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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
L2100444 WRIT OF SUMMONS
Today, the March twenty-second two thousand and twenty one, at the request of the legal person governed by public law REPUBLIC OF INDIA, seated in New Delhi, the Republic of India, which elects to be domiciled at the office address of Hanotiau & van den Berg, Avenue Louise 480 B.9 (IT Tower, 9th Floor), Brussels (1050), Belgium, of which law firm, Prof. Dr. Mr. A.J. van den Berg together with Ms. M. van Leeuwen, associated with the law firm Derains & Gharavi, established at Rue Balzac 25 in Paris (75008), will act as counsel in this case, as well as electing domicile at the office address of DVDW Advocates at Weena 690 in Rotterdam (3012 CN), of which firm M.J. Siegers is appointed local (procedural) counsel and will act as such,
I HAVE (ASSIGNED) BAILIFF, ETC.;
SUMMONED:
1. The company incorporated in accordance with foreign law CAIRN ENERGY PLC (registered under number SC226712 in the UK Trade Register) having its registered office and principal place of business at 50 Lothian Road, Edinburgh, EH3 9BY, Scotland, United Kingdom (“Defendant sub 1”), therefore with no known office address or director in the Netherlands; 2. The company incorporated in accordance with foreign law CAIRN UK HOLDINGS LIMITED (registered under number SC304517 in the UK Trade Register) having its registered office and principal place of business at 50 Lothian Road, Edinburgh, EH3 9BY, Scotland, United Kingdom (“Defendant sub 2”), therefore with no known office address or director in the Netherlands;
Also for the purpose of service on Defendants sub 1 and sub 2 serving notice on its directors:
A. SIMON JOHN THOMSON (Director of CAIRN ENERGY PLC and CAIRN UK HOLDINGS LIMITED), residing at Tynehead, Pathhead, EH37 5XR, Midlothian, Scotland, United Kingdom, therefore with no known domicile or residence in the Netherlands, having chosen as his correspondence address 50 Lothian Road, Edinburgh, EH3 9BY, Scotland United Kingdom;
B. JAMES DONALD SMITH (Director of CAIRN ENERGY PLC and CAIRN UK HOLDINGS LIMITED), residing at 44 Barnton Avenue, Edinburgh, EH4 6JL, Scotland, United Kingdom, therefore with no known domicile or residence in the Netherlands, having chosen as his correspondence address 50 Lothian Road, Edinburgh, EH3 9BY, Scotland United Kingdom;
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
C. JANE ALISON WOOD (Director of CAIRN ENERGY PLC), residing at Labdens House, Colliers End, Ware, Hertfordshire, SG11 1EN, England, United Kingdom, therefore with no known domicile or residence in the Netherlands, having chosen as her correspondence address 50 Lothian Road, Edinburgh, EH3 9BY, Scotland, United Kingdom;
D. KEITH GEDDES LOUGH (Director of CAIRN ENERGY PLC), residing at Lochside House, Lochwinnoch, PA12 4JH, Scotland, United Kingdom, therefore with no known domicile or residence in the Netherlands, having chosen as his correspondence address 50 Lothian Road, Edinburgh, EH3 9BY, Scotland, United Kingdom;
E. PETER STEPHEN KALLOS (Director of CAIRN ENERGY PLC), residing at 3B, West Side Common, London, SW19 4TN, England, United Kingdom, therefore with no known domicile or residence in the Netherlands, having chosen as his correspondence address 50 Lothian Road, Edinburgh, EH3 9BY, Scotland, United Kingdom;
F. CATHERINE LEE KRAJICEK (Director of CAIRN ENERGY PLC), residing at 1616 Fountain View Dr Apt 604, Houston, TX 77057, United States of America, therefore with no known domicile or residence in the Netherlands, having chosen as her correspondence address 50 Lothian Road, Edinburgh, EH3 9BY, Scotland, United Kingdom;
G. ERIK BERNHARD DAUGBJERG (Director of CAIRN ENERGY PLC), residing at 6310 Westchester Dr. Dallas, TX 75205, United States, therefore with no known domicile or residence in the Netherlands, having as his chosen correspondence address 50 Lothian Road, Edinburgh, EH3 9BY, Scotland, United Kingdom;
H. NICOLETTA CARLA MARIA GIADROSSI (Director of CAIRN ENERGY PLC), residing in France, therefore with no known domicile or residence in the Netherlands, having as her chosen correspondence address 50 Lothian Road, Edinburgh, EH3 9BY, Scotland, United Kingdom, therefore with respect to Defendant sub 1 and Defendant sub 2 and their directors mentioned in sub A. to H. inclusive, in accordance with Article 7(1) of the Hague Service Convention 1965 in conjunction with Article 55(1) of the Dutch Code of Civil Procedure, I hereby serve a copy of this writ of summons on the office of the Public Prosecutor at the Court of The Hague, at Prins Clauslaan 60 in The Hague (2595 AJ):
- For Defendant sub 1 at its aforesaid office address two copies of this writ and two translations thereof into the English language;
- For Defendant sub 2 at its aforesaid office address two copies of this writ and two translations thereof into the English language;
- For the Director of Defendants sub 1 and sub 2, named in sub A., at his aforesaid correspondence address, four copies of this writ and four translations thereof into the English language;
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
- For the Director of Defendants sub 1 and sub 2, named in sub A., at his aforesaid residence address, four copies of this writ and four translations thereof into the English language;
- For the Director of Defendants sub 1 and sub 2, named in sub B., at his aforesaid correspondence address, four copies of this writ and four translations thereof into the English language;
- For the Director of Defendants sub 1 and sub 2, named in sub B., at his aforesaid residence address, four copies of this writ and four translations thereof into the English language;
- For the Director of Defendant sub 1, named in sub C., at her aforesaid correspondence address, two copies of this writ and two translations thereof into the English language;
- For the Director of Defendant sub 1, named in sub C., at her aforesaid residence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named in sub D., at his aforesaid correspondence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named in sub D., at his aforesaid residence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named in sub E., at his aforesaid correspondence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named in sub E., at his aforesaid residence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named under sub F., at her aforesaid correspondence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named under sub F., at her aforesaid residence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named in sub G., at his aforesaid correspondence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named in sub G., at his aforesaid residence address, two copies of this writ and two translations thereof into the English language;
- For the Director of defendant sub 1, named in sub H., at her aforesaid correspondence address, two copies of this writ and two translations thereof into the English language;
Leaving copy to, , employed there;
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
stating that in accordance with Articles 3 to 6 of the Hague Service Convention 1965, this writ is to be served in accordance with the method prescribed by the internal law of the addressed signatory State for the service of documents in domestic actions upon legal and natural persons who are within its territory, but only where simple delivery is impossible; and also stating that the Central Authority of the addressed State should be requested to return a copy of this writ together with the certificate referred to in Article 6 of the Hague Service Convention 1965; Whereas, I will furthermore send - a third copy of this writ and a translation thereof into the English language forthwith by registered mail AND by courier, to Defendant sub 1 and Defendant sub 2 and each of their directors named in sub A. through H. to the aforementioned office addresses, correspondence addresses and residential addresses; - with respect to the directors mentioned in sub-paragraphs F. and G., transfer an amount of USD 95 for each of them to the competent authority ABC Legal;
Also for the purpose of serving on Defendant sub 1 my writ of summons to its director named in sub. H., being: NICOLETTA CARLA MARIA GIADROSSI (Director of CAIRN ENERGY PLC), residing at 18 Rue Weber, 75116 Paris, France, reason why I, (additional) bailiff aforesaid, on the basis of Article 56(2) of the Code of Civil Procedure, as well as in accordance with the provisions of the (EC) Service Regulation No. 1393/2007 of the European Parliament and of the Council of 13 November 2007 on the service in the Member States of judicial and extrajudicial documents in civil or commercial matters (“Service Regulation”), repealing Regulation (EC) No. 1348/2000 (OJ L 324/79), have today sent a registered letter as well as an email to the receiving agency:
S.C.P LANDEZ Frédéric, BARTET Pierre Olivier, LOUVEAU-DEZAUNAY Dorine et GAUTHERON Orlane 18 rue Mesnil 75116 Paris, France TEL: +33 1.42.16.86.86 FAX: +33 1.45.83.70.47 EMAIL: [email protected] two copies of this document and two translations thereof into the English language, attached to the standard form "request for service of documents" referred to in Article 4(3) of the aforementioned Service Regulation, completed by me in French, requesting the aforementioned receiving agency to:
I. serve a copy as aforementioned in the manner described in section 5.1 of said application; which service should be effected as soon as possible, for which we request you, the receiving agency to take care; II. send me a copy of the document, accompanied by the certificate of service referred to in Article 10 of the Service Regulation (by mail, but also directly by e-mail to: [email protected]);
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
Whereas furthermore, I shall immediately send by registered post AND by courier to the residence address of NICOLETTA CARLA MARIA GIADROSSI (Director of CAIRN ENERGY PLC), residing at 18 Rue Weber, 75116 Paris, France, a third copy of this writ, a translation thereof into the English language and the standard form drawn up in all languages of the European Union as set out in Article 8 of the Service Regulation and reproduced in Annex II of the Service Regulation, with the statement that the person for whom the document is intended to be served may refuse to accept it (i) at the time of service or (ii) by returning the document to the receiving agency within one week if is not written in or accompanied by a translation into either language which the addressee understands or the official language of the addressed Member State; .
FURTHERMORE, because the addresses of the directors mentioned in sub A. to H. cannot be determined with certainty, I am serving my writ on the office of the Public Prosecutor of the Hague Court of Appeal, at Prins Clauslaan 60 in The Hague (2595 AJ), where I leave a copy for Defendant sub 1 and Defendant sub 2 and for each of the directors named in sub A. through H. to:
, employed there;
Whereas, furthermore, a copy of this writ shall be published in the STATE GAZETTE;
TO: Appear on Tuesday, 28 September 2021, in the morning at 10:00 a.m., not in person but represented by a lawyer, at the hearing of the Court of Appeal in The Hague, sitting in the Palace of Justice at Prins Clauslaan 60 in The Hague.
WITH NOTICE THAT: a. if a defendant fails to instruct an attorney or to pay the court fee hereinafter specified in a timely manner, and the prescribed time limits and formalities have been observed, the court shall enter default against such defendant and grant the claim hereinafter described, unless it appears to the court to be unlawful or unfounded; b. if at least one of the defendants appears in the proceedings and has paid the court fee in a timely fashion, a single judgment will be rendered between all parties, which will be considered an adversarial judgment; c. if the defendant appears in court, a court registry fee will be charged and is to be paid within four weeks from the time of appearance; d. the amount of the court fees is stated in the most recent annex to the Civil Cases Court Fees Act, which can be found on the website: www.kbvg.nl/griffierechtentabel;
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
e. from a person who is impecunious, a court fee for impecunious persons as established by or pursuant to Act shall be levied, if, at the time the court fee is levied, the person has produced: First, a copy of the decision of assignment within the meaning of Article 29 of the Legal Aid Act, or if this is not possible due to circumstances not reasonably attributable to him, a copy of the application, referred to in Article 24, paragraph 2 of the Legal Aid Act, or Second, a statement from the board of the Legal Aid Board referred to in section 7(3)(e) of the Legal Aid Act showing that his income does not exceed the incomes referred to in the Order in Council pursuant to section 35(2) of that Act; f. a joint court fee is levied only once on the basis of Article 15 of the Civil Cases Court Fees Act of defendants who appear while represented the same lawyer and while making identical submissions or putting forward identical defences,
IN ORDER TO:
To respond to the following claims of the Republic of India:
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
TABLE OF CONTENTS
LIST OF DEFINED TERMS ...... 10 I. INTRODUCTION ...... 15 II. BACKGROUND ...... 18 A. Factual Background ...... 19 (i) Cairn in India ...... 19 CEP’s Entry into India: The Origin Story from 1996 to 2006 ...... 19 The 2006 Transactions: The Mechanics and the Motivations ...... 21 (ii) The Consequences of the 2006 Transactions ...... 36 India Imposes Taxes on the 2006 Transactions ...... 36 Double Non-Taxation: The Intended Consequence of the 2006 Transactions ...... 39 B. The BIT and the Arbitration Proceedings ...... 43 (i) Relevant Provisions of the India-UK BIT ...... 44 (ii) Procedural History of the Arbitration ...... 46 (iii) Summary of the Award ...... 50 Has Cairn Made an “Investment” as defined in the India-UK BIT? ...... 50 Do Cairn’s Claims Fall Outside the Scope of Protection of the India-UK BIT?...... 52 Do Tax Disputes Fall Outside the Purported Offer to Arbitrate in the India-UK BIT? ...... 53 Maturity of the Claims ...... 54 Did India’s Tax Measures Violate the FET Standard? ...... 55 Damages Awarded ...... 57 III. COMPETENCE OF THE COURT OF APPEAL OF THE HAGUE ...... 57 IV. GROUND FOR SETTING ASIDE 1: LACK OF VALID ARBITRATION AGREEMENT (ARTICLE 1065(1)(A) DCCP) ...... 59 A. Legal Framework ...... 59 B. Jurisdiction Ground 1: The Tribunal Decided on Issues that Are Not Arbitrable .. 64 (i) Tax Disputes, such as the one between Cairn and India, Are Not Arbitrable ...... 64 The Tribunal Erred in its Findings on Dutch Law ...... 66 The Tribunal Erred in Ignoring Indian Law on the Issue of Arbitrability of Tax Disputes...... 76 The Tribunal’s Findings are Erroneous under International Law ...... 86 (ii) In Deciding India’s Defences, the Tribunal essentially decided “Tax Disputes” as Defined by the Tribunal ...... 105 C. Jurisdiction Ground 2: Cairn did not Make an “Investment” in India – No “Dispute” in Relation to an “Investment” or an “Investor” ...... 112 (i) The Tribunal Erred in Not Independently Characterizing Cairn’s Claims ...... 114 (ii) The Tribunal did Not Conduct a Complete Jurisdictional Inquiry into the Legality of Cairn’s Alleged Investments ...... 118 7
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
(iii) In any event, the Tribunal Erroneously Found that there was No Tax Avoidance ...... 125 Indian Law on Tax Avoidance ...... 126 The Tribunal’s Erroneous Findings on Tax Avoidance – Failure to Apply Dominant Purpose Test in Accordance with Indian Law ...... 130 (iv) Cairn’s Alleged Investment was Actually a Divestment – As Such it was Not an “Investment”...... 144 CUHL’s Alleged Investment was Actually a Divestment ...... 145 Assets Acquired During a “Divestment” Cannot Qualify as an “Investment” Under International Law ...... 148 CEP’s Alleged Investment does not Survive Absent CUHL’s Investment ...... 150 V. GROUND FOR SETTING ASIDE 2: VIOLATION OF PUBLIC POLICY (ARTICLE 1065(1)(E) OF THE DCCP) ...... 152 A. Legal Framework ...... 153 (i) Substantive Public Policy ...... 153 (ii) Procedural Public Policy ...... 154 The Right of Both Parties to Be Heard ...... 154 Equal Treatment ...... 156 B. Public Policy Ground 1: The Tribunal’s Violation of Substantive Public Policy ... 156 (i) Double Non-Taxation ...... 156 Cairn’s Double Non-Taxation ...... 158 Transnational Public Policy on Double Non-Taxation ...... 163 European Union’s Public Policy ...... 167 (ii) Non-Arbitrability of Tax Disputes ...... 170 The Exclusive Competence of the Indian Courts ...... 171 Undermining Legal Certainty ...... 174 The Erga Omnes Effect of the Award ...... 174 C. Public Policy Ground 2: The Tribunal’s Violation of Procedural Public Policy .... 176 (i) Violation of Right to Be Heard ...... 176 (ii) Equal Treatment ...... 177 (iii) The Surprise Decision ...... 178 VI. CONCLUSION ...... 180 VII. EVIDENCE ...... 180 VIII. CONDUCT OF THE PROCEEDINGS ...... 181 IX. INCIDENTAL CLAIM PURSUANT TO ARTICLE 27 AND 28 OF THE DCCP READ WITH ARTICLE 208 OF THE DCCP ...... 181 A. Importance of Confidentiality ...... 182 B. Legal Framework ...... 182 C. Request to the CoA in Connection with the Provisions of Article 28 of the DCCP 185 X. REQUEST FOR RELIEF ...... 186 LIST OF EXHIBITS ...... 188
8
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
ANNEX A ...... 193 ANNEX B ...... 196 ANNEX C ...... 202
9
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
LIST OF DEFINED TERMS
ABN Amro ABN AMRO Rothschild
Arbitration PCA Arbitration Case No. 2016-7 Cairn Energy PLC and Cairn UK Holdings Limited v. Republic of India
Award Award dated 21 December 2020 rendered in PCA Arbitration Case No. 2016-7 Cairn Energy PLC and Cairn UK Holdings Limited v. Republic of India
BEPS Base Erosion and Profit Shifting
BIT Bilateral investment treaty
Brown WS-1 First Witness Statement of Janice M. Brown dated 27 June 2016
Brown WS-2 Second Witness Statement of Janice M. Brown dated 23 June 2017
Brown WS-3 Third Witness Statement of Janice M. Brown dated 3 August 2018
Cairn Cairn Energy PLC and Cairn UK Holdings Limited, together
CEO Chief Executive Officer
CEP Cairn Energy PLC, Defendant sub 1 in this proceeding and First Claimant in the Arbitration
CIHL Cairn India Holdings Limited
Claimants Cairn Energy PLC and Cairn UK Holdings Limited, together
CoA Court of Appeal of The Hague
Command Petroleum Command Petroleum Limited
CUHL Cairn UK Holdings Limited, Defendant sub 2 in this proceeding and Second Claimant in the Arbitration
C-PHB Claimants’ Post-Hearing Brief dated 7 December 2018 submitted in the Arbitration
C-SoRj Claimants’ Statement of Rejoinder on Jurisdiction dated 28 May 2018 submitted in the Arbitration
DAO Income Tax Department’s Draft Assessment Order of 9 March 2015
Daylight Loans Two daylight overdraft loans that Cairn Energy PLC received from Citibank on: (i) 12 October 2006 for a cash amount of INR 50,373,987,924; and (ii) 22 November 2006 for a cash amount of INR 17,554,239,705
10
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
DCC Dutch Civil Code
DCCP Dutch Code of Civil Procedure
Defendant sub 1 Cairn Energy PLC
Defendant sub 2 Cairn UK Holdings Limited
Delhi High Court High Court of Delhi
DRP Order Dispute Resolution Panel Order dated 31 December 2015
ECHR European Convention on Human Rights
ECT Energy Charter Treaty 1994
EU European Union
FAO Income Tax Department’s Final Assessment Order dated 25 January 2016
FET Fair and Equitable Treatment
ICJ International Court of Justice
ICIJ Leaks Offshore Leaks Database published by the International Consortium of Investigative Journalists
ILC International Law Commission
ILC Articles International Law Commission’s Articles on Responsibility of States for Internationally Wrongful Acts
Inclusive Framework OECD/G20 Inclusive Framework on BEPS established in 2016
India Republic of India, Applicant in this proceeding and Respondent in the Arbitration
Indian Constitution Constitution of India 1950
India-Netherlands BIT Agreement between the Republic of India and the Kingdom of The Netherlands for the Promotion and Protection of Investments, which entered into force on 1 December 1996
India-UK BIT Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Promotion and Protection of Investments, which entered into force on 6 January 1995
India-UK DTAA Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains between India and the United Kingdom dated 25 October 1993
11
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
IPO Initial Public Offering
ISDS Investor – State Dispute Settlement
IT Act Indian Income Tax Act 1961
ITAT Income Tax Appellate Tribunal
ITAT Order Income Tax Appellate Tribunal Order dated 9 March 2017
JOA Joint operation agreements
Kumar WS-1 Respondent’s First Witness Statement of Sanjay Kumar dated 3 February 2017
LCI Report Law Commission of India’s 260th report regarding India’s (then draft) Model BIT 2016
MBA Fields Mangala, Bhagyam and Aishwariya oil fields, together
McDowell Judgment McDowell and Co. Ltd. v. CIT [1985] 3 SCC 230
MFN Most-Favoured-Nation
MPC Requirement Minimum Promoter Contribution Requirement
NoA Notice of Arbitration against India dated 22 September 2015
OECD Organisation for Economic Co-operation and Development
OECD BEPS Action Action Plan initiated by the OCED in 2013 on its BEPS initiative Plan
OECD Model Tax 2017 edition of its Model Tax Convention on Income and on Capital Convention
Parties Cairn Energy PLC, Cairn UK Holdings Limited and Republic of India, collectively
Parties’ Post-Hearing Claimants’ Post-Hearing Brief and Respondent’s Post-Hearing Brief Briefs dated 7 December 2018, together, as submitted in the Arbitration
PCA Permanent Court of Arbitration
Petronas Petronas International Corporation Ltd.
Plan C Plan C-2 proposed by RSM Advisory Services to Cairn Energy PLC’s Board on 11 May 2006, on which the 2006 Transactions were based
PO 2 Procedural Order No. 2 dated 12 August 2016
PO 16 Procedural Order No. 16 dated 18 March 2019
12
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
PO 18 Procedural Order No. 18 dated 9 August 2019
PSC Production Sharing Contract
Puri WS-1 First Witness Statement of Sanjay Puri dated 2 February 2017
R-PHB Respondent’s Post-Hearing Brief dated 7 December 2018 submitted in the Arbitration
R-SoRj Respondent’s corrected Statement of Rejoinder dated 19 April 2018 submitted in the Arbitration
Request for Bifurcation Respondent’s Request for bifurcation of the arbitral proceedings dated 6 October 2016
Respondent Republic of India
RSM RSM Advisory Services
Rosenbloom ER-1 Respondent’s First Expert Report of H. David Rosenbloom dated 1 February 2017
Rosenbloom ER-2 Respondent’s Second Expert Report of H. David Rosenbloom dated 23 June 2017
SEBI India’s Securities and Exchange Board
SEBI DIP Guidelines India’s Securities and Exchange Board’s Disclosure and Investor Protection Guidelines
SoC Claimants’ Statement of Claim dated 28 June 2016 submitted in the Arbitration
SoD Respondent’s Statement of Defence dated 4 February 2017 submitted in the Arbitration
SoRy Claimants’ Statement of Reply dated 21 December 2017 submitted in the Arbitration
Tribunal The arbitral tribunal composed of Mr. Stanimir Alexandrov, Mr. Christopher Thomas QC and Mr. Laurent Lévy that rendered the Award in PCA Case No. 2016-7
TWAIL Third World Approaches to International Law
UK Government of the United Kingdom of Great Britain and Northern Ireland
UN United Nations
UN BEPS United Nations Subcommittee on Base Erosion and Profit Shifting Subcommittee Issues for Developing Countries established in 2013
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
UNCITRAL Rules Arbitration Rules of The United Nations Commission on International Trade Law, 1976
UNCTAD United Nations Conference on Trade and Development
Vedanta Vedanta Resources PLC
Vedanta Arbitration PCA Arbitration Case No. 2016-05 Vedanta Resources PLC v. The Republic of India
VCLT Vienna Convention on the Law of Treaties 1969
Vodafone Judgment Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613
Withheld Appendices Appendices V and VI to ABN AMRO Rothschild’s presentation dated 4 April 2005 to the Board of Cairn Energy PLC titled “Project Sapphire - Options”, which Claimants had refused to disclose in the Arbitration Writ of Summons The current setting aside application dated 22 March 2021 filed by the Republic of India against the Award dated 21 December 2020 rendered in PCA Arbitration Case No. 2016-7 Cairn Energy PLC and Cairn UK Holdings Limited v. Republic of India. 27 Subsidiaries Cairn Energy PLC’s 27 subsidiaries holding its Indian oil and gas assets comprising: CUHL (Scotland), Cairn Energy Holdings Limited, Cairn Energy Hydrocarbons, Cairn Petroleum India Limited, Cairn Energy Discovery Limited, Cairn Exploration (No. 2) Limited, Cairn Exploration (No. 4) Limited, Cairn Exploration (No. 6) Limited, Cairn Exploration (No. 7) Limited, Cairn Energy Gujarat Block 1 Limited, Cairn Energy Netherlands Holdings B.V., Cairn Energy Group Holdings B.V, Cairn Energy Australia PTY LTD, CEH Australia Limited, CEH Australia PTY Limited, Cairn Energy Asia PTY LTD, Wessington Investments PTY LTD, Cairn Energy Investments Australia PTY LTD, Sydney Oil Company PTY LTD, Command Petroleum (PPL56) LTD, Cairn Energy India PTY LTD, Cairn Energy India Holdings B.V., Cairn Energy India West Holdings B.V., Cairn Energy India West B.V., Cairn Energy Cambay Holdings B.V., Cairn Energy Cambay B.V., Cairn Energy Gujarat Holdings B.V., Cairn Energy Gujarat B.V.
2006 Transactions Series of transactions structured by Cairn Energy PLC and Cairn UK Holding Limited over an eight-month period between end-April – December 2006
2012 Clarification Clarification to Section 9(1)(i) of the Income Tax Act 1961 implemented through the Finance Act 2012 (Act No. 23 of 2012)
14
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
I. INTRODUCTION 1. For over a decade, Cairn Energy PLC (“CEP”) has profited from the right granted to it by the Republic of India (“India”) to explore India's natural resources in the oil and gas sector. Amidst some small oil fields it had discovered in the past, in 2004, CEP hit upon three major oil fields in the State of Rajasthan, which, in the words of CEP’s Chief Executive Officer, “transformed” its “fortunes”.1 As a result, all of a sudden, CEP became a “stock market sensation”.2 Therewith started CEP’s ill-intentioned expedition to maximize its profits at the cost of the Indian tax payer. 2. Eager to monetize these discoveries, CEP commenced the process of divesting its assets in India. In doing so, in a series of intra-group transactions in 2006, CEP employed convoluted and artificial devices to ensure that the huge profits from its divestment could be realized with a zero-tax burden. The dominant purpose behind CEP’s conduct in 2006, engineered through dedicated subsidiaries that served no legitimate business purpose, was obvious: avoidance of capital gains tax in India. One of these subsidiaries, Cairn UK Holdings Ltd. (“CUHL”), is a party to these setting aside proceedings. 3. More specifically, CEP and CUHL (together referred to as “Cairn” or “Claimants”), through their exploitative conduct in India in 2006, realized capital gains of approximately USD 5.5 billion, on which they should have paid capital gains taxes in the amount of, at least, USD 1.6 billion. Cairn, however, deliberately failed to do so, by simply not filing a tax return for the relevant period. The associated loss of revenue to India on account of Cairn’s attempt to avoid payment of these taxes cannot be emphasized enough. To put it in perspective, USD 1.6 billion is equivalent to approximately 12 percent of India’s latest education budget and approximately 16 percent of its latest health and family welfare budget.3 4. Cairn’s aggressive tax avoidance strategy was not directed only at India. Cairn’s was a “classic case”4 of a multinational corporation that shifts profits from the country where such profits were made under the pretext of an intra-group restructuring and then transfers them to another country(ies), where it equally does not pay any taxes. Cairn’s 2006 transactions thus resulted in the globally condemned phenomenon of “Double Non-Taxation”. Indeed, aggressive tax avoidance by multinational corporations has become a plague of recent times in the globalized world. Multinational corporations around the world are shamelessly engaging in insidious tax avoidance strategies. As a result, many States have been compelled to implement stringent measures to combat the spread of aggressive tax avoidance, which has
1 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 2, pp. 175:13-175:17 (Claimants’ Opening Statement); see also Cairn’s 2004 Interim Report (“During 2004 Cairn’s fortunes and prospects have been transformed through major exploration success in Rajasthan.”) 2 Exh. RoI-6, The Telegraph, Cairn's Indian oil find comes in at the top end of City forecasts, 5 September 2004. 3 See Ministry wise Summary of Budget 2021 provisions, available at: https://www.indiabudget.gov.in/doc/eb/sumsbe.pdf. India’s education budget for FY 2021-22 is INR 93,198 Crore (approx. USD 12.9 billion). India’s health and family welfare budget for FY 2021-22 is INR 71,423 Crore (approx. USD 9.8 billion). 4 Exh. RoI-4, Exh. C-70, Final Assessment Order dated 25 January 2016, ¶ 9.1.9. 15
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severe repercussions on their economies. Cairn’s 2006 transactions are the perfect example of such shameless tax-avoidance. 5. CEP’s success in avoiding payment of capital gains tax lasted until India discovered its tax avoidant scheme in 2014 and sought to rightfully tax the immense capital gains made by CEP through the 2006 transactions. It did so by taxing the transactions pursuant to the Income Tax Act 1961 (“IT Act”), clarified by way of a legislative measure passed by the Indian Parliament in 2012 in the Finance Act 2012 (Act No. 23 of 2012) (“2012 Clarification”). The constitutionality of the 2012 Clarification remains unchallenged by Cairn (or any other party) before the Indian courts, and was permissible in accordance with well-established principles of Indian law, which were transparently in place at the time of Cairn’s purported investment. However, India was dragged into international investment arbitration proceedings by Cairn where it was forced to justify its tax measures before an ad hoc arbitral tribunal that had no jurisdiction over the tax dispute before it. 6. The Arbitral Tribunal did not only wrongfully endorse Cairn’s conduct in the Award under challenge dated 21 December 2020 (“Award”) rendered in PCA Case No. 2016-7 (“Arbitration”). The Arbitral Tribunal has even praised Cairn for it. That is to say, the Tribunal awarded Cairn damages in excess of amount of USD 1.2 billion with compliments for “devising a creative structure”, which it described as “a triumph of form over substance”.5 Rarely, if ever, does an ad hoc investor-State dispute settlement (“ISDS”) tribunal praise an investor’s tax avoidant conduct against a sovereign State in such embarrassing terms. 7. The assumption of jurisdiction by the Tribunal in the arbitration was a severe and undeniable encroachment on India’s fiscal sovereignty. 8. Whilst the Award appears on its face to be detailed, your Court must not be misled by its mammoth size. In addition to being morally reprehensible for rewarding tax avoiding companies, the Award is riddled with fundamental legal errors as the Tribunal, inter alia: a. decided on a non-arbitrable tax dispute; b. acted in violation of public policy and India’s fundamental due process rights; c. knowingly and consciously permitted Cairn’s aggressive schemes for tax avoidance to fall under the protection of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland (“UK”) and the Government of the Republic of India for the Promotion and Protection of Investments, which entered into force on 6 January 1995 (“India-UK BIT”); and d. knowingly and consciously endorsed Cairn’s Double-Non-Taxation scheme. 9. Your Court will appreciate that the dispute that Cairn has submitted to arbitration is a pure tax dispute, which is not arbitrable under any of the relevant laws applicable to the Parties’
5 Exh. RoI-1, Award, ¶ 1588. 16
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disputes, including Dutch law, Indian law and international law. The Tribunal rightly recognized that tax disputes are not arbitrable and acknowledged the “public policy rationale of keeping tax disputes within the exclusive competence of domestic courts”.6 However, to overcome this jurisdictional hurdle and assume jurisdiction where there was none, the Tribunal created a novel and artificial category of “tax-related investment disputes”. The Tribunal did so knowing full well that the exclusively competent Indian courts were, during the Arbitration, seized with the exact same tax issues as were at stake in the Arbitration (as they continue to be to this day). Thus, by assuming jurisdiction over Cairn’s claims, the Tribunal was in fact usurping the exclusive jurisdiction of competent Indian courts to resolve any disputes concerning India’s fiscal matters. Such jurisdiction could never have been vested in the Tribunal under the India-UK BIT. By assuming jurisdiction over Cairn’s tax dispute against India, the Tribunal fell prey to the undue pressure referred to by Advocate General Drijber in his opinion in the Ecuador/Chevron case. The Advocate General pointed to the criticism that investment arbitration may be abused as a “means for multinational companies to exert pressure on countries”.7 Put simply, investment arbitration was never meant to resolve tax disputes. 10. Moreover, there was not any purported offer to arbitrate by India under the India-UK BIT as Cairn’s alleged investments forming the subject matter of the dispute before the Tribunal were in actuality existing assets that were transferred within the Cairn group. The sole purpose thereof was to divest these assets by transferring them from India to other jurisdictions. It is obvious that divestment is the reverse of an investment. Therefore, India could not have been considered to offer to arbitrate with an investor whose purported investment was immediately divested and who never made any contribution to the Indian economy. The existence of an “investment” under the India-UK BIT was a jurisdictional requirement, which each of the Claimants had to meet individually. As this was not the case here, there was also for that reason never any valid arbitration agreement between the Parties pursuant to which the Tribunal could have exercised jurisdiction over CEP and CUHL’s claims in the arbitration. 11. The absence of any purported offer to arbitrate by India is further clear as Cairn’s investments had not been established, nor did they change form, “in accordance with the laws of the Contracting Party in whose territory the investment is made” (i.e. Indian law) as required by Article 1(b) of the India-UK BIT. As a result, the purported investment was not covered under the definition of “investment” in Article 1(b) of the India-UK BIT and, hence, fell outside the scope of the BIT. 12. The various complex steps of these transactions will be explained in detail in the forthcoming Section II below. At present, it is useful to note that the world-renowned expert on international tax law, Professor Kees vaan Raad, reaches the following conclusion upon his review of Cairn’s transactions:
6 Exh. RoI-1, Award, ¶ 826. 7 A-G Drijber’s conclusion for DSC 12 April 2019, ECLI:NL:HR:2019:97 (Ecuador/Chevron II), ¶¶ 82-85. 17
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“I have looked at the transactions through which a change in the Cairn group structure was effected in 2006. With this change, the transfer within the group of the Cairn companies that owned the Indian assets was accomplished. The share participations in these group companies (the ‘participations’) were first transferred by CEP to CEP’s subsidiary, CUHL, which CEP had created a few days before the said transfer. Subsequently, after about a month, the participations were transferred by CUHL to CIHL, which CUHL had created a few days before the said transfer. Finally, during the last months of 2006, CUHL transferred the CIHL-shares (and with them – indirectly – the participations) to CIL, a new Indian company that had been created by CUHL earlier in the year. When I review the creation of these various new companies along with the transfers among them of the participations (referred to as the ‘2006 transactions’) from the perspective of the resulting tax effects, the following observations can be made. a) The creation of the CUHL and CIHL companies does not seem to serve any purpose related to Cairn’s regular business activities. b) The way in which the participations were transferred in successive transactions at book value, with the exception of the last – indirect – transfer to CIL, where CUHL entered the CIL shares it received in return in its books for their fair market value, resulted in the realization of a capital gain on which Indian tax was avoided. c) The various plans and devices (for instance, the ‘daylight loan’) that were developed by Cairn and its advisers to convert into cash, through a public share issue in the Indian stock market, the value of part of the participations that were held in the end by CIL, were designed with a view to avoid taxation by India of the increase in value of these participations. On the basis of these observations, it appears that the dominant purpose pursued – and effectively accomplished – with the 2006 transactions has been the avoidance of Indian capital gains taxation. As, at the same time, it has not been demonstrated that the increase in value of the underlying participations has effectively been taxed elsewhere in the world, the inescapable conclusion is that the 2006 transactions represent a clear case of “double non-taxation”.8
13. With the above context in mind, it shall be shown to Your Court in the following Sections of this setting aside application that the above and several other grounds each constitute a standalone basis for setting aside this Award.
II. BACKGROUND 14. This Chapter describes the factual and legal background of this setting aside application (“Writ of Summons”). 15. Section II.A below addresses the transactions giving rise to the dispute between Cairn and India. 16. Section II.B below provides an overview of the investment treaty Arbitration that was initiated by Cairn against India regarding the dispute between them. In the Arbitration, administered by the Permanent Court of Arbitration in The Hague (“PCA”) as PCA Case No.
