Results of retrospective tax modifications in India – given Cairn and Vodafone – Tax

At the beginning of 2000 the trend in (direct) corporate taxes increased
identified as one of the largest sources of income in India.
The FDI regime was simplified and India opened up various sectors to it
foreign direct investment. Around the same time, India made India
Commitments to the WTO to rationalize indirect
Taxes. As a result, customs duties and excise taxes were added
considerably reduced. Reduced tax benefits through indirect
Taxes led to a further recognition of the benefits of corporate
direct taxes. Income of non-resident entities that
Contracts in India, attracted attention and there were corporate taxes
identified as a lucrative source of income. Quarrels soon began
from capital gains and taxable income related to
Cross-border transaction services. That's when
the retrospective trend changes – either directly or through
& # 39; Clarifications & # 39 ;, saw an increase.

In Ishikawajma-Harima Heavy Industries Ltd. vs. DIT1,
(2007) the Supreme Court of India dealt with the issue
Taxation of income from offshore services under
S.9 (1) (vii) of the Income Tax Act, 1961 (fees from technical
Services) and provisions to avoid double taxation
Agreement (DTAA) between India and Japan. Working out the principle
of the "territorial nexus," the Apex Court ruled that, if anything
No income generating business is done in India then
Income from such transactions is not taxable in India.
Ishikawajma was a non-resident company providing services to
Indian entity. The court spoke out against giving the term an expanded meaning
the words "income that is considered to be accrued or to be incurred in
India ". So if p.9 (1) (vii) covered a resident
Indian within its scope, a non-resident and services of a
Nonresident used in India is outside the jurisdiction of
this determination.

However, this judgment has been watered down as a statement
inserted in sec. 9 para. 2 EStG, also that
looking back from 1976. This statement
& # 39; clarified & # 39; that income in the form of interest, royalties and
Technical service fees are considered to be incurred or incurred in India
and this income is included in the total income of the
non-resident Indian whether the non-resident Indian is a
Residence or place of business or business relationship in India.

The pattern of subsequent amendments to tax regulations, moreover
of & # 39; Clarifications & # 39 ;, continuation and several judicial
Pronouncements were reversed or negated by constants
Changes. § 9 EStG itself was
subjected to numerous changes.

It is generally accepted that tax changes are constant
Articles of association lead to a negative perception among investors. Companies
require legal certainty when structuring investments,
especially if the investments are made in developing countries.
Although there is a preliminary ruling mechanism where the Assesse
can request a preliminary ruling on the proposed transaction, however
The regulation must also be treated with caution, as such a regulation
binding for the expert and limits the scope of the contestation of the

Ahead of a massive legal battle over India
With serious financial consequences came two crucial cross-border ones
Transactions. One, at Vodafone International Holding and the
others with Cairn UK Holding Limited. Both transactions involved
indirect transfer of Indian assets and has been affected by a change made
to the Finance Act, made retrospectively from 2012
Change had a huge financial impact on foreign companies
in question and thus led to extensive legal disputes within India
as well as before international forums.

Vodafone International Holdings

In 2007, Vodafone became International Holdings
(Vodafone) bought 100% of the shares in CGP Investments
(Holding) Ltd. (CGP), a Cayman-based company
Iceland for $ 11.1 billion. CGP was a wholly owned subsidiary of
Hutchison Telecommunications International Ltd.
(barn), which was also based on Cayman Island.
Through various companies that like CGP in countries
Mauritius controlled it 67% of Hutchison Essar Limited (Hutch
Essar), an Indian company. Due to the share transfer
Vodafone acquires CGP's subsidiaries, including Hutch Essar in
India. Vodafone also acquired telecommunications licenses to make mobile
Communication in India from November 1994. In September
In 2007, Vodafone received a preliminary notification from the Indian tax authorities
to clarify the reason why the tax was not withheld,
Installments to Hutch in connection with the above transfer of shares
as the said transaction of the transfer of shares in the CGP is a
Effects of indirect asset transfers in India. The legal problem
revealed whether the transfer of shares between two foreign
Company that transfer capital assets in India and amount
whether such a transaction is taxable in India?

The matter went to the Supreme Court and Vodafone
International Holdings BV v Union of India2, the Supreme Court
took the view that it was up to the court to determine the nature of the
Transaction and must consider the whole look
Transaction. The Court found that the main purpose in Vodafone
Share transfer was to transfer the shares of CGP and not
Transfer of rights to Hutch Essar in India.

