Introduction

Bilateral Investment Treaties have become an integral part of International Commercial Arbitration relations. It has become a fundamental part of India by helping enhance the country’s economic growth. BITs play an important role in protecting and promoting foreign investment in India. One of the key aspects of the BITs is international commercial arbitration and the settlement of disputes. International arbitration is an important factor that helps in solving disputes arising from Bilateral Investment Treaties. The main feature of international commercial dispute resolution is the independent settlement of disputes between the host and foreign state. It is a distinctive feature that allows for alternative dispute resolutions, under which the aggrieved can take the recourse of arbitration under the auspices of (ICSID) rather than approaching the court of the host state. The International Centre for Settlement of Investment Disputes(ICSID) was established in 1996 and regulates as an independent and effective dispute settlement institution. It has over 155 member states and eight signatory states. The award rendered by the ICSID is final and binding on all signatory states. Under the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the New York Convention, an investment award cannot be reviewed by the domestic courts. India is a signatory to this convention but has availed reservation under Article I(3) of the Convention, which restricts the scope of application of the same.

The same can be increasingly observed in many BIT claims against India. Foreign arbitral awards are refused to be enforced, after which India initiates its proceedings. It has become routine for India to refuse the enforcement of international arbitration awards and has been receiving flak from the international arbitration community. The effectiveness of BITs and arbitration as a mechanism for the settlement of disputes has become a question in India. It has been a tough time for the Indian government concerning BIT Arbitration cases. In the past few years, there have been approximately fifteen cases against India filed by foreign nationals under various Bilateral Investment Treaties. India has lost several high-profile cases and is having an equally hard time resisting the enforcement of the BIT Arbitration awards in India. 

Interpretation of the MFN and the White Industries Case

The importance and relevance of the Most Favoured Nation (MFN) clause were observed in the case of White Industries v. Republic of India. There were serious allegations against the efficiency of the Indian Judiciary in the White Industries Case. The Most Favoured Nation clauses are included as a part of investment treaties. It is an equitable treaty that is generally included to make sure that the parties to the investment treaties are not less favourable than the other treaties. According to this clause, countries cannot discriminate between their trading partners or grant someone a special favour. The World Trade Organization grants all its members the status of Most Favored Nation, wherein all the members are treated equally in relation to trade policies and tariffs. The White Industries Case of Investment Treaty Claim (ITA) against India came after the Dhabol Case, the first-ever ITA claim against India.  This case is a landmark judgement that dealt with the importance and interpretation of the Most Favoured Nation clause. 

The White Industries case arose from a commercial arbitration dispute under the ICC. The dispute was between White Industries and Coal India (owned subsidiary of the Indian government) under the ICC Arbitration Rules in 1999. White Industries filed a case against the Indian government because Coal India failed to enforce the foreign arbitral award as the ICC award was ruled against the Indian company. The matter was pending before the Supreme Court for nine years until White Industries initiated an Investment Treaty Claim against India under the India-Australia BIT. The inordinate delay by the Indian courts to enforce the arbitral awards was a breach of the provisions on Fair and Equitable Treatment (FET), expropriation, and a violation of the MFN clause. The non-enforcement of the foreign award also violated Article V of the New York Convention, which is a signatory. The Satyam Computer case and the Bhatia International case were responsible for the delay in enforcing the ICC Award as they took precedence over the case. In 2008, the judgement laid down in the Bhatia Case permitted the Indian courts to set aside foreign awards and to appoint arbitrators in arbitration in foreign countries (Indtel Technical Services v. WS Atkins). Following the ratio in the Satyam Case, the Calcutta High Court set aside the foreign award. What happened? India’s legal framework at the time of the dispute was underdeveloped. The broad and vague provisions, such as the ‘Most Favoured Nation’ and the ‘effective means’(the right to assert claims and enforce rights promised under the treaty) explain provisions, which give the other parties the freedom to go treaty shopping and get maximum compensation which directly affects the Indian economy. 

India witnessed many investor-state proceedings against it after the White Industries Case. The award was an eye-opener for India, after which India’s approach towards BITs underwent a sea change. It culminated in the introduction of the new Indian Model BIT in 2016. To prevent what happened in the White Industries case, India terminated 58 BITs and became very skeptical while signing a new BIT. The 2016 India Model BIT is proof of India’s new approach to BITs. However, it is not free encumbrances. The present BIT model prioritizes the interest of only the investing state rather than of Indian investors as they invest in a foreign state. The reason the Indian government approaches this model is because, under various BITs, India has had to pay millions of dollars in damages. The damages are paid from the taxpayer’s money and directly affect the Indian economy. 

Retrospective Taxation: The Vodafone and the Cairn Energy Controversy

In 2012, the Indian government amended Section 9(1)(i) of the Income Tax Act 1961 through the Finance Act 2012. This hasty decision was made to avoid the effect of the Apex Court’s judgement in the Vodafone International Holding v. Union of India case. The cases of Cairn Energy PLC & Cairn UK Holdings Limited v. The Republic of India and Vodafone have arisen out of retrospective taxation. Retrospective taxation is an unfair method of gaining revenue. It is the tax imposed on past transactions and the revenue gained from it. Retrospective taxation usually refers to the retroactive application of new tax regimes or the change in the existing tax laws. 

Vodafone acquired a majority stake in an Indian telecommunications company in 2007. The Indian government tried to impose retroactive taxation on the acquisition under the new tax laws. However, The Permanent Court of Arbitration(PCA) ruled the dispute in favour of the investor. The decision was in favour of Vodafone because India was found in violation of the BIT between India and the Netherlands. It was also found to violate the United Nations Commission on International Trade Law (UNCITRAL). UNCITRAL recognises the negative impacts of retrospective taxation and has observed that it can impact the stability of bilateral foreign investments. The move to impose retrospective taxation violated Article 4(1) of the BITs, which guarantees fair and equitable treatment. The pressure on the Indian government of the International business community was high because the enforcement of retrospective taxation made India an unattractive destination for foreign investors. This made India settle the dispute by allowing Vodafone to pay a part of the total tax demanded.  