8 Exh. RoI-5, Expert Opinion by Professor Kees van Raad. 18
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2016-7, on 21 December 2020, the Award was rendered by an arbitral tribunal composed of Mr. Stanimir Alexandrov, Mr. Christopher Thomas QC and Mr. Laurent Lévy (“Tribunal”). India’s current setting aside application is directed against the Award rendered by this Tribunal. In providing an overview of the Arbitration between Cairn and India, Section B below addresses the key provisions of the investment treaty on the basis of which Cairn brought its claims in the arbitration, i.e., the India-UK BIT, as well as a summary of the procedural history of the Arbitration and the Award. 17. After having provided the factual and legal background of the case, Section B below identifies certain crucial aspects of the case that the Tribunal erroneously ignored, which led to its premature and erroneous findings on issues that fell outside any purported offer of arbitration under the India-UK BIT.
A. Factual Background 18. This introductory Section addresses, in Sub-Section (i) below, the relevant transactions at issue in this case, through which Cairn organized its business and alleged investments in India with the dominant purpose of causing billions of dollars from India’s developing economy to be siphoned off without paying taxes in India or anywhere else in the world. 19. Relatedly, Sub-Section (ii) below explains how these transactions were taxed by India, whereby Cairn was required to pay its fair share of taxes on the capital gains that it realized following, inter alia, the discovery of very substantial natural resources in India that Cairn was allowed to explore. This Sub-Section addresses how India – like many other nations – fights against the unwarranted loss of billions of dollars of tax revenues to aggressive tax avoidance schemes adopted by multinational investors. (i) Cairn in India 20. In order to explain why Cairn’s alleged “investments” do not actually qualify as such under international law,9 it is important to appreciate, at the outset, the source and constituents of those alleged investments in India. The origin of Cairn’s business in India shall be discussed in Sub-Section II.A(i)(a) below, followed by an analysis of the intra-group restructuring of its holdings in 2006, which served the dominant purpose of tax avoidance10 in Sub-Section II.A(i)(b) below. CEP’s Entry into India: The Origin Story from 1996 to 2006 21. The First Claimant in the Arbitration, i.e., Defendant sub 1 in this proceeding, CEP, is a company which was incorporated in Scotland, United Kingdom in 1988. It is engaged in the
9 As discussed in detail in Section IV.B, India’s position is that Cairn’s alleged investments do not qualify as such, as per the definition of the term “investment” in Article 1(b) of the India-UK BIT, nor do they satisfy the economic concept or inherent meaning of investment in international law. 10 As discussed in detail in Section IV.B, India’s position that Cairn’s alleged investments do not qualify as such, as per the definition of the term “investment” in Article 1(b) of the India-UK BIT, is based on the submission that these alleged investments, including particularly the changes in their form, were not “in accordance with” Indian laws. Further, Cairn’s tax avoidance, and the Tribunal’s endorsement thereof, is also violative of Dutch, European and international public policy. 19
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business of oil and gas exploration, development, and production.11 The Second Claimant in the Arbitration, i.e., Defendant sub 2 in this proceeding, CUHL, is CEP’s wholly owned subsidiary, which was incorporated in Scotland, United Kingdom in 2006.12 Whether or not CUHL has any legitimate business or commercial purpose is at the heart of the dispute in this case. 22. It is common ground that CEP originally acquired assets in India in 1996 by virtue of CEP’s acquisition of an Australian company called Command Petroleum Limited (“Command Petroleum”), which held interests in and the rights to exploit an oil and gas field in the southern part of India under a long-term Production Sharing Contract (“PSC”).13 23. It is undisputed that after CEP’s entry into the Indian oil and gas industry in 1996, it restructured its holdings through several intra-group share transfers and acquired interests in other PSCs across India, either directly or through joint operating agreements (“JOA”) with other parties.14 24. Cairn’s business dealings from 1996 to 2006 as well as its corporate restructuring and further acquisitions of rights and interests in PSCs and JOAs in that period have no bearing on the central issues of this case, as India consistently pointed out during the arbitration.15 The only
11 See https://www.cairnenergy.com/about-us/at-a-glance/; Exh. RoI-1, Award, ¶ 5. 12 Exh. RoI-1, Award, ¶ 6. 13 Exh. RoI-4, Claimants’ First Witness Statement of Janice M. Brown, 27 June 2016 (“Brown WS-1”), ¶¶ 23-24; Exh. RoI-1, Award, ¶¶ 18-19. 14 Exh. RoI-4, Brown WS-1, ¶¶ 25-29; Exh. RoI-1, Award, ¶¶ 20-26. 15 Exh. RoI-4, SoD (defined at ¶ 71 below), f.n. 22; Exh. RoI-4, R-PHB (defined at ¶ 85 below), ¶¶ 75-77; Exh. RoI-4, R-PHB, Appendix A, Respondent’s Answers to the Tribunal’s Questions, ¶¶ 12-17. This is, of course, without prejudice to any legal implications that the timing of CEP’s original acquisition of assets in India may have, for instance, on the creation of Claimants’ legitimate expectations, if any. That is an issue going towards the merits of Claimants’ claims and not the Tribunal’s jurisdiction. Notably, during the arbitration proceedings, Claimants’ case, not only on the merits but also on jurisdiction, focussed extensively on the intra-group transactions that occurred between 1996 and 2006. In this regard, they sought to argue that none of those intra- group transactions, which entailed sale of shares by non-residents in non-Indian companies whose underlying assets derived value from India, were ever subjected to any capital gains taxes in India. Further, they argued that the illegalities relied upon by India pertained only to transactions that occurred in 2006 and not to the original acquisition in 1996 (see Exh. RoI-4, SoC (defined at ¶ 68 below), ¶¶ 56-67; Exh. RoI-4, SoRy (defined at ¶ 77 below), ¶¶ 345-347; Exh. RoI-4, C-SoRj (defined at ¶ 79 below), ¶¶ 230-246; Exh. RoI-4, C-PHB (defined at ¶ 85 below), ¶¶ 682-689; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 2, pp. 162:15-175:12 (Claimants’ Opening Statement); Exh. RoI-4, Brown WS-1, ¶ 34; Exh. RoI-4, Claimants’ Submission on the Merits, slides 10-31). Without prejudice, the only points that India considers appropriate to make with respect to these temporally misplaced arguments are that (i) it is a non-sequitur to contend that the fact that certain intra- group transactions were allegedly not subjected to taxes somehow automatically entails that all intra-group transactions would be immune from taxation in India, particularly if those transactions are tax avoidant in nature; (ii) whether or not such transactions would incur taxation in India would depend on the application of specific provisions of the Indian Income Tax Act on the taxation of internal transfers and – importantly – on whether the relevant transactions were ever brought to the attention of the Indian tax authorities or hidden from them; and (iii) in any event, what makes the transactions that occurred in 2006 (discussed in ¶ 30 below) instrumental and unique is that those transactions, which sourced CUHL’s alleged investment in India, had the dominant purpose of tax avoidance, and were designed to siphon of money received by Indian taxpayers from a public offering of shares. These illegalities tainted the entirety of Cairn’s alleged investments in India, including the constituents dating from 1996, which from 2006 onwards were held in toto through CUHL. Accordingly, what transpired before these all- encompassing illegal transactions is of no relevance this case, especially from the point of view of the Tribunal’s jurisdiction. 20
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exception to the irrelevance of Cairn’s business dealings from 1996 to 2006 is the discovery of certain oil fields by CEP immediately prior to the restructuring transactions in 2006. 25. In 2004, CEP discovered an oil field, called the Mangala oil field, in the northern State of Rajasthan in India, which Cairn’s key witness in the arbitration, Ms. Janice Brown (the former Managing Director and Chief Financial Officer of CEP and former acting Finance Director of CIL), rightly described as “the largest onshore discovery in India over two decades”.16 In Cairn’s own words, this discovery was “transformative” for CEP.17 This was followed by two other “significant” oil fields discovered in the same year, called the Bhagyam and Aishwariya oil fields. These three oil fields are referred to together in CEP’s annual reports as the “MBA Fields”.18 The discovery of the MBA Fields in Rajasthan changed CEP’s “fortunes and prospects”,19 and became the “catalyst for Cairn’s continued growth in South Asia”.20 In the words of a contemporaneous news report from 2005, these discoveries made CEP “a stock market sensation . . . after its share price quadrupled following its . . . Indian discoveries.”21 26. According to CEP’s erstwhile Chairman, the intra-group corporate restructuring of CEP’s business of 2006 – including the Initial Public Offering of shares on Indian stock exchanges (“IPO”) – was a “natural evolution” for CEP’s business following the exponential growth in CEP’s prospects resulting from the MBA Fields’ discoveries in Rajasthan.22 Through the IPO, CEP sought to capitalize on this exponential growth it had achieved thanks to India’s natural resources, which makes it all the more inappropriate that the capital gains Cairn realized in the process have been siphoned off without paying any taxes. It was with this dominant purpose of abusive tax avoidance to the detriment of the Indian treasury that the restructuring transactions were engineered in 2006. The 2006 Transactions: The Mechanics and the Motivations 27. It is apparent from the record of the arbitration that Cairn was wary of the tax-abusive nature of the structure they engineered and implemented in 2006. In order to avoid any focus on their abusive tax avoidance, Cairn carefully framed the Parties’ dispute as arising from “a retroactive legislation that was imposed on the Claimants” by India,23 being the clarification
16 Exh. RoI-4, Brown WS-1, ¶ 31; Exh. RoI-4, Claimants’ Submission on the Merits, slide 32. 17 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 2, pp. 175:13-175:17 (Claimants’ Opening Statement). 18 Exh. RoI-4, R-258, Cairn Energy PLC – Annual Report 2008, p. 5; Exh. RoI-4, R-260, Cairn Energy PLC – Annual Report 2010, p. 6; Exh. RoI-4, R-261, Cairn Energy PLC – Annual Report 2011, p. 10; Exh. RoI-4, C- 477, Cairn India Limited – Annual Report and Financial Statements 2011-2012, p. 12. 19 Exh. RoI-7, Cairn Energy PLC – Interim Report and Accounts 2004, pp. 1-2. 20 Exh. RoI-8, Cairn Energy PLC – Interim Report and Accounts 2005, p. 2. 21 Exh. RoI-6, The Telegraph, Cairn’s Indian oil find comes in at the top end of City forecasts, 5 September 2004. 22 Exh. RoI-9, Cairn Energy PLC – Interim Report and Accounts 2006, pp. 3-4 (Chairman’s statement: “I am pleased that we are both on track to proceed with a partial IPO of the Indian business in December 2006 and that the scale and size of the Rajasthan discoveries has been supported by independent estimates.”) 23 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 39:2-39:11 (Claimants’ Opening Statement). 21
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
to Section 9(1)(i) of the IT Act made by the Finance Act 2012 (Act No. 23 of 2012), the 2012 Clarification.24 Moreover, throughout the arbitration, Cairn consistently evaded their duty to produce contemporaneous documents, pertaining to their restructuring in 2006, which compelled India to raise several objections with respect to Cairn’s insufficient production of documents.25 Despite India having alerted the Tribunal to these insufficient and belated production of documents, the paucity of which was striking in the face of the complexity of the transactions at issue,26 the Tribunal failed to draw any material inferences from this striking lack of candor. Nor did the Tribunal recognize the fallacy of Cairn’s tactical positioning of the dispute as pertaining to the nature and temporal scope of the 2012 Clarification.27 28. Before addressing the illegal motivations underlying Cairn’s restructuring in 2006, it is crucial, for the Court’s understanding, to explain how these series of transactions were structured over an eight-month period in 2006 (together these steps are referred to as the “2006 Transactions”). This explanation will show Your Court that the 2006 Transactions were structured in an unnecessarily convoluted manner with the dominant purpose to avoid the payment of capital gains taxes in India. The real substance of these Transactions was the transfer of Cairn’s capital assets that derived their entire value from India. Accordingly, the 2006 Transactions were always taxable in India, i.e., even in 2006, on the basis of, inter alia, the judicial anti-avoidance rule, affirmed by the Indian Supreme Court, which requires assessing the “substance” of a transaction (in this case, the transfer of capital assets) over its “form” (in this case, the intra-group sale of shares engineered through the 2006 Transactions) in the face of evidence of a “dominant purpose” to avoid Indian taxes.28 29. Notably, there were various step-wise explanations of the 2006 Transactions that were advanced in the arbitration, including in the Award itself.29 However, for a proper understanding of the 2006 Transactions it is imperative to revisit the summary provided by the Tribunal in the Award, since the Tribunal’s summary either obfuscated certain significant
24 Exh. RoI-4, C-53, Finance Act 2012 [Act No. 23 of 2012]. 25 See, inter alia, Exh. RoI-4, Procedural Order No. 8 dated 28 June 2017; Exh. RoI-4, RCom-164, Respondent’s Email of 21 October 2017; Exh. RoI-4, Procedural Order No. 11 dated 16 November 2017; Exh. RoI-4, RCom-177, Respondent’s Letter of 29 November 2017; Exh. RoI-4, RCom-260, Respondent’s Letter of 18 August 2018; Exh. RoI-4, RCom-255, Respondent’s Email of 16 August 2018; Exh. RoI-4, RCom-261, Respondent’s Email of 18 August 2018; Exh. RoI-4, RCom-354, Respondent’s Email of 18 January 2019; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 4:4-22:4; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 2, pp. 1:14-1:24, 2:16-2:25, 14:5-14:17, 129:3-130:11; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 3, pp. 11:14-22:4. 26 Exh. RoI-4, R-PHB, ¶ 195. 27 See, inter alia, Exh. RoI-4, R-PHB, ¶¶ III and VII in general. India’s position with respect to nature and temporal scope of the 2012 Clarification is further addressed in ¶¶ 117-118 below and in Annex B. As noted there, while the Tribunal’s failures in that respect are not relied on in this Writ of Summons as a separate ground of challenge under Dutch law, the position taken by India in this respect is firmly maintained and will be invoked again, as appropriate, in the context of any other proceedings, including proceedings regarding the enforcement of the Award. 28 Exh. RoI-4, C-59, Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613, ¶ 68. 29 Exh. RoI-1, Award, ¶¶ 27-76; Exh. RoI-1, Award, ¶¶ 1028-1037, 1458. 22
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
intervening steps by collapsing them30 or overstated certain immaterial steps by devoting unwarranted individual attention to them.31 30. With the above factors in mind, the essential steps of the 2006 Transactions are described below:32 (i) Step 1: Separation of Indian and Non-Indian Assets – (i) Starting April 2006, CEP consolidated its assets worldwide, held through various subsidiaries, and separated the Indian assets from the non-Indian assets. (ii) On 24 April 2006, CEP incorporated Cairn Resources Limited in Scotland as its wholly owned subsidiary. Thereafter, CEP transferred to this newly incorporated company its subsidiaries holding the non-Indian assets.33 (iii) On 26 June 2006, CEP incorporated CUHL in Scotland as its wholly owned subsidiary. Then, on 30 June 2006, CEP transferred to CUHL its shares in the 27 subsidiaries holding the Indian assets, nine of which were companies incorporated in the UK, which in turn held the remaining 18 (“27 Subsidiaries”).34 This share transfer was undertaken in exchange of shares in CUHL issued to CEP (i.e., a share swap).35 Step 1 resulted in the following structural allocation of assets:
30 For instance, the Tribunal collapsed the various steps discussed in Steps 3 through 6 in ¶ 30 of this Writ of Summons into one single step (being Step 4 of the Tribunal’s summary; see Exh. RoI-1, Award, ¶¶ 1028-1037, 1458). 31 For instance, the Tribunal divided the various aspects of Step 1 discussed in ¶ 30 of this Writ of Summons into two steps (being Steps 1 and 2 of the Tribunal’s summary; see Exh. RoI-1, Award, ¶¶ 1028-1037, 1458). 32 It must be borne in mind that the steps explained in this Section do not represent the entire gamut of the 2006 Transactions, nor are they an exhaustive category of steps that constituted the 2006 Transactions. The delineation in this Section is limited to the most crucial aspects of the 2006 Transactions. 33 Exh. RoI-4, Brown WS-1, ¶ 58; Exh. RoI-1, Award, ¶ 32. 34 Exh. RoI-4, Brown WS-1, ¶¶ 59-60; Exh. RoI-4, Puri WS-1, ¶ 49; Ex. RoI-4, SoD, f.n. 23 and 24 and ¶ 15(b); Exh. RoI-1, Award, ¶¶ 33-35; see Exh. RoI-4, CWS-Brown-52, Cairn UK Holdings Limited, Certificate of Incorporation of a Private Company dated 26 June 2006; Exh. RoI-4, CWS-Brown-54, Share Exchange Agreement between Cairn Energy PLC and Cairn UK Holdings Limited dated 30 June 2006. 35 Exh. RoI-4, Brown WS-1, ¶ 60; Exh. RoI-4, Respondent’s First Witness Statement of Sanjay Puri, 2 February 2017 (“Puri WS-1”), ¶ 49; Ex. RoI-4, SoD, ¶ 15(c); Exh. RoI-4, CWS-Brown-54, Share Exchange Agreement between Cairn Energy PLC and Cairn UK Holdings Limited dated 30 June 2006. 23
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail. Figure 1: Separation of Indian and Non-Indian Assets
An expanded version of the above Figure 1, enlisting each of the individual Indian assets, is depicted in the following pictorial representation, and is also included in Annex A to this Writ of Summons: Figure 2: Expanded Version of Figure 1
24
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
(ii) Step 2: Interposing CIHL in Jersey to Hold Indian Assets – (i) On 2 August 2006, CUHL incorporated Cairn India Holdings Limited (“CIHL”) in Jersey as its wholly owned subsidiary. (ii) On 7 August 2006, CUHL transferred to CIHL its shares in the 27 Subsidiaries holding its Indian assets.36 This share transfer was undertaken in exchange of shares in CIHL issued to CUHL (i.e., another share swap).37 (iii) On 1 September 2006, CEP assigned to CUHL a debt owed to CEP by another of its subsidiaries in exchange for shares in CUHL.38 (iv) In turn, CUHL assigned this debt to CIHL in exchange for shares in CIHL.39 Step 2 resulted in the following structural organization of Cairn’s Indian assets (which are the only category of assets relevant from Step 2 onwards): Figure 3: Interposing CIHL in Jersey to Hold Indian Assets
36 Exh. RoI-4, Brown WS-1, ¶ 62; Exh. RoI-4, Puri WS-1, ¶ 50; Ex. RoI-4, SoD, ¶ 15(d); Exh. RoI-1, Award, ¶¶ 36-37; Exh. RoI-4, CWS-Brown-55, Cairn India Holdings Limited, Certificate of Incorporation of a Limited Company dated 2 August 2006; Exh. RoI-4, CWS-Brown-56, Share Exchange Agreement between Cairn UK Holdings Limited and Cairn India Holdings Limited, 7 August 2006. 37 Exh. RoI-4, Brown WS-1, ¶ 62; Exh. RoI-4, Puri WS-1, ¶ 50; Ex. RoI-4, SoD, ¶ 15(e); Exh. RoI-1, Award, ¶¶ 36-37; Exh. RoI-4, CWS-Brown-56, Share Exchange Agreement between Cairn UK Holdings Limited and Cairn India Holdings Limited dated 7 August 2006. 38 Exh. RoI-4, Brown WS-1, f.n. 58; Exh. RoI-4, Puri WS-1, ¶ 51; Ex. RoI-4, SoD, ¶ 15(g); Exh. RoI-1, Award, ¶ 40; Exh. RoI-4, CWS-Brown-59, Debt Conversion Agreement among Cairn Energy PLC, Cairn UK Holdings Limited, Cairn India Holdings Limited and Cairn Energy Hydrocarbons Limited dated 1 September 2006. 39 Exh. RoI-4, Brown WS-1, f.n. 58; Exh. RoI-4, Puri WS-1, ¶ 51; Ex. RoI-4, SoD, ¶ 15(g); Exh. RoI-1, Award, ¶ 41; Exh. RoI-4, CWS-Brown-59, Debt Conversion Agreement among Cairn Energy PLC, Cairn UK Holdings Limited, Cairn India Holdings Limited and Cairn Energy Hydrocarbons Limited dated 1 September 2006. 25
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
(iii) Step 3: Incorporation of CIL – On 21 August 2006, CUHL incorporated Cairn India Limited (“CIL”) in India as its wholly owned subsidiary.40 (iv) Step 4: First Two Tranches of CUHL’s Sale of CIHL Shares to CIL – (i) Tranche 1: On 12 October 2006, pursuant to a Share Subscription Agreement dated 15 September 2006, CUHL subscribed to certain shares in CIL in exchange for a cash consideration.41 This cash consideration was obtained from a so-called daylight overdraft that CEP received from Citibank, which was a loan repayable on the same day (“Daylight Loan”). This Daylight Loan was transferred by CEP to CUHL via an intercompany loan, and CUHL used this amount to pay the cash consideration to CIL.42 On the same day, CIL used the same amount it had received from CUHL to acquire the first tranche of shares in CIHL from CUHL (16.5%). In the Tribunal’s own words, “the cash provided by the Daylight Loan . . . entered and exited India on the same day”.43 A cash amount of INR 50,373,987,924 (approximately USD 1.1 billion at the time)44 was round-tripped to and from India within the day on 12 October 2006.45 (ii) Tranche 2: On 22 November 2006, the above described same-day round-tripping repeated itself. CUHL transferred another cash consideration to CIL for shares it had subscribed to in October 2006.46 Again, on the same day, CIL used the cash amount received from CUHL to acquire the second tranche of shares in CIHL from CUHL (5.3%).47 A cash amount of INR 17,554,239,705 (approximately
40 Exh. RoI-4, Brown WS-1, ¶ 64; Ex. RoI-4, SoD, ¶ 15(f); Exh. RoI-1, Award, ¶ 38; Exh. RoI-4, CWS- Brown-57, Cairn India Limited, Certificate of Incorporation dated 21 August 2006; Exh. RoI-4, CWS-Brown-75, Cairn India Limited Prospectus dated 22 December 2006, p. 26. 41 Exh. RoI-4, Brown WS-1, ¶ 84; Exh. RoI-4, SoD, ¶ 15(i); Exh. RoI-1, Award, ¶¶ 56-59; Ex. RoI-4, Exh. C-6, Subscription and Share Purchase Agreement between Cairn Energy, CUHL, CIL, and CIHL dated 15 September 2006 (and amended on 5 October 2006), Sections 2 and 3. 42 Exh. RoI-4, Brown WS-1, ¶ 84; Exh. RoI-4, SoD, ¶ 15(i); Exh. RoI-1, Award, ¶ 58; Exh. RoI-4, CWS- Brown-63, Letter from Royal Bank of Scotland to Cairn Energy dated 12 September 2006. 43 Exh. RoI-4, Brown WS-1, ¶ 84; Exh. RoI-4, Claimants’ Second Witness Statement of Janice M. Brown, 23 June 2017 (“Brown WS-2”), ¶ 78; Exh. RoI-4, Puri WS-1, ¶ 56(a), 59; Ex. RoI-4, SoD, ¶ 15(i); Exh. RoI-1, Award, ¶¶ 60-61; Exh. RoI-4, CWS-Brown-63, Letter from Royal Bank of Scotland to Cairn Energy dated 12 September 2006; Ex. RoI-4, Exh. C-6, Subscription and Share Purchase Agreement between Cairn Energy, CUHL, CIL, and CIHL dated 15 September 2006 (and amended on 5 October 2006), Section 4. 44 This is calculated at the rate of INR 45.6 = USD 1, which was the exchange rate on 12 October 2006, as published on the website of the Reserve Bank of India. 45 Ex. RoI-4, SoD, ¶ 15(i); Exh. RoI-1, Award, ¶ 61; Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016, ¶ 7.1.3. 46 Exh. RoI-4, Brown WS-1, ¶ 85; Ex. RoI-4, SoD, ¶ 15(i); Exh. RoI-1, Award, ¶ 62; Ex. RoI-4, Exh. C-6, Subscription and Share Purchase Agreement between Cairn Energy, CUHL, CIL, and CIHL dated 15 September 2006 (and amended on 5 October 2006). 47 Exh. RoI-5, Brown WS-1, ¶ 65; Exh. RoI-4, Brown WS-2, ¶ 78; Exh. RoI-4, Puri WS-1, ¶¶ 56(b), 59; Ex. RoI-4, SoD, ¶ 15(i); Exh. RoI-1, Award, ¶ 63; Exh. RoI-4, CWS-Brown-63, Letter from Royal Bank of Scotland to Cairn Energy PLC dated 12 September 2006; Ex. RoI-4, Exh. C-6, Subscription and Share Purchase Agreement between Cairn Energy, CUHL, CIL, and CIHL dated 15 September 2006 (and amended on 5 October 2006), Section 6. 26
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
USD 392 million at the time)48 was round-tripped to and from India within the day on 22 November 2006.49 (v) Step 5: The IPO – Between 11 December 2006 and 15 December 2006, the IPO bidding process was conducted in India whereby CIL’s newly issued shares were publicly floated on the Indian stock exchanges. It is common ground that the IPO raised USD 1.98 billion, contributed by the Indian investors (including the public) in exchange for the publicly floated CIL shares.50 Steps 3 to 5 resulted in the following structural organization of Cairn’s Indian assets after the roundtripping of the Daylight Loan amounts: Figure 4: Daylight Loan Round-Tripping
48 This is calculated at the rate of INR 44.75 = USD 1, which was the exchange rate on 22 November 2006, as published on the website of the Reserve Bank of India. 49 Ex. RoI-4, SoD, ¶ 15(i); Exh. RoI-1, Award, ¶ 63; Ex. RoI-4, Exh. C-70, Final Assessment Order dated 25 January 2016, ¶ 7.1.3. 50 Exh. RoI-4, Brown WS-1, ¶¶ 90-91; Exh. RoI-4, Puri WS-1, ¶ 47; Exh. RoI-1, Award, ¶ 74; Exh. RoI-4, CWS-Brown-42, Cairn Energy PLC – Annual Report and Accounts 2006, pp. 2, 3, 9, 32. 27
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
(vi) Step 6: Last Two Tranches of CUHL’s Sale of CIHL Shares to CIL – (i) Tranche 3: On 20 December 2006, CIL acquired the third tranche of shares in CIHL from CUHL (53.9%) in exchange for which it issued some of its own shares to CUHL (i.e., another share swap).51 (ii) Tranche 4: On 29 December 2006, CIL acquired the fourth and last tranche of shares in CIHL from CUHL (24.3%) in exchange for which CIL paid cash consideration. The cash consideration of USD 1.35 billion for the last tranche was paid by CIL entirely through the funds raised in the IPO.52 These IPO proceeds were then transferred by CUHL to CEP, and subsequently, USD 940 million thereof were distributed to CEP’s shareholders.53 As a result of this step, CIHL had become a wholly-owned subsidiary of CIL. CIL, in turn, was held by CUHL (69%) as well as by the Indian investors who had purchased the publicly floated shares in the IPO (31%). As a result of Step 6, Cairn’s Indian assets were organized as follows: Figure 5: Last Two Tranches of CUHL’s Sale of CIHL Shares
51 Exh. RoI-4, Brown WS-1, ¶ 88; Exh. RoI-4, Puri WS-1, ¶ 56; Exh. RoI-1, Award, ¶ 68; Ex. RoI-4, Exh. C- 7, Share Purchase Deed between Cairn Energy PLC, Cairn UK Holdings Limited, Cairn India Limited and Cairn India Holdings Limited dated 12 October 2006, Sections 4.1 and 5.1. 52 Exh. RoI-4, Brown WS-1, ¶ 88; Exh. RoI-4, Puri WS-1, ¶ 56; Exh. RoI-1, Award, ¶ 68; Ex. RoI-4, Exh. C- 7, Share Purchase Deed between Cairn Energy PLC, Cairn UK Holdings Limited, Cairn India Limited and Cairn India Holdings Limited dated 12 October 2006, Section 4.1. 53 Exh. RoI-4, Brown WS-1, ¶ 91; Exh. RoI-1, Award, ¶ 74; Exh. RoI-4, CWS-Brown-42, Cairn Energy PLC, Annual Report & Accounts 2006, p. 32. 28
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
31. A timeline of Cairn’s key transactions, including most importantly the various steps of the 2006 Transactions, is reflected in the pictorial representation below, which is also included as Annex A to this Writ of Summons: Figure 6: Timeline of Cairn's Key Transactions
32. Having described the convoluted 2006 Transactions in a step-wise manner, it is imperative to clarify at this stage that as a result of the above six steps, CUHL realized capital gains in the amount of approximately USD 5.5 billion. This is no longer a disputed matter. Even though the realization of these capital gains was disputed by Cairn in the arbitration,54 the Tribunal rejected Cairn’s position and confirmed, as a matter of fact, the Indian Income Tax Department’s finding regarding the realisation of capital gains by CUHL.55 CUHL’s capital gains arise out of the difference between the price at which CUHL acquired CEP’s Indian assets, i.e., the 27 Subsidiaries, in Step 1 above, which acquisition was recorded at the book value of these 27 Subsidiaries (approximately GBP 251 million or USD 455 million) and the price at which CIL acquired these Indian assets from CUHL in Steps 4 and 6 above, which acquisition was recorded at the market value of these 27 Subsidiaries (approximately USD 6 billion).56
54 Ex. RoI-4, C-PHB, ¶¶ 194-204; Ex. RoI-4, SoRy, ¶ 130. 55 Exh. RoI-1, Award, ¶ 1042; Ex. RoI-4, Exh. C-70, Final Assessment Order dated 25 January 2016, ¶¶ 2.2.8, 12 56 Exh. RoI-4, Puri WS-1, ¶¶ 53-54; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 9, pp. 117:19-117:22 (Testimony of Sanjay Puri); Exh. RoI-4, Brown WS-2, ¶ 121; Exh. RoI-1, Award, ¶ 1035. 29
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
33. In addition to the undisputed realization of capital gains in the amount of approximately USD 5.5 billion by CUHL, there are three further disturbing takeaways of the 2006 Transactions that are immediately apparent. These are as follows: (i) the unnecessary convolutions created by interposing CUHL and CIHL in Cairn’s corporate structure (Steps 1 and 2 above); (ii) the same-day round-tripping of funds to and from India by CUHL and CIL under the guise of the Daylight Loan (Steps 3 and 4); and (iii) the public floatation of CIL’s newly issued shares on the Indian stock exchanges and the resultant transfer of funds amounting to USD 1.35 billion raised through the IPO, from CIL to CUHL, and ultimately to CEP and its shareholders (Steps 5 and 6). 34. These takeaways belie Cairn’s pretext for the 2006 Transactions, i.e., “of gathering all Indian operations and assets under a single [Indian] entity and offering shares to the public”.57 The motivations behind the 2006 Transactions were not as straightforward and innocuous as Cairn presented them to be. Instead, the objectives that Cairn actually sought to achieve with the 2006 Transactions were to immediately capitalize on the exponential growth potential that the recent discovery of the MBA Fields in India had brought, by siphoning off funds from the Indian public and, in the process, avoid paying taxes in India as well as anywhere else in the world. 35. Indeed, already from the first takeaway stated at ¶ 33 above, it is evident that CEP went through suspiciously disproportionate and convoluted steps of interposing CUHL and CIHL in Cairn’s corporate structure, without them serving any indispensable role in that structure. These unnecessary convolutions, readily evident from Figures 3 through 5 above, bear out the illegitimate motivations behind Steps 1 and 2 and must be taken into account while examining the propriety of the 2006 Transactions in these setting aside proceedings. 36. Notably, while the Tribunal specifically acknowledged that an “argument could be made that CUHL was not indispensable” and “[i]t is also conceivable that an Indian court might find that CIHL’s dominant purpose was to avoid tax”,58 it inexplicably refused to draw the appropriate factual and legal consequences from the dispensable and tax avoidant nature of these interposed entities and their role in the 2006 Transactions. Instead, it endorsed CEP’s and CUHL’s claims under the India-UK BIT. 37. Similarly, the second and third takeaways set forth at ¶ 33 above, (i.e., the round-tripping of funds and the siphoning off of USD 1.35 billion raised through the IPO without paying any taxes on the capital gains those funds represented), cast a clear light on Cairn’s true motivation underlying the 2006 Transactions.