The Supreme Court interpreted S.9 (1) (i) of the Income Tax Act.
Said section contains- "All income or
directly or indirectly, through or out
Doing business in India or through or from a property in
India, or through or from any asset or source of income in India,
or by transferring a financial position in
India ". The Court found that the words" immediate or
indirect "in Section 9 (1) (i) of the Act refer to income
and not the transfer of a capital asset. It stated that the application of the
Words "direct or indirect" referring to the transfer of a
Investment (Hutch Essar is an investment) "would
amount to a change in the content and scope of Section 9 (1) (i). The
The court considered the legislature's intention to be clear
since there is only the direct transfer of income within it
Area of ​​responsibility and non-indirect transfers. What was being considered was that
Selling stocks and not selling assets. Hutch Essar had one too
Present in India since 1994 and paying income tax

It was found that the tax is based on the source and the
Source is the place where the sale takes place and not the place where the
Product is derived or purchased. Hutch and Vodafone are
foreign companies, and sales took place outside India, so the
Source of income is outside India. The transaction was carried out
between two non-resident legal entities in a contract concluded abroad
India, where the consideration was also provided outside of India. It
it was determined that the sale of Hutch's CGP shares to Vodafone
Transfer of capital assets within the scope of § 2 Paragraph 14 of the
Income tax law and therefore not creditable under capital gains.
The claim made by the income tax department was thus

Finance Act 2012 – Amendment of Section 9 (1) (i) of the of
Income Tax Act, 1961

In 2012, as an obvious step in bypassing the Supreme
The court ruling in Vodafone was changed retrospectively
Section 9 (1) (i) of the Income Tax Act to apply it to
Transfer of shares by a non-resident in a registered company company
abroad if the share is (directly or indirectly) its
Value mainly from assets in India.

This hit the root of the entire case on which
Vodafone's claims were made prior to the proceedings in the
Supreme Court. Given the laws of the land itself, was law
changed, Vodafone has initiated arbitration proceedings before the Permanent Court
Court of Arbitration, Hague, on the grounds that the retrospective
Change violates fair and equitable treatment
promised under two separate bilateral investment contracts
(BIT) – The India-Netherlands BIT and India-UK BIT.

Recently the Indian government challenged the arbitration
Awarded an arbitration in the Singapore court on the grounds that taxation is not covered
under the treaty and is a sovereign right of the country.

Cairn UK Holdings Limited

The Vodafone ruling and the subsequent amendment to the section
9 (1) (i) of the Income Tax Act had an impact on several existing ones
cross-border transactions. According to Vodafone in 2015, the
Indian government imposed on Cairn UK Holdings Limited
(Cairn Great Britain), a draft tax bill of? 10,247
crores for an alleged capital gain from an internal company
Restructuring that took place in 2006.

Cairn UK, a UK registered company, had one
Subsidiary, namely Cairn India Holdings Limited (Cairn
), a Jersey incorporated company –
(Cairn jersey). Subsidiaries owned by Cairn Jersey in
India. In 2006, Cairn UK broadcast its entire
Cairn Jersey's stake in Cairn India. Then Cairn
India, sold about 30% of its shares in an initial public

In 2014, in view of the 2012 change, the income tax
found in India that the transfer of stake in
Cairn Jersey effected the transfer of business in 2006
in India and therefore changed with a view to retrospective
Income Tax Act, Cairn UK was subject to capital gains tax in
India. The Income Tax Office has a claim of Rs. 22,100 / –
Crore on Cairn.

Cairn initiated arbitration proceedings against India before the investor
State arbitration tribunal for dispute settlement in The Hague. Interesting,
India argued that the 2012 contested amendment
only a clarification on "indirect transfers"
and that there is no actual retrospective change in the
Statute. Cairn argued that the retrospective amendment was against the
UK-India bilateral investment contract with a standard clause
which obliges India to treat UK investments fairly
and just way. This argument was supported by the
Court and it was found that Section 9 (1) (i) of Income Tax
The law was fundamentally changed by the 2012 amendment. It was too
that India is bound by its contractual obligations that
India's liability arose due to the breach of
International law and the same was independent of constitutionality
the attacked provision in India.

In December 2020, the three-member arbitral tribunal met in
in favor of Cairn, finding that India is against fairness and
India-UK BIT equal treatment provision. The tribunal
India pledges to pay Cairn UK more than $ 1.2 billion
Making amends for Cairns' expropriation losses
continued efforts to enforce his investment in India in 2014
retroactive tax measures and non-treatment of the company
and its investments just and fair. 3

Reports were made in the months following the award of the award
that discussions about a possible agreement were held between the parties and
that India offered to waive 50% of the alleged tax liability
Cairn attributed according to Indian law. But all speculation
a possible agreement between the parties was brought to rest
when in May 2021 Cairn Energy Plc. Lawsuit filed in the US in
to enforce the award.

