BIT“).  If adopted, the Draft BIT may raise questions about the Kingdom’s attractiveness for foreign investors who have long taken advantage of Dutch treaty protections by structuring their investment via companies in the Netherlands.  The Netherlands proposes to use the new model as a basis for renegotiating its existing BITs with non-EU states, and, as such, the new draft’s more restrictive provisions may be significant for existing investors with protection under existing BITs, as well as those considering future investments. Key features of the Draft BIT are considered below.

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Upheaval and uncertainty in mineral regulation in parts of Africa: resurgence of resource nationalism highlights the importance of investment treaty protections

The last few months have seen significant changes to mining regulations in various African states, giving rise to a concern that a regional trend of resource nationalism may be (re-)emerging. In this context it is important for companies associated with the mining sector to be aware of the protection international investment treaties may provide against the impact of resource nationalism on their assets, and how to maximise that protection before risks materialise.  This bulletin briefly considers some of the last few months’ developments, before discussing how companies can use investment treaties to protect themselves against the risks they pose.

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State-to-State dispute settlement under the EU’s draft Withdrawal Agreement: CJEU jurisdiction not arbitration

We have known for some time now that the UK and EU have very different views regarding the state-to-state dispute resolution mechanism to be contained in the Withdrawal Agreement between the EU and the UK. The EU has never made any secret of its intention for the CJEU to adjudicate on disputes between the UK and the EU over the interpretation of, and compliance with, the Withdrawal Agreement. Yesterday the EU released a draft Withdrawal Agreement for the UK’s consideration which contains a state-to-state dispute resolution provision which is consistent with that approach. This post provides an initial reaction to this draft provision.

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ITLOS rules in favour of Ghana in long-standing maritime dispute with Côte d’Ivoire

On 23 September 2017, a Special Chamber of the International Tribunal for the Law of the Sea (ITLOS) delivered its judgment on the longstanding maritime boundary dispute between Ghana and Côte d’Ivoire.

The Special Chamber reconfirmed the relevance of the equidistance methodology in determining the maritime boundary between the two States. The judgment also touches on important issues affecting States and international companies operating in disputed waters such as the applicable obligations pending resolution of such disputes.
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