57 Exh. RoI-4, Brown WS-1, ¶¶ 40, 43; Exh. RoI-4, Brown WS-2, ¶ 43. Of course, India’s position is that these self-proclaimed reasons were not the only reasons why the 2006 Transactions were structured in the manner they were. 58 Exh. RoI-1, Award, ¶ 1471. 30
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
38. The Tribunal considered that the “rapid circular flow of funds” obtained through the Daylight Loan, “[a]lthough effected very quickly”, was not in the nature of a share swap, but constituted bona fide sale and purchase transactions motivated by regulatory considerations.59 In so doing, the Tribunal ignored that Cairn’s own advisors, RSM Advisory Services (“RSM”) had qualified this same-day round-tripping of funds as essentially constituting a share swap, which is prohibited by the very regulations that Cairn purported to have taken into account.60 Moreover, despite acknowledging that “Claimants extracted [USD] 1.35 billion from India without paying a single dollar of tax on those proceedings anywhere”, the Tribunal had no problem condoning the appropriation of funds and blatant and abusive avoidance of taxes.61 As per the Tribunal, “[p]laintive though it may be . . . [t]he mere fact that a transaction does not result in taxes being paid anywhere in the world is insufficient to establish tax avoidance”.62 In a similar vein, the Tribunal further held that: “Cairn and its advisors spent considerable effort and no doubt money devising a creative structure that met the company’s commercial objectives. If some aspects of the structure seem to be a triumph of form over substance, it is because corporations law attaches much significance to matters of form. This, in the Tribunal’s opinion, is the stuff of solicitors’ work in complex commercial affairs.”63 [emphasis added]
39. Accordingly, the Tribunal essentially rewarded investors for their tax avoidant strategies and went so far as to laud them for strategizing a “triumph of form over substance”. The shocking endorsement of Cairn’s illegal and tax avoidant conduct, apart from being morally reprehensible, raises grounds for the setting aside of the Award under Article 1065(1) of the Dutch Code of Civil Procedure (“DCCP”), as will be established in the forthcoming Sections of this Writ of Summons. 40. Prior to that, at this preliminary juncture, it is important to bust two related myths that Cairn had created in the arbitration in order to mislead the Tribunal about the rationale behind the 2006 Transactions: (i) First Myth: CEP and CUHL were Good Corporate Citizens of India – On their website, CEP’s Chief Executive Officer (“CEO”) declares, “[w]e are very proud of Cairn Energy’s 20-year history in India, where we have been a model corporate citizen”.64 Also, Ms. Janice Brown’s testimony during the arbitration was riddled with self-serving proclamations as to how Cairn “as a guest in India, . . . prided [itself] on being fully compliant with all regulations”65 and wished to enhance its “in-country
59 Exh. RoI-1, Award, ¶¶ 1559-1562. 60 Exh. RoI-4, CWS-Brown-69, Letter from RSM to Cairn India Limited dated 11 October 2006 to CIL; Exh. RoI-1, Award, f.n. 1957. 61 Exh. RoI-1, Award, ¶¶ 1043-1044. 62 Exh. RoI-1, Award, ¶ 1455. 63 Exh. RoI-1, Award, ¶ 1588. 64 https://www.cairnenergy.com/cairn-in-india/india/. 65 Exh. RoI-4, Brown WS-1, ¶ 41; Exh. RoI-4, Brown WS-2, ¶ 58; see Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 5, pp. 116:3-116:10, pp. 123:16-124:15 (Testimony of Ms. Janice Brown). 31
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
reputation”.66 Cairn had also mislead the Tribunal during the arbitration by stating that Cairn and its entities had generated significant taxable revenues during their operations in India, and that it did not matter whether these revenues was in the nature of capital gains tax or not, since they ultimately constituted “taxes on the exact same asset”.67 The Tribunal did not buy into Cairn’s myth of the well-intentioned “model corporate citizen”, having found explicitly that the 2006 Transactions were not motivated by a desire “to be a ‘good citizen’, as Ms. Brown has testified”.68 However, inexplicably, the Tribunal did endorse Cairn’s argument that Cairn and its entities had generated “significant taxable revenues” for India.69 The Tribunal’s endorsement of this argument, in addition to being unsupported by any contemporaneous evidence of these “significant taxable revenues”, was based on a fundamental misunderstanding of tax laws in India. Cairn had itself admitted that only “some” of the tax revenues they had allegedly generated were “in the nature of gains on sales”. The majority were “in the nature of other different types of taxes”,70 such as “profit petroleum taxes, cess and royalties, corporation tax, . . . and other miscellaneous taxes”.71 The fact that these different types of taxes may have been sourced in the same oil and gas assets is absolutely immaterial to the fact that Cairn, specifically CUHL, had undisputedly72 not paid any capital gains tax on the sale of the CIHL shares and, in turn, the 27 Subsidiaries to CIL through the 2006 Transactions. Similarly, the fact that CUHL had paid some capital gains taxes on totally distinct sales transactions, whereby it divested its shareholding in CIL in favour of Vedanta Resources Plc (“Vedanta”) and Petronas International Corporation Ltd. (“Petronas”), is equally immaterial because those taxes had nothing to do with the capital gains realized by CUHL as a result of the 2006 Transactions.73 As Respondent had pointed out to the Tribunal, unfortunately in vain, “this is not how India’s tax laws work”.74
66 Exh. RoI-4, Brown WS-1, ¶ 41; Exh. RoI-4, Brown WS-2, ¶ 48. 67 Ex. RoI-4, C-PHB, ¶ 505; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 151:4- 153:1 (Claimants’ Opening Statement). 68 Exh. RoI-1, Award, ¶ 1522. 69 Exh. RoI-1, Award, ¶ 1477. 70 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 152:16-152:17 (Claimants’ Opening Statement). 71 Exh. RoI-1, Award, f.n. 1834; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 151:7-151:10 (Claimants’ Opening Statement). 72 Indeed, the Tribunal’s inexplicable approach is even more shocking in light of its acknowledgement that it was “undisputed” in the arbitration that “[n]o capital gains tax has even been paid on the gains of around US[D] 5 billion made by Cairn on its Indian assets between 1996 and 2006” (see Exh. RoI-1, Award, ¶¶ 1043-1044). 73 Exh. RoI-4, Respondent’s First Expert Report of H. David Rosenbloom dated 1 February 2017 (“Rosenbloom ER-1”), ¶ 32. 74 Ex. RoI-4, SoD, Annex A, ¶¶ 20-21; Ex. RoI-4, R-PHB, ¶¶ 477-480. The capital gains taxes paid on the Vedanta and Petronas share sales only taxed the capital gains made by Cairn on its Indian assets between 2006 and the date of those sales. No capital gains tax at all was paid on the massive capital gains made following the discovery of oil, all the way up to the 2006 Transactions (which were devised for the very purpose of making those capital gains disappear from the Indian tax net). 32
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
Unsurprisingly, there is no support in the contemporaneous documents for Cairn’s myth of the well-intentioned tax-compliant “model corporate citizen”. Instead, the contemporaneous documents bear out that Cairn was out to quickly capitalize the value of the Indian assets by withdrawing billions with the dominant objective of tax avoidance. For instance, in April 2006, when CEP announced the 2006 Transactions to its shareholders, including its decision to float CIL’s newly issued shares through an IPO on the Indian stock exchanges, it clearly stated that the IPO was triggered by the discovery of the MBA Fields in Rajasthan and that CEP considered this to be “an optimal opportunity to capitalise on its competitive edge through a proposed partial IPO of its Indian business” [emphasis added].75 Indeed, CEP’s eagerness to quickly capitalize on the significant value of the Indian natural resources that had recently been discovered is also evidenced by the fact that it had started considering its options in this regard immediately after the discovery of the MBA Fields in Rajasthan in January 2004.76 Against this background, Cairn’s position to the effect that they organised the 2006 Transactions in order to conduct themselves as model corporate citizens of India is bogus. The truth of the matter is that the 2006 Transactions were carefully engineered by Cairn with the objective of taking out of India, as quickly as possible, a maximum of capital gains created in India, thanks to the discovery of Indian natural resources, without paying a rupee in taxes.77 Accordingly, the first myth stands busted. (ii) Second Myth: The IPO was Intended to Raise Funds for Investing in Rajasthan: Directly connected to the first myth is the second one, whereby Cairn propagated that “[t]he primary purpose of the IPO was to raise funds to reinvest in India, to fund Rajasthan and to fund other operations in India”.78 This was also Ms. Janice Brown’s initial stance in her witness testimony.79 During the hearing, Cairn’s counsel was keen
75 Exh. RoI-4, CWS-Brown-48, “Annual General Meeting Statement” (Cairn Energy PLC, 20 April 2006), p. 4. Similarly, CEP’s own annual report of 2006, particularly Ms. Brown’s financial review contained therein, states that the decision to engineer the 2006 Transactions, including the IPO, was taken “pursuant to Cairn’s strategy of increasing the autonomy of that business and of realising value for shareholders”. [emphasis added] (see Exh. RoI- 4, CWS-Brown-42, Cairn Energy PLC – Annual Report & Accounts 2006, pp. 9, 32). 76 Ex. RoI-4, C-358, Email from Ernst & Young to Cairn dated 8 April 2004. Despite giving indications in her witness testimony that the process of reorganizing Cairn’s structure to capitalize on the Indian assets started only in 2005, Ms. Janice Brown could not deny the fact that she had already started taking the first steps towards the 2006 Transactions back in April 2004 when she met Mr. Rajiv Memani of Ernst & Young (see Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 4, pp. 94:20-95:23 and pp. 197:19-201:4 (Testimony of Ms. Janice Brown)). 77 Exh. RoI-4, Puri WS-1, ¶ 45. 78 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 40:10-40:14 (Claimants’ Opening Statement). 79 Exh. RoI-4, Brown WS-1, ¶ 40. Later in the proceedings, Ms. Brown did reluctantly admit that the 2006 Transactions were, inter alia, intended to realize the value of the Indian assets for CEP’s shareholders. Exh. RoI- 4, Brown WS-2, ¶ 44; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 4, pp. 205:7-223:4 (Testimony of Ms. Janice Brown). Notably, when questioned about the motivations behind the 2006 Transactions during the hearing, some of which were referenced in presentations given by CEP’s advisors, Ms. Brown tried to 33
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
to highlight that “[t]he basic point is there was very substantial investment including the construction of a very long pipeline” needed in Rajasthan. Thus, according to Cairn, “the IPO was [not] some smash and grab operation where money was exfiltrated . . . It was a reinvestment in India in a very substantial way.”80 Nothing could be further from reality. As India had consistently pointed out to the Tribunal, the IPO could not have been motivated to make an investment in Rajasthan, since only a “relatively small amount of money”, i.e., USD 600 million was retained by CIL, and the larger portion of the IPO proceeds, i.e., USD 1.35 billion, were transferred to CUHL and, in turn, to CEP and its shareholders.81 Thus, it was “no coincidence or serendipity that Cairn ended up paying no capital gains tax anywhere in the world” given that the “driver of the structure was tax [avoidance]” and not any purported reinvestment in India.82 While the Tribunal noted, as a matter of fact, this disproportionate allocation of the IPO proceeds,83 it failed to draw the obvious conclusion from it, namely that Cairn’s 2006 Transactions – and especially the IPO – provided no impetus for further investments in India that would benefit the Indian economy. The intention behind the IPO could not possibly have been the alleged reinvestment of proceeds in India “in a very substantial way,” as was Cairn’s pleaded case in the arbitration, because, at the shortest possible notice, they withdrew three-quarters of the IPO proceeds out of India in the guise of consideration for share purchases, which were then applied directly to the benefit of CEP and its shareholders, and to the detriment of the Indian economy. Instead, the intention was plainly to maximize the gains resulting from the recent discovery of the Indian natural resources in the MBA Fields as “[i]n 2006, the Indian market was booming and it would be expected that . . . [t]he price achieved by an IPO in India was therefore likely to be significantly better than in an IPO in the UK”.84 The Minutes of the CEP Board of Directors’ Meeting dated 8 March 2006 clearly bear out that the decision to proceed with the Indian IPO was taken because its key objectives had nothing to do with any reinvestment in India. The CEP Board was, instead, driven by
distance herself from “merchant banks” whose motivations behind recommending the Indian IPO were to maximize their own profits (see, in this regard, Exh. RoI-4, CWS-Brown-139, Board Presentation: Project Sapphire - Options dated 6 April 2005 [without appendices], which defined the objectives of the 2006 Transactions as follows: “The metamorphosis of [CEP] from ‘exploration’ to ‘development & production’ following the Rajasthan success raises the challenge of how to realise the development value to shareholders and: . . . [m]anage delivery of the ‘Indian’ value to shareholders”; see also Ex. RoI-4, R-PHB, ¶¶ 204, 209, 243, 244). 80 Exh. RoI-4, Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 2, pp. 179:14-179:19 (Claimants’ Opening Statement). 81 Exh. RoI-4, SoD, ¶ 106; Ex. RoI-4, R-PHB, ¶ 191. 82 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 116:23-117:3, pp. 123:13-123:21 (Respondent’s Opening Statement). 83 Exh. RoI-1, Award, ¶¶ 74, 1037 84 Exh. RoI-4, Puri WS-1, ¶ 46. 34
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
the desire of market capitalization in the “buoyant” Indian market, which was “key” in its decision to proceed to an IPO.85 Accordingly, the second myth also stands busted. 41. With Cairn’s self-created myths about the 2006 Transactions disproven by the economic reality of the prevailing circumstances in 2006 and its subsequent shameless cash-out of USD 1.35 billion, it shall be easier to visualize the 2006 Transactions for what they were, i.e., abusive tax avoidant transactions through which CUHL made capital gains to the tune of USD 5.5 billion without the payment of any taxes whatsoever. Not in India, and not anywhere else in the world either. The Tribunal failed to recognize Cairn’s glaring tax avoidance strategy and, accordingly, failed to draw the correct factual and legal consequences for Cairn’s case. The Tribunal, instead, found a refuge in Cairn’s argument that the decision to engineer the 2006 Transactions in such a complicated manner was motivated by genuine regulatory concerns.86 Further, the Tribunal erroneously held that CUHL, CIHL and the 27 Subsidiaries had a genuine business purpose for the most part.87 The Tribunal’s erroneous endorsement of these aspects of Cairn’s case shall be addressed in the subsequent Sections of this Writ of Summons (see Section C below). 42. At this point, in order to complete the factual picture of Cairn’s 2006 Transactions, it suffices to point out that the epilogue to the 2006 Transactions itself clearly establishes the absence of any legitimate purpose or objective other than siphoning off gains from India without paying taxes. The 27 Subsidiaries, which Cairn emphatically argued had a legitimate business purpose88 – an argument that was wrongly endorsed by the Tribunal89 – were collapsed after the 2006 Transactions.90 Contrary to Ms. Janice Brown’s testimony about this,91 the collapse of these 27 Subsidiaries had been foreseen and planned back in 2004, which in and of itself demonstrates that none of these 27 Subsidiaries (like CUHL and CIHL) were ever meant to have any genuine business purpose.92 43. The 2006 Transactions were purely tax avoidant in nature and intent, and accordingly, should have been treated as such by the Tribunal, with the result that it lacked jurisdiction under Article 9 of the India-UK BIT. Moreover, India’s decision to tax the 2006 Transactions, in
85 Exh. RoI-4, CWS-Brown-45, Cairn Energy PLC Board Committee Meeting Minutes dated 8 March 2006, pp. 1-5; see Ex. RoI-4, R-PHB, ¶¶ 201, 205; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 4, pp. 230:15-240:1 (Testimony of Ms. Janice Brown) 86 See, inter alia, Exh. RoI-1, Award, ¶¶ 1518, 1528, 1536-1540, 1555-1566. 87 Exh. RoI-1, Award, ¶¶ 1470-1497. 88 Exh. RoI-4, Brown WS-2, Section II. 89 Exh. RoI-1, Award, ¶¶ 1471-1493. 90 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 68:15-70:10 (Respondent’s Opening Statement); Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 4, pp. 88:13-105:6 (Respondent’s Opening Statement). 91 Exh. RoI-4, Claimants’ Third Witness Statement of Janice M. Brown dated 3 August 2018 (“Brown WS- 3”), ¶ 36; Ex. RoI-4, C-SoRj, ¶ 34. 92 See Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 4, pp. 88:13-105:6 (Respondent’s Opening Statement); Ex. RoI-4, C-358, Email from Ernst & Young to Cairn dated 8 April 2004, slide 6; Ex. RoI- 4, C-390, Email from RSM to Cairn Energy dated 10 March 2006; Exh. RoI-4, CWS-Brown-46, Cairn Energy PLC Rothschild Meeting Note dated 24 March 2006. 35
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particular the capital gains that CUHL made by selling its shares in CIHL to CIL, could not possibly be qualified as an unfair or inequitable treatment of Cairn’s non-existent investment. (ii) The Consequences of the 2006 Transactions 44. Having addressed the history of CEP’s business in India and the mechanics and motivations underlying the 2006 Transactions, this Sub-Section examines the consequences of the 2006 Transactions. Sub-Section (ii)(a) below describes the reasons for India’s taxation of the 2006 Transactions, followed by an explanation, in Sub-Section (ii)(b) below, of the wider systemic problem of “Double Non-Taxation” that all countries, particularly developing countries, around the world are combatting. The 2006 Transactions are an emblematic instance of such “Double Non-Taxation”. India Imposes Taxes on the 2006 Transactions 45. India taxed the capital gains that CUHL made as a result of the 2006 Transactions at the then prevailing rate of 40%. In particular, the elements of the 2006 Transactions that were subjected to a short-term capital gains tax concern Steps 4 and 6 described above, i.e., the four tranches through which CUHL sold its shares in CIHL to CIL. In that process CUHL made capital gains in the amount of USD 5.5 billion, including the USD 1.35 billion siphoned off from the IPO proceeds (see ¶¶ 30 and 31 above).93 The short-term capital gains tax was ultimately levied on CUHL by the Income Tax Department’s Final Assessment Order of 25 January 2016 (“FAO”),94 which was preceded by a Draft Assessment Order of 9 March 2015 (“DAO”)95 and an order of the Dispute Resolution Panel dated 31 December 2015 (“DRP Order”).96 The DRP Order was rendered in the context of CUHL’s challenge to the DAO and was taken into account in the FAO. 46. In this context, it must be noted that in India, it is incumbent on the taxpayer – whether resident or non-resident – to declare its income and file a tax return proactively.97 CUHL chose not to file any tax returns for the assessment years 2007-2008, i.e., when the capital gains as a result of the 2006 Transactions were realized. It only filed such a tax return in April 2014, after being called upon to do so by a notice of the Income Tax Department in January 2014, declaring a ‘nil’ return.98 47. The reason why the Income Tax Department invited CUHL in 2014 to file a tax return was that an Income Tax officer in the Investigation Wing, Mr. Sanjay Kumar, had discovered in
93 Ex. RoI-4, C-31, Draft Assessment Order to CUHL dated 9 March 2015, ¶¶ 12-13; Ex. RoI-4, C-70, Final Assessment Order dated 25 January 2016, ¶¶ 12-13; see Exh. RoI-1, Award, ¶ 1042. 94 Ex. RoI-4, C-70, Final Assessment Order dated 25 January 2016. 95 Ex. RoI-4, C-31, Draft Assessment Order to CUHL dated 9 March 2015. 96 Ex. RoI-4, C-69, Directions of the Dispute Resolution Panel under Section 144C(5) of the Income Tax Act 1961 dated 31 December 2015. 97 Exh. RoI-4, Puri WS-1, ¶¶ 115-116. 98 Exh. RoI-4, Respondent’s First Witness Statement of Sanjay Kumar dated 3 February 2017 (“Kumar WS- 1”), ¶ 13; Exh. RoI-4, Puri WS-1, ¶¶ 64-66; Ex. RoI-4, C-9, Letter from the Deputy Director of Income Tax to CUHL dated 21 January 2014; Ex. RoI-4, C-169, CUHL Tax Return for Assessment Year 2007-2008 dated 3 April 2014. 36
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July 2013, the name of CIL’s Chairman in the Offshore Leaks Database published by the International Consortium of Investigative Journalists (“ICIJ Leaks”), which was comparable to the Wikileaks Cablegate or the Panama Papers scandals. The ICIJ Leaks provided a “comprehensive list of offshore companies and the beneficial owners behind them”.99 Based on this discovery, he investigated the origin of CIL and found out that CUHL’s capital gains in the assessment year 2007-2008 had escaped taxation as a result of CUHL’s choice not to file any tax return.100 This investigation triggered the initiation of proceedings against CUHL by the Income Tax Department,101 which ultimately culminated in the FAO. 48. It is undisputed that the primary stated basis for the Income Tax Department’s imposition of short-term capital gains tax upon CUHL was “that the real effect of the transfer of the shares of CIHL (which gave rise to a capital gain[s]) was to transfer capital assets situated in India and that the transfer was therefore within the scope of the [S]ection 9(1)(i) [of the IT Act], as clarified by Explanation 5 (inserted in the 2012 Clarification)”.102 In other words, it was on the basis of Section 9(1)(i) of the IT Act, as clarified by the 2012 Clarification, that the FAO levied capital gains tax on CUHL.103 However, India’s position has consistently been that the Income Tax Department did not need to rely on other grounds for imposing short- term capital gains tax on CUHL, because the 2012 Clarification did not constitute the creation of a new basis for taxation, but was only a clarification of an unsettled legal situation regarding the interpretation of Section 9(1)(i) of the IT Act.104 49. That being said, it is crucial to bear in mind that the FAO had clearly indicated that, quite apart from the chosen legal basis to impose capital gains tax on CUHL, one of the principal reasons to tax the 2006 Transactions was Cairn’s plainly tax avoidant conduct.105 50. This phenomenon of “Double Non-Taxation” lies at the heart of the present case and was one of the main reasons identified by the Income Tax Department for taxing CUHL, including most prominently in the FAO, which recorded how the Indian Income Tax Department saw the phenomenon as being applicable to the 2006 Transactions in the following extract: “This analysis clearly points out to the arrangement structured by the Cairn Energy Group to systematically divest its stake in Indian Oil and Gas business.
99 Exh. RoI-4, Kumar WS-1, ¶ 12; Exh. RoI-4, Kumar-3, Snapshot of profile of Sundeep Laxmilal Bhandari on The International Consortium of Investigative Journalists. 100 Exh. RoI-4, Kumar WS-1, ¶ 13. 101 Exh. RoI-4, Kumar-5, Interim Report from the Office of the Deputy Director of Income Tax (Inv.) Unit- IV(2) to the Deputy Director of Income Tax Cir. 1(1) (International Tax), New Delhi dated 16 January 2014; Exh. RoI-4, Puri-1, Survey Report in the Case of Cairn Group submitted on 24 February 2016. 102 Ex. RoI-4, C-PHB, Appendix, Claimants’ Response to Questions from the Tribunal, ¶ 16; Ex. RoI-4, R- PHB, Appendix A, Respondent’s Answers to the Tribunal’s Questions, ¶ 43. 103 Ex. RoI-4, C-31, Draft Assessment Order to CUHL dated 9 March 2015, ¶¶ 9.2, 9.5, 11.1.4; Ex. RoI-4, C- 70, Final Assessment Order dated 25 January 2016, ¶¶ 9.2, 9.5, 11.1.4. 104 See, inter alia, Exh. RoI-4, R-PHB, Appendix A, Respondent’s Answers to the Tribunal’s Questions, ¶ 44; Ex. RoI-4, R-PHB, §§ III and VII in general and f.n. 27 above. 105 It is no surprise that the Delhi High Court admitted India’s amended Memorandum of Appeal on 3 December 2019 against the Income Tax Appellate Authority’s order dated 9 March 2017 (rendered in CUHL’s appeal against the FAO). This amended Memorandum of Appeal includes submissions on the issue of tax avoidance (see Exh. RoI-4, RCom-391, 14.01.2020 Email to AT with attachment). 37
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As a result of this arrangement, even though the assessee had earned substantial capital gains, it did not pay any taxes in any territory in the world. This makes it a classic case of double non taxation which is biggest area of concern to International community and policy makers. The affairs of the Group were structured in such a manner that the shares of companies which are operating and using and owning the assets involved in Oil and Gas business enterprise were transferred first to a UK based holding company from where they were transferred to the Jersey based another holding company the shares of which are ultimately sold to an Indian Company for a substantial cash consideration. All this happened in preplanned sequential steps within a period of three months. The physical operations of the enterprise were not affected at all during this period. The money was remitted out of the country bypassing or circumventing all procedural requirements. The transaction did not attract any tax liability in UK probably because of CFC regime, as the assets changing hands were not in UK. For India, where they (the business operations as well as assets) were located, the transaction was given the colour of a share sale transaction of a Foreign company incorporated in a Low Tax Jurisdiction. The liberalized economic regime of India was taken advantage of for making hassle free remittance on the basis of perfunctory legal opinion of a Tax Consultant without withholding any due taxes and following automatic approval route.”106
51. Indeed, combatting Double Non-Taxation was also a clear aim of the 2012 Clarification of Section 9(1)(i) of the IT Act (which provision was the primary stated basis of the India’s taxation of the capital gains made in the 2006 Transactions). This was stated in forceful terms by the Finance Minister in a speech to the Indian Parliament in the course of the debates on the 2012 Clarification:107 “The last point, which was referred to by Shri Advani ji, is about the operation against black money. My whole argument on the Vodafone was on that point. It is because my point is very simple. I would like to be guided either by the Double Taxation Avoidance Agreement or tax. There cannot be a situation where somebody will make money on an asset located in India and will not pay tax either to India or to the country of its origin by making some arrangements to certain tax haven areas, to certain tax haven locations through a complicated setting up of a series of subsidiaries, and having huge capital gains on the assets located in India. We cannot declare India as a tax haven simply to attract the foreign investment. I want foreign investment for technology, for development, for resources. Either you pay tax here or you pay tax in your own country with which we have a Double Taxation Avoidance Agreement. It is as simple as that.”108 [emphasis added]
52. It falls within a State’s sovereign powers to have its competent tax authorities levy taxes with a view to avoid creating precedents of successful tax avoidance. As the 2006 Transactions constituted a textbook example or a “classic case” (in the words of the FAO) of Double Non-
106 Ex. RoI-4, C-70, Final Assessment Order dated 25 January 2016, ¶ 9.1.9. 107 Such statements by the mover of the relevant draft legislation to Parliament have formal interpretative value under Indian law. They were ignored by the Tribunal, which preferred to rely instead on anecdotal statement in a book later written by the Finance Minister: see Exh. RoI-1, Award, ¶ 1108. 108 Ex. RoI-4, R-165, Shri Pranab Mukherjee, Minister of Finance, Transcript of Speech before Lok Sabha (Parliament), 7 May 2012, pp. 30-31. 38
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Taxation, India legitimately exercised its sovereign taxation power to impose short-term capital gains tax on CUHL. Double Non-Taxation: The Intended Consequence of the 2006 Transactions 53. In this last Sub-Section of the factual background, the endemic problem that Double Non- Taxation poses to developing States shall be briefly explained, against the background of the 2006 Transactions that were engineered to deliberately avoid the payment of any taxes in the world. The obvious irony of the matter will not escape the Court: Cairn realized substantial capital gains in 2006 because of the discovery of Indian natural resources. On the basis of the potential of those Indian natural resources, Cairn raised billions from the Indian public in an IPO, the proceeds of which it immediately distributed to its shareholders. Thereafter, Cairn refused to declare any income and pay any tax – let alone its fair share – to India, where legitimately levied taxes are much needed to advance the development of the country. What is more, Cairn’s transactions dexterously avoided the payment of taxes in the UK as well. 54. In this regard, it should be noted that the intended consequence of the 2006 Transactions was that the payment of the following taxes, which may otherwise have been due, was avoided: (i) capital gains tax in India; (ii) capital gains tax in the UK; (iii) stamp duty in the UK; and (iv) corporation tax in the UK. 55. While the specifics of the abusive tax avoidant devices employed to avoid each of these taxes shall be discussed in detail in the forthcoming Sections of this submission (Sections IV.C below and V.B below), at this preliminary juncture, it is important to highlight the following aspects of Cairn’s aggressive tax avoidance through the 2006 Transactions, most of which came to light following Cairn’s reluctant compliance with orders for the production of documents in the arbitration: (i) With respect to the device employed by Cairn to avoid Indian capital gains tax, the fundamental point to be borne in mind is that as a matter of Indian law, if the shares of the promoter of an IPO, i.e., CUHL in the present case, are “offered for sale”, the IPO proceeds are subject to capital gains tax, but if new shares are issued and offered in an IPO, the proceeds do not attract capital gains tax in India.109 Amongst various restructuring plans that were presented by RSM and Ernst & Young to Cairn, the plan that was ultimately selected dexterously avoided the “offer for sale” route and provided for the issuance of new shares by CIL. This was despite the fact that the selected plan brought about other regulatory complications, such as the requirement of a “Minimum Promoter Contribution”, as per which the promoter of an IPO “shall contribute not less
109 Ex. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slide 6; Ex. RoI-4, R-SoRj, ¶ 325; Exh. RoI-1, Award, ¶ 1545. 39
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than 20% of the post issue capital”, which contribution was required to be kept in “escrow account” to be released with the public issue proceeds.110 Cairn employed the device of the Daylight Loan allegedly to comply with the so-called Minimum Promoter Contribution Requirement (“MPC Requirement”) without having to seek any approval in that respect and thus without having to bring the attention of India’s Securities and Exchange Board (“SEBI”) to the stratagem being used,111 while simultaneously seeking exemptions from SEBI for compliance with other regulatory elements.112 (ii) With respect to the avoidance of UK capital gains tax, Cairn never disputed that they have not paid any capital gains tax in the UK. It must be borne in mind that before engineering the 2006 Transaction, together with the advice on the Indian tax implications, Cairn also took advice on UK tax implications, including on how to take advantage of the so-called “substantial shareholders’ exemption” from the payment of UK capital gains tax.113 CEP and CUHL essentially sought to use this exemption in order to avoid paying any capital gains tax in the UK, on the pretext that they held a “substantial shareholding” (i.e., more than 10%) in the company whose shares they were respectively transferring, which allegedly entitled them to an exemption under a Schedule 7AC of the Taxation of Chargeable Gains Act, 1962.114 (iii) With respect to the avoidance of UK stamp duty, Cairn never disputed that the incorporation of CIHL in the tax haven of Jersey was intended dominantly to avoid paying stamp duty in the UK.115 (iv) With respect to the avoidance of UK corporation tax, the device employed by Cairn was to ensure that the IPO proceeds in the amount of USD 1.35 billion that were siphoned off from India, were paid to CUHL as consideration for CIL’s purchase of the last tranche of CIHL shares and not as dividends to CUHL in its capacity as CIL’s
110 Ex. RoI-4, R-131, SEBI (Disclosure and Investor Protection) Guidelines, sections 4.1.1 and 4.9.1. 111 Exh. RoI-4, Brown WS-1, ¶ 48; Exh. RoI-4, Brown WS-2, ¶ 79; see Exh. RoI-4, CWS-Brown-50A, RSM, Plan C – Concept Paper dated 19 May 2006, p. 19. Cairn’s documents referred to this colourable device as a clever “exploitation” of the relevant regulations of the SEBI (see Exh. RoI-4, R-100A, Email trail concerning “RBI and Daylight”, p. 7). 112 See Exh. RoI-4, CWS-Brown-156, Letter from DSP Merrill Lynch to Securities and Exchange Board of India dated 2 November 2006; Ex. RoI-4, R-135, Email trail from Chitresh Mody to Ashish Patil and others with subject “Re: SEBI Covering letter” dated 2 November 2006 (produced by Claimants as CL001282-CL001291); Exh. RoI-4, CWS-Brown-157, Letter from Securities and Exchange Board of India to DSP Merrill Lynch Limited, ABN Amro Securities (India) Private Limited and JM Morgan Stanley Private Limited dated 15 November 2006; Exh. RoI-4, CWS-Brown-70, Letter from DSP Merrill Lynch Limited, ABN AMRO Securities (India) Private Limited and JM Morgan Stanley Private Limited to SEBI dated 12 October 2006 (enclosing Cairn India Limited Draft Red Herring Prospectus dated 12 October 2006). 113 Exh. RoI-1, Award, ¶¶ 1041, 1044; see Exh. RoI-4, CWS-Brown-49A, RSM Concept Paper dated 11 May 2006, with annexures, pp. 77-80; Exh. RoI-4, CWS-Brown-50A, RSM, Plan C – Concept Paper dated 19 May 2006, with annexures, pp. 81-84. 114 Exh. RoI-4, Exhibit DR-05, Schedule 7AC of the Taxation of Chargeable Gains Act, 1962. 115 Ex. RoI-4, C-PHB, Appendix, Claimants’ Response to Questions from the Tribunal, ¶¶ 35, 41; Exh. RoI- 4, Brown WS-2, ¶¶ 67, 89; see Ex. RoI-4, C-371, Email from RSM attaching Modified RSM Concept Paper dated 9 June 2006, pp. 28-29; Exh. RoI-4, CWS-Brown-51A, RSM, Structure Concept Paper 16 June 2006, with annexures, p. 30. 40
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shareholder. If this payment had been made in the form of dividends, it would have been subject to corporation tax in the UK. Again, Cairn purposely rejected one of the restructuring plans that was presented by RSM because it included the payment of the IPO proceeds to CUHL as dividend, which would have exposed it to corporation tax.116 Essentially, by employing this device, Cairn ensured that its shareholders would pocket all the money siphoned off from India without it having to pay any taxes on the dividends whatsoever. What is more, Cairn specifically requested the Tribunal to gross up its award of damages with the applicable UK corporation tax, since Cairn would apparently be obliged to pay such corporation tax on the damages awarded by the Tribunal.117 Thus, not only did Cairn engineer the 2006 Transactions to abusively avoid the payment of UK corporation tax, it sought to shift the liability of any corporation tax it would be required to pay on the damages awarded by the Tribunal on to India. While the Tribunal rejected Cairn’s request to this effect,118 that does not take away from the fact that advancing such a request itself is indicative of Cairn’s shameless corporate greed. 56. The above aspects of Cairn’s aggressive tax planning through the 2006 Transactions validate the accuracy of the FAO’s characterization of these Transactions as a “classic case” of Double Non-Taxation. As rightly pointed out in the FAO, the phenomenon of Double Non- Taxation is currently one of the “biggest area[s] of concern” in the international community.119 In the past decade, the phenomenon of Double Non-Taxation has received extensive attention from the Organisation for Economic Co-operation and Development (“OECD”), the United Nations (“UN”) and the European Union (“EU”). The initiatives undertaken by these international organizations, as well as States’ responses to them, shall be discussed in detail in the forthcoming Sections of this submission (see Section V.B below). However, at this juncture, it is imperative to note that the OECD has identified “tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax”,120 as resulting in base erosion and profit shifting (“BEPS”), which is one of the leading causes for Double Non-Taxation. It is widely accepted in the international community, including by the OECD and the UN, that such aggressive tax planning by multinational corporations disproportionately affects developing countries due to their higher reliance on taxes payable by corporations.121 57. In the context of its BEPS initiative, the OECD consistently warns that aggressive tax planning by multinational corporations “risks shifting the burden of taxes onto less mobile
116 Ex. RoI-4, R-SoRj, ¶¶ 316-333; Ex. RoI-4, C-363, RSM, Project Gin, Phase I Pre-IPO Presentation dated 3 May 2006, slides 18 and 32; Ex. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slide 17. 117 Ex. RoI-4, C-PHB, ¶¶ 751-759. 118 Exh. RoI-1, Award, ¶¶ 1919-1930. 119 Ex. RoI-4, C-70, Final Assessment Order dated 25 January 2016, ¶ 9.1.9. 120 See “What is BEPS?”, OECD, available at: http://www.oecd.org/tax/beps/about/#mission-impact. 121 See “What is BEPS?”, OECD, available at: http://www.oecd.org/tax/beps/about/#mission-impact. 41
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bases and may pose a particular risk for developing countries with small economies”.122 Similarly, the UN has established a Subcommittee on Base Erosion and Profit Shifting Issues for Developing Countries in 2013 (“UN BEPS Subcommittee”), with a view to engaging with developing countries on issues they face as a result of aggressive tax planning by multinational corporations.123 Various developing countries, including India, have responded to the UN’s initiative.124 India’s response to the UN BEPS Subcommittee is particularly instructive for this case. India points out that aggressive tax planning by multinational corporations “has been a concern for the developing and emerging economies … for long and has now been acknowledged and appreciated by the developed countries also as a serious cause of concern”.125 In this context, India emphasizes that: “Base erosion and profit shifting in developing economies and low income countries (LICs), such as India, whose tax revenues are often more reliant on corporate tax, particularly from multinational enterprises in view of their lower per capita GDP, are intricately linked and dependent upon the international taxation rules and procedures adopted by the developed countries, in particular, the OECD member countries. Many of these international taxation rules, which have been drawn to a large extent, on the basis of the preference of the developed states to allocate greater taxation rights to the state of residence and restrict the ability of the source states to enforce their sovereign right of administering the taxes allocated to them, have to be accepted by the developing countries and LICs, in view of their limited ability to bargain with developed countries. In view of the inherent vulnerability of these countries in their bilateral treaty negotiations with developed countries, the United Nations needs to take a position that protects the sovereign taxation rights of the developing countries and LICs and prevent the international taxation rules from getting unjustly skewed in favour of the developed countries. In particular, the United Nations needs to take the interest of the developing countries and the base erosion and profit shifting faced by them into account while carrying out work on BEPS. In particular, BEPS has a detrimental effect on the Indian economy because it reduces the tax revenues that could be collected in the absence of BEPS. In a developing economy like India, tax revenues are crucial for reducing poverty and
122 See “OECD secretariat invites public input on the Global Anti-Base Erosion (GloBE) Proposal under Pillar Two,” OECD, available at: https://www.oecd.org/tax/oecd-secretariat-invites-public-input-on-the-global-anti- base-erosion-proposal-pillar-two.htm; Ex. RoI-4, RLA-66, OECD (2013), Action Plan on Base Erosion and Profit Shifting. Notably, to align itself with the OECD’s BEPS initiative, the Netherlands has also recently indicated that it intends to reorient its treaty practice to ensure that tax treaties “prevent double taxation without creating possibilities to generate double non-taxation or lower taxation” (see Dutch Deputy Minister of Finance, Memorandum on Fiscal Treaty Policy (2020), p. 8, available at: https://www.rijksoverheid.nl/documenten/rapporten/2020/05/29/notitie-fiscaal-verdragsbeleid). 123 “Subcommittee on Base Erosion and Profit Shifting for Developing Countries, Report by the Coordinator,” United Nations, 12 October 2015, available at: https://www.un.org/esa/ffd/wp- content/uploads/2015/10/11STM_CRP11_beps.pdf. 124 “Responses to questionnaire for developing countries from the UN Subcommittee on Base Erosion and Profit Shifting,” United Nations, 30 September 2014, available at: https://www.un.org/esa/ffd/wp- content/uploads/2014/10/10STM_CRP12_BEPS1.pdf. 125 “Questionnaire, Countries’ experiences regarding base erosion and profit shifting issues,” United Nations, 2014, available at: https://www.un.org/esa/ffd/wp-content/uploads/2014/10/ta-BEPS-CommentsIndia.pdf. 42
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inequality. BEPS slows down the pace of development by lowering the fiscal spend of the country.”126 [emphasis added]
58. Indeed, the constant struggle of countries, especially developing countries in the Third World, to balance their interests in attracting foreign investments while simultaneously ensuring that the multinational investors do not end up avoiding their fair share of tax obligations and, in the process, disproportionately burdening the common taxpayer, has been extensively commented upon in legal and economic scholarly writing.127 Particularly in the critical school of the Third World Approaches to International Law (“TWAIL”), it has been pointed out that the unfortunate consequence of aggressive tax planning by investors is that “the burden removed from . . . foreign investors . . . is normally shifted to the very Third World peoples that the ‘development project’ is meant to protect”.128 59. This is the essence of how CEP chose to ruthlessly pursue its own economic interests and those of its shareholders to the detriment of the Indian people, the Indian economy and the Indian treasury. Cairn employed colorable devices with the dominant purpose to avoid any tax obligations in India, siphoned off billions of dollars it raised from the Indian public in the IPO, and engineered a restructuring scheme that would garner capital gains to the tune of USD 5.5 billion and attract no tax liability anywhere in the world. Again, this is a textbook example of a multinational corporation that uses a country’s natural resources – that obviously belong to its people – to create substantial financial gains without contributing a single rupee on taxes arising out of the capital gains created in the process – let alone its fair share of the country’s tax burden – in return. Accordingly, it was well within India’s sovereign powers to redress the situation of Double Non-Taxation that Cairn had created by avoiding the payment of taxes anywhere in the world.