Similarly, in 2006, Cairn Energy transferred its Indian assets to Cairn India. This gave Cairn energy capital gains of Rupees 24,500 crores. Based on this, approximately 1.6 billion USD in taxes was imposed by India. In 2012, India amended its laws pertaining to income tax and introduced retrospective tax. The International Arbitrational Tribunal, applying the Fair and Reasonable Treatment (FET) standard, stated that India failed to create a ‘just environment,’ violating Article 3(2) of the BIT between India and the UK. It states that the investors of each contracting party shall be accorded fair and equitable treatment and would also enjoy the protection and security in the territory of the contracting party. The Permanent Court Of Arbitration awarded the judgement in favour of Cairn, which ruled that India had breached the UK-India Bilateral Investment Treaty. The tribunal directed the Indian government to pay a compensation of $1.2 billion for the total harm suffered by Cairn due to the breaches. However, in 2021, the same was challenged by the Indian government in the Dutch Court, claiming that the dispute arose because of the violation of Indian Tax laws (Retrospective taxation imposed in the year 2012), which was not under the ambit of the India- United Kingdom BITs. The case is a complex battle and is still pending. 

National Security And Antrix v. Devas Case

The Antrix v. Devas deal is a prime example of poor regulation in the country. This case is a testament that multiple complexities can arise even after a foreign investor receives an award in its favour. Devas is an Indian Private company with many foreign investors backing it. Antrix, on the other hand, is the commercial arm of the Indian Space Research Organisation(ISRO). Due to a dispute between Antrix and Devas, the UPA government rescinded the contract, alleging force majeure. Later, it also stated that the Antrix v. Devas case was contaminated by a criminal offence. The three investors of Devas, the Mauritian investors, CC/ Devas, and DT, bought separate BIT claims under the India-Mauritius BIT and India-Germany BIT, respectively. The foreign investors received several treaty arbitration awards in their favour but still failed to get them enforced in India.

In 2011, the International Chambers of Commerce(ICC) at the Hague District Court ruled that Antrix had breached the contract with Devas and was asked to pay damages. The Comptroller and Auditor General(CAG) found several faults in the Antrix v. Devas contract and was of the view that the agreement promoted the interest of individual private entities at the cost of the public interest. The Indian government set aside the ICC award, stating that the award was contrary to the public policy and national security of India. In 2022, the National Company Law Tribunal(NCLT) finally ruled that Devas was fraudulently incorporated and ordered the winding up of the company. India hid behind the veil of ‘national security’ in its judgement to cover its mistakes. Furthermore, later, it was argued that Devas was incorporated under fraudulent means. This is a landmark judgement because it raised the issue of the balance between investors and national security. The contract between Antrix and Devas seems valid and the Indian government still has been very vague about the fraudulent incorporation of Devas. 

India went ahead and breached the obligation of protecting the rights of foreign investors and international laws. India always tends to avoid the enforcement of the ICC awards, as it did in the case of the Deutsche Telekom AG v. Republic of India.  After the Devas agreement was annulled, Deutsche Asia, which has a 20% stake in the company through its parent company, bought arbitration against India, citing India’s breach of FET obligations under the India-Germany BIT. India, by citing “essential security interest,” justified its decisions. Tribunals have recognised the fact that India’s decision to wind up the company was grossly unfair and was in violation of international investment law. This case highlights the importance and need for a dispute resolution mechanism to impartially resolve the dispute between the host state and foreign states. The case is a landmark judgement as it draws attention to the challenges faced by foreign investors in India who are sceptical about forming future BITs with our country due to the lack of transparency and respect for international arbitration awards.

Conclusion

India has adopted a conservative mindset towards the BITs. The 2016 Model Bilateral Investment Treaty centralizes the power towards the host state and simultaneously gives rise to a protectionist model. It gives unbridled power to the host state, resulting in a lack of trust and protection for the investors. This present model of BIT continues to operate without any change. Indian investors are not protected under this model, which is a cause for concern. Similarly, India has terminated almost all the BITs to protect itself from future disputes. However, the recent passing of the Taxation Laws Amendment Bill 2021 amends the contentious retrospective taxation, which would favour all those parties who had to pay retrospective taxation under the previous taxation laws. All the pending litigation would be withdrawn, and no demand for damages would be made in the future. The present law also proposes to refund the taxes paid by the taxpayers. This move would highly benefit Cairn and Vodafone, who had to pay millions of dollars in taxes and have had a legal battle with the Indian government for a very long time. 

The recent BIT proceedings are a testament to the fact that India is a hot spot for foreign investors; however, the same can come with challenges. India must learn to follow the regulations and the due process of law efficiently and transparently. It is imperative that India implements a clear and transparent approach. India needs to provide stability to foreign investors by providing a stable investment environment. This can be done by strengthening the legal framework by protecting foreign and domestic investors. This can be achieved by incorporating investor-state dispute provisions in these treaties. For the same, India needs to provide fair and equitable treatment to all its investors. It is time that India addresses all investment treaty disputes impartially and transparently. India should encourage international arbitration to solve disputes rather than relying on state judgements. This would be fair to both the host and the foreign investors. India still has a long way to go to improve its reputation in the cases of bilateral investment treaty arbitration. However, with sustained efforts of both the host and the foreign state, India can achieve this goal. 

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Muskan Agarwal is a second year law student at Jindal Global Law School.