It is interesting that Cairn filed the lawsuit against Air
India. Cairn tried to force Air India and explain
as the "alter ego of the Indian government" because of that
wholly owned and largely controlled by the government of
India. It is argued that Air India is "legally"
indistinct from the state itself "and that it should be kept
jointly and severally for the amounts owed by Cairn
the Indian government.

Cairn wants to appeal to the judgment of the US Supreme Court
entitled First National City Bank NA v Banco Para El
Comercio Exterior de Cuba4 – better known as
Banec, where the court found that federal customary law
should fully determine the independent legal status of a legal person
owned by a foreign state. As soon as the court determines that it is a
Fall of the company veil being pierced while the Indian is being held
Government liable, Cairn would be legally entitled to apply
Attachment of Indian assets (such as aircraft, bank accounts etc.) in
the USA.

Cairn has also initiated proceedings against India in other cases
Jurisdictions around the world seeking recognition and enforcement
of the award. India has appealed the award

Role of BIT and Fair and Equitable Treatment clauses in such

The full text of the two awards in Cairn and
Vodafone, is not available to the author here. However from
available information can be determined to be a violation of the
Fair and Just Treatment Clause (hereinafter referred to as to)
FET) in the respective BIT, was a
important factor for holding in favor of investors. The
Dispute arises from retrospective changes made in
India and closes (so far) with the arbitral tribunal that the
retrospective change and the subsequent effects on the investor,
violate BIT – FET. Hence a brief understanding of
The interpretation of the FET clauses becomes relevant.

Bilateral Investment Agreements (BITs) impose obligations on the
Contracting country to treat the investment country "fairly"
and fair "way. FET clause that is otherwise a
harmless, mostly a vaguely worded contract term,
Found relevance in many recent cross-border disputes. These
Rule is often used in arbitration today
BITs. It is noteworthy that this clause has a 62% success rate
international dispute resolution. 5 Both Cairn and Vodafone are
Instances of the arbitral tribunal in favor of
Investor for violation of the FET clause.

The concept of fair and equitable treatment in relation to BIT is
nuanced. The FET clause is usually a broad provision in BITs.
The scope of the obligations imposed on the host country is also
not well defined. While "national treatment" and
Consider most-favored nation treatment
taking into account the circumstances of the host country is the FET clause
regardless of the local conditions in the host country and
well regardless of how it is related to. is treated
other investment countries. One school of thought states that FET
The government of the host country obliges the investing party with clauses
Country with "minimum standard" as required under required
Customary international law. The actual practice seems, however
indicate that it is asking something of the host government
about the required minimum international standards
Law. In contrast to the “minimum standards” obligations, FET is considered to be
The term does not come from customary international law. Still,
it is increasingly becoming a standard clause included in
international investment treaties. It is widely believed that
The FET clause was included with the aim of providing protection for
investing countries entering into treaties with developing countries

FET is not a specially defined concept. It has evolved
over a period of time along with international arbitration. While
there may be variations in the way FET clauses are formulated, some
common factors when it comes to hosting developing countries
Nations, include: –
Transparency and respect for legitimate trust, stability and
Consistency of legal and administrative decisions after due
Legal process and protection from arbitrariness and discrimination
Treatment. At first glance, these seem straightforward and
reasonable factors to consider when interpreting the FET. must be taken into account
Circumstances. Your interpretation by the arbitral tribunal
Courts can still be tipped in favor of developed investments
Country. The pressure of developing countries is increasing
strive for the same weighting of their respective sovereign rights
regulate and enact their laws. From the point of view of
The FET clause is just one aspect of developing countries
which is just a business investment deal. So while
interpreted by arbitral tribunals outside the host country, they
should not be used as a guarantee of business or profit for companies
Investments. In addition, they must never be used as
Tools to break into the host's regulatory framework
Country. The host country should be free to make changes
in its legal framework in accordance with its law and
socio-economic circumstances without being deterred by threats
narrow interpretation of such (FET) clauses. Further, even
the interpretation of FET by arbitral tribunals is not uniform.
In some cases, courts have tried the ELSI. apply
Standard6, the one special
high threshold; That is, the behavior of the host state must
"shock or surprise the judicial sense of the tribunal"
Decency & # 39 ;. Conversely, however, other courts have opted for it
a relatively low threshold by using only dictionaries
Definitions, while other tribunals tend to have one
subjective and ambiguous threshold that requires "treatment in such"
an unfair or arbitrary way that the treatment rises to the level
that is unacceptable from an international point of view. Of a
Perspective of the developing country, the last two thresholds
not only represent the increasingly pervasive nature of FETs
Obligation, but above all arbitration tribunals that are based on dangerous
Justification through the introduction of subjectively indefinite formulations, the
potentially serious gaps in the regulatory prospectuses of
Developing countries. Evidence of this unjustified development
could be derived from the empirical assessment of a commentator
who found that violations of the ELSI standard were found in
only 22 percent of the cases in which arbitrariness was accused,
whereas 75 percent of violations were found when courts
a lower threshold was applied.7 These results seem to confirm
the fear of many developing countries that as tribunals
strive to lower the threshold for determining arbitrariness,
there will be more violations and therefore greater potential for
Intervention in the regulatory framework of the host countries.