B. The BIT and the Arbitration Proceedings 60. This Section provides an overview of the investment treaty arbitration initiated by CEP and CUHL against India under the India-UK BIT. In particular, Sub-Section II.B(i) below extracts the relevant provisions of the India-UK BIT in the present case, Sub-Section II.B(ii) below
126 “Questionnaire, Countries’ experiences regarding base erosion and profit shifting issues,” United Nations, 2014, available at: https://www.un.org/esa/ffd/wp-content/uploads/2014/10/ta-BEPS-CommentsIndia.pdf. 127 Bundesverfassungsgericht, 27 June 1991, 2 BvR 1493/89, discussed in Exh. RoI-10, Victor Thuronyi, Comparative Tax Law (Alphen aan den Rijn: Kluwer Law International, 2003), p. 83; Exh. RoI-11, Bundesfinanzhof, 10 January 2012, I R 66/09, ¶ 25; see also “The internal market: factual examples of double non- taxation cases,” Staff Working Paper, European Commission, 2012, p. 4, available at: https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/consultations/tax/double _non_tax/consultation_paper_en.pdf; Exh. RoI-12, Luc Hinnekens, “La prévention de la double non-imposition dans les conventions bilatérales suivant le modèle de l’OCDE,” in Mélanges John Kirkpatrick (Brussels: Bruylant, 2004), 385-424; Exh. RoI-13, Anne Van de Vijver, “International Double (Non-)taxation: Comparative Guidance from European Legal Principles,” EC Tax Review 24, No. 5 (2015): 240-257, 243. 128 Exh. RoI-14, Jalia Kangave, “‘Taxing’ TWAIL: A Preliminary Inquiry into TWAIL’s Application to the Taxation of Foreign Direct Investment,” International Community Law Review 10, No. 4 (Dec. 2008): 389-400, 395. See also See Exh. RoI-15, Jalia Kangave, “The Dominant Voices in Double Taxation Agreements: A Critical Analysis of the “Dividend” Article in the Agreement between Uganda and the Netherlands,” International Community Law Review 11, No. 4 (Nov. 2009): 387-407. 43
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provides a non-exhaustive summary of the procedural history of the arbitration and Sub- Section II.B(iii) below provides a non-exhaustive summary of the Award. (i) Relevant Provisions of the India-UK BIT 61. The purported offer to arbitration on the basis of which CEP and CUHL initiated arbitration against India is set forth in Article 9 of the India-UK BIT:
“ARTICLE 9 Settlement of Disputes between an Investor and a Host State (1) Any dispute between an investor of one Contracting Party and the other Contracting Party in relation to an investment of the former under this Agreement shall, as far as possible, be settled amicably through negotiations between the parties to the dispute. (2) Any dispute which has not been amicably settled within a period of six months from written notification of a claim may be submitted to international conciliation under the Conciliation Rules of the United Nations Commission on International Trade Law, if the parties to the dispute so agree. (3) Where the dispute is not referred to international conciliation, or where it is so referred but conciliation proceedings are terminated other than by the signing of a settlement agreement, the dispute may be referred to arbitration as follows: (a) if the Contracting Party of the investor and the other Contracting Party are both parties to the Convention on the Settlement of Investment Disputes between States and Nationals of other States, 1965, and the investor consents in writing to submit the dispute to the International Centre for the Settlement of Investment Disputes such a dispute shall be referred to the Centre; or (b) if both parties to the dispute so agree under the Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings; or (c) to an ad hoc arbitral tribunal by either party to the dispute in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law, 1976. In respect of such arbitral proceedings, the following shall apply: (i) The Arbitral Tribunal shall consist of three arbitrators. Each party shall select an arbitrator. These two arbitrators shall appoint by mutual agreement a third arbitrator, the Chairman, who shall be a national of a third State. The arbitrators shall be appointed within two months from the date when one of the parties to the dispute informs the other of its intention to submit the dispute to arbitration within the period of the six months mentioned earlier in paragraph (2) of this Article;
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(ii) If the necessary appointments are not made within the period specified in subparagraph (c)(i), either party may, in the absence of any other agreement, request the President of the International Court of Justice to make the necessary appointment; (iii) The arbitral award shall be made in accordance with the provisions of this Agreement; (iv) The tribunal shall reach its decision by a majority of votes; (v) The decision of the arbitral tribunal shall be final and binding and the parties shall abide by and comply with the terms of its award; (vi) The arbitral tribunal shall state the basis of its decision and give reasons upon the request of either party; (vii) Each party concerned shall bear the cost of its own arbitrator and its representation in the arbitral proceedings. The cost of the Chairman in discharging his arbitral function and the remaining costs of the tribunal shall be borne equally by the parties concerned. The tribunal may, however, in its decision direct that a higher proportion of costs shall be borne by one of the two parties, and this award shall be binding on both parties.”
62. The notions of “investment” and “investors” are defined in the definitions clause contained in Article 1 of the India-UK BIT, which is reproduced below, in relevant part:
“ARTICLE 1 Definitions For the purposes of this Agreement: (a) “companies” means: (i) in respect of the United Kingdom: corporations, firms and associations incorporated or constituted under the law in force in any part of the United Kingdom or in any territory to which this Agreement is extended in accordance with the provisions of Article 13; (ii) in respect of India: corporations, firms and associations incorporated or constituted under the law in force in any part of India; (b) “investment” means every kind of asset established or acquired, including changes in the form of such investment, in accordance with the national laws of the Contracting Party in whose territory the investment is made and in particular, though not exclusively, includes; (i) movable and immovable property as well as other rights such as mortgages, liens or pledges; (ii) shares in and stock and debentures of a company and any other similar forms of interest in a company;
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(iii) rightful claims to money or to any performance under contract having a financial value; (iv) intellectual property rights, goodwill, technical processes and know- how in accordance with the relevant laws of the respective Contracting Party; (v) business concessions conferred by law or under contract, including concessions to search for and extract oil and other minerals; (c) “investors” means any national or company of a Contracting Party; (d) “nationals” means: (i) in respect of the United Kingdom: physical persons deriving their status as United Kingdom nationals from the law in force in the United Kingdom; (ii) in respect of India: persons deriving their status as Indian nationals from the law in force in India; (e) “returns” means the monetary amounts yielded by an investment such as profit, interest, capital gains, dividends, royalties and fees; [. . .]”
63. The applicable law is stipulated in Article 11 of the India-UK BIT in the following terms:
“ARTICLE 11 Applicable Laws (1) Subject to the provisions of this Agreement, all investment shall be governed by the laws in force in the territory of the Contracting Party in which such investments are made. (2) Notwithstanding paragraph (1) of this Article nothing in this Agreement precludes the host Contracting Party from taking action for the protection of its essential security interests or in circumstances of extreme emergency in accordance with its laws normally and reasonably applied on a non- discriminatory basis.”
(ii) Procedural History of the Arbitration 64. On 22 September 2015, CEP and CUHL, gave Notice of Arbitration against India (“NoA”) on the basis of Article 9 of the India-UK BIT under the Arbitration Rules of The United Nations Commission on International Trade Law, 1976 (“UNCITRAL Rules”).129 65. On 16 February 2016, the Tribunal was duly constituted. 66. As the Parties could not agree on the place of arbitration, the Tribunal decided on 6 May 2016 that the arbitration would be seated in The Hague, the Netherlands.130 67. On 27 May 2016, India requested that the Tribunal put in place a transparency regime between this arbitration and another arbitration initiated by Vedanta Resources PLC, PCA Arbitration Case No. 2016-05 Vedanta Resources PLC v. The Republic of India (“Vedanta
129 Exh. RoI-4, Claimants’ Notice of Arbitration of 22 September 2015, ¶ 1. 130 Exh. RoI-4, AT-8, Arbitral Tribunal’s Letter of 6 May 2016, p. 2. 46
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Arbitration”), which involved directly related issues of fact and law in that it was based on the exact same transaction.131 In so doing, India sought to avoid two potentially contradictory decisions of two different tribunals in respect of the exercise of the same sovereign power to levy tax over the same transaction. 68. On 28 June 2016, CEP and CUHL filed their Statement of Claim (“SoC”). 69. On 12 August 2016, the Tribunal refused to adopt the transparency regime that India had requested to avoid inconsistent outcomes in the parallel arbitrations. Instead, the Tribunal directed that the proceedings in the Cairn arbitration be confidential, save for the publication of certain documents, subject to redaction.132 70. In view of India’s jurisdictional and admissibility objections, based, inter alia, on the non- arbitrability of tax disputes, the prematurity of Cairn’s claims and the fact that the dispute did not arise out of an investment, on 6 October 2016, it requested that the Tribunal bifurcate the arbitral proceedings in order to deal with the issue of jurisdiction on a preliminary basis (“Request for Bifurcation”).133 71. On 4 February 2017, India filed a Statement of Defence (“SoD”), in which it reiterated and further substantiated the objections it had already articulated against the Tribunal’s jurisdiction in its Request for Bifurcation. In particular, India submitted that the claims of CEP and CUHL were premature in light of the fact that Cairn’s tax liability was yet to be determined by the competent Indian tax authorities and would potentially be followed by a challenge before the competent Indian courts.134 Further, India also emphasized the non- arbitrability of tax disputes and the fact that that Cairn’s claims did not relate to an investment, certainly not one made in accordance with Indian law.135 72. On 19 April 2017, the Tribunal also rejected India’s Request for Bifurcation.136 73. On 24 June 2017, Cairn filed its Statement of Reply.137 74. On 28 June 2017, the Tribunal issued Procedural Order No. 8 dealing with the Parties’ document production requests.138 75. On 4 September 2017, the Tribunal issued Procedural Order No. 10, providing for a procedure in case either Party wished to disclose documents from the Cairn arbitration into the Vedanta Arbitration and vice versa.139
131 Exh. RoI-4, Respondent’s Application for a Stay of the Proceedings of 6 June 2016; Exh. RoI-4, Respondent’s Submissions on Transparency of 27 May 2016. 132 Exh. RoI-4, Procedural Order No. 2 of 12 August 2016, ¶ 59. 133 Exh. RoI-4, Respondent’s Application for Bifurcation of 6 October 2016, ¶ 85. 134 Exh. RoI-4, SoD, ¶¶ 195-211. 135 Exh. RoI-4, SoD, ¶¶ 212-246. 136 Exh. RoI-4, Procedural Order No. 4 of 19 April 2017, ¶ 90. 137 Exh. RoI-4, Claimants’ Statement of Reply of 24 June 2017, ¶ 2. 138 Exh. RoI-4, Procedural Order No. 8 of 28 June 2017, § V. 139 Exh. RoI-4, Procedural Order No. 10 of 4 September 2017, ¶¶ 23-28. 47
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76. On 16 November 2017, the Tribunal issued Procedural Order No. 11, in which it addressed mutual complaints about the non-compliance with the document production as ordered in Procedural Order No. 8. India specifically complained of Cairn’s failure to properly comply with its obligation to produce documents pertaining to the different options it had been presented with to avoid the payment of taxes anywhere in the world. However, the Tribunal dismissed India’s new document production requests.140 77. On 21 December 2017, Cairn filed its Updated Statement of Reply (“SoRy”).141 78. On 9 April 2018, India filed its Rejoinder to Cairn’s Updated Statement of Reply, followed by a corrected version of its Rejoinder to Cairn’s Updated Statement of Reply on 19 April 2018 (“R-SoRj”). 79. On 28 May 2018, Cairn filed their Rejoinder on Jurisdiction (“C-SoRj”). 80. After considerable insistence on the Respondent’s part about Cairn’s incomplete production of documents, on 13 August 2018, Cairn finally disclosed a nearly complete version of the critical “Project Sapphire – Options” Presentation.142 This presentation had been made on 4 April 2005, by ABN AMRO Rothschild (“ABN Amro”) to the board of CEP. The presentation itself had originally been submitted by Cairn with Ms. Brown’s second Witness Statement, however, without any appendices as Cairn contended that it had been presented to the board without appendices.143 After India’s insistence on the disclosure of the presentation with its appendices, Cairn finally provided some of the appendices but still refused to disclose Appendices V and VI (the “Withheld Appendices”) on grounds of privilege. The Withheld Appendices concerned the structure paper, setting out the steps to be taken at different stages of the 2006 Transactions, including an analysis of the tax issues that may arise, and the tax analysis provided to the board.144 81. On 16 August 2018, India objected to Cairn’s privilege claim in respect of the Withheld Appendices.145 82. At the evidentiary hearing that took place in The Hague from 20 to 31 August 2018, the Tribunal determined that it would not order Cairn to produce the Withheld Appendices but
140 Exh. RoI-4, Procedural Order No. 11 of 16 November 2017, § IV. 141 Cairn filed its Statement of Reply dated 24 June 2017 before the document production had been completed. Thereafter, the Tribunal permitted Claimants to comment on any documents that were belatedly produced (see Exh. RoI-4, Procedural Order No. 4 of 19 April 2017, Annex A, f.n. 1), and, accordingly, despite India’s objections to the contrary (see Exh. RoI-4, RCom-137, Respondent’s Letter of 21 June 2017, ¶ 7; see also Exh. RoI-4, RCom- 143, Respondent’s Letter of 19 July 2017, ¶ 4), the Tribunal permitted the optional filing of an updated Statement of Reply and a Statement of Rejoinder thereafter (see Exh. RoI-4, AT-102, Arbitral Tribunal’s Letter of 4 September 2017, p. 4). 142 Exh. RoI-4, CWS-Brown-139A, Board Presentation: Project Sapphire - Options dated 6 April 2005 [with appendices]. 143 Exh. RoI-4, CWS-Brown-139, Board Presentation: Project Sapphire - Options dated 6 April 2005 [without appendices].] 144 Exh. RoI-4, Confidentiality Expert’s Second Report of 12 November 2018, p. 2. 145 Exh. RoI-4, RCom-255, Respondent’s Email of 16 August 2018. 48
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instead referred the matter for examination to a confidentiality expert, who was finally instructed on 5 November 2018.146 83. On 12 November 2018, the confidentiality expert issued his report on the Withheld Appendices and recommended that a partially redacted version of Appendix VI be disclosed.147 84. On 3 December 2018, i.e., more than three months after the evidentiary hearing had been completed and a mere four days before the Parties’ post-hearing briefs were due, Cairn finally shared the redacted version of the Withheld Appendix VI.148 85. The Parties exchanged their post-hearing briefs on 7 December 2018 (“C-PHB” and “R- PHB” for Claimants’ and Respondent’s post-hearing briefs, respectively, and collectively “Parties’ Post-Hearing Briefs”).149 86. On 15 December 2018, India sought the Tribunal’s permission to adduce in the proceedings before the High Court of Delhi (“Delhi High Court”) the oral evidence that had been given during the August 2018 hearing by Ms. Janice Brown as well as the belatedly disclosed information about the options considered by Cairn to avoid the payment of tax anywhere in the world. Ms. Brown attested to the fact that Cairn structured the 2006 Transactions so as to avoid the payment of any tax anywhere in the world.150 Her testimony and the documents that evidence the true purpose of the 2006 Transactions are obviously relevant for the tax proceedings before the Delhi High Court. 87. On 17 December 2018, two days prior to the oral closings in Paris, the Tribunal issued Procedural Order No. 15, largely rejecting the Respondent’s request for the production of the complete Appendices V and VI. 88. On 19 and 20 December 2018, the Parties made their oral closing submissions in Paris. 89. On 18 March 2019, the Tribunal issued Procedural Order No. 16 dated 18 March 2019 (“PO 16”), directing the Parties to comply with their confidentiality obligations under Procedural Order No. 2 dated 12 August 2016 (“PO 2”) and reserving its decision as to whether India established a basis to derogate from Procedural Order No. 2 in respect of the evidence of Ms. Brown for the purposes of the Indian tax proceedings.151 90. On 7 and 28 February 2020, the Parties filed their cost claims and reply submissions on costs.
146 Exh. RoI-4, AT-221, Arbitral Tribunal’s Email of 5 November 2018. 147 Exh. RoI-4, Confidentiality Expert’s Second Report of 12 November 2018. 148 Exh. RoI-4, CCom-260, Claimants’ Email of 3 December 2018; Exh. RoI-4, RCom-322, Respondent’s Email of 3 December 2018; Exh. RoI-4, CCom-249, Claimants’ Email of 13 November 2018. 149 Exh. RoI-4, Claimants’ Post-Hearing Brief of 7 December 2018; Exh. RoI-4, Respondent’s Post-Hearing Brief of 7 December 2018. 150 Exh. RoI-4, RCom-335, Respondent’s Email of 15 December 2018. 151 Exh. RoI-4, Procedural Order No. 16 of 18 March 2019, ¶ 66; Exh. RoI-4, Procedural Order No. 2 of 12 August 2016. 49
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91. On 21 December 2020, the Tribunal issued the Award, which was dispatched to the Parties on 22 December 2020.152 (iii) Summary of the Award 92. Cairn’s claims in the Arbitration were based on the central premise that the Indian Income Tax Department’s FAO of 25 January 2016,153 by means of which capital gains tax was levied on CUHL over the 2006 Transactions, violated India’s treaty obligations because (i) it allegedly resulted in the taxation of income of non-residents; and (ii) it was based on the allegedly retroactive 2012 Clarification, which fundamentally changed Indian tax law.154 On that basis, CEP and CUHL claimed that India violated its obligation under the BIT: (i) to create favourable investment conditions for Cairn’s investment as required by Article 3(1) of the India-UK BIT and to accord Cairn and their investment fair and equitable treatment (“FET”) as required by Article 3(2) of the India-UK BIT; (ii) not to expropriate CUHL’s investment in CIL without providing fair and equitable compensation as per Article 5(1) of the India-UK BIT; and (iii) to grant Cairn unrestricted transfer of their investments and returns under Article 7 of the India-UK BIT. 93. It was India’s case before the Tribunal that the Income Tax Department’s imposition of short- term capital gains tax on CUHL was justified by the fact that the transfer of the shares of CIHL, which gave rise to a capital gains, effectively amounted to the transfer of capital assets situated in India, and accordingly, fell within the scope of Section 9(1)(i) of the IT Act, as clarified by Explanation 5 of the 2012 Clarification.155 94. India also objected to the jurisdiction of the Tribunal and the admissibility of Cairn’s claims on several grounds. The Tribunal’s findings on these jurisdictional and admissibility objections, as well as on the merits of Cairn’s claims, are summarized below. Has Cairn Made an “Investment” as defined in the India-UK BIT? 95. First, India submitted that Cairn’s claims did not pertain to an investment and thus fell outside any purported offer to arbitrate because CUHL’s alleged investment was not made lawfully, as is required by Article 1(b) of the India-UK BIT, which stipulates that an investment must be “in accordance with the laws of the Contracting Party in whose territory the investment is made”, i.e. India.156 It was India’s position that CUHL’s investment did not meet this requirement as “CUHL was established and acquired shares in CIL as part of the 2006
152 Exh. RoI-4, Permanent Court of Arbitration’s Letter to the Parties of 22 December 2020. 153 Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016. 154 Exh. RoI-4, SoC, ¶¶ 294-388; Exh. RoI-4, SoRy, ¶¶ 349-672; Exh. RoI-4, C-PHB, ¶¶ 334-463. 155 Exh. RoI-4, SoD, ¶¶ 71-194; Exh. RoI-4, R-SoRj, ¶¶ 603-648; Exh. RoI-4, R-PHB, Appendix A, Respondent’s Answers to the Tribunal’s Questions, ¶ 43. 156 Exh. RoI-1, Award, ¶¶ 675-680; Exh. RoI-4, SoD, ¶¶ 244-246; Exh. RoI-4, R-SoRj, ¶¶ 123-154; Exh. RoI- 4, R-PHB, ¶¶ 75-89. 50
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Transactions, which were structured as an abusive tax-avoidant scheme in violation of the then applicable laws and regulations.”157 96. In response to India’s jurisdictional objection in this respect, Cairn took the position that they had established and acquired their investments in India in 1996 and that the 2006 Transactions merely constituted a restructuring of those investments.158 97. The Tribunal found that although the India-UK BIT requires investments to be made in accordance with the laws of the host State, not all violations of municipal law would place an investment outside the scope of protection of the BIT. According to the Tribunal, in order for a violation of municipal law to disqualify an investment from the protection of the BIT, the violation “must be of such a nature that it is capable of rendering unlawful the transaction(s) through which the investment is acquired or established”.159 The Tribunal found that a violation of such a nature does not exist in the present case, since “even if it were assumed, for the sake of argument, that the Claimants engaged in an abusive tax avoidance during the 2006 Transactions, this would not affect the Claimants’ title over their shares and other assets comprising their investment; it would instead result in the Claimants’ liability to pay relevant taxes and penalties”.160 98. The Tribunal further failed to establish its jurisdiction in respect of each of CEP and CUHL individually and instead took the original 1996 investment by CEP as the sole foundation for its jurisdiction.161 The Tribunal found that “[o]nce the investment has been established or acquired lawfully, a dispute regarding a subsequent allegedly unlawful conduct by the investor or the investment is by definition an investment-related dispute and thus falls within the Tribunal’s jurisdiction.”162 On the basis of its finding that CEP’s initial investment in 1996 had been lawful, the Tribunal erroneously assumed that any illegality in the incorporation of CUHL in 2006 and its subsequent acquisition of shares in CIL in 2006 could not affect its jurisdiction. Accordingly, the Tribunal dismissed India’s jurisdictional objection.163 99. As will be demonstrated in Section IV.C below, by treating both CEP and CUHL conjunctively and requiring that any violation of municipal law should render an investment unlawful or invalid, the Tribunal understood and applied the requirement of legality under Article 1(b) of the India-UK BIT erroneously. Further, the Tribunal also erred in not interpreting this requirement of legality as applying not only to the making of the investment, but also to any changes in its form. Had it understood and applied the requirement of legality correctly, the Tribunal would have come to the conclusion that it had no jurisdiction over
157 Exh. RoI-1, Award, ¶ 675. See also Exh. RoI-4, R-SoRj, ¶ 125(a); Exh. RoI-4, R-PHB, ¶ 75; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 2, pp. 24:21-25:6 (Respondent’s Opening Statement). 158 Exh. RoI-1, Award, ¶ 688; Ex. RoI-4, C-PHB, ¶¶ 687-689. 159 Exh. RoI-1, Award, ¶ 709. 160 Exh. RoI-1, Award, ¶ 713. 161 Exh. RoI-1, Award, ¶ 712. 162 Exh. RoI-1, Award, ¶ 710. 163 Exh. RoI-1, Award, ¶ 714. 51
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Cairn because of the illegality affecting the 2006 Transactions. Accordingly, Your Court should set aside the award on this ground in accordance with Article 1065(1)(a) of the DCCP. Do Cairn’s Claims Fall Outside the Scope of Protection of the India-UK BIT? 100. Second, India objected to the Tribunal’s jurisdiction on the ground that the dispute related to “returns” as defined in Article 1(e) of the India-UK BIT and not to an “investment” as defined in Article 1(b) of the India-UK BIT. This was, inter alia, because the 2006 Transactions, which lie at the heart of the Parties’ dispute and were the Transactions that were ultimately taxed by the Indian Income Tax Department, constituted an outbound divestment rather than an inbound investment into the Indian economy. As a result, Cairn’s’ complaints about the fiscal treatment of their divestment through the 2006 Transactions did not constitute a “dispute between an investor of one Contracting Party and the other Contracting Party in relation to an investment,” as Article 9 of the India-UK BIT requires.164 Instead, they concerned a dispute about the creation of CUHL in 2006 for the sole purpose of acquiring CIL’s shares to extract the capital gains made by the Cairn group on their Indian assets out of India, without paying taxes anywhere in the world over these gains. 101. According to India, as the substantive protection of Articles 3 and 5 of the India-UK BIT only applied to investments and not to returns (which Articles 4(2) and 7 of the India-UK BIT reference separately), India’s fiscal measures could not amount to a treaty violation and were, thus, outside the Tribunal’s jurisdiction. India further pointed out that insofar as Article 9 of the India-UK BIT could be interpreted as applying to disputes related to returns, the Tribunal could only exercise jurisdiction over claims based on substantive provisions that provide protection over returns, i.e., only Articles 4(2) and 7 of the BIT, and no other provisions.165 102. Cairn took the position that a dispute arising out of the treatment of the returns on an investment relates to that investment and therefore automatically falls within the scope of Article 9 of the BIT.166 103. The Tribunal considered that the dispute arose out of measures imposed by India on the reorganisation of Cairn’s investment.167 In addition, the Tribunal held that the fact that the India-UK BIT provides separate definitions of the terms “investment” and “returns” does not mean that they are mutually exclusive. Accordingly, the Tribunal found that the fact that the dispute may relate to returns does not exclude that it also relates to an investment.168 On that basis, the Tribunal erroneously concluded that Cairn’s claims related to an investment and,
164 Exh. RoI-1, Award, ¶ 731; Exh. RoI-4, SoD, ¶¶ 226-243; Exh. RoI-4, R-SoRj, ¶¶ 102-122; Exh. RoI-4, R- PHB, ¶ 70; Exh. RoI-4, Evidentiary/Merits Hearing, August 2018, Hr. Tr., Day 1, pp. 262:15-269:23 (Respondent’s Opening Statement); Exh. RoI-4, Respondent’s Application for Bifurcation of 6 October 2016, ¶¶ 66-84. 165 Exh. RoI-1, Award, ¶ 731; R-PHB, ¶ 72; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr., Day 1, pp. 267:17-268:4 (Respondent’s Opening Statement). 166 Exh. RoI-1, Award, ¶ 739; Exh. RoI-4, C-PHB, ¶ 675. 167 Exh. RoI-1, Award, ¶ 747. 168 Exh. RoI-1, Award, ¶¶ 754, 755, 757. 52
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thus, fell within the scope of its jurisdiction under Article 9 of the India-UK BIT.169 As will be demonstrated in Section IV.C(iv) below, the Tribunal erred by failing to appreciate that any assets arising out of a divestment process, instead of an investment process, are not protected under the India-UK BIT. Do Tax Disputes Fall Outside the Purported Offer to Arbitrate in the India- UK BIT? 104. Third, India objected to the Tribunal’s jurisdiction on the ground that tax disputes, such as the dispute between Cairn and India about the taxability of the 2006 Transactions, are not arbitrable and therefore fall outside any purported offer to arbitrate contained in Article 9 of the India-UK BIT. India submitted that tax disputes are not arbitrable as a matter of Indian law, as a matter of Dutch law and as a matter of international public policy.170 105. Cairn asserted that tax-related disputes are arbitrable under the laws of England & Wales, the Netherlands and India and also as a matter of international public policy.171 106. Although the Tribunal did recognize that there is a “public policy rationale of keeping tax disputes within the exclusive competence of domestic courts”,172 it overcame that obvious hurdle to its jurisdiction through a self-serving invented distinction between a “tax dispute” and a “tax-related investment dispute.”173 Without citing any authority or precedent for such distinction, the Tribunal defined a tax dispute as a dispute “concerning the taxability (including the tax-amount) of a specific transaction”, which would concern “the question whether and how a particular transaction is taxable under the applicable (municipal) law”.174 The Tribunal simply declared that while it cannot be seized of tax disputes, it can be seized of “tax-related investment disputes”.175 In the Tribunal's view, it was “not assessing whether the 2006 Transactions gave rise to tax, and if so, in what amount”,176 but was rather tasked to “determin[e] whether certain fiscal measures imposed by the Respondent have breached the Treaty.”177 107. The Tribunal only considered whether its newly found category of “tax-related investment disputes” are arbitrable under Dutch law (as the lex arbitri) and as a matter of international public policy. The Tribunal concluded that such disputes were arbitrable under Dutch law and as a matter of international public policy and, accordingly, concluded that the dispute fell within the scope of the India-UK BIT.178 It is important to note at this juncture that although
169 Exh. RoI-1, Award, ¶ 762. 170 Exh. RoI-1, Award, ¶¶ 771, 774-777; Exh. RoI-4, R-SoRj, ¶¶ 84-101; Exh. RoI-4, R-PHB, ¶¶ 56-69; Exh. RoI-4, SoD, ¶¶ 214, 218-225; Exh. RoI-4, Respondent’s Application for Bifurcation of 6 October 2016, ¶¶ 56, 59- 62. 171 Exh. RoI-1, Award, ¶ 786; Exh. RoI-4, C-PHB, ¶¶ 639-673; Exh. RoI-4, SoRy, ¶¶ 316-333. 172 Exh. RoI-1, Award, ¶ 826. 173 Exh. RoI-1, Award, ¶ 793. 174 Exh. RoI-1, Award, ¶ 793. 175 Exh. RoI-1, Award, ¶ 825. 176 Exh. RoI-1, Award, ¶ 821. 177 Exh. RoI-1, Award, ¶ 821. 178 Exh. RoI-1, Award, ¶¶ 824-835. 53
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India specifically argued that the dispute was not arbitrable as a matter of Indian law, the Tribunal refused to analyse the arbitrability issue under Indian law.179 108. For the reasons set forth in Sections IV.B below, the Tribunal’s distinction between “tax disputes” and “tax-related investment disputes” is artificial and devoid of any legal foundation and rationale under international law. Since tax disputes are not arbitrable under the relevant applicable laws, being Dutch law and Indian law, and are also not arbitrable as a matter of international public policy, the Tribunal ought to have declined jurisdiction. Further, even if one applied the Tribunal’s self-serving distinction between “tax disputes” and “tax- related investment disputes”, the Tribunal, in fact, expressly went on to determine disputes falling within its own definition of (non-arbitrable) “tax disputes”, i.e., whether the 2006 Transactions were taxable for being tax avoidant and/or under Section 2(47)(vi) of the Indian IT Act. The Tribunal’s failure to correctly assess the non-arbitrability under the applicable laws and its failure to correctly recognize the non-arbitrability as a matter of international public policy, necessitates the setting aside of the Award on the basis of Articles 1065(1)(a) and 1065(1)(e) of the DCCP. Maturity of the Claims 109. Fourth, India also submitted that Cairn’s claims were premature and therefore inadmissible because they stand or fall with untested issues of Indian law, including the constitutionality of the 2012 Clarification as well as the issues of tax avoidance and the operation of Section 2(47)(vi) of the IT Act. India pointed out to the Tribunal that as a result of Cairn’s failure to properly pursue their claims before the competent Indian courts, “various questions which are essential to the task of this Tribunal in determining the Claimants’ claims have not yet been ventilated before and clarified by the bodies which are best qualified to answer those questions (i.e., the Indian courts).”180 110. Cairn argued that the involvement of the Indian courts or authorities would effectively introduce a requirement of exhaustion of local remedies, which Article 9 of the India-UK BIT does not contemplate.181 111. The Tribunal expressly recognized that India’s fiscal treatment of the 2006 Transactions was sub judice before the competent Indian tax courts: “[I]ndependently of this international proceeding, which has been concerned with the determination of taxability that was actually made by the ITD, it appears that the Delhi High Court, and perhaps a higher court will pronounce on whether, among other things, the structure adopted by Cairn in 2006 can be considered to be tax avoidant. The Tribunal cannot anticipate what the Indian courts might or might not do, but the fact that the issue is presently sub judice before a court with the power to apply Indian law fully as well as the power to direct the tax authorities to act in accordance with the court’s directives (i.e., to take action or to refrain to take action) not only underscores the mandate/role and lack of a
179 Exh. RoI-1, Award, ¶ 820; Exh. RoI-4, R-PHB, ¶ 69. 180 Exh. RoI-4, R-PHB, ¶ 43. See also Exh. RoI-4, R-SoRj, ¶¶ 51-72; Exh. RoI-4, SoD, ¶¶ 195-211. 181 Exh. RoI-1, Award, ¶ 847, 849; Exh. RoI-4, C-PHB, ¶¶ 619-638; Exh. RoI-4, SoRy, ¶¶ 257-296. 54
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‘concrete measure’ issues just discussed, but also, as shall be seen, shows the frailties of determining tax avoidance based upon pleadings rather than on an actual determination by the relevant authority.”182 [emphasis added]
“The Tribunal cannot but agree that the facts are different and it cannot rule out the possibility that the Delhi High Court (or the Supreme Court, were the matter to go further) could attach significance to certain facts or see a gloss in the Indian caselaw which has not been apparent from the evidence that has been put before this Tribunal.”183 [emphasis added]
112. Despite recognizing that the Indian courts, specifically the Delhi High Court, could well render different findings on the underlying issues of Indian law, including issues of taxability and tax avoidance, the Tribunal did not draw the appropriate consequences from this in terms of its jurisdiction and the admissibility of Cairn’s claims. Not only did it dismiss India’s admissibility objection and dodge the issue of the pendency of proceedings to the merits,184 in comprehensively determining the issues of tax avoidance without awaiting the Indian courts’ determination of the same, it ended up determining non-arbitrable “tax disputes”, as that term was defined by the Tribunal itself. 113. For these reasons too, the Award should be set aside under Article 1065(1)(a) of the DCCP.185 Did India’s Tax Measures Violate the FET Standard? 114. Fifth, the Tribunal concluded that India had breached the legal certainty component of the FET standard set forth in Article 3(2) of the India-UK BIT,186 and dispensed with the analysis of the alleged violations of the other standards of protection of the India-UK BIT.187 115. While Cairn had argued and framed its breach of FET claims principally on the basis of the alleged violation of their legitimate expectations, the Tribunal instead chose to find a violation of the principle of legal certainty, which it declared to be “the correct principle to apply in the present case.”188 Applying that principle, the Tribunal concluded that India had breached the FET standard when it levied capital gains tax on CUHL in relation to the 2006 Transactions on the basis of Section 9(1)(i) of the IT Act, as clarified by Explanation 5 of the 2012 Clarification.189 116. To reach that conclusion, the Tribunal engaged in an extensive assessment of issues that fell clearly within its own definition of a “tax dispute”, including the taxability of the 2006 Transactions. The Tribunal did so primarily in the context of India’s defence to the effect that
182 Exh. RoI-1, Award, ¶ 1436(b). 183 Exh. RoI-1, Award, ¶ 1773. 184 Exh. RoI-1, Award, ¶ 873. 185 As India recognizes that the Tribunal’s approach on admissibility may not be a ground for annulment in the sense of Article 1065 of the DCCP, it does not rely on the Tribunal’s failure to declare Claimants’ claims inadmissible in this Writ of Summons. Instead, it seeks to challenge the Tribunal’s determination of non-arbitrable disputes, which arises as a direct consequence of its rejection of India’s admissibility objection. 186 Exh. RoI-1, Award, ¶¶ 1816 and 1823. 187 Exh. RoI-1, Award, ¶ 1825. 188 Exh. RoI-1, Award, ¶ 1771. 189 Exh. RoI-1, Award, ¶ 1100. 55
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the 2006 Transactions would have been taxable even without the 2012 Clarification, in view of their tax avoidant nature under the “look at” doctrine in Indian law (which allows a court to tax a transaction in accordance with its substance, and not its form, where it is tax avoidant) and as the indirect transfer of immovable property under Section 2(47)(vi) of the IT Act. 117. As part of its assessment, the Tribunal heavily relied on the Indian Supreme Court’s judgment rendered in 2012 in the case of Vodafone International Holdings B.V. v. Union of India & Anr. (the “Vodafone Judgment”).190 The Tribunal considered Vodafone Judgment to be the “sole judicial authority to have interpreted Section 9(1)(i) [of the IT Act] prior to the 2012 Amendment”.191 While the Tribunal confirmed that it was not bound by the Vodafone Judgment, it regarded it as “compelling evidence” in finding that Section 9(1)(i) of the IT Act as it stood prior to the 2012 Clarification, did not apply to indirect transfers of capital assets,192 and, accordingly, concurred with the Supreme Court’s refusal in the Vodafone Judgment to purposively interpret the fourth limb of Section 9(1)(i) of the IT Act.193 In doing so, it failed to ask itself, in particular, the correct question of whether the meaning of Section 9(1)(i) had been clear under Indian law prior to the Vodafone Judgment, including at the time when Cairn conducted its restructuring in 2006, and the consequences this had for Cairn’s claims on the merits. It, instead, contrived to avoid the application of Indian law to the relevant issues. 118. Thus, in its decision, the Tribunal disregarded a number of crucial issues. For instance, the Tribunal failed to engage with the question of what, if any, legitimate expectations Cairn had while allegedly investing in India, stating that it “does not intend to base its decision on an application of the ‘legitimate expectations’ doctrine”.194 Thus, in the process, the Tribunal ignored the fact that the PSCs that existed between Cairn and the Government of India did have very narrow stabilization clauses, “which only cover[ed] changes in taxes on petroleum, and which directly undermine[d] the Claimants’ claim that they had an all-encompassing ‘legitimate expectation’ of tax stability.”195 Similarly, the Tribunal ignored the fact that India had a long and transparent history of retrospective taxation in circumstances such as those of the present case, which was permissible in accordance with equally well-established and transparent principles of Indian constitutional law. 119. The Tribunal also disregarded the issue regarding Cairn’s failure to have challenged the constitutionality of the 2012 Clarification, holding that irrespective of the constitutionality of the 2012 Clarification, it would still have to examine whether India’s measures violated the
190 Exh. RoI-4, C-59, Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613. 191 Exh. RoI-1, Award, ¶¶ 1227 and 1249. 192 Exh. RoI-1, Award, ¶¶ 1227 and 1249. 193 Exh. RoI-1, Award, ¶ 1230. 194 Exh. RoI-1, Award, ¶ 1771. 195 See, inter alia, Exh. RoI-4, CWS-Brown-12, Article 17.10, PR-OSN-2004/1 02-03-07, Production Sharing Contract between the Government of India and Oil & Natural Gas Corporation Ltd and Tata Petrodyne Limited and Cairn Energy India Ltd dated 30 June 1998; Exh. RoI-4, R-SoRj, ¶ 438, Section V. C.2(b); Exh. RoI-4, R- PHB, ¶¶ 386-397. In the process, the Tribunal also baselessly found that “when scrutinising retroactive changes to the legal framework, the search for specific commitments is of limited relevance” (see Exh. RoI-1, Award, ¶ 1786). 56
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FET standard contained in Article 3(2) of the India-UK BIT.196 While the Tribunal’s failure to apply the law it was mandated to apply under Article 11(1) of the India-UK BIT (i.e., Indian law) to the issues of the constitutionality of the 2012 Clarification, as well as to the issues of tax avoidance and the operation of Section 2(47)(vi) of the IT Act, is shocking, India recognizes, for the purposes of the present annulment proceedings under Dutch law, that the Tribunal’s approach and its failure to apply the applicable law may not be a ground for annulment under Article 1065 of the DCCP. However, India firmly maintains its position in this respect and reserves the right to reiterate that position in the context of recognition and enforcement proceedings in other jurisdictions.197 In this regard, India’s comprehensive position on this issue is set forth in Annex B. Damages Awarded 120. Finally, the Tribunal found that the interest India had in preventing Cairn from succeeding in achieving double non-taxation did not justify the capital gains tax it had levied on CUHL in relation to the 2006 Transactions simply because India did not have a “specific public purpose that would justify applying the 2012 Amendment to past transactions.”198 121. The Tribunal ordered India to pay damages in excess of USD 1.2 billion, plus interest at a rate of USD 6-month LIBOR plus a 6-month margin of 1.375%, compounded semi-annually on the net proceeds, as well as a compensation of more than USD 22 million on account of the arbitration costs and legal costs incurred by Cairn.199
III. COMPETENCE OF THE COURT OF APPEAL OF THE HAGUE 122. The Court of Appeal of The Hague (“CoA”) is competent to hear this Writ of Summons for the setting aside of the Award rendered on 21 December 2020 in PCA Case No. 2016-7 between CEP and CUHL as Claimants in the Arbitration and India as Respondent in the Arbitration for the following reasons. 123. The Arbitration was initiated by Cairn on the basis of the India-UK BIT, which contains an arbitration clause in Article 9 that provides, in relevant part, as follows: “. . . (3) Where the dispute is not referred to international conciliation, or where it is so referred but conciliation proceedings are terminated other than by the signing of a settlement agreement, the dispute may be referred to arbitration as follows: (a) if the Contracting Party of the investor and the other Contracting Party are both parties to the Convention on the Settlement of
196 Exh. RoI-1, Award, ¶ 1694. 197 The present writ has been drafted for the specific purpose of the annulment proceedings in The Netherlands under Article 1065 of the DCCP. It does not in any way limit the material and arguments which India may rely on in any other jurisdiction in relation to any proceedings arising from or related to the matters covered in the Award, including but not limited to proceedings regarding the recognition and enforcement of the Award in any such jurisdiction. 198 Exh. RoI-1, Award, ¶ 1816. 199 Exh. RoI-1, Award, ¶ 2032. 57
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Investment Disputes between States and Nationals of other States, 1965, and the investor consents in writing to submit the dispute to the International Centre for the Settlement of Investment Disputes such a dispute shall be referred to the Centre; or (b) if both parties to the dispute so agree under the Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings; or (c) to an ad hoc arbitral tribunal by either party to the dispute in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law, 1976. In respect of such arbitral proceedings, the following shall apply: (i) The Arbitral Tribunal shall consist of three arbitrators. Each party shall select an arbitrator. These two arbitrators shall appoint by mutual agreement a third arbitrator, the Chairman, who shall be a national of a third State. The arbitrators shall be appointed within two months from the date when one of the parties to the dispute informs the other of its intention to submit the dispute to arbitration within the period of the six months mentioned earlier in paragraph (2) of this Article; (ii) If the necessary appointments are not made within the period specified in subparagraph (c)(i), either party may, in the absence of any other agreement, request the President of the International Court of Justice to make the necessary appointment; (iii) The arbitral award shall be made in accordance with the provisions of this Agreement; (iv) The tribunal shall reach its decision by a majority of votes; (v) The decision of the arbitral tribunal shall be final and binding and the parties shall abide by and comply with the terms of its award; (vi) The arbitral tribunal shall state the basis of its decision and give reasons upon the request of either party; (vii) Each party concerned shall bear the cost of its own arbitrator and its representation in the arbitral proceedings. The cost of the Chairman in discharging his arbitral function and the remaining costs of the tribunal shall be borne equally by the parties concerned. The tribunal may, however, in its decision direct that a higher proportion of costs shall be borne by one of the two parties, and this award shall be binding on both parties.” [footnotes omitted]
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124. As determined by the Tribunal, the place of arbitration (legal seat) for the purposes of Article 1037 of the DCCP and Article 16 of the UNCITRAL Rules is The Hague, the Netherlands.200 125. Pursuant to Article 1073 of the DCCP, the provisions of Book IV, Title 1 of the DCCP govern arbitral proceedings seated in The Netherlands, and define the legal recourses available against an award rendered in The Netherlands as per the provisions of Book IV, Title 1, Section 5 (Articles 1064-1068 of the DCCP). 126. Pursuant to Article 1064a(1) of the DCCP, any annulment action must be instituted before the CoA in whose district the place (legal seat) of the arbitration is located. Therefore, the CoA in The Hague is competent to hear India’s application for the setting aside of the Award.
IV. GROUND FOR SETTING ASIDE 1: LACK OF VALID ARBITRATION AGREEMENT (ARTICLE 1065(1)(A) DCCP) 127. As part of the first ground for setting aside, India submits that the Tribunal did not have the jurisdiction to determine the case between Cairn and India. The Tribunal lacked jurisdiction for multiple reasons, each of which shall be explained in this Section in turn. Prior to that, at the outset, the legal framework surrounding the invocation of Article 1065(1)(a) of the DCCP shall be explained in Section IV.A below. This shall be followed by India’s arguments on (i) the first ground for lack of jurisdiction, i.e., the Tribunal decided on issues that are not arbitrable (Section IV.B below); (ii) the second ground for lack of jurisdiction, i.e., Cairn cannot be considered to have made an “investment” in India, nor can CEP or CUHL be considered as “investors” that have made an “investment” under the India-UK BIT (Section IV.C below).
A. Legal Framework 128. As established above (see Section III above), the CoA is competent to hear this Writ of Summons for the setting aside of the Award.201 129. When entering into an arbitration agreement, the parties thereto renounce their right of access to the courts afforded by law. In view of the fundamental nature of the right of access to the courts afforded by law, laid down in Article 17 of the Constitution of The Netherlands and Article 6(1) of the European Convention on Human Rights (“ECHR”), the question as to whether a valid arbitration agreement exists is ultimately determined by the annulment court, i.e., the court competent to decide an application for setting aside of an award.202
200 Exh. RoI-4, AT-8, Tribunal’s Letter of 6 May 2016. 201 Cf. Supreme Court, 26 September 2014, ECLI:NL:HR:2014:2838, NJ 2015, 318 (Ecuador/Chevron), ¶ 4.2; Supreme Court, 27 March 2009, ECLI:NL:HR:2009:BG6443, NJ 2010, 170 (Smit Bloembollen B.V/Ruwa Bulbs), ¶ 3.4.1; Supreme Court, 9 January 1981, ECLI:NL:HR:1981:AG4130, NJ 1981, 203 (De Raad/Wagemaker). See also G.J. Meijer Tekst & Commentaar Rv, Art. 1065 DCCP, ¶ 2.a.; G.J. Meijer, Overeenkomst tot arbitrage (Alpen aan den Rijn: Kluwer, 2011), p. 939; H.J. Snijders, Nederlands Arbitragerecht, Groene Serie Burgerlijke Rechtsvordering, Article 1052 DCCP, ¶ 1. 202 Supreme Court, 9 January 1981, ECLI:NL:HR:1981:AG4130, NJ 1981, 203 (De Raad/Wagemaker); Supreme Court, 27 March 2009, ECLI:NL:HR:2009:BG6443, NJ 2010, 170 (Smit Bloembollen B.V/Ruwa Bulbs), ¶ 3.4.1; Supreme Court, 26 September 2014, ECLI:NL:HR:2014:2837, NJ 2015, 318 (Ecuador/Chevron), ¶ 4.2. 59
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130. Since the annulment court has the last say on an arbitral tribunal’s jurisdiction, the annulment court reviews the jurisdiction of an arbitral tribunal de novo under Article 1065(1)(a) of the DCCP. Accordingly, the annulment court does not have to exercise the restraint while reviewing the jurisdiction of an arbitral tribunal under Article 1065(1)(a) of the DCCP that it does have to observe in respect of the other grounds for annulment or setting aside under Article 1065.203 The Netherlands Supreme Court has confirmed this, inter alia, in its judgment in the Ecuador/Chevron case: “Pursuant to Article 1020(1) of the DCCP, parties can agree to submit to arbitration disputes that arose between them by virtue of a certain legal relationship. The arbitral tribunal that is so appointed is competent to determine its own jurisdiction (Article of the 1052(1) DCCP), but the fundamental right to access to a court means that the question as to whether or not a valid arbitration agreement has been entered into, is ultimately to be answered by the court (cf. Article of the 1022(1) DCCP and Article 1065(1), preamble and under (a) of the DCCP, as well as Supreme Court 9 January 1981, ECLI:NL:HR:1981:AG4130, NJ 1981/203). This fundamental right also means that the court shall not exercise restraint in assessing the validity of a claim for setting aside the arbitral award on the basis of Article 1065(1)(a) DCCP.”204
131. Accordingly, since the CoA is competent to review the jurisdiction of the Tribunal de novo, it is incumbent upon it to review whether each of the constituent requirements for the jurisdiction of the Tribunal has been satisfied. 132. In investor-state arbitrations under a bilateral investment treaty (“BIT”), arbitral tribunals derive their jurisdiction from the BIT executed between the home State of the investor(s) and the host State where the investment is allegedly made. The arbitration clause stipulated in a BIT, if any, constitutes the offer to arbitrate by the host State, which can subsequently be accepted by any investor(s) that is a national of the other contracting State to the BIT, if and when a dispute arises.205 The acceptance of the offer to arbitrate is effected by filing a notice of arbitration. 133. In the present case, the relevant clause of the India-UK BIT, on which the claim for the Tribunal’s jurisdiction is based, is Article 9 (quoted in ¶ 123 above), which is being reproduced here, in relevant part, for ease of reference: “(1) Any dispute between an investor of one Contracting Party and the other Contracting Party in relation to an investment of the former under this Agreement shall, as far as possible, be settled amicably through negotiations between the parties to the dispute. (2) Any dispute which has not been amicably settled within a period of six months from written notification of a claim may be submitted to international conciliation under the Conciliation Rules of the United
203 Supreme Court, 27 March 2009, ECLI:NL:HR:2009:BG6443, NJ 2010, 170 (Smit Bloembollen B.V./Ruwa Bulbs B.V.); Supreme Court, 26 September 2014, ECLI:NL:HR:2014:2837, NJ 2015, 318 (Ecuador/Chevron). 204 Supreme Court, 26 September 2014, ECLI:NL:HR:2014:2837, NJ 2015, 318 (Ecuador/Chevron), ¶ 4.2. 205 Supreme Court, 26 September 2014, ECLI:NL:HR:2014:2837, NJ 2015, 318 (Ecuador/Chevron). 60
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Nations Commission on International Trade Law, if the parties to the dispute so agree. (3) Where the dispute is not referred to international conciliation, or where it is so referred but conciliation proceedings are terminated other than by the signing of a settlement agreement, the dispute may be referred to arbitration as follows: (a) if the Contracting Party of the investor and the other Contracting Party are both parties to the Convention on the Settlement of Investment Disputes between States and Nationals of other States, 1965 and the investor consents in writing to submit the dispute to the International Centre for the Settlement of Investment Disputes such a dispute shall be referred to the Centre; or (b) if both parties to the dispute so agree under the Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings; or (c) to an ad hoc arbitral tribunal by either party to the dispute in accordance with the Arbitration Rules of the United Nations Commission on International Trade Law, 1976 . . .”
134. CEP and CUHL brought their claims against India on the basis of the India-UK BIT. As a consequence, both CEP and CUHL as well as their claims underlying the Parties’ dispute must, inter alia, satisfy the two formal requirements of the arbitration clause, which are set forth in Article 9(1) read with Article 9(3)(c) of the said BIT. 135. First, the dispute must be between an “investor of one Contracting Party and the other Contracting Party”. Thus, only a party that qualifies as an “investor”, as defined in the following terms in Article 1(c) of the India-UK BIT, can bring a claim against the other Contracting Party: “(c) “investors” means any national or company of a Contracting Party;” 136. Second, the dispute must be “in relation to an investment of the [investor]”. Thus, an “investor” can only bring a claim against a Contracting Party, which concerns an “investment”, as defined in the following terms in Article 1(b) of the India-UK BIT: “(b) “investment” means every kind of asset established or acquired, including changes in the form of such investment, in accordance with the national laws of the Contracting Party in whose territory the investment is made and in particular, though not exclusively, includes; (i) movable and immovable property as well as other rights such as mortgages, liens or pledges; (ii) shares in and stock and debentures of a company and any other similar forms of interest in a company; (iii) rightful claims to money or to any performance under contract having a financial value;
61
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(iv) intellectual property rights, goodwill, technical processes and know- how in accordance with the relevant laws of the respective Contracting Party; (v) business concessions conferred by law or under contract, including concessions to search for and extract oil and other minerals;”
137. Article 9 of the India-UK BIT formed the foundation of the Tribunal’s jurisdiction. Consequently, if either or both requirements, referred to in ¶¶ 135 and 136 above, were not satisfied by each of CEP and CUHL, the Tribunal would have no jurisdiction to hear and award the claims that they had brought before it on the basis of the India-UK BIT. 138. In addition to the non-satisfaction of jurisdictional requirements stemming from the BIT itself, an arbitral award can also be set aside if the dispute that it resolves concerns a matter that is not arbitrable.206 Article 1020(3) of the DCCP stipulates that the arbitration agreement may not serve to determine legal consequences that the parties cannot freely dispose.207 An arbitration agreement through which the parties seek to resolve non-arbitrable matters that the parties cannot freely dispose shall be considered null and void under Article 3:40 of the Dutch Civil Code (“DCC”).208 In that case, any ensuing award will, thus, have been based on an invalid arbitration agreement, which is a ground for setting aside such award under Article 1065(1)(a) of the DCCP.209 Moreover, the non-arbitrability of disputes may also give rise to the annulment of the arbitral award on grounds of violation of public policy under Article 1065(1)(e) of the DCCP (see Section V.C below).210 139. It is well-established that the defendant in setting aside proceedings bears the burden of proving that there is a valid arbitration agreement between the parties.211 Therefore, Cairn can only succeed in its defence to this Writ of Summons if it proves to Your Court that (i) each of the constituent requirements of Article 9 of the India-UK BIT had been satisfied in respect of each of CEP and CUHL and their claims in the Arbitration; and (ii) the subject matter of Cairn’s claims concerned matters that can be freely disposed of by the Parties as required under Article 1020(3) of the DCCP. 140. Whether this burden of proof is satisfied by the defendant in setting aside proceedings must usually be evaluated in light of a party’s fundamental constitutional right of access to national
206 Parliamentary Papers II 1983/84, 18 464, No. 3, pp. 29-30 (Explanatory Memorandum). 207 Parliamentary Papers II 1983/84, 18 464, No. 3, pp. 29-30 (Explanatory Memorandum). 208 Parliamentary Papers II 1983/84, 18 464, No. 3, pp. 29-30 (Explanatory Memorandum). 209 Parliamentary Papers II 1983/84, 18 464, No. 3, pp. 29-30 (Explanatory Memorandum). 210 Parliamentary Papers II 1983/84, 18 464, No. 3, pp. 29-30 (Explanatory Memorandum). See G.J. Meijer, Tekst & Commentaar Rv, Art. 1065, ¶ 2.c; P. Sanders, Het Nederlandse Arbitragerecht (Deventer: Kluwer, 2001), p. 191. 211 Supreme Court 21 February 1913, NJ 1913, p. 584 (Offermeier/Portheine): “(…) that where the civil court is requested to rule on a dispute and where arbitrators have exclusive jurisdiction to render a decision, if parties have thus agreed, then the party asserting that such an agreement exists shall bear the burden of proof if the other party disputes it.” This was recently confirmed by the Court in Rotterdam, see District Court of Rotterdam, 18 May 2011, ECLI:NL:RBROT:2011:BQ5670 (Eiser/Cimcool), ¶ 4.6. See also G.J. Meijer, Tekst & Commentaar Rv, Art. 1065, ¶ 2.a.; G. J. Meijer, Overeenkomst tot arbitrage (Alpen aan den Rijn: Kluwer, 2011), p. 944; H.J. Snijders, Groene Serie Burgerlijke Rechtsvordering, Article 1065 DCCP, ¶ 2. 62
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courts that cannot be renounced except by means of a valid arbitration agreement. However, another factor must be borne in mind while evaluating the satisfaction of this burden of proof by the defendant when the consent to arbitrate of a sovereign State is at issue. It is widely accepted as a matter of international law that the consent of a sovereign State to have a dispute resolved through arbitration, be it in State-State disputes212 or in investor-State disputes,213 is required to be expressed in “clear and unambiguous” terms. The reason for this is that a sovereign State is presumed to have jurisdictional immunity from proceedings before courts or tribunals other than its own national courts, including investment treaty arbitration tribunals. Any waiver of such immunity in favour of the jurisdiction of an arbitral tribunal cannot be lightly assumed and must meet the high threshold of a “clear and unambiguous” intention to waive immunity. In this context, the Advocate General, in his opinion in the Ecuador/Chevron case before the Netherlands Supreme Court, also stated that when interpreting the bilateral investment treaty in which the sovereign State’s consent to arbitrate is expressed, “an unnecessarily broad encroachment of the sovereignty of a State . . . must be avoided”.214 141. In the present case, as will be demonstrated in Sections IV.B and IV.C below, Cairn cannot satisfy this burden of proof, since a valid arbitration agreement between the Parties is lacking and, therefore, the Tribunal had no jurisdiction to hear and award the claims. Accordingly, Your Court should set aside the Award on the basis of Article 1065(1)(a) of the DCCP.
212 See Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), Judgment, 2008 I.C.J. Rep. 177 (Jun. 4, 2008), pp. 203-204, ¶¶ 60-62, available at: https://www.icj-cij.org/public/files/case- related/136/136-20080604-JUD-01-00-EN.pdf; Rights of Minorities in Upper Silesia (Minority Schools), Judgment, Publications of the P.C.I.J., Series A, No/ 15 (Apr. 26, 1928), p. 24 (referring to “an unequivocal indication of the desire of a State to obtain a decision”), available at: https://www.icj- cij.org/public/files/permanent-court-of-international- justice/serie_A/A_15/46_Droits_de_minorites_en_Haute_Silesie_Ecoles_minoritaires_Arret.pdf; Corfu Channel (United Kingdom v. Albania), Preliminary Objection, Judgment, 1948 I.C.J. Reports 15 (Mar. 25, 1948), p. 27 (referring to “voluntary and indisputable acceptance of the Court’s jurisdiction”), available at: https://www.icj- cij.org/public/files/case-related/1/001-19480325-JUD-01-00-EN.pdf; Application of the Convention on the Prevention and Punishment of the Crime of Genocide (Bosnia and Herzegovina v. Yugoslavia), Preliminary Objections, Judgment, 1996 I.C.J. Reports 595 (Jul. 11, 1996), pp. 620-621, ¶ 40 (referring to “voluntary and indisputable” consent), available at: https://www.icj-cij.org/public/files/case-related/91/091-19960711-JUD-01- 00-EN.pdf. 213 Wintershall Aktiengesellschaft v. Argentine Republic (ICSID Case No. ARB/04/14, Award, 8 December 2008), ¶ 167 (“all international arbitration must be based upon an agreement of the parties, which must be clear and unambiguous”), available at: https://www.italaw.com/sites/default/files/case-documents/ita0907.pdf; Plama Consortium Limited v. Republic of Bulgaria (ICSID Case No. ARB/03/24, Decision on Jurisdiction, 8 February 2005), ¶ 198 (“an agreement [to arbitrate] must be clear and unambiguous”), available at: https://www.italaw.com/sites/default/files/case-documents/ita0671.pdf; Daimler Financial Services AG v. Argentine Republic (ICSID Case No. ARB/05/1, Award, 22 August 2012) (“Non-consent is the default rule; consent is the exception.”), ¶ 175, available at: https://www.italaw.com/sites/default/files/case- documents/ita1082.pdf; Vladimir Berschader and Moïse Berschader v. Russian Federation (SCC Case No. 080/2004, Award, 21 April 2006), available at: https://www.italaw.com/sites/default/files/case- documents/ita0079_0.pdf; Telenor Mobile Communications A.S. v. Republic of Hungary (ICSID Case No. ARB/04/15, Award, 13 September 2006), ¶ 90, available at: https://www.italaw.com/sites/default/files/case- documents/ita0858.pdf. 214 A-G Spier’s conclusion for DSC 28 March 2014, ECLI:NL:PHR:2014:1774 (Ecuador/Chevron), ¶ 7.8. 63
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B. Jurisdiction Ground 1: The Tribunal Decided on Issues that Are Not Arbitrable 142. The Tribunal made two fatal errors with respect to the arbitrability of the tax disputes brought before it by Cairn. 143. First, the Tribunal erred in not recognizing that “tax disputes” of the kind at issue in the present case are not arbitrable under any of the relevant laws, including Dutch law, Indian law as well as international law. A key flaw in the Tribunal’s reasoning in this regard was its invention of a baseless distinction between “tax disputes” and “tax-related investment disputes”. This fatal error of the Award shall be discussed in Sub-Section IV.B(i) below. 144. Second, even if one were to assume that such a distinction between “tax disputes” and “tax- related investment disputes” exists, the Tribunal itself did not adhere to it as it proceeded to resolve “tax disputes” when it determined India’s defences against Cairn’s claims, including the defences in relation to tax avoidance and Section 2(47)(vi) of the IT Act. This fatal error of the Award shall be discussed in Sub-Section IV.B(ii) below. 145. It must be noted that India had consistently and repeatedly objected in the Arbitration to the arbitrability of the “tax disputes” that were submitted to Arbitration by Cairn. Further, and in any event, it is important to recall that the general rule that jurisdictional objections on the basis of Article 1065(1)(a) of the DCCP that were not raised in a timely manner before the arbitral tribunal are generally considered forfeited, does not apply to objections relating to the arbitrability of the dispute.215 Accordingly, India’s objection that the disputes are not arbitrable can in no way be considered forfeited and the Award should now be set aside on the basis of that objection. (i) Tax Disputes, such as the one between Cairn and India, Are Not Arbitrable 146. India had consistently argued that “tax disputes” of the kind at issue in the arbitration are not capable of settlement by arbitration because they are not arbitrable.216 Despite Cairn’s arguments to the contrary,217 the Tribunal did not reject this essential premise of India’s pleaded case on jurisdiction. In fact, it expressly recognized that there is “a public policy rationale of keeping tax disputes within the exclusive competence of domestic courts.”218 147. Instead, the Tribunal chose to plot a way around the obvious non-arbitrability of tax disputes by inventing a self-serving distinction between “tax-related investment disputes” and “tax disputes” without any legal authority for such distinction under any applicable law.219 A bare perusal of this artificial distinction makes it clear that it is a strawman, invented only in order to find a tenuous basis to uphold jurisdiction, which cracks upon further scrutiny. This is not
215 See Article 1052(3) of the DCCP. 216 Exh. RoI-4, R-PHB, ¶¶ 56-69; Exh. RoI-4, SoD, ¶¶ 212-225; Exh. RoI-4, R-SoRj, ¶¶ 73-101; Exh. RoI-4, Respondent’s Application for Bifurcation of 6 October 2016, ¶¶ 54-65; Exh. RoI-4, Respondent’s Reply to the Claimants’ Response to the Respondent’s Application for Bifurcation of 19 February 2017, ¶¶ 24-29; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 2, pp. 89:10-102:9 (Respondent’s Opening Statement). 217 See, inter alia, Exh. RoI-4, SoRy, ¶¶ 264-277; Exh. RoI-4, C-SoRj, ¶¶ 178-210. 218 Exh. RoI-1, Award, ¶ 826. 219 Exh. RoI-1, Award, ¶ 793; see also Exh. RoI-1, Award, ¶¶ 821, 825, 828. 64
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unlike the approach of a number of investment treaty arbitration tribunals that are very eager to assume jurisdiction over high-profile cases, without appropriately appreciating the considerations relating to a State’s sovereignty at issue.220 148. Although the entirety of the Tribunal’s analysis of India’s jurisdictional objection regarding non-arbitrability of tax disputes is worthy of being set aside and is, thus, being challenged in this Writ of Summons,221 the distinction between “tax disputes” and “tax-related investment disputes”, articulated by the Tribunal in the following terms, is particularly appalling: “[I]t merits clarifying that the present dispute is a tax-related investment dispute, not a tax dispute. More precisely, this dispute concerns alleged violations of an investment treaty resulting from certain sovereign measures taken by the Respondent in the field of taxation, also referred to as fiscal measures. This type of dispute must be distinguished from tax disputes proper, which are disputes concerning the taxability (including the tax-amount) of a specific transaction. The distinction is significant. In a tax dispute, the question is whether and how a particular transaction is taxable under the applicable (municipal) law or, possibly laws of several countries if the transaction is international. In tax-related investment disputes, on the other hand, the tribunal is tasked with determining whether the respondent State has breached substantive standards of treatment under the investment treaty through the exercise of its authority in the field of taxation, and whether liability arises as a result. The issue at stake is thus not a matter of domestic tax law; it is rather whether the fiscal measures taken by the State, valid or not under its own tax laws, violate international law.”222
149. Based on this distinction, the Tribunal considered that “whether tax disputes are arbitrable . . . is irrelevant” and “what matters is” whether arbitration of “tax-related investment disputes” is prohibited.223 Essentially, since the Tribunal had classified the Parties’ dispute as “a tax- related investment dispute” as a preliminary matter, it subsequently limited its considerations of arbitrability to this self-concocted category of “tax-related investment disputes”.224 It dismissed as “irrelevant” the real issue in dispute between the Parties regarding the non- arbitrability of “tax disputes”, which was at the heart of India’s jurisdictional objection. 150. Importantly, none of the Parties had ever sought to draw the distinction between “tax-related investment disputes” and “tax disputes” in these terms during the procedural debate, nor had the Tribunal ever afforded the Parties an opportunity to make specific submissions on this distinction it intended to draw between “tax-related investment disputes” and “tax disputes” to serve as the basis for its jurisdiction.
220 See, inter alia, A-G Drijber’s conclusion for DSC 12 April 2019, ECLI:NL:PHR:2019:97 (Ecuador/Chevron II), ¶¶ 82-85; A-G Spier’s conclusion for DSC 28 March 2014, ECLI:NL:PHR:2014:1774, ¶ 11.10; H. J. Snijders, “BITs, MITs, TTIP en IDR,” Tijdschrift voor Arbitrage 2016, No. 1 (2016): 1-9. 221 Exh. RoI-1, Award, ¶¶ 792-836. 222 Exh. RoI-1, Award, ¶ 793. See, in this regard, ¶¶ 225-237 below, where it is further established why this distinction between “tax disputes” and “tax-related investment disputes” is baseless as a matter of international law. 223 Exh. RoI-1, Award, ¶ 821; see also Exh. RoI-1, Award, ¶¶ 826, 828. 224 Exh. RoI-1, Award, ¶ 821, see also Exh. RoI-1, Award, ¶¶ 826, 828. 65
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
151. As a result, the entirety of the Tribunal’s determination of this crucial issue of jurisdiction is based on a distinction it introduced of its own motion after the procedural debate between the Parties had been closed. Therefore, in reality, the Tribunal ignored the Parties’ submissions on the non-arbitrability of “tax disputes” and purported to determine a completely separate issue from what the Parties had actually pleaded in the arbitration. 152. It shall be demonstrated in the forthcoming Sub-Sections that the Tribunal’s findings on this jurisdictional issue regarding non-arbitrability is erroneous as a matter of Dutch law, which is applicable as the lex arbitri (see Sub-Section IV.B(i)(a) below), Indian law, which is applicable, inter alia, to the legal relationship between the Indian Income Tax Department and CUHL as the tax assessee and for determining the existence of India’s consent to be bound to Article 9 of the India-UK BIT (see Sub-Section IV.B(i)(b) below) and international law, which is applicable, inter alia, to interpret the India-UK BIT (see Sub-Section IV.B(i)(c) below). Notably, while the Tribunal did purport to assess the arbitrability of its newly invented category of “tax-related investment disputes” under international law and under Dutch law, it chose to ignore Indian law, which had been put forward by India as one of three laws applicable to the issue of non-arbitrability. The Tribunal Erred in its Findings on Dutch Law 153. The Tribunal rightly recognized that because The Hague (The Netherlands) was the place (the legal seat) of the arbitration, pursuant to Article 1073 of the DCCP, the provisions of Dutch arbitration law set forth in Book IV, Title 1 of the DCCP govern the arbitral proceedings as the lex arbitri.225 Accordingly, in the context of the assessment of its own jurisdiction pursuant to Article 1052 of the DCCP (compétence de la compétence), the Tribunal had to assess whether a valid arbitration agreement was made by reference to the mandatory provisions of Articles 1020 and 1021 of the DCCP.226 154. Pursuant to Article 1065(1)(a) of the DCCP, it is in now incumbent upon Your Court, as the annulment court, to review the Tribunal’s assessment on jurisdiction in a de novo manner, i.e., without exercising the restraint that must be observed in relation to other annulment grounds under Article 1065(1) of the DCCP. 227 155. As a preliminary matter, it must be noted that the existence of the arbitration agreement between Cairn and India depends on whether Cairn validly accepted India’s purported offer to arbitrate contained in Article 9 of the India-UK BIT. Cairn alleges that it accepted India’s offer when CEP and CUHL submitted their Notice of Arbitration on 22 September 2015 (see ¶ 64 above). 156. Under Dutch law, the formal validity of an arbitration agreement is governed by Article 1020 of the DCCP, which reads, in relevant part, as follows:
225 Exh. RoI-1, Award, ¶ 819. 226 G.J. Meijer, Tekst & Commentaar Rv, Art. 1020 DCCP, ¶ 2. 227 Supreme Court, 27 March 2009, ECLI:NL:HR:2009:BG6443, NJ 2010, 170 (Smit Bloembollen B.V./Ruwa Bulbs B.V.); Supreme Court, 26 September 2014, ECLI:NL:HR:2014:2837, NJ 2015, 318 (Ecuador/Chevron). 66
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
“(1) The parties may agree to submit to arbitration disputes, which have risen or may arise between them, out of a defined legal relationship, whether contractual or not. [. . .] (3) The arbitration agreement shall not serve to determine legal consequences that may not be freely determined by the parties.”
157. The substantive validity of an arbitration agreement is assessed ex officio in legal proceedings before Dutch courts,228 in accordance with one of the three potentially applicable laws referred to in Article 10:166 of the DCC:229 “(1) the law chosen by the parties to govern their arbitration agreement; (2) the law of the place of arbitration; or (3) the law governing the legal relationship in respect of which the arbitration agreement is made.”