In S. D. Myers, Inc. v. Canada, (November 13, 2000)
The tribunal also found, among other things, that
"..Determination (whether there is one or not)
Violation of a FET-like clause) must in view of the high
Degree of reverence to which international law in general extends
the right of the domestic authorities to deal with matters within their
own limits.
The determination must also take time
Consideration of any specific rules of international law that
applicable to the case … "

What the author finds interesting here is that of
the perspective of the developing / host country, the arguments (from
Unpredictability, arbitrariness, inconsistency, discrimination
etc.), which are levied against the host by the investing countries
Countries that try their case in arbitration tribunals can
can also be brought against the arbitral tribunal by the host countries
Courts while they favor the FET clauses
the investors. Just as the investor has legitimate expectations
with regard to the legal framework in the host country, the
The host country also has a right to a fair, just,
uniform and non-discriminatory assessment standard, if
its national legal framework will be examined before
international forums.


Conflicting interests of both the investor and the host country
must be taken into account when determining tax disputes. To judge if there is
is a case of tax avoidance or legitimate tax planning. To
Balance, the government's legitimate expectation, theirs
Sovereignty in tax matters with that of the investor
Expectation of a stable tax policy. You can find the answer in
Exercise of sovereign rights in accordance with international law
& Practice and at the same time for transnational tribunals
concepts of international law fair, just and
consistent manner in resolving disputes when the parties
not assimilated.

Vodafone has initially properly demly
Jurisdiction of Indian courts and within their legal framework
led to the Supreme Court. The highest
The court ruled in his favor. However, it was after
this decision made by the Government of India retrospectively
Changes and used the legislature to get what the judiciary wanted
not allow. Even without the benefit of detailed submissions
was brought before the tribunal on behalf of India, it is clear that till
the law of the country at the time the retrospective change was made
Vodafone preferred. As Vodafone, the
international tribunal contested, including the
an act by the Indian government to make a material one
Change of law retrospectively, and then just name it
Clarification. In other words, Vodafone did not pose any challenges
applicable laws or regulations, but changing the
applicable law to his disadvantage. Noting that the top court of
which India held itself in favor of the investing society it would
Even the high ELSI standard is difficult to adhere to
in favor of India before an international forum. In the case of Cairn
The effects were also similar as the investment in India
before the date of the retrospective change. It's not unreasonable
that an investor accepts this regulation of host country laws
Country would be within the four corners of its legal framework,
which would even be protected by the courts in it. If the law
itself is changed that also retrospectively, it offsets and
upsets all of the investor's bonafide calculations.

A nation's tax system must be both secure and predictable.
The absence of either of these two conditions leads to discouragement
Investors influencing the host's overall economic growth

In the present context, the litigation began with taxes
Claims made by India against foreign investors have ended
drag India into lengthy litigation rather than international ones
Forums. When a sovereign state transacts with
foreign investors expect mutual benefits, however
the sovereign rights of the host country must be respected. However,
this must also be done with legitimate expectations of the company
Investors who only decide to invest after examining the feasibility
their investments based on the host's applicable laws


1st (2007)
3 SCC 481,

(2012) 6 SCC 613

3. Due to its 2012 mistake, India's Cairn
Hague challenge likely to fail, Hindustan Times, Jan.
March 2021

4,462 U.S.
611 (1983)

5.https: //
Pervasiveness_in_Light_of_Developing_Countries% 27_Concerns _-_ The_Case_for_Regulatory_Rebalancing

Elettronica Sicula SpA (ELSI) (United States of America v Italy),
IGH reports. 1989. The Chamber of the International Court of Justice of
Justice (I.C.J.) ruled in its judgment of July 20, 1989 that the
Demand for constant protection and security, as in
the FCN treaty between Italy and the United States was not a
Guarantee to a US investor that no interference
Circumstances would arise and that the request by an Italian
Government agency of an insolvent Italian company that is partially owned
of the US investor does not violate the regulation. Besides, it is
Wording of arbitrariness in international law rejected
mere illegality in domestic law, without more, equating with

7.https: //
_Light_of_Developing_Countries% 27_Concerns _-_ The_Case_for_Regulatory_Rebalancing

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