158. It is common ground between the Parties that there is no specific choice of law governing the arbitration agreement invoked by Cairn, and that The Hague, The Netherlands, is the place of the Arbitration. Accordingly, the substantive validity of the arbitration agreement can be established by reference to: (i) Dutch law, as the law of the place of arbitration, i.e., the lex arbitri, which will be addressed in this Sub-Section; (ii) Indian law, (a) as the law governing the legal relations between the Indian Income Tax Department and CUHL as the tax assessee arising from the Final Assessment Order of the Income Tax Department; (b) pursuant to Article 46 of the Vienna Convention on the Law of Treaties 1969 (“VCLT”); and/or (c) pursuant to Article 11 of the India-UK BIT. These aspects of Indian law shall be addressed in Sub-Section IV.B(i)(b); or (iii) international law, (a) as the law governing the legal relations between CEP and CUHL as purported investors and the Republic of India as the host State of their alleged investment for the purposes of the India-UK BIT; and/or (b) as the law governing the interpretation of the India-UK BIT and any questions of State responsibility. 159. With respect to Dutch law on arbitrability, the Tribunal’s shallow analysis – if one can call it that – is limited to three substantive paragraphs of the Award: (i) in paragraph 825 of the Award, the Tribunal circumvented the obvious non-arbitrability of the issues in dispute by asking itself the wrong question. Instead of assessing whether “tax disputes” are arbitrable or not, which had been extensively debated between both
228 Art. 10:2 DCC. 229 M. Koppenol-Laforce, Tekst & Commentaar art. 10:166 DCC. 67
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sides in the arbitration,230 the Tribunal considered the different question of the arbitrability of its newly invented category of “tax-related investment disputes”; 231 (ii) in paragraph 826 of the Award, the Tribunal dismissed the proposition that “tax disputes” are not arbitrable in The Netherlands as having “no bearing” because no Dutch taxes are at stake in the dispute between India and Cairn; 232 and (iii) in paragraph 827 of the Award, the Tribunal sought to derive, from the Agreement between the Republic of India and the Kingdom of The Netherlands for the Promotion and Protection of Investments (“India-Netherlands BIT”), an understanding on the part of The Netherlands that “tax-related investment disputes” arising under treaties would be arbitrable.233 160. As the Tribunal took the wrong question as the starting point of its jurisdictional inquiry (i.e., “[a]re tax-related investment disputes arbitrable under Dutch law?”), it naturally arrived at a wrong answer too: “Once again, the provisions invoked by the Respondent relate to tax disputes, not tax-related investment disputes. In the former, the dispute concerns the taxability of a given transaction, and the determination may indeed potentially have erga omnes effect vis-à-vis other taxpayers in like circumstances. Article 9(3)(v) of the BIT provides that the decision of the arbitral tribunal is binding on the disputing parties. It has no erga omnes effect. (…) The mandate of this Tribunal is different from that of a domestic tax court, which may determine with an erga omnes or at least precedential effect whether particular types of transactions are taxable as a matter of municipal tax law.”234
161. Since the Tribunal starts by asking the wrong question, its findings on jurisdiction cannot stand. Had the Tribunal’s jurisdictional inquiry started from the correct question that the Parties had actually debated in the arbitration (i.e., Are tax disputes arbitrable under Dutch law?), its jurisdictional inquiry would have ended with a negative conclusion for the following five independent reasons. 162. First, in terms of the formal requirements of Article 1020(1) of the DCCP, an arbitration agreement is only valid if it is made in respect of disputes concerning a defined legal relationship. 163. It is matter of record that on 22 September 2015, when CEP and CUHL commenced the arbitration by filing their Notice of Arbitration, the Indian Income Tax Department was yet to finally determine CUHL’s tax liability. It only did so on 25 January 2016, when it issued the Final Assessment Order, i.e., the FAO.235 On 22 September 2015, the Indian Income Tax
230 Exh. RoI-4, SoD, ¶¶ 212-225; Exh. RoI-4, SoRy, ¶¶ 297-331; Exh. RoI-4, R-SoRj, ¶¶ 73-101; Exh. RoI-4, C-SoRj, ¶¶ 154-210; Exh. RoI-4, R-PHB, ¶¶ 56-69; Exh. RoI-4, C-PHB, ¶¶.639-673. 231 Exh. RoI-1, Award, ¶ 825. 232 Exh. RoI-1, Award, ¶ 826. 233 Exh. RoI-1, Award, ¶ 827. 234 Exh. RoI-1, Award, ¶ 825. 235 Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016. 68
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Department had not (yet) levied capital gains tax on CUHL in full and final terms, as a result of which there existed no legal relationship between the Income Tax Department and the tax assessee, i.e., CUHL, let alone a defined legal relation. As a result of the inexistence of a defined legal relationship between the Parties as of 22 September 2015, there was no measure and thus no dispute had or could have arisen from it. 164. It is trite law that the issue of jurisdiction must be assessed at the moment of the commencement of the arbitration and that all jurisdictional requirements must be satisfied on that date.236 165. Accordingly, at the moment when CEP and CUHL purported to accept India’s offer to arbitrate, set forth in Article 9 of the India-UK BIT, by filing their Notice of Arbitration, there existed no legal relationship giving rise to a dispute, let alone a defined legal relationship in the sense of Article 1020(1) of the DCCP. For that reason, the Tribunal should have declined jurisdiction. 166. Second, because of the importance of the fundamental right of access to the courts afforded by law, as reflected in Article 17 of the Dutch Constitution and Article 6 of the ECHR, Article 1020 of the DCCP requires the existence of a validly concluded arbitration agreement to establish arbitral jurisdiction.237 A waiver of the right of access to the courts afforded by law must be unequivocal and voluntary.238 Advocate General Spier rightly pointed out in the Ecuador/Chevron case that when construing a State’s offer to arbitrate in a BIT, “it must be sufficiently clear that certain limitations of [state sovereignty] were intended” and that “an unnecessarily broad encroachment of the sovereignty of a State … must be avoided.” (see, in this regard, ¶ 140 above).239 167. Therefore, as a matter of Dutch law, the validity and the scope of an arbitration agreement stand or fall with the question as to whether the parties to the agreement intended to remove the dispute from the jurisdiction of the court afforded by law and submit it to arbitral jurisdiction instead.240 168. In this particular case, the pertinent question is whether India intended to limit its fiscal sovereignty and agree to transfer jurisdiction over issues of taxation, exclusively reserved with its municipal tax authorities and courts under municipal law, to an international arbitral tribunal. For reasons further elaborated in Sub-Section IV.B(i)(c) below, no such intention
236 Exh. RoI-16, Christoph Schreuer, “At What Time Must Jurisdiction Exist?,” in Practising Virtue: Inside International Arbitration, eds. David D. Cameron et al. (Oxford: Oxford University Press, 2015): 264-279, pp. 266-267; Exh. RoI-17, Markus Burgstaller and Agnieszka Zarowna, “Effects of Disposal of Investments on Claims in Investment Arbitration,” in ed. Maxi Scherer, Journal of International Arbitration 36, No. 2 (2019): 231-258, 240; Case Concerning the Arrest Warrant of 11 April 2000 (Democratic Republic of the Congo v. Belgium), Judgment, 2002 I.C.J. Reports 3 (Feb. 14, 2002), p. 13, ¶ 26, available at: https://www.icj- cij.org/public/files/case-related/121/121-20020214-JUD-01-00-EN.pdf. 237 See G.J. Meijer, Tekst & Commentaar Rv. Art. 1065, ¶ 2(a) and G.J. Meijer, Tekst & Commentaar Rv. Art. 1020, ¶ 1(g). 238 G.J. Meijer, Tekst & Commentaar Rv, Art. 1020, ¶ 1(g). 239 Advocate General Spier, Opinion 28 March 2014, ECLI:NL:PHR:2014:1774, ¶ 7.8. 240 G.J. Meijer, Tekst & Commentaar Rv, Art. 1020, ¶ 1(g). 69
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can be deduced from either the text of the India-UK BIT, its surrounding context or its object and purpose. Further, nothing in the limited travaux préparatoires of the India-UK BIT indicates that India (and the UK) intended to remove disputes concerning the taxability of transactions under their respective legislative enactments or concerning the propriety of those legislative enactments from the exclusive jurisdiction of their municipal tax authorities and courts. 169. That India and the UK never intended to limit the exclusive jurisdiction of their municipal (tax) courts in such matters is also recognized by the Tribunal. After having defined “tax disputes” as disputes “concerning the taxability (including the tax-amount) of a specific transaction”, which go to “the question … whether and how a particular transaction is taxable under the applicable (municipal) law”,241 the Tribunal took great care in creating the impression that it was staying clear of the exclusive jurisdiction of the municipal (tax) courts. 170. Precisely because the Tribunal was aware that there was no intention on the part of India to hand over to ad hoc arbitral tribunals the jurisdiction to resolve any disputes regarding its sovereign power to tax, which are by law exclusively reserved for the Income Tax Department and the exclusively competent Indian courts respectively (see ¶¶ 191-194 below), the Tribunal repeatedly stated that it was “not assessing whether the 2006 Transactions gave rise to tax, and if so, in what amount.”242 Importantly, the Tribunal also acknowledged, at subsequent junctures of its Award, that the taxability of the 2006 Transactions, including the questions of whether those Transactions were tax avoidant under Indian tax law or taxable as a result of Section 2(47)(vi) of the IT Act as transfer of immovable property, were sub judice before the competent Delhi High Court (see ¶¶ 284-294 below).243 171. However, despite paying lip service in this manner to the exclusive jurisdiction of the Indian municipal (tax) courts and acknowledging that “it is neither a tax investigator, nor an Indian court, and it ought not to undertake either of the roles associated therewith”,244 the Tribunal actually did consider and determine issues concerning the taxability of the 2006 Transactions in its determinations on the merits of the case (the liability section of the Award),245 and purported to make declarations as to those issues in the dispositif section of the Award.246 172. In the absence of any evidence of an intention on the part of India to submit disputes about the taxability of the 2006 Transactions to arbitration, no valid arbitration agreement ever came into existence. Accordingly, there was no valid arbitration agreement that conferred upon the Tribunal the jurisdiction to make findings in relation to those issues. For that reason, the Tribunal should have declined jurisdiction.
241 Exh. RoI-1, Award, ¶ 793. 242 Exh. RoI-1, Award, ¶ 821. 243 Exh. RoI-1, Award, inter alia, ¶¶ 1436(b) and 1773. 244 Exh. RoI-1, Award, ¶ 1436(a). 245 Exh. RoI-1, Award, ¶¶ 1017, 1298-1424, 1425-1591, 1646. 246 Exh. RoI-1, Award, ¶ 2032, sub. 5 and 7. 70
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
173. Third, the Tribunal ought to have determined whether the issues referred to it for resolution were arbitrable under Dutch law.247 Despite the fact that the Tribunal recognized the need to “assess the question of arbitrability of this dispute under Dutch law”248 as the lex arbitri, it actually failed to apply the Dutch law standard to the issue of (non-)arbitrability. 174. Under Dutch law, it is generally accepted that a matter can be non-arbitrable either pursuant to statute or on grounds of public policy.249 Non-arbitrability on the basis of statute follows from the exclusive attribution of jurisdiction to specific courts, while non-arbitrability on grounds of public policy follows from the communis opinio that certain types of disputes are not suitable for disposition by private adjudicators, i.e., arbitrators, who derive their power merely from an agreement between parties.250 Article 1020(3) of the DCCP is a statutory rule on non-arbitrability, which shall be discussed herein below. The issue of non-arbitrability on grounds of public policy is addressed separately in Section V.C below. 175. Article 1020(3) of the DCCP excludes from arbitral jurisdiction the determination of legal consequences that may not be freely determined by parties. It is obvious that the questions as to whether a transaction is taxable and whether that transaction is tax avoidant under Indian law, involve legal consequences that cannot be freely disposed of by the parties. As demonstrated in ¶¶ 191-194 below, any determination of such tax disputes is the prerogative of the Indian Income Tax Department under the IT Act, subject to judicial review by the exclusively competent Indian courts. 176. Because neither CEP nor CUHL had a role to play in the determination of their own tax liability, the Tribunal ought to have recognized that the issues that were presented for resolution in the arbitration involved legal consequences that could not have been freely determined by the Parties. As a result, they fell squarely outside the permitted scope of Article 1020(3) of the DCCP. 177. Although the DCCP does not expressly state which matters are arbitrable and which are not,251 there are at least three additional sources of Dutch law that should have led the Tribunal to establish that the disputed issues referred to it are not arbitrable under Dutch law:
247 G.J. Meijer, Tekst & Commentaar Rv, Art. 1020, ¶ 6; N. Peters, IPR, Proces & Arbitrage (Groningen: Rijksuniversiteit Groningen, 2015), ¶ 6.2; H.J. Snijders, Nederlands Arbitragerecht, 2018/2.1.4.1.2. 248 Exh. RoI-1, Award, ¶ 819. 249 H.J. Snijders, Note in response to Supreme Court 10 November 2006, ECLI:NL:HR:2006:AY4033, NJ 2007/561 (Spee c.s. en Groenselect/Van den Boogaard), ¶ 2; H.M. De Mol van Otterloo, “Arbitrabiliteit van vennootschapsrechtelijke geschillen; het Groenselect-arrest,” Ondernemingsrecht 2010, No.1 (January 2010): 15- 23, ¶ 6.1. 250 Ibid.; M.J. Kroeze, Asser/Maeijer & Kroeze 2-I* 2015/248; P. Sanders, Het Nederlandse Arbitragerecht (Deventer: Kluwer, 2001), p. 198; H.J. Snijders, Groene Serie Burgerlijke Rechtsvordering, Art. 1020, ¶ 4.1.2; De Witt Wijnen, “De herziening en het ABC,” Tijdschrift van Arbitrage (2005): 10-16, p. 10 ('TvA Special'). 251 Parliamentary Papers II 2012/13, 33 611, 3, p. 3 (Explanatory Memorandum to the 2015 Dutch Arbitration Act); G.J. Meijer, Tekst & Commentaar Rv, Art. 1020, ¶ 6. 71
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
(i) Statutes: Like Indian law (see ¶¶ 191-194 below), the Dutch State Taxes Act and the Dutch Administrative Law Act provide that the Dutch tax courts have exclusive jurisdiction over tax disputes.252 By dismissing the exclusive attribution of jurisdiction to the tax courts in The Netherlands as irrelevant because no Dutch taxes were involved in the dispute between Cairn and India,253 the Tribunal erroneously ignored the fact that, as a matter of the Dutch lex arbitri, the exclusive attribution of jurisdiction is the starting point and a key factor in establishing non-arbitrability pursuant to statute. (ii) Case Law: The Netherlands Supreme Court held in 2007, in the Abacus case,254 that “[a] decision on the claims requires an interpretation of [the agreement in dispute] and thereby a judgment of the authority of the tax inspector (…) to still levy the [tax in dispute]. (…) The closed system of legal protection in tax law does not offer [the parties] the possibility to obtain declaratory relief from the tax court, irrespective of the financial interest at stake (…).” The Supreme Court went on to conclude that “[t]he question as to whether the tax courts or the civil courts are competent to resolve a dispute is not a matter that can be freely determined by the parties.” [emphasis added] Ten years later, in 2017, the Netherlands Supreme Court reconfirmed that rule in the case of Rederij Volendam-Marken Express/Gemeente Waterland255 holding that “[t]he question as to whether the tax courts or the civil courts are competent to resolve a dispute is not a matter that can be freely determined by the parties. The tax court is exclusively competent to determine the correctness of a tax assessment (…).” [emphasis added] A private party does not have a choice which court will determine the correctness of its tax assessment. Under Dutch law (as well as under Indian law for that matter), disputes relating to tax assessments fall to be decided exclusively by the competent (tax) court and therefore cannot be freely disposed of by the Parties in the sense of Article 1020(3) of the DCCP. (iii) Legislator: In the parliamentary history of the Dutch arbitration law, the legislator clarified specifically in relation to public law disputes that “not the nature of the dispute is determinative but the question whether the arbitration would lead to the determination of legal consequences that can or cannot be freely determined by the parties”. [emphasis added] The legislator added that “in general it must be noted that the scope of arbitration has always been, and this is historically, limited to disputes of
252 Art. 26 Dutch State Taxes Act (Algemene wet inzake rijksbelastingen) and Art. 8:1 General Administrative Law Act (Algemene Wet Bestuursrecht). 253 Exh. RoI-1, Award, ¶ 826. 254 Exh. RoI-4, RLA-80, The Netherlands Supreme Court 21 April 2006, ECLI:NL:HR:2006:AU4548, NJ 2006, 271 (Abacus), ¶ 3.4.2 and ¶ 3.5. 255 Exh. RoI-4, Exh. RLA-203, Netherlands Supreme Court 16 June 2017, ECLI:NL:HR:2017:1103 (Rederij Volendam-Marken Express B.V./Gemeente Waterland), ¶ 3.5. 72
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
which the object is of a private law (pertaining to property law) nature.”256 [emphasis added] It is evident that disputes concerning the imposition of tax do not arise in the private law domain, where parties can freely determine legal consequences. Disputes about the imposition of tax and the assessment of tax liability arise in the public law domain, where parties do not have the freedom to freely determine legal consequences. In addition, the Tribunal’s artificial distinction between “tax disputes” and “tax-related investment disputes” that it repeats and reiterates ad nauseam throughout the Award cannot rescue its jurisdiction. As the legislator clearly stated, it is not the nature of the dispute that determines whether it is arbitrable but rather the question of whether the arbitration would lead to the determination of legal consequences that can be freely determined by the parties or not (see, in this regard, ¶¶ 225-237 below, where it further established why this distinction between “tax disputes” and “tax-related investment disputes” is baseless as a matter of international law). Had the Tribunal asked itself the question as to whether its findings and the relief it awarded triggered any legal consequences that can be freely determined by the Parties, it would have reached the conclusion that they cannot. Not as a matter of Dutch law, and not as a matter of Indian law as is demonstrated in Sub-Section IV.B(i)(b) below. However, the Tribunal did not ask itself that question. In its quest for jurisdiction, the Tribunal chose to ignore the plainly worded prohibition of Article 1020(3) of the DCCP and to substitute the only relevant question it had to ask itself with the mantra of the “tax-related investment dispute”. 178. Because of its failure to assess the non-arbitrability of the issues in dispute by reference to the applicable standard of the Dutch lex arbitri, the Tribunal proceeded to determine issues involving legal consequences that the Parties could not freely determine. In so doing, the Tribunal violated the prohibition of Article 1020(3) of the DCCP to the effect that “[t]he arbitration agreement shall not serve to determine legal consequences that may not be freely determined by the parties.” In the absence of a valid arbitration agreement under Dutch law, the Tribunal had no jurisdiction. 179. Fourth, under the Dutch lex arbitri, the question as to whether legal consequences could be freely determined by the parties in the sense of Article 1020(3) of the DCCP will in certain cases directly depend on the substantive law applicable to the subject matter in dispute. In those cases, pursuant to Article 1020(3) of the DCCP, regard to the substantively applicable law may be had by way of a renvoi.257
256 Parliamentary Papers II 1983/84, 18 464, 3, p. 5 (Explanatory Memorandum to the 1986 Dutch Arbitration Act). 257 G. J. Meijer, Overeenkomst tot arbitrage (Alpen aan den Rijn: Kluwer, 2011), ¶ 7.2.2.3(c)(i), ¶ 7.4.1; N. Peters, IPR, Proces & Arbitrage (Groningen: Rijksuniversiteit Groningen, 2015), ¶ 6.2. 73
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
180. The dispute between Cairn and India is one of those disputes, where through the renvoi embodied in Article 1020(3) of the DCCP, it must be assessed whether the legal consequences of the claims instituted by Cairn could be freely disposed of by the Parties under the law that governs their legal relationship. The legal relationship between the Indian Income Tax Department and CUHL as a tax assessee is substantively governed by Indian tax law (see ¶ 158 above). As established in Sub-Section IV.B(i)(b) below, India’s sovereign power to define a tax base in the form of a source rule can only be exercised by the exclusively competent Indian tax authority, i.e., the Income Tax Department, subject to judicial review by India’s exclusively competent courts. 181. However, the relief granted by the Tribunal in Section X of the Award258 creates legal consequences that could not be freely disposed of and determined by the Parties. That is because (i) those legal consequences could only have been brought about by the exercise of the exclusive power of India’s Income Tax Department to assess Cairn’s tax liability arising out of the 2006 Transactions; and (ii) they are based on the Tribunal’s finding that the manner in which Cairn chose to structure the 2006 Transactions was not an abusive form of tax avoidance and that the Transactions were not taxable as a transfer of immovable property under Section 2(47)(vi) of the IT Act. 182. Despite India’s submissions to the effect that the non-arbitrability of the issues in dispute had to be assessed by reference to Indian law, the Tribunal refused to assess non-arbitrability under Indian law. That refusal, in addition to being erroneous as a matter of the VCLT and Indian constitutional law (see Sub-Section IV.B(i)(b) below), also constitutes a violation of the Dutch lex arbitri because, under Article 1020(3) of the DCCP, the Tribunal was required to assess whether the arbitration would involve legal consequences that could not be freely determined by the Parties under Indian tax law as the substantive applicable law. In view of its failure to do so, the Tribunal’s inquiry into the question of whether a valid arbitration agreement existed was incomplete and therefore defective. 183. Fifth, in a half-hearted attempt to add a guise of credibility to the three paragraphs of reasoning on Dutch law, the Tribunal relied on a transmittal note of the Dutch Foreign Ministry concerning the India-Netherlands BIT as the basis for the proposition that “the Netherlands does not view even tax-related investment disputes arising under treaties to which it is a party as inherently incapable of being resolved by international arbitration”.259 184. However, the India-Netherlands BIT is irrelevant to the duty that the Tribunal had to perform under Dutch law, namely ascertaining whether under the Dutch lex arbitri a valid arbitration agreement existed based on which it could exercise jurisdiction. Whatever The Netherlands wrote to India about an unrelated treaty can arguably only have consequences for the
258 Exh. RoI-1, Award, ¶ 2032, sub. 5 and 7. 259 Exh. RoI-1, Award, ¶ 827; see Exh. RoI-4, RLA-359, Telefax message from PJ Nayak, Department of Economic Affairs, to K Rana, Ambassador to Germany, Letter from A Mishra, Director, Foreign Investment to Joint Secretary, Foreign Trade and Investment and other preparatory documents to other Indian BITs with other countries. 74
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
relationship between The Netherlands and India on the international plane. It certainly has no bearing on the question whether, as a matter of Dutch law, CEP and CUHL on the one hand validly entered into an arbitration agreement with India on the other, the scope of which was broad enough to confer jurisdiction on the Tribunal to make findings and award reliefs concerning Cairn’s tax liability and the illegality of the 2006 Transactions. 185. In addition, the Tribunal’s interest in The Netherlands’ treaty practice is selective and wholly inapposite for two reasons. 186. In the first place, the transmittal note that the Tribunal bases its argument on dates back to 1995 and concerns a bilateral investment treaty that was terminated unilaterally by India in 2016. 187. In the second place, it is common knowledge that The Netherlands’ treaty practice underwent a transformation over the last decade. The new Dutch Model BIT published in 2018 clearly demonstrates that tax disputes and specifically disputes concerning measures aimed at the avoidance or evasion of taxes, such as the present dispute, are not arbitrable:260 “ARTICLE 10 Fiscal Treatment 1. With respect to taxes, fees, charges and to fiscal deductions and exemptions, each Contracting Party shall, regarding the operation, management, maintenance, use, enjoyment and disposal of the investment, accord to investors of the other Contracting Party who are engaged in any economic activity in its territory, treatment not less favorable than that accorded to its own investors or to those of any third State who are in like situations, whichever is more favorable to the investors concerned. For this purpose, however, any tax benefits granted by that Contracting Party pursuant to the following obligations shall not be taken into account: a) under an agreement for the avoidance of double taxation; or b) by virtue of its participation in a customs union, economic union, monetary union or similar institution, such as the European Union, or on the basis of interim agreements leading to such unions or institutions; or c) on the basis of reciprocity with a third State. 2. Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining any taxation measure aimed at preventing the avoidance or evasion of taxes pursuant to its tax laws or its agreements for the avoidance of double taxation. 3. This Agreement does not affect the rights and obligations of a Party under an agreement for the avoidance of double taxation. In the event of inconsistency between such agreement and this Agreement, the agreement
260 Dutch Model BIT, published 26 October 2018, available at: https://www.rijksoverheid.nl/ministeries/ministerie-van-buitenlandse- zaken/documenten/publicaties/2018/10/26/modeltekst-voor-bilaterale-investeringsakkoorden. 75
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
for the avoidance of double taxation prevails to the extent of the inconsistency.”
188. In view of the fact that the Tribunal’s reasoning regarding the India-Netherlands BIT has no bearing on arbitrability as a matter of Dutch lex arbitri, it cannot stand. Accordingly, the Tribunal failed to ascertain by reference to the relevant Dutch law standard that there existed a valid arbitration agreement that could source its jurisdiction. 189. On the basis of the foregoing erroneous findings on Dutch law, the Award must be set aside pursuant to Article 1065(1)(a) of the DCCP. The Tribunal Erred in Ignoring Indian Law on the Issue of Arbitrability of Tax Disputes 190. In addition to the Tribunal’s erroneous treatment of India’s jurisdictional objection regarding non-arbitrability of tax disputes as a matter of Dutch law, the Tribunal also erred in ignoring Indian law on this issue.
191. In this regard, it must be noted, at the outset, that, as India consistently pointed out to the Tribunal,261 it is a settled position of Indian law that tax disputes are not arbitrable. The most important manifestation of this principle exists in Section 293 of the IT Act, which is a legislative enactment of the Parliament providing as follows: “293. Bar of suits in civil courts. – No suit shall be brought in any civil court to set aside or modify any proceeding taken or order made under this Act; and no prosecution, suit or other proceeding shall lie against the Government or any officer of the Government for anything in good faith done or intended to be done under this Act.” [emphasis added]
192. This provision, in particular the emphasized portion, underlines the non-arbitrability of tax disputes, especially when read together with the general principle of non-arbitrability espoused by court decisions in India. Indian courts have, on several occasions, held that when cases relate to “actions in rem”, they would be non-arbitrable, whereas when they relate to “actions in personam”, they would be arbitrable.262 In this regard, the Supreme Court’s seminal judgment in Booz Allen Hamilton v. SBI Home Finance Ltd. case is worth noting. In this judgment, the Supreme Court characterized arbitral tribunals as “private fora” that are, in principle, capable to resolve “[e]very civil or commercial dispute”. However, as per the Supreme Court, “[c]ertain other categories of cases . . . may by necessary implication stand excluded from the purview of private fora” because they implicate rights in rem.263 This seminal judgment has been followed by many subsequent judgments of the Indian Supreme
261 See Exh. RoI-4, SoD, ¶¶ 220-222; Exh. RoI-4, R-SoRj, ¶ 91. 262 Exh. RoI-4, R-34, Booz Allen Hamilton v SBI Home Finance Ltd and Others, (2011) 5 SCC 532, ¶ 23. (“A right in rem is a right exercisable against the world at large, as contrasted from a right in personam which is an interest protected solely against specific individuals. Actions in personam refer to actions determining the rights and interests of the parties themselves in the subject matter of the case, whereas actions in rem refer to actions determining the title to property and the rights of the parties, not merely among themselves but also against all persons at any time claiming an interest in that property.”) 263 Exh. RoI-4, R-34, Booz Allen Hamilton v SBI Home Finance Ltd and Others, (2011) 5 SCC 532, ¶ 22. 76
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
Court in the context of non-arbitrability.264 One such judgment was rendered recently, and explicitly recognized that the “[c]orrectness and validity of the State or sovereign functions”, including the exercise of executive power in the field of taxation, “cannot be made a direct subject matter of a private adjudicatory process” under Indian arbitration law.265 193. Thus, the situation in Indian law is not unlike the situation in Dutch law discussed above (see ¶¶ 168-177 above), as per which tax disputes may not be resolved by arbitration and are reserved for the exclusive competence of the relevant authorities (and appellate courts) under the IT Act. 194. Based on the above legal position, India had pointed out to the Tribunal during the Arbitration that Indian law confirmed the non-arbitrability of tax disputes. India had supported the applicability of Indian law to the jurisdictional objection on the basis of India being the most likely place of enforcement.266 As mentioned in ¶¶ 158, 179-182 above, there are multiple other reasons why Indian law was squarely applicable to India’s jurisdictional objection on non-arbitrability, including because the lex arbitri mandates its application. 195. However, the Tribunal ignored Indian law in its assessment of India’s jurisdictional objection on the ground that “States may not negate [an international treaty] in reliance on their municipal laws, for instance, by arguing that the subject-matters that fall within the scope of the relevant treaty are not arbitrable under their domestic laws”.267 196. The Tribunal’s finding is wrong, not only because the Dutch lex arbitri itself mandated it to apply Indian law, but also because international law, especially the VCLT, mandated the application of Indian law, particularly to the extent of any constitutional rules of fundamental importance therein, in order to determine the extent of India’s consent to be bound by the India-UK BIT. 197. In rejecting the relevance of Indian law, the Tribunal relied on Article 3 of the International Law Commission’s (“ILC”) Articles on Responsibility of States for Internationally Wrongful Acts (“ILC Articles”) in support of its finding, which provides that: “The characterization of an act of a State as internationally wrongful is governed by international law. Such characterization is not affected by the characterization of the same act as lawful by internal law.”
198. It has been clarified by the ILC, inter alia, in its commentary on the ILC Articles that this provision is intended to be a substantive “statement of principle” that “addresses the underlying question of the origin of responsibility”. It is not intended to be a “rule of procedure” about whether or not internal (or domestic) laws can be invoked or relied upon
264 Exh. RoI-18, Vimal Kishor Shah & Ors v. Jayesh Dinesh Shah & Ors, Civil Appeal 8164 of 2016 (arising out of SLP(C) No. 13369 of 2013), 2016 (8) SCALE 116; Exh. RoI-19, A. Ayyasamy v. A. Paramasivam & Ors, Civil Appeals 8245-8246 of 2016, 2016 SCC OnLine SC 1110. 265 Exh. RoI-20, Vidya Drolia and Ors. v. Durga Trading Corporation, Civil Appeal 2402 of 2019, ¶ 32. 266 See Exh. RoI-4, SoD, ¶¶ 220-221; Exh. RoI-4, R-SoRj, ¶ 91 and the sources cited therein. 267 Exh. RoI-1, Award, ¶ 820. 77
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by States on the international plane.268 In other words, Article 3 of the ILC Articles is intended to deal more with the substantive matters of State responsibility for characterizing a breach of an international obligation, and not with procedural issues of whether a State can (prior to such characterization) invoke or rely upon its internal law in respect of the very existence of the international obligation. In this context, the Tribunal’s reliance on Article 3 of the ILC Articles appears inapposite. 199. Instead, the more relevant provisions with respect to determining the relevance and applicability of Indian law are contained in Articles 27 and 46 of the VCLT,269 which provide as follows: “Article 27 Internal law and observance of treaties A party may not invoke the provisions of its internal law as justification for its failure to perform a treaty. This rule is without prejudice to article 46.” “Article 46 Provisions of internal law regarding competence to conclude treaties 1. A State may not invoke the fact that its consent to be bound by a treaty has been expressed in violation of a provision of its internal law regarding competence to conclude treaties as invalidating its consent unless that violation was manifest and concerned a rule of its internal law of fundamental importance. 2. A violation is manifest if it would be objectively evident to any State conducting itself in the matter in accordance with normal practice and in good faith.” 270
268 “Draft articles on Responsibility of States for Internationally Wrongful Acts, with commentaries,” United Nations, 2001, p. 38, ¶ 8, available at: https://legal.un.org/ilc/texts/instruments/english/commentaries/9_6_2001.pdf); see also “Documents of the twenty-fifth session including the report of the Commission to the General Assembly,” Yearbook of the International Law Commission, Vol. II, 1973, p. 188, ¶ 15, available at: https://legal.un.org/ilc/publications/yearbooks/english/ilc_1973_v2.pdf). 269 Notably, while Article 10:167 of the DCC provides that “a State, other legal person governed by public law or State enterprise . . . may not invoke its law or regulations in order to contest its capacity or competence to enter into the arbitration agreement or the susceptibility of the dispute to be decided by arbitration”, it must be noted that this provision is applicable only in the context of international commercial arbitration agreements and does not apply in the context of international treaties. With respect to treaties, Articles 27 and 46 of the VCLT are the governing provisions. This has been accepted in respect of Article 177(2) of the Swiss Private International Law on Arbitration, which contains a similar provision as Article 10:167 of the DCC (see The Ministry of Defence and Support for Armed Forces of the Islamic Republic of Iran v. Westinghouse Electric Corporation (ICC Case No. 7375/CK, Award on Preliminary Issues, 5 June 1996, ¶ 56, available at: https://jusmundi.com/en/document/decision/en-the-ministry-of-defence-and-support-for-armed-forces-of-the- islamic-republic-of-iran-v-westinghouse-electric-corporation-award-on-preliminary-issues-wednesday-5th-june- 1996; referring to ICC Case No. 7263). Accordingly, Article 10:167 of the DCC is irrelevant in the present case, since India’s purported offer to arbitrate is contained in the India-UK BIT. 270 It merits clarifying that although India has not signed the VCLT, its provisions, including Articles 27 and 46, are applicable to India as customary international law. Exh. RoI-21, Hannah Woolaver, “From Joining to Leaving: Domestic Law’s Role in the International Legal Validity of Treaty Withdrawal,” European Journal of International Law 30, No. 1 (February 2019): 73-104, p. 93; Certain Questions of Mutual Assistance in Criminal Matters (Djibouti v. France), Judgment, 2008 I.C.J. Rep. 177 (Jun. 4, 2008), ¶ 124, available at: https://www.icj- cij.org/public/files/case-related/136/136-20080604-JUD-01-00-EN.pdf; Case Concerning the Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v. Nigeria: Equatorial Guinea intervening), Judgment, 78
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
200. Articles 27 and 46 of the VCLT represent a legal position congruent to the one discussed above regarding Article 3 of the ILC Articles. Article 27 of the VCLT precludes the invocation of provisions of “internal law as a justification for . . . failure to perform a treaty”. [emphasis added] The emphasised portion delineates its scope in a manner that it covers “any act or omission that is attributable to a State Party and constitutes an unlawful breach of a treaty obligation”.271 In other words, Article 27 of the VCLT “reaches into the field of [State] responsibility”,272 and is concerned more with the performance (or breach) of an international law obligation and not the existence per se of that international law obligation. On the contrary, Article 46 of the VCLT does not deal with the performance of an international law obligation, but its very existence, inasmuch as it permits the invocation of “internal law regarding competence to conclude treaties” with the consequence of invalidating the consent of the host State to be bound by the treaty in question.273 201. In the present case, Indian internal law is relevant, inter alia, in the above described legal context stemming from the VCLT. Based on this context, it is important to bear in mind that India never sought to, and does not currently seek to, invoke its internal law to justify any failure to perform any obligation under the India-UK BIT within the meaning of Article 27 of the VCLT or Article 3 of the ILC Articles. Thus, the Tribunal was wrong to consider, and reject, the relevance of Indian law from this narrow perspective. Instead, India’s argument is that Indian law “regarding competence to conclude treaties” is relevant under Article 46 of the VCLT in order to assess the extent to which India’s consent to the India-UK BIT, in particular Article 9 thereof, is validly in existence. Of course, this is over and above the relevance of Indian law via the other routes mentioned in ¶ 194 above, i.e., because India is the most likely place of enforcement of the Award and because the lex arbitri mandates its application. 202. India’s reliance on Article 46 of the VCLT shall now be explained. In particular, it shall be established that (i) the internal law that India seeks to invoke pertains to the competence to conclude treaties; (ii) the violation of the said internal law is manifest; and (iii) the rule of internal law rule is of fundamental importance.
2002 I.C.J. Rep. 303 (Oct. 10, 2002), ¶ 258, available at: https://www.icj-cij.org/public/files/case-related/94/094- 20021010-JUD-01-00-EN.pdf; Maritime Delimitation in the Indian Ocean (Somalia v. Kenya), Preliminary Objections, 2017 I.C.J. Rep. 3 (Feb. 2, 2017), ¶¶ 42-50, available at: https://www.icj-cij.org/public/files/case- related/161/161-20170202-JUD-01-00-EN.pdf; see Exh. RoI-22, Jeeja Ghosh v. Union of India, Writ Petition (C) 98 of 2012, (2016) 7 SCC 761; see also, in this regard, Exh. RoI-4, SoD, ¶ 239; Exh. RoI-4, R-PHB, ¶ 56; Exh. RoI-1, Award, f.n. 773. 271 Exh. RoI-23, Kirsten Schmalenbach, Article 27: Internal law and observance of treaties in Vienna Convention on the Law of Treaties: A Commentary, eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018), ¶ 12, pp. 497-498. 272 Exh. RoI-23, Kirsten Schmalenbach, Article 27: Internal law and observance of treaties in Vienna Convention on the Law of Treaties: A Commentary, eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018), ¶¶ 12 and 22, pp. 497 and 502. 273 Exh. RoI-24, Richard Kearney, “Internal Limitations on External Commitments - Article 46 of the Treaties Convention,” International Lawyer 4, No. 1 (October 1969): 1-21, 5. 79
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Translation
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− Violation of Internal Law Regarding Competence to Conclude Treaties 203. The rule of internal law that India is invoking is the constitutional principle of separation of powers, and its manifestation in the hierarchy of norms in India. 204. While the Constitution of India 1950 (“Indian Constitution”) does not contain a specific provision regarding the principle of separation of powers, it has been recognized by the Indian Supreme Court as a foundational constitutional principle that is part of the “basic structure” of the Indian Constitution.274 The Indian Constitution delineates the powers of the legislative, judicial and executive branches of the Republic of India. In this regard, notably, Article 73 of the Indian Constitution recognizes that the powers of the executive branch are co-terminous with those of the legislative branch, i.e., the Parliament in India, including with respect to entering into treaties on behalf of the State.275 205. Accordingly, in principle, the executive can enter into international treaties or agreements and assume international law obligations on behalf of India.276 However, pursuant to Article 253 of the Indian Constitution as well as Entries 10 and 14 of List I of its Seventh Schedule, it is the Parliament that has the power to enact “[l]egislation for giving effect to international agreements” or “for implementing any treaty”.277 206. Notably, a legislative enactment by the Indian Parliament under Article 253 of the Indian Constitution is not always mandated under Indian law. In fact, it is common practice in India that the executive branch itself ratifies treaties, especially bilateral treaties, that have been signed without a separate ratification by the Parliament,278 which is why although India has been recognized as following the “dualist” system requiring transformation of international law into municipal law by way of legislation,279 many often refer to it as endorsing “formal
274 Exh. RoI-25, Indira Nehru Gandhi vs Shri Raj Narain & Anr, Appeal (Civil) 887 of 1975, 1976 (2) SCR 347; see Exh. RoI-26, Kesavananda Bharati Sripadagalvaru and Ors v. State of Kerala and Anr, Writ Petition (Civil) 135 of 1970, (1973) 4 SCC 225. 275 Exh. RoI-27, Constitution of India 1950, Article 73 (“Subject to the provisions of this Constitution, the executive power of the Union shall extend – (a) to the matters with respect to which Parliament has power to make laws; and (b) to the exercise of such rights, authority and jurisdiction as are exercisable by the Government of India by virtue of any treaty or agreement.”). 276 See Exh. RoI-28, VS Mani, “Effectuation of International Law in the Municipal Legal Order – The Law and Practice in India,” Asian Yearbook of International Law 5, No. 1 (1997): 145-174, pp. 162–163. 277 Exh. RoI-27, Constitution of India 1950, Article 253, Seventh Schedule of the Constitution of India. 278 “The instruments of ratification or accession are prepared by the Legal and Treaties Division and put up for the President’s signature” (see http://www.mea.gov.in/Images/pdf1/652annex.pdf); Exh. RoI-29, Aparna Chandra, “India and International Law: Formal Dualism, Functional Monism,” Indian Journal of International Law 57, No. 1 (2017): 25-45. 279 Exh. RoI-30, Bhavesh Lakhani v. State of Maharashtra, Criminal Appeal 1452 of 2009 (arising out of SLP (Crl.) No. 6407 of 2008), (2009) 9 SCC 551; Exh. RoI-31, State of West Bengal v. Kesoram Industries, Appeal (Civil) 1532 of 1993, (2004) 10 SCC 201; Exh. RoI-32, Jolly George Varghese v Bank of Cochin, 1980 AIR SC 470, ¶ 6 (“Even so, until the municipal law is changed to accommodate the Covenant what binds the court is the former, not the latter. A. H. Robertson in ‘Human Rights-in National and International Law’ rightly points out that international conventional law must go through the process of transformation into the municipal law before the international treaty can become an internal law.”). 80
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dualism” but “functional monism”.280 The Supreme Court has confirmed that the executive power to enter into treaties “is vested in the [sic] President and is exercisable in accordance with the Constitution”.281 That is precisely what happened with the India-UK BIT,282 which did not go through the scrutiny of the Indian Parliament, but was signed by the High Commissioner for India in the UK and ratified under the signature of the President of India.283 207. While a legislative enactment by the Indian Parliament under Article 253 of the Indian Constitution is not always mandated, there are two situations where such a Parliamentary ratification by way of legislation is required, as recognized by the Indian Supreme Court. These situations are (i) when the international treaty restricts the rights of Indian citizens; or (ii) when it results in the alteration or modification of Indian laws. This was recognized by the Constitutional Bench of the Indian Supreme Court in Maganbhai Ishwarbhai Patel v. Union of India already in 1970.284 The Supreme Court confirmed this proposition in its recent judgment in 2020 in the case of Union of India v. Agricas LLP, in the following terms: “It was also clarified that Article 253 deals with the legislative power of the Parliament and thereby confers power on the Parliament which it may not otherwise possess. This provision does not seek to circumscribe the extent of power conferred under Article 73. In other words, [if] in consequence of the exercise of executive power, rights of the citizens or others are restricted or infringed, or laws are modified, the exercise of power must be supported by legislation; where there is no such restriction, infringement of the right or modification of the laws, the executive is competent to exercise the power.”285 [emphasis added]
208. The emphasized part of the Supreme Court’s judgment in Union of India v. Agricas LLP clarifies that the exercise of executive competence to enter into a treaty without a corresponding Parliamentary ratification in a situation where that treaty effectively modifies Indian law is an impermissible exercise of the executive’s competence. In the present case, to subject India to Article 9 of the India-UK BIT, to the extent that it may be considered to cover arbitration of “tax disputes”, would qualify as such an impermissible exercise of the executive’s competence in the absence of a Parliamentary ratification. This is because it would run into conflict with the clear and absolute affirmation of non-arbitrability of tax disputes in Indian law, including through Section 293 of the IT Act, which is a legislative
280 Exh. RoI-29, Aparna Chandra, “India and International Law: Formal Dualism, Functional Monism,” Indian Journal of International Law 57, No. 1 (2017): 25-45. 281 Exh. RoI-33, Maganbhai Ishwarbhai Patel v Union of India, (1970) 3 SCC 400; This follows from Article 53 of the Indian Constitution, as per which “[t]he executive power . . . shall be vested in the President and shall be exercised by him either directly or through officers subordinate to him in accordance with this Constitution”. 282 Exh. RoI-34, Ministry of Finance, Note for the Cabinet, Approval of a Bilateral Investment Promotion and Protection Agreement with the United Kingdom, D.O. No. F.26/1/93-FI&T; Exh. RoI-35, Letter by Ministry of External Affairs regarding ratification process, 7 April 1994. 283 Exh. RoI-36, Instrument of Ratification of the India-UK BIT. 284 Exh. RoI-33, Maganbhai Ishwarbhai Patel v Union of India, (1970) 3 SCC 400 (“making of law under that authority [in Entries 10 and 14 of List I of its Seventh Schedule] is necessary when the treaty or agreement operates to restrict the rights of citizens or others or modifies the laws of the State”). 285 Exh. RoI-37, Union of India v. Agricas LLP, Transfer Petition (Civil) 496-509 of 2020, 2020 SCC OnLine SC 675. 81
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enactment of the Parliament (see ¶ 191 above). Such impermissible exercise of competence has many implications in the sphere of Indian domestic law as well as on the international law plane. 209. In the sphere of domestic law, if the executive has entered into a treaty that has the effect of modifying legislative enactment, but that treaty is not supported by a corresponding Parliamentary ratification, a conflict is created between the international law norm and a domestic law norm. In a situation of such a conflict, the Indian Supreme Court has recognized, in Gramophone Company of India Ltd. v Birendra Bahadur Pandey, that the domestic (legislative) norm prevails over the international law norm because “the sovereignty and the integrity of the Republic and the supremacy of the constituted legislatures in making the laws may not be subjected to external rules except to the extent legitimately accepted by the constituted legislatures themselves”.286 Scholars have recognized that by way of this ruling, the Indian Supreme Court has “pegged [international law] below statutes in the hierarchy of norms”.287 Thus, the Supreme Court’s ruling provides the default position on the principle of hierarchy of norms in India. 210. In this regard, it must be noted that there are several provisions in Indian legislations that do regulate conflicts between those legislations and certain kinds of treaties, and in some situations, permit the treaty to take precedence over the legislation. For instance, the IT Act itself, in Section 90(2) thereof, prescribes that the provisions of the IT Act will only apply to an assessee to the extent that they are more favourable than the applicable DTAA that India has entered into.288 In this regard, the assessee is given the option to choose between the application of the IT Act and the applicable DTAA, as a result of the notification of the said DTAA in the Official Gazette pursuant to Section 90(2) of the IT Act itself. However, there is no similar solution for regulation of conflicts between legislations and BITs in any legislations in India. In situations where specific legislations do not specifically regulate conflicts between international and domestic law norms, the default position clarified by the Indian Supreme Court regarding the hierarchy of norms applies. 211. On the international law plane, an impermissible exercise of competence by the executive to subject India to a treaty that conflicts with domestic legislative enactments by the Parliament qualifies as a violation of internal law regarding competence to conclude treaties for the purposes of Article 46 of the VCLT.289
286 Exh. RoI-38, Gramophone Company of India Ltd. v Birendra Bahadur Pandey, Civil Appeals 3216 to 3218 of 1983, (1984) 2 SCC 534; see also Exh. RoI-30, Bhavesh Lakhani v. State of Maharashtra, Criminal Writ Petition 676 of 2008 (arising out of SLP (Crl.) 6407 of 2008), (2009) 9 SCC 551 (“The Act as also the treaties entered into by and between India and foreign countries are admittedly subject to our municipal law. Enforcement of a treaty is in the hands of the Executive. But such enforcement must conform to the domestic law of the country. Whenever, it is well known, a conflict arises between a treaty and the domestic law or a municipal law, the latter shall prevail”). 287 Exh. RoI-29, Aparna Chandra, “India and International Law: Formal Dualism, Functional Monism,” Indian Journal of International Law 57, No. 1 (2017): 25-45. 288 See also Section 73 of the Black Money Act; Section 44 of Gift Tax Act. 289 In this regard, it is important to bear in mind that while India’s dualist traditions may theoretically have inhibited India from invoking a violation of internal law regarding competence to conclude treaties had India’s 82
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212. The constitutional principle of separation of powers qualifies as pertaining to the “competence to conclude treaties” for the purposes of Article 46 of the VCLT.290 Further, it is well settled that the reference to “internal law” in Article 46 of the VCLT includes both explicitly written constitutional law as well as unwritten principles of constitutional law pronounced by courts or even matters of constitutional practice.291 This becomes clear also from the travaux préparatoires of Article 46 of the VCLT.292 Therefore, India’s practice in the conclusion of treaties, i.e., signature and ratification of BITs by the executive branch and how that may be considered an impermissible exercise of competence when it contravenes legislative enactments, is a relevant consideration while determining the contents and violation of its “internal law” for the purpose of Article 46 of the VCLT. 213. Based on the above, it is clear that if Article 9 of the India-UK BIT is interpreted to include the arbitration of tax disputes, the executive would be considered to have exercised its competence to bind India to this provision in violation of Indian internal law regarding the competence to conclude treaties. Of course, such an absurd interpretation of Article 9 of the India-UK BIT is not what India endorsed in the arbitration, nor does it endorse it in this Writ of Summons. However, it is the Tribunal that interprets Article 9 of the India-UK BIT in this manner, thereby resulting in this absurdity.
− Violation of the Internal Law is Manifest 214. Having established a potential violation of internal law resulting from the Tribunal’s interpretation of Article 9 of the India-UK BIT, it shall now be shown that the said violation was of a manifest nature. In this regard, Article 46(2) of the VCLT states that “[a] violation is manifest if it would be objectively evident to any State conducting itself in the matter in accordance with normal practice and in good faith.” 215. It is clear from the language of Article 46(2) of the VCLT that in order to be considered “manifest”, it should be established that the violation was “objectively evident” to the counterparty of the State invoking Article 46 of the VCLT.293 From the travaux préparatoires
Parliament ratified the India-UK BIT, as mentioned above, India did not follow traditional dualism in this connection (see ¶ 206). Since the India-UK BIT was signed and ratified only by the executive, it is not principally inhibited from invoking a violation of internal law regarding competence to conclude treaties on the international law plane. 290 Exh. RoI-23, Thilo Rensmann, Article 46. Provisions of internal law regarding competence to conclude treaties in Vienna Convention on the Law of Treaties: A Commentary, eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018), ¶ 36, p. 850. 291 Exh. RoI-23, Thilo Rensmann, Article 46. Provisions of internal law regarding competence to conclude treaties in Vienna Convention on the Law of Treaties: A Commentary, eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018), ¶¶ 29-31, pp. 847-848. 292 “Summary Records of the Fifteenth Session,” Yearbook of the International Law Commission, 1963. Vol. I, pp. 4, 12-14 (“It should be made clear that the term covered not only constitutional law, but also constitutional practice and possibly also other provisions of public law”), available at: https://legal.un.org/ilc/publications/yearbooks/english/ilc_1963_v1.pdf. 293 The intention behind Article 46(2) of the VCLT was to provide an exception to the ostensible or apparent authority of certain bodies to conclude treaties on behalf of a State (see Exh. RoI-24, Richard Kearney, “Internal Limitations on External Commitments - Article 46 of the Treaties Convention,” International Lawyer 4, No. 1 (October 1969): 1-21, 21). 83
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of Article 46 of the VCLT, it appears that the criterion of “objectively evident” would be considered satisfied when the limitation in competence of the concerned body would be “easily ascertainable” or “easily known, for they were undoubted rules which the most elementary prudence would require the negotiators to ascertain”.294 That would be the case if the limitation in authority had been “common knowledge”, for instance by virtue of publication in the public domain.295 Thus, while the counterparty is not under a “general obligation” to investigate exhaustively the competence of the body concluding the treaty on behalf of a State,296 it does have a “standard of care” of exercising “some inquiry demanded by ordinary prudence”297 and it cannot be forgiven for “negligent ignorance”.298 216. In the present case, neither the High Commissioner of India (who signed the India-UK BIT) nor the President (who signed the instrument of ratification) was competent to bind India to any provision of a treaty that would, in any manner, conflict with a legislative enactment. This would certainly have been objectively evident to the UK for the following reasons. 217. First, the UK could not have been unaware about the Indian constitutional principle of separation of powers and its implication on the practice to conclude treaties because the legal regime of the UK substantively mirrors that of India in this regard.299 In the UK too, the executive is not competent to bind the State to a treaty that would conflict with a legislative enactment, which is a higher norm.300 After all, India follows the Westminster model of democracy, which it inherited from the UK, as per which the President of India is not competent to overreach legislative enactments of the Parliament.301
294 “Summary Records of the Fifteenth Session,” Yearbook of the International Law Commission, 1963. Vol. I, pp. 206-207, available at: https://legal.un.org/ilc/publications/yearbooks/english/ilc_1963_v1.pdf. 295 Yearbook of the International Law Commission, Documents of the fifteenth session including the report of the Commission to the General Assembly, 1963, Vol. II, p. 46, available at: https://legal.un.org/ilc/publications/yearbooks/english/ilc_1963_v2.pdf 296 Case Concerning the Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v. Nigeria: Equatorial Guinea intervening), Judgment, 2002 I.C.J. Rep. 303 (Oct. 10, 2002), ¶ 266, available at: https://www.icj-cij.org/public/files/case-related/94/094-20021010-JUD-01-00-EN.pdf; Maritime Delimitation in the Indian Ocean (Somalia v. Kenya), Preliminary Objections, 2017 I.C.J. Rep. 3 (Feb. 2, 2017), ¶ 49, available at: https://www.icj-cij.org/public/files/case-related/161/161-20170202-JUD-01-00-EN.pdf. 297 “United Nations Conference on the Law of Treaties, Second session, Vienna, 9 April-22 May 1969, Official Records, Summary records of the plenary meetings and of the meetings of the Committee of the Whole,” United Nations, 1969, p. 85, available at: https://legal.un.org/diplomaticconferences/1968_lot/docs/english/sess_2.pdf. 298 Exh. RoI-23, Thilo Rensmann, Article 46. Provisions of internal law regarding competence to conclude treaties in Vienna Convention on the Law of Treaties: A Commentary, eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018), p. 854, ¶ 46. 299 In any event, the practice regarding conclusion of treaties in India and their position in the hierarchy of norms was well known as a matter of Indian law in 1994, given that the Indian Supreme Court’s judgments in Maganbhai Ishwarbhai Patel v. Union of India (see ¶ 207) and Gramophone Company of India Ltd. v Birendra Bahadur Pandey (see ¶ 209), amongst others, had been rendered and were publicly available much before 1994. 300 Exh. RoI-40, R (Miller) v. Secretary of State for Exiting the European Union [2017] UKSC 5, 24 January 2017, ¶ 5 (“ministers are not normally entitled to exercise any power they might otherwise have if it results in a change in UK domestic law, unless statute, i.e. an Act of Parliament, so provides.”); Exh. RoI-41, Arabella Lang, Briefing Paper Number 5855, House of Commons, 17 February 2017, Parliament’s role in ratifying treaties. 301 Exh. RoI-42, S. L. Verma, “Installation of Federal Authority in the Indian Political System: Quest for a Real Federation,” The Indian Journal of Political Science 47, No. 2 (April - June 1986): 247-257. 84
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218. In the present case, up to and including the signature of the Instrument of Ratification by the President of India upon the approval of the Cabinet, the entire process of concluding the India- UK BIT was performed exclusively by the executive branch. Thus, while as a matter of principle the conclusion of a treaty such as the India-UK BIT did not fall beyond the executive’s competence, if and to the extent the BIT is interpreted as purportedly allowing for arbitration of tax disputes (inconsistently with, inter alia, Section 293 of the Indian IT Act, which too was always a publicly accessible piece of legislation), the exercise of that competence was impermissible as a matter of Indian law. 219. Second, it is crucial to bear in mind that India had, at all times during the negotiation of the India-UK BIT, insisted on Indian law being the applicable law therein. The UK was made aware that it was preferable for India to have its law govern all relevant matters under the India-UK BIT resulting from investments made in India. As a corollary, it is obvious that India never intended, neither explicitly nor implicitly, and could never have imagined that that Indian legislative enactments passed by the Parliament would become subservient to the India-UK BIT signed and ratified by the executive. A number of contemporaneous documents surrounding the negotiation of the India-UK BIT establish this intention. For instance, in the Note prepared by the Ministry of Finance for the Cabinet of Ministers on 8 March 1994, it was specifically stated that the negotiations with the UK had resulted in three areas of disagreement, one of which pertained to “the application of domestic laws”. In this regard, the Note stated that “[t]he application of domestic laws to govern all investments . . . were contained in the Indian negotiating text . . . This issue, too, remained unresolved in negotiation.”.302 Similarly, a letter of the Ministry of External Affairs preceding the Ministry of Finance’s Note mentioned above,303 as well as another Note prepared by the Legal & Treaties Division of the Ministry of External Affairs,304 establish India’s preference. 220. The above contemporaneous documents make it clear that not only did India prefer the applicability of Indian law, but it also communicated its preference in this regard to the UK. This preference should certainly be construed to cover the application of legislative enactments that would conflict with any overly expansive interpretation of the India-UK BIT. 221. Therefore, the fact that India specifically drew the UK’s attention to Indian law, coupled with the shared history of the two nations and the publicly available materials on Indian law, makes the violation of Indian internal law regarding the competence to conclude treaties “manifest” within the meaning of Article 46(2) of the VCLT.
302 Exh. RoI-34, Ministry of Finance, Note for the Cabinet, Approval of a Bilateral Investment Promotion and Protection Agreement with the United Kingdom, D.O. No. F.26/1/93-FI&T. 303 Exh. RoI-43, Ministry of External Affairs, Letter dated 1 March 1994, No.1320/AS(ER)/94. 304 Exh. RoI-43, Ministry of External Affairs, Letter dated 1 March 1994, No.1320/AS(ER)/94, Legal & Treaties Division, Note on ‘Issue of international arbitration in the context of bilateral investment agreements’, ¶ 7. That preference was, in fact, given effect to in the final treaty, by way of Article 11 of the BIT. 85
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− Rule of Internal Law is of Fundamental Importance 222. The last condition under Article 46 of the VCLT for invoking internal law regarding he competence to conclude treaties is that the rule of internal law being invoked must be of “fundamental importance”. It has been explained by the International Court of Justice (“ICJ”) in several cases305 as well as in scholarly writings306 that any “constitutional rule” regarding the competence to conclude treaties, including the principle of separation of powers in a country, is a rule of “fundamental importance” for the purposes of Article 46 of the VCLT. Indeed, as mentioned above, the Indian Supreme Court has itself qualified the principle of separation of powers as being part of the “basic structure” of the Indian Constitution, which cannot ever be altered in the Indian constitutional democracy (see ¶ 204 above).307 223. In light of the above, it is clear that Indian law was a relevant law for the Tribunal to consider while determining India’s jurisdictional objection regarding the non-arbitrability of tax disputes. This is not only because India was a likely place of enforcement of the Award or because the lex arbitri mandated the Tribunal to do so (see ¶¶ 158, 179-182 above), but also in order to delineate the extent to which Article 9 of the India-UK BIT could be interpreted to create an obligation upon India to arbitrate tax disputes. Pursuant to Article 46 of the VCLT, since the Indian executive, which signed and ratified the India-UK BIT, was not competent to bind India to any international treaty obligation that would conflict with Indian legislative enactments and since Section 293 of the Indian IT Act (a legislative enactment) read with the consistent case law of the Indian Supreme Court renders tax disputes non- arbitrable, including especially if they are sought to be arbitrated against the Government, a determination of non-arbitrable tax disputes did not fall within the Tribunal’s jurisdiction. In failing to recognize this, and in completely ignoring the relevance of Indian law, the Tribunal rendered a plainly wrong Award that must be set aside by Your Court under Article 1065(1)(a) of the DCCP. The Tribunal’s Findings are Erroneous under International Law 224. In this Sub-Section, it shall be established that the Tribunal’s findings on India’s jurisdictional objection regarding non-arbitrability of tax disputes are erroneous as a matter of international law, not only because they are baseless, but also because they are contrary to the fundamental principles of treaty interpretation. Both of these errors shall be addressed in turn.
305 Case Concerning the Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v. Nigeria: Equatorial Guinea intervening), Judgment, 2002 I.C.J. Rep. 303 (Oct. 10, 2002), ¶ 265, available at: https://www.icj-cij.org/public/files/case-related/94/094-20021010-JUD-01-00-EN.pdf; Maritime Delimitation in the Indian Ocean (Somalia v. Kenya), Preliminary Objections, 2017 I.C.J. Rep. 3 (Feb. 2, 2017), ¶ 48, available at: https://www.icj-cij.org/public/files/case-related/161/161-20170202-JUD-01-00-EN.pdf. 306 Exh. RoI-23, Thilo Rensmann, Article 46. Provisions of internal law regarding competence to conclude treaties in Vienna Convention on the Law of Treaties: A Commentary, eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018), p. 852, ¶ 39. 307 Exh. RoI-25, Indira Nehru Gandhi vs Shri Raj Narain & Anr, Appeal (Civil) 887 of 1975, 1976 (2) SCR 347; see Exh. RoI-26, Kesavananda Bharati Sripadagalvaru and Ors v. State of Kerala and Anr, Writ Petition (Civil) 135 of 1970, (1973) 4 SCC 225. 86
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− The Tribunal’s Findings are Baseless 225. The Tribunal’s findings, in particular with respect to the distinction between “tax disputes” and “tax-related investment disputes” (quoted in ¶ 148 above), formed the basis of its entire analysis on India’s jurisdictional objection regarding non-arbitrability. However, this artificial and fanciful distinction is neither supported by any principle of international law, customary or conventional, nor by any other source or legal authority. Moreover, as mentioned above, none of the Parties in the arbitration had explicitly argued or relied on authorities that explicitly endorsed any distinction between “tax disputes” and “tax-related investment disputes” (see ¶ 150 above). Even if one were to look beyond the Parties’ submissions in the arbitration, the Tribunal could not have found any source or legal authority in support of this concocted distinction between “tax disputes” and “tax-related investment disputes” because none exists. This distinction was invented by the Tribunal only as a desperate attempt to be able to uphold its jurisdiction. Although the baselessness of this distinction is self-evident, it is important to explain two factors in this regard. 226. The first factor relates to how the Tribunal’s treatment of the “tax disputes” at issue in the present case does not find any support in case law in investment treaty arbitration. It must be noted that, in the present case, Cairn had challenged the general exercise of legislative powers by India through the enactment of the 2012 Clarification, which was a legislative enactment of general import based on policy considerations and sovereign prerogatives of taxation intended to clarify the taxability of gains arising from indirect transfers of assets.308 Despite Cairn’s misleading indications to the contrary during the arbitration and their disingenuous attempts to limit the scope of their claims to the application of the 2012 Clarification to their alleged investments,309 it is evident from a bare perusal of their submissions that their claims pertained primarily to the general exercise of sovereign legislative powers to tax and not merely to the application of the 2012 Clarification to their investments.310 227. Case law in investment treaty arbitration has broadly recognized a distinction between two types of “tax disputes”, i.e., (i) tax disputes that pertain to a general exercise of legislative powers; and (ii) tax disputes that allege a discriminatory application of tax provisions or the imposition of taxes which were inconsistent with specific promises under tax stabilization clauses or other specific commitments made by the host State.311 In general, it has been
308 Exh. RoI-4, SoD, ¶ 212; Exh. RoI-4, R-PHB, ¶¶ 527-529; Exh. RoI-4, R-165 Shri Pranab Mukherjee, Minister of Finance, Transcript of Speech before Lok Sabha (Parliament), 7 May 2012, pp. 30-31. 309 Exh. RoI-4, SoRy, ¶¶ 16, 38 (stating that “Claimants’ claims challenge the retroactive application of a new tax obligation, not the wisdom of India’s taxation policy” and “Claimants take no issue with India’s stated policy concern to combat the exploitation of tax havens”); Exh. RoI-4, SoRy, ¶¶ 253-254 (“The Claimants, however, do not challenge the Respondent’s general taxation measures, tax policies, or fiscal sovereignty. Instead, the Claimants challenge the specific impact of the Retroactive Amendment and FAO on the Claimants’ investments in India.”) 310 Indeed, it is clear from the Table of Contents of their SoC that Cairn clearly challenged both “The Enactment and Application of the Retroactive Amendment” separately as being “Arbitrary, Unfair and Inconsistent With Obligations of Good Faith” [emphasis added] (Exh. RoI-4, SoC, Section III.C(3)). 311 Exh. RoI-4, SoD, ¶ 213; Exh. RoI-4, R-SoRj, ¶ 85; see generally Marvin Feldman v Mexico (ICSID Case No ARB(AF)/99/1), available at: https://www.italaw.com/sites/default/files/case-documents/ita0319.pdf; 87
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accepted that the former type of tax disputes is not arbitrable in international investment arbitration under BITs, while the latter type may be subject to the satisfaction of strict and narrowly applied conditions. For instance, in the case of Burlington Resources v. Ecuador, the tribunal declined jurisdiction over a claim that challenged the propriety of a legislative enactment on the ground that it amounted to a challenge of the host State’s “tax power, and therefore raises ‘matters of taxation’”.312 Similarly, in the case of Spyridon Roussalis v. Romania, the tribunal specifically stated the following: “Article 25(1) of the ICSID Convention requires a dispute to arise ‘directly out of an investment’ to fall under ICSID jurisdiction. It follows that general measures of tax or economic policy not directly related to the investment, as opposed to measures specifically addressed to the operations of the business concerned, will normally fall outside the jurisdiction of the Centre.”313 [emphasis added]
228. The tribunal in Spyridon Roussalis v. Romania ultimately decided to uphold jurisdiction on claimant’s claims on the ground that they would not require it “to make decisions applying general tax policies”.314 The claimant in that case had, indeed, admitted that certain type of tax disputes, which would require the Tribunal “to adjudicate the tax matters [and] to delve
Occidental Exploration and Production Company v The Republic of Ecuador (LCIA Case No. UN3467, Final Award of 1 July 2004), available at: https://www.italaw.com/sites/default/files/case-documents/ita0571.pdf; EnCana Corporation v Republic of Ecuador (LCIA Case No. UN3481, Award of 3 February 2006), available at: https://www.italaw.com/sites/default/files/case-documents/ita0285_0.pdf; Perenco Ecuador Ltd. v. The Republic of Ecuador and Empresa Estatal Petroleos Del Ecuador (ICSID Case No.ARB/08/6), available at: https://www.italaw.com/sites/default/files/case-documents/italaw10837.pdf; Burlington Resources, Inc v Ecuador (ICSID Case No. ARB/08/5, Decision on Jurisdiction of 2 June 2010), available at: https://www.italaw.com/sites/default/files/case-documents/ita0106.pdf; Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain (ICSID Case No. ARB/14/1), available at: https://www.italaw.com/sites/default/files/case- documents/italaw9710.pdf; Antaris Solar GmbH and Dr. Michael Göde v. Czech Republic (PCA Case No. 2014- 01), available at: https://www.italaw.com/sites/default/files/case-documents/italaw9809.pdf; Isolux Netherlands, BV v. Kingdom of Spain (SCC Case V2013/153), available at: https://www.italaw.com/sites/default/files/case- documents/italaw9219.pdf; CEF Energia BV v. Italian Republic (SCC Case No. 158/2015), available at: https://www.italaw.com/sites/default/files/case-documents/italaw10557_0.pdf; Foresight Luxembourg Solar 1 S.A.R.L, Foresight Luxembourg Solar 2 S.A.R.L., Greentech Energy Systems A/S et al. v. The Kingdom of Spain (SCC Case No. 2015/150), available at: https://www.italaw.com/sites/default/files/case- documents/italaw10142.pdf; Greentech Energy Systems A/S, NovEnergia II Energy & Environment (SCA) SICAR, and NovEnergia II Italian Portfolio SA v. Italy (SCC Case No. V 2015/095), available at: https://www.italaw.com/sites/default/files/case-documents/italaw10291.pdf. 312 Burlington Resources, Inc v Ecuador (ICSID Case No. ARB/08/5, Decision on Jurisdiction of 2 June 2010), ¶¶ 206-207, available at: https://www.italaw.com/sites/default/files/case-documents/ita0106.pdf. 313 Spyridon Roussalis v. Romania (ICSID Case No. ARB/06/1, Award, 7 December 2011), ¶ 489, available at: https://www.italaw.com/sites/default/files/case-documents/ita0723.pdf. Similarly, many other tribunals have also refused to extend protection to investors that bring claims challenging the propriety or legislative enactments on taxation, on the ground that such matters are “more a subject for political debate than arbitral decisions” (Sergei Paushok, CJSC Golden East Company and CJSC Vostokneftegaz Company v Mongolia (Award on Jurisdiction and Liability of 28 April 2011), ¶ 328, available at: https://www.italaw.com/sites/default/files/case- documents/ita0622.pdf) or that tribunals under BITs would have “no competence to hear these claims” (Mamidoil Jetoil Greek Petroleum Products Societe S.A. v. Republic of Albania (ICSID Case No. ARB/11/24, Award, 30 March 2015), ¶¶ 787-789, available at: https://www.italaw.com/sites/default/files/case- documents/italaw4228.pdf). 314 Spyridon Roussalis v. Romania (ICSID Case No. ARB/06/1, Award, 7 December 2011), ¶ 492, available at: https://www.italaw.com/sites/default/files/case-documents/ita0723.pdf. 88
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into the sovereign right to . . . tax” were non-arbitrable, but that such kind of disputes were not being placed before the tribunal.315 Instead, the claims before the tribunal pertained only to the adjudication and enforcement of taxation by tax authorities. It was on this basis that the tribunal affirmed its jurisdiction over the claims.316 229. This is very far from the situation in the present case wherein the foundation of Cairn’s claims was their challenge to the propriety of the 2012 Clarification,317 which was a legislative embodiment of the sovereign right to tax. By any reading, Cairn’s claims could not have been decided by the Tribunal without first adjudicating upon India’s policy decision to enact a tax legislation, which constitutes India’s exclusive sovereign prerogative that cannot be adjudicated upon by an investment treaty tribunal.318 The Tribunal was well aware of that, and specifically recognized that “Claimants’ case under Article 3 of the BIT is directed both at the 2012 [Clarification] itself, and against its application against the Claimants”.319 [emphasis added] Why else would the Tribunal dedicate approximately 150 pages of its analysis to the 2012 Clarification, comprised of (i) approximately 100 pages on the issue of whether the 2012 Clarification was a clarification or a retroactive amendment of the legal regime in India;320 and (ii) approximately 50 further pages to the issue of whether the 2012 Clarification itself “and”, separately, its “application” to Cairn breached FET.321 Accordingly, Cairn’s claims as well as the Tribunal’s Award directly and impermissibly implicated matters of sovereign policy.322 In other words, they directly implicated India’s “fiscal sovereignty” (see, for a discussion on the general principle of “fiscal sovereignty”, ¶¶ 252-264 below).323 230. Despite the clear implication of India’s fiscal sovereignty, the Tribunal incomprehensibly did not consider that Cairn’s claims gave rise to a “tax dispute”. Instead, it created a novel category of disputes, i.e., “tax-related investment disputes”, in order to excavate some tenuous basis to uphold its jurisdiction without actually dealing with the non-arbitrability of “tax disputes”. The impression that the Tribunal’s approach was motivated by an inclination
315 Spyridon Roussalis v. Romania (ICSID Case No. ARB/06/1, Award, 7 December 2011), ¶ 487, available at: https://www.italaw.com/sites/default/files/case-documents/ita0723.pdf. 316 Spyridon Roussalis v. Romania (ICSID Case No. ARB/06/1, Award, 7 December 2011), ¶¶ 487-488, available at: https://www.italaw.com/sites/default/files/case-documents/ita0723.pdf. 317 Exh. RoI-4, SoC, Section III (arguing that “The Retroactive Amendment Fundamentally Departs From Accepted Principles of Income Taxation of Non-Residents” (Section III.A); “The Retroactive Amendment Fundamentally Changed Indian Tax Law on a Retroactive Basis, and was not Merely ‘Clarificatory’” (Section III.B); “The Type of Retroactive Legislation at Issue Here is the Most Offensive to the Rule of Law” (Section III.C(1)). 318 The Tribunal recognized in its assessment on the merits that Cairn’s claims are “grounded on a substantive amendment of the law (namely, the 2012 [Clarification])” (Exh. RoI-1, Award, ¶ 1016). 319 Exh. RoI-1, Award, ¶ 1022. 320 Exh. RoI-1, Award, pp. 256-341. 321 Exh. RoI-1, Award, pp. 466-509. 322 Exh. RoI-4, SoC, ¶ 244 (alleging that “Cairn remains a victim of this political impasse and the wrongful policy decisions of the . . . Government”); Exh. RoI-4, SoRy, ¶ 439 (alleging that India was not concerned to take “principled positions on its tax law and policy”); see also Exh. RoI-4, SoC, Sections II.E, ¶¶ 200-201; Exh. RoI- 4, SoRy, ¶¶ 423-436. 323 Exh. RoI-5, Expert Opinion by Professor Kees van Raad. 89
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to uphold jurisdiction by attempting to narrowly escape arbitrability concerns is bolstered by the Tribunal’s findings at other junctures of the Award. In particular, the Tribunal was well- aware that it would be incompetent to deal with matters implicating India’s fiscal sovereignty manifested in the general exercise of legislative powers. The Award is replete with findings where the Tribunal recognized that there is a “public policy rationale of keeping tax disputes within the exclusive competence of domestic courts”,324 and “matters of tax policy . . . are matters for legislators, not the Tribunal”.325 Similarly, while assessing the merits of Cairn’s claims, the Tribunal stated the following: “The Respondent argues in this respect that investment treaty tribunals cannot second-guess a State’s policy decisions. The Tribunal agrees that, as a general matter, it is not its role to question the policy decisions of a State. As discussed in Section VII.A.3.f(i)(5) below, it is for this reason, among others, that the Tribunal cannot find fault with the Respondent’s decision to expand the source rule and tax indirect transfers. This is a policy decision which falls squarely within India’s sovereign powers and on which this Tribunal will not comment.”326 [emphasis added]
231. From the above extracts, it is apparent that the Tribunal was aware of its lack of competence to decide on matters relating to India’s sovereign tax policy. In fact, the Tribunal did not stop at inventing only an artificial distinction in its findings on India’s jurisdictional objection. In its assessment of the merits of Cairn’s claims, the Tribunal invented another distinction between “prospective” and “retrospective” taxation from the perspective of their effect on a State’s fiscal sovereignty and the Tribunal’s competence to question it.327 According to the Tribunal, prospective taxation “is one of the sovereign prerogatives of the State”328 and the Tribunal cannot “second-guess [sic] the wisdom of the Indian policy-maker”329 in this regard “[e]ven if the policy justification for increased taxation was exclusively one of revenue maximisation”.330 However, according to the Tribunal, this policy justification of revenue maximisation while “a valid policy justification for prospective taxation, . . . is insufficient to justify retroactive legislation”.331 According to the Tribunal, while it may not be competent to “question . . .whether the taxation of indirect transfers was justified”, it could question “whether the Respondent was justified in introducing it retroactively”.332 The Tribunal did not provide any rationale as to why different policy considerations would apply for cases involving prospective taxation and those involving retrospective taxation.
324 Exh. RoI-1, Award, ¶¶ 826,1455. 325 Exh. RoI-1, Award, ¶ 1588. The Tribunal also offers lip-service to the fact that it needs to “bear [sic] in mind that the Tribunal is ad hoc, not part of the judicial machinery of the State, and not vested with a legislative or policy-making power” (Exh. RoI-1, Award, ¶ 1801). 326 Exh. RoI-1, Award, ¶ 1794. 327 See, inter alia, Exh. RoI-1, Award, ¶¶ 1805-1814. 328 Exh. RoI-1, Award, ¶ 1805. 329 Exh. RoI-1, Award, ¶ 1810. 330 Exh. RoI-1, Award, ¶ 1805. 331 Exh. RoI-1, Award, ¶ 1814. 332 Exh. RoI-1, Award, ¶ 1810. 90
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232. In reality, the Tribunal could not have provided any rationale for this artificial differentiation because all matters of sovereign tax policy manifested in the general exercise of legislative powers, be it by way of prospective taxation or otherwise, would involve the same considerations of fiscal sovereignty. All such matters, regardless of the nature or temporal scope of the legislative enactment in question, fall outside any offer to arbitrate contained in an international investment treaty on the basis of the general principle of “fiscal sovereignty”, which cannot be interfered with or undermined in international law, let alone by interventions that are based on baseless and untenable distinctions (see ¶¶ 252-264 below). 233. The second factor that makes the distinction between “tax disputes” and “tax-related investment disputes” untenable is the Tribunal’s failure to identify the measure under challenge in a precise manner and its related failure to appreciate the conceptual distinction between the challenged measure and the standards of protection under the India-UK BIT. In international law, it is incumbent upon the adjudicatory body, be it a court or a tribunal, that the measure under challenge be identified as “precisely and narrowly as is reasonably possible having regard to the factual and legal issues”.333 This process is an essential precursor to determining whether a sovereign State has consented to resolve the dispute regarding the measure at issue through an international investment arbitration by waiving its default sovereign immunity from such actions (see ¶ 141 above).334 234. Although the Tribunal did enlist the challenged measures in its assessment on the merits of the case,335 it avoided doing so in its assessment of India’s jurisdictional objections. In fact, despite acknowledging that Cairn’s claims were “grounded on a substantive amendment of the law (namely, the 2012 [Clarification])”,336 which was a general exercise of India’s legislative powers over matters of fiscal sovereignty, the Tribunal, instead of declining jurisdiction, chose the ill-fated route of characterizing the claims as giving rise to a “tax- related investment dispute” (see ¶ 148 above). 235. While characterizing the Parties’ dispute as a “tax-related investment dispute”, the Tribunal described such a dispute as pertaining to “whether the respondent State has breached substantive standards of treatment under the investment treaty through the exercise of its authority in the field of taxation, and whether liability arises as a result”.337 This generic definition of the scope of the dispute does not qualify as an appropriately precise or narrow identification of the measures under challenge. If one were to go by this generic definition, then any measure that an investor wishes to challenge, regardless of whether it implicates a
333 Exh. RoI-44, James Crawford, “International Law and Foreign Sovereigns: Distinguishing Immune Transactions,” British Yearbook of International Law 75, no. 96 (1984), p. 96. 334 Exh. RoI-45, Zachary Douglas, “State Immunity for the Acts of State Officials,” British Yearbook of International Law 82, no. 1 (2012): 281–348, p. 328; Exh. RoI-44, James Crawford, “International Law and Foreign Sovereigns: Distinguishing Immune Transactions,” British Yearbook of International Law 75, no. 96 (1984), pp. 96-97; Exh. RoI-46, Roger O’Keefe, Christian J. Tams, Antonios (eds), The United Nations Convention on Jurisdictional Immunities of States and Their Properties (OUP, 2012), pp. 66-67; Exh. RoI-47, Hazel Fox, The Law of State Immunity (3rd ed., OUP 2013), pp. 410-418. 335 Exh. RoI-1, Award, ¶¶ 1021-1025. 336 Exh. RoI-1, Award, ¶ 1016. 337 Exh. RoI-1, Award, ¶ 793. 91
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State’s fiscal sovereignty, would necessarily fall within a host State’s offer to arbitrate under any BIT because the investor would, in most cases, naturally invoke the violation of the substantive standards of treatment under the investment treaty in question. That cannot be the intention behind investment treaty arbitration. 236. In reality, it is immaterial that the propriety of the 2012 Clarification was being examined against the substantive standards of treatment under the India-UK BIT. The process of identifying the measure in a precise and narrow manner implicitly requires a tribunal to distinguish between the measure under challenge and the standards against which the propriety of such a measure shall be examined. If the measure under challenge implicates a State’s fiscal sovereignty manifested in the general exercise of legislative powers, which in the present case it does, no tribunal can exercise jurisdiction over such a measure, regardless of whether the propriety of such a measure is to be examined against the substantive standards of treatment under the India-UK BIT. The Tribunal’s characterization of the dispute between Cairn and India regarding the propriety of the 2012 Clarification as a “tax-related investment dispute” blurs this basic conceptual distinction between the measure under challenge and the substantive standards against which the propriety of such a measure is to be examined. 237. For all the above reasons, the Tribunal’s findings on India’s jurisdictional objection regarding non-arbitrability of tax disputes are baseless and untenable.
− The Tribunal’s Findings are Based on an Erroneous Treaty Interpretation 238. In addition to being baseless and untenable, the Tribunal’s findings on India’s jurisdictional objection are also violative of the principles of treaty interpretation. It shall be shown that the Tribunal did not appropriately interpret Article 9 of the India-UK BIT under Articles 31 and 32 of the VCLT.338 In this connection, the Tribunal’s interpretation is reflective of broadly three errors. 239. The first error in the Tribunal’s interpretation of Article 9 of the India-UK BIT arises due to its myopic focus on the absence of an “explicit” broad tax exclusion in the India-UK BIT, and correspondingly, the presence of a “limited tax-related exception” in Article 4(3) thereof. 240. The treaty text that was under interpretation by the Tribunal was the following phrase in Article 9(1) of the India-UK BIT: “Any dispute between an investor of one Contracting Party and the other Contracting Party in relation to an investment of the former . . .” (see for the entire provision ¶ 61 above). According to the Tribunal, “[n]othing in the ordinary meaning of the language of Article 9 of the BIT suggests that tax-related investment disputes fall outside the scope of the Tribunal’s jurisdiction. In particular, it does not contain any explicit exclusion for tax-related investment disputes”.339 [emphasis added] Quite apart from the fact
338 It is not denied that the rules of interpretation under the VCLT are applicable in the present case, despite India not having signed or ratified it, since they constitute customary international law (see Exh. RoI-4, SoD, ¶ 239; Exh. RoI-4, R-PHB, ¶ 56; Exh. RoI-1, Award, f.n. 773). 339 Exh. RoI-1, Award, ¶ 797. 92
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that the Tribunal was answering the wrong question, i.e., the arbitrability of “tax-related investment disputes” and not “tax disputes” (see ¶ 149 above), this finding of the Tribunal is erroneous under Article 31 of the VCLT. Article 31 VCLT provides as follows: “Article 31 General rule of interpretation 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; (b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. 3. There shall be taken into account, together with the context: (a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions; (b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation; (c) any relevant rules of international law applicable in the relations between the parties. 4. A special meaning shall be given to a term if it is established that the parties so intended.”
241. Article 31(1) of the VCLT requires interpreting a treaty in “good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose”. Treaty interpretation is, accordingly, a conjunctive exercise under Article 31 of the VCLT, as per which all of the elements of interpretation, i.e., (i) ordinary meaning; (ii) context; and (iii) objective and purpose, are to be applied as part of “a single combined operation”.340 Your Court has accepted this indisputable proposition in the case of Hulley/Veteran/Yukos v. The Russian Federation.341 242. The Tribunal did not respect this general rule of treaty interpretation. Instead, in its interpretation of Article 9 of the India-UK BIT, the Tribunal focussed too extensively on the absence of an “explicit exclusion for tax-related investment disputes” in the India-UK BIT,
340 Exh. RoI-23, Oliver Dörr, Article 31: General rule of Interpretation in Vienna Convention on the Law of Treaties: A Commentary, eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018), p. 580, ¶ 38. 341 The Hague Court of Appeal, 18 February 2020, Case 200.197.079/01, Judgment (Russian Federation/Hulley Enterprises Limited, Veteran Petroleum Limited and Yukos Universal Limited), ¶ 4.2.3, available at: https://www.italaw.com/sites/default/files/case-documents/italaw11186.pdf (“The provision of Article 31(1) VCLT contains one rule of interpretation, of which the three elements of that provision (text, context and object and purpose) form an integral part; the interpretation is a process whereby these elements - in good faith - are applied in one joint operation.”) 93
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which was not even a disputed issue between the Parties.342 Almost at every juncture of applying the tenets of interpretation, the Tribunal repeated the absence of “express language” regarding a tax-related exclusion.343 As a corollary, the Tribunal also focussed on the “limited tax-related exception” in Article 4(3) of the India-UK BIT.344 In this regard, it is important to reproduce Article 4 of the India-UK BIT in its entirety:
“ARTICLE 4 National Treatment and Most-favoured-Nation Treatment (1) Each Contracting Party shall accord to investments of investors of the other Contracting Party, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded either to investments of its own investors or to investments of investors of any third State. (2) In addition each Contracting Party shall accord to investors of the other Contracting Party, including in respect of returns on their investments, treatment which shall not be less favourable than that accorded to investors of any third State. (3) The provisions of this Agreement relative to the grant of treatment not less favourable than that accorded to the investors of either Contracting Party or of any third State shall not be construed so as to oblige one Contracting Party to extend to the investors of the other the benefit of any treatment, preference or privilege resulting from: (a) any existing or future customs union or similar international agreement to which either of the Contracting Parties is or may become a party, or (b) any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly or mainly to taxation.”
243. With respect to Article 4(3) of the India-UK BIT, the Tribunal, inter alia, stated as follows: “In particular, Article 4 of the BIT, which contains the National Treatment and the [Most-Favoured-Nation (“MFN”) Treatment] clauses, excludes from the scope of those provisions ‘any treatment, preference or privilege resulting from […] any international agreement or arrangement relating wholly or mainly to taxation or any domestic legislation relating wholly or mainly to taxation.’ The presence of this limited tax-related exception in the BIT belies India’s argument that ‘arbitration of tax disputes was entirely unthinkable and not in the contemplation of the state parties’ to the BIT. Indeed, if, as the Respondent suggests, ‘the entire idea of tax arbitration [were] beyond the contemplation of the contracting parties’, and if ‘tax disputes [were] outside the BIT’s scope’, there would be no need to exclude such matters
342 India had never disputed that there was no express exclusion of taxation under the India-UK BIT. Instead, it had argued that the lack of such expression exclusion is “of no moment, because at issue here is the existence of general limits to the scope of protection of investment treaties which exist even if they are not made explicit” (see Exh. RoI-4, SoD, ¶¶ 212-216; see also Exh. RoI-4, R-SoRj, ¶¶ 77, 81-85). 343 Exh. RoI-1, Award, ¶¶ 797-798, 820. 344 Exh. RoI-1, Award, ¶¶ 796-800. 94
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specifically from the National Treatment and the MFN protections.”345 [emphasis added; footnotes omitted]
244. Based, inter alia, on the above understanding, the Tribunal concluded its misconceived interpretation exercise by finding that “neither the BIT in general nor its dispute resolution provision in particular contains an exclusion for tax-related investment disputes”.346 245. The Tribunal’s interpretation, in particular its understanding of Article 4(3) of the India-UK BIT, is a textbook example of an a contrario interpretation of a treaty, “by which the fact that the provision expressly provides for one category of situations is said to justify the inference that other comparable categories are excluded”.347 Based on the presence of a “limited tax- related exception” in Article 4(3) of the India-UK BIT, the Tribunal inferred the exclusion of the possibility of a general exception for tax-related disputes (or more appropriately, tax disputes) from the scope of the BIT. 246. Such an a contrario interpretation is not permissible within the regime of interpretation prescribed in Article 31 of the VCLT. The ICJ has recently stated in the Question of Delimitation case that an a contrario interpretation of a treaty “is only warranted . . . when it is appropriate in light of the text of all the provisions concerned, their context and the object and purpose of the treaty.”348 Such an exceptional approach to interpretation cannot replace a “good faith” application of the elements of interpretation in Article 31 of the VCLT, nor can it be the focal point of an interpretation exercise. Scholarly writings have also endorsed that an a contrario interpretation “is never in and of itself determinative of a particular interpretation”,349 and should be taken into account only “when necessary” given that the VCLT preferred the text of a treaty to be the driving force of interpretation (and not logical inferences from absence of text).350 247. In the present case, the Tribunal’s a contrario interpretation of Article 4(3) of the India-UK BIT was clearly “in and of itself determinative” of its understanding of Article 9 of the India- UK BIT. Indeed, the Tribunal referred to the so-called “limited tax-related exception” or “carve-out” in Article 4(3) of the India-UK BIT on several occasions throughout its interpretation exercise,351 and in general focussed extensively on the presence of Article 4(3)
345 Exh. RoI-1, Award, ¶¶ 799-800. 346 Exh. RoI-1, Award, ¶ 809. 347 Question of the Delimitation of the Continental Shelf between Nicaragua and Colombia beyond 200 nautical miles from the Nicaraguan Coast (Nicaragua v. Colombia), Judgment of 17 March 2016, Preliminary objections, ¶ 35, available at: https://www.icj-cij.org/public/files/case-related/154/summary-judgment-17-march- 2016-en.pdf. 348 Question of the Delimitation of the Continental Shelf between Nicaragua and Colombia beyond 200 nautical miles from the Nicaraguan Coast (Nicaragua v. Colombia), Judgment of 17 March 2016, Preliminary objections, ¶ 35, available at: https://www.icj-cij.org/public/files/case-related/154/summary-judgment-17-march- 2016-en.pdf. 349 Exh. RoI-48, Abdulqawi A. Yusuf and Daniel Peatp, “A Contrario Interpretation in the Jurisprudence of the International Court of Justice,” CJCCL 3, no. 1 (2017), p. 15. 350 Exh. RoI-49, Liliana E. Popa, “The Holistic Interpretation of Treaties at the International Court of Justice,” Nordic Journal of International Law 87 (2018): 249-343, pp. 257-258. 351 See Exh. RoI-1, Award, inter alia, ¶¶ 799-800, 806, 812, 827. 95
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of the India-UK BIT and, relatedly, the absence of any other broader “explicit exclusion” in the BIT.352 248. Moreover, the Tribunal conducted an a contrario interpretation when it was clearly inappropriate in light of the elements of interpretation under Article 31 of the VCLT. A bare perusal of Article 4(3) of the India-UK BIT, in its proper context, makes it evident that the provision was only intended to limit the MFN and National Treatment obligations contained in Articles 4(1) and 4(2) of the India-UK BIT, such that these obligations would not bind the host State to extend benefits to investors that are afforded to other investors (domestic or foreign) under any international agreements or domestic legislations. This had been pointed out to the Tribunal by India,353 but the Tribunal completely misunderstood India’s submission. The Tribunal understood India’s argument as being that Article 4(3) of the India- UK BIT “gives precedence to the [Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains between India and the UK (“India-UK DTAA”)] over the BIT, and thus the [India-UK] DTAA should govern any ‘treatment’ provided by India to UK investors in tax matters”. Based on this misunderstanding, the Tribunal inexplicably examined India’s argument under Article 30(2) of the VCLT.354 249. However, at no point had India invoked Article 30 of the VCLT, which pertains to the “Writ of Summons of Successive Treaties Relating to the Same Subject-Matter”, in its argument regarding Article 4(3) of the India-UK BIT. The simple point that India had advanced in the Arbitration, and maintains in this Writ of Summons, is that Article 4(3) of the India-UK BIT is only intended to limit the MFN and National Treatment obligations contained in Articles 4(1) and 4(2) of the India-UK BIT, and is “consistent with a general intention not to submit tax matters to the treaty; not the converse”.355 250. Indeed, India’s understanding of Article 4(3) of the India-UK BIT is supported by other sources. The United Nations Conference on Trade and Development (“UNCTAD”), in its report on “Taxation” published in 2000 as part of its Series on Issues in International Investment Agreements, examined in detail various kinds of limitations or exclusions in BITs for tax-related matters, and explained the objective and implication of provisions such as Article 4(3) of the India-UK BIT. As per UNCTAD, the objective of provisions such as Article 4(3) of the India-UK BIT is that “many countries prefer to address international taxation issues . . . in separate treaties dealing specifically with such matters in order to maintain maximum fiscal sovereignty”.356 [emphasis added] This clearly establishes that provisions such as Article 4(3) of the India-UK BIT are, in fact, confirmations of the State parties’ intention to maintain as much fiscal sovereignty over tax related matters as possible,
352 See Exh. RoI-1, Award, inter alia, ¶¶ 799-800, 805-806. 353 Exh. RoI-4, R-SoRj, ¶ 81. 354 Exh. RoI-1, Award, ¶¶ 805-807. 355 Exh. RoI-4, R-SoRj, ¶¶ 80-81. 356 Exh. RoI-4, RLA-176, United Nations Conference on Trade and Development, Taxation, UNCTAD Series on Issues in International Investment Agreements (United Nations 2000), p. 36. 96
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and not to a contrario waive such fiscal sovereignty in respect of other provisions of the BIT. As a corollary, the implication of provisions such as Article 4(3) of the India-UK BIT was described by UNCTAD as being that they “may not permit certain specific tax questions, which have a direct bearing on the rights of investors under the agreement, from being fully dealt with” under BITs.357 [emphasis added] 251. Thus, such provisions are not in any way “limited tax-related exceptions” as the Tribunal chose to qualify them. They are, instead, manifestations of the general principle of fiscal sovereignty. If the Tribunal had understood Article 4(3) of the India-UK BIT in its proper context, that would have led it towards the principle of fiscal sovereignty, and not towards endorsing an a contrario interpretation that was neither warranted nor necessary in these circumstances in light of the tenets of interpretation in Article 31 of the VCLT. 252. The second error in the Tribunal’s interpretation of Article 9 of the India-UK BIT arises due to its effective ignorance of Article 31(3)(c) of the VCLT as an element of treaty interpretation. Article 31(3)(c) of the VCLT is an element of treaty interpretation that requires taking into account “any relevant rules of international law applicable in the relations between the parties”. This element of interpretation is considered to be very significant, since it ensures “systemic integration within the international legal system” by incorporating customary international law and general principles of international law into the treaty interpretation process under Article 31 of the VCLT.358 This element is required to be taken into account “together with” the other elements in Article 31 of the VCLT, in particular, the context of the treaty. This is clear from the chapeau of Article 31(3) of the VCLT. 253. The Tribunal itself recognized, at another juncture of the Award, that Article 31(3)(c) VCLT is “not a supplementary, but a primary means of treaty interpretation”, and that it therefore “cannot look at [a treaty’s] terms in isolation; it must ascertain their meaning . . . in the broader context of international law”.359 However, while interpreting Article 9 of the India- UK BIT in order to examine India’s jurisdictional objection pertaining to the non-arbitrability of tax disputes, the Tribunal failed to practice what it preached. 254. In particular, the Tribunal ignored the general principle of international law that India had relied upon, i.e., the principle of “fiscal sovereignty”.360 India had submitted multiple
357 Exh. RoI-4, RLA-176, United Nations Conference on Trade and Development, Taxation, UNCTAD Series on Issues in International Investment Agreements (United Nations 2000), p. 77. 358 Exh. RoI-50, C. McLachlan, “The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention,” International and Comparative Law Quarterly 54, (2005): 279, p. 310 et seq; Exh. RoI-49, Liliana E. Popa, “The Holistic Interpretation of Treaties at the International Court of Justice,” Nordic Journal of International Law 87 (2018): 249-343; Exh. RoI-23, Oliver Dörr, Article 31: General rule of Interpretation in Vienna Convention on the Law of Treaties: A Commentary eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018), p. 608, ¶ 99 (“para 3 lit c would even allow reference to general principles of law within the meaning of Art 38 para 1 lit c ICJ Statute in the context of interpreting a treaty provision”). 359 Exh. RoI-1, Award, ¶ 1714. 360 Exh. RoI-4, R-SoRj, ¶ 77. 97
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authorities in support of this general principle of universal application. However, the Tribunal either ignored those authorities without reason,361 or made erroneous findings on them.362 255. Indeed, it is important to first examine the errors associated with the Tribunal’s treatment of this general principle of fiscal sovereignty under Article 31(3)(c) of the VCLT before discussing the contours of the principle itself. As mentioned, the Tribunal essentially ignored most of the authorities relied upon by India in support of its argument regarding the general principle of fiscal sovereignty. In this regard, the Tribunal found that no general principle of international law or customary international law can affect the Tribunal’s jurisdiction or the arbitrability of tax-related investment disputes since Article 9 of the India-UK BIT “represented a negotiated advance on such rules” that cannot be “equated to” a general principle of international law or customary international law.363 This constituted a wrong and absurd understanding and application of the element of interpretation contained in Article 31(3)(c) of the VCLT. Article 31(3)(c) of the VCLT does not require equating the treaty under interpretation with a general principle of international law or customary international law. Article 31(3)(c) of the VCLT, instead, serves the function of ensuring that a treaty is interpreted in line with any general principle of international law and/or customary international law. 256. As mentioned, the Tribunal was aware of this function of Article 31(3)(c) of the VCLT, but for no apparent reason turned a blind eye to it while interpreting Article 9 of the India-UK BIT (see ¶ 253 above). The only juncture at which the Tribunal referred to Article 31(3)(c) of the VCLT in its interpretation of Article 9 of the India-UK BIT was when considering the
361 See, inter alia, Exh. RoI-4, RLA-176, United Nations Conference on Trade and Development, Taxation, UNCTAD Series on Issues in International Investment Agreements (United Nations 2000), p. 1; Exh. RoI-4, RLA- 177, Harold Wurzel, “Foreign Investment and Extraterritorial Taxation,” Columbia Law Review 38, (1938): 809; Exh. RoI-4, RLA-178, Martin Norr, “Jurisdiction to Tax and International Income,” Tax Law Review 17, (1961- 62): 431; Exh. RoI-4, RLA-305, Arnold A. Knechtle, Basic Problems in International Fiscal Law, (HFL Publishers Ltd., 1979), pp. 34, 37, 40; Exh. RoI-4, RLA-181, Edwin van der Bruggen, “State Responsibility under Customary International Law in Matters of Taxation and Tax Competition,” International Tax Review 29, no. 4 (2000): 115, pp. 120-121; Case concerning the taxation liability of Euratom employees between the Commission of Atomic Energy Community (Euratom) and the United Kingdom Atomic Energy Authority, Decision dated 25 February 1967 XVII Reports of International Arbitral Awards 467 (1967), p. 507, available at: https://legal.un.org/riaa/cases/vol_XVIII/497-517.pdf; Exh. RoI-4, RLA-109, The American Law Institute, Restatement of the Law (Third): The Foreign Relations Law of the United States (American Law Institute Publishers, 1987), ¶ 112; Exh. RoI-4, RLA-183, Bin Cheng, “The Rationale of Compensation for Expropriation,” Transactions of the Grotius Society 44, (1958): 267, p. 287; Emanuel Too v Greater Modesto Insurance Association (Iran-US Claims Tribunal Case No. 880, Award No. 460-880-2), available at: https://iusct.com/cases/final-award-no-460-29-december-1989/. 362 Exh. RoI-1, Award, ¶¶ 828-833. The Tribunal’s findings, inter alia, on the OECD’s practice were also erroneous because the Tribunal did not give effect to the clear language in a 1984 OECD report whereby arbitration of tax disputes “would represent an unacceptable surrender of fiscal sovereignty” (see Exh. RoI-4, RLA-184, OECD, “Transfer Pricing and Multinational Enterprises – Three Taxation Issues,” OECD Committee on Fiscal Affairs, (June 1984). In this regard, the Tribunal’s reliance on Article 18 of the OECD’s Multilateral Convention of 2016 is also misplaced since that provision does not only envisage “the possibility for member States to notify their agreement arbitrate such disputes” but actually envisages a separate notification requirement if the States wish to apply the arbitration provisions to tax disputes (see Exh. RoI-4, R-SoRj, ¶ 84(d); Exh. RoI-4, CLA-284, OECD, Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, Part VI, dated 24 November 2016). 363 Exh. RoI-1, Award, ¶ 834. 98
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relationship between the India-UK DTAA and the India-UK BIT.364 However, there, too, the Tribunal erred in finding that there is no “relevant rule in the former that would suggest that the latter should be interpreted so as to exclude tax-related measures from its scope”.365 257. As shall be explained in the Expert Opinion of Professor Kees van Raad, a world-renowned expert on international tax law engaged by India, the very existence of a DTAA manifests a general principle of “fiscal sovereignty”. Indeed, when two States enter into a DTAA, they implicitly limit their sovereignty over fiscal or tax issues. Once that is done, “it would be difficult – if not impossible – to understand in the great many cases in which two States have concluded in addition to a tax treaty a cross border investment protection agreement (like a BIT), that the latter treaty would provide a further restriction – of a very unprecise nature – on the exercise by each of the States of their tax jurisdiction, i.e. over and beyond the detailed rules agreed upon in the tax treaty.”366 258. In fact, along the lines of what Professor van Raad explains, UNCTAD, in its report on “Taxation” discussed above, also alludes to a distinction in purpose between DTAAs and BITs, and, in the process, recognizes that tax matters should only be regulated in the former: “The principal purpose of [Double Taxation Treaties] is to deal with issues arising out of the allocation of revenues between countries; the principal purpose of BITs is to protect the investments that generate these revenues (and tax issues are excluded from their provisions)”367
259. Similar statements find resonance in State practice, which is discussed in greater detail in ¶¶ 268-273 below. For instance, the United States’ explanatory notes to many of their BITs have mentioned that there is an “assumption that tax matters are properly covered by bilateral tax treaties” or that they “should be dealt with in bilateral tax treaties”.368 Likewise, other States, such as Italy, have indicated to India during their negotiations that “fiscal questions do not enter into the context of” BITs.369 Along these lines, the Law Commission of India’s 260th report regarding India’s (then draft) Model BIT 2016 (“LCI Report”) also stated that “[t]he power to tax exists independent of a [bilateral investment] treaty” and “[t]he absence of [an explicit exclusion] clause will not affect India’s taxing power”.370
364 Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, signed 25 January 1993, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/498363/india- dtc_-_in_force.pdf 365 Exh. RoI-1, Award, ¶ 808(b). 366 Exh. RoI-5, Expert Opinion by Professor Kees van Raad. 367 Exh. RoI-4, RLA-176, United Nations Conference on Trade and Development, Taxation, UNCTAD Series on Issues in International Investment Agreements (United Nations 2000), p. 27. 368 See the explanatory notes to the US-Ukraine BIT (1996), US-Georgia BIT (1994), available at: https://2009-2017.state.gov/e/eb/ifd/43366.htm 369 Exh. RoI-51, Note Verbale, Embassy of Italy, 23 February 1995. 370 Exh. RoI-52, Government of India, Law Commission of India, Report No. 260, Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty, ¶ 2.3.5. 99
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260. These statements, as well as Professor van Raad’s opinion, confirm the existence of the principle of “fiscal sovereignty”.371 In particular, Professor van Raad states the following in respect of the existence and meaning of this principle: “Every State enjoys fiscal sovereignty, which is an essential attribute of its sovereignty and statehood under international law. Fiscal sovereignty can be described as a State’s sovereignty over matters of taxation, i.e., the power to independently develop and decide its own tax policy, along with the corresponding powers to codify its tax policy by way of fiscal rule-making and to adjudicate issues that may arise regarding the making and the interpretation of its tax laws.
The existence of fiscal sovereignty is a general principle of international law that cannot be doubted. This sovereignty cannot be restricted or waived under customary or conventional international law unless a State explicitly expresses its intention to do so. Examples of conventional restrictions are tax treaties (conventions for the avoidance of double taxation) and treaties that create jointly with other States a supranational body such as e.g. the European Union. Thus, unless a treaty expressly mentions that it covers matters of taxation, it cannot be assumed to cover them. This holds true for bilateral investment treaties as well. In the absence of such express inclusion, these treaties cannot be construed as restricting in any manner a State’s fiscal sovereignty.”372
261. Indeed, it cannot be doubted that the principle of fiscal sovereignty is embedded in international law such that “[n]o significant issue in international tax can be discussed without raising the question of ‘sovereignty’”373 This principle of fiscal sovereignty has been recognized by UNCTAD in the following absolute terms: “[T]he jurisdiction to tax . . . based on the domestic legislative process, which is an expression of national sovereignty, thus heightening the sensitivity of the surrounding issues. There are no restrictions under international law to the legislative jurisdiction to impose and collect taxes”.374 [emphasis added]
262. Insofar as the territorial reach of a State’s fiscal sovereignty is concerned, it has been clearly stated in the award in the Case concerning the taxation liability of Euratom employees between the Commission of the European Atomic Energy Community (Euratom) and the United Kingdom Atomic Energy Authority, that a State has the sovereign authority to decide “any question of taxes to be imposed on residents in that State or on income derived from or
371 Exh. RoI-5, Expert Opinion by Professor Kees van Raad. 372 Expert Opinion by Prof. Kees van Raad. 373 Exh. RoI-53, Diane M Ring, “What’s at Stake in the Sovereignty Debate?: International Tax and the Nation State,” Va J Intl L 49, (2008-2009): 155, p. 156. 374 Exh. RoI-4, RLA-176, United Nations Conference on Trade and Development, Taxation, UNCTAD Series on Issues in International Investment Agreements (United Nations 2000), pp. 1-2, 7. As per another related definition, fiscal sovereignty is “the non-derivative sovereignty of a State, which is in principle internally as well as externally unlimited, and which manifests itself vis-â-vis other States in exercising sole (exclusive) authority in respect of acts of legislation, administration and justice within its territorial power sphere” (Exh. RoI-4, RLA- 305, Arnold A. Knechtle, Basic Problems in International Fiscal Law, (HFL Publishers Ltd., 1979), p. 34). 100
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paid in that State”.375 [emphasis added] It can hardly be questioned that a legislative enactment such as the 2012 Clarification would fall within this understanding of fiscal sovereignty, as it sought to clarify taxation of “an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India . . . if the share or interest derives, directly or indirectly, its value substantially from the assets located in India”.376 [emphasis added] 263. Investment arbitration case law has also alluded to the principle of “fiscal sovereignty over tax related matters”.377 Similarly, many scholars have also affirmed the existence of this general principle of fiscal sovereignty in international law.378 In fact, recently, some scholars have also recognized that BITs, and in particular investor-State arbitrations thereunder, could infringe upon a sovereign State’s fiscal sovereignty in many ways. For instance, it has been suggested that the “misalignment of the parties involved in a BIT arbitration makes the threat to the sovereign tax authority of a BIT treaty partner even greater”. Indeed, to this end, scholars argue that “[b]ecause investors, both corporations themselves and the individual investors in those corporations, are driven by profit maximization, the calculation those investors will make in choosing whether or not to go forward with arbitration will be determined by the likelihood of creating profit” and not “by thoughts of the well-being of the BIT signatory country’s citizens, or by the nation’s sovereign authority to determine its own tax laws.”379 264. The present case exemplifies such an infringement on India’s sovereignty. Indeed, by interpreting Article 9 of the India-UK BIT without taking into account the general principle of fiscal sovereignty under Article 31(3)(c) of the VCLT, the Tribunal erred gravely. As a consequence, it wrongly upheld jurisdiction over a claim that directly implicated India’s fiscal
375 Case concerning the taxation liability of Euratom employees between the Commission of Atomic Energy Community (Euratom) and the United Kingdom Atomic Energy Authority, Decision dated 25 February 1967 XVII Reports of International Arbitral Awards 467 (1967), p. 507, available at: https://legal.un.org/riaa/cases/vol_XVIII/497-517.pdf 376 Exh. RoI-4, C-53, Finance Act 2012 [Act No. 23 of 2012]. 377 Exh. RoI-4, Exh. RLA-91, Murphy Exploration & Production Company International v. Republic of Ecuador, PCA Case No. 2012-16 (formerly AA 434), Partial Final Award, 6 May 2016, ¶ 165, available at: https://www.italaw.com/sites/default/files/case-documents/italaw7489_0.pdf (“Most governments view [taxation] powers as a central element of sovereignty. Therefore, while they may be willing to accept international discipline over State conduct, they are reluctant to accept such oversight as regards their powers of taxation”); see also Sun Reserve Luxco Holdings SRL v. Italy, SCC Case No. 132/2016, ¶ 510, available at: https://www.italaw.com/sites/default/files/case-documents/italaw11475.pdf. 378 Exh. RoI-4, RLA-181, Edwin van der Bruggen, “State Responsibility under Customary International Law in Matters of Taxation and Tax Competition,” International Tax Review 29, no. 4 (2000): 115, pp. 120-121; Exh. RoI-4, RLA-177, Harold Wurzel, “Foreign Investment and Extraterritorial Taxation,” Columbia Law Review 38, (1938): 809; Exh. RoI-4, RLA-178, Martin Norr, “Jurisdiction to Tax and International Income,” Tax Law Review 17, (1961-62): 431; Exh. RoI-54, Roland Paris, “The Globalization of Taxation? Electronic Commerce and the Transformation of the State,” International Studies Quarterly 47, (2003): 153, pp. 153-155; Exh. RoI-55, Allison Christians, “Sovereignty, Taxation, and Social Contract,” Legal Studies Research Paper Series 7-8, Paper No. 1063 (2008); Exh. RoI-56, Charles E McLure, “Globalization, Tax Rules and National Sovereignty,” BFIT 55, (2001): 328, pp. 328-329. 379 Exh. RoI-57, Jennifer Bird-Pollan, “The Sovereign Right to Tax: How Bilateral Investment Treaties Threaten Sovereignty,” Notre Dame Journal of Law Ethics & Public Policy 32, no. 1 (2008): 107-133, pp. 125- 126. 101
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sovereignty manifested in the general exercise of legislative powers. Such matters of fiscal sovereignty were never meant to be adjudicated by ad hoc tribunals in BITs, especially when DTAAs exist between the same States providing for a self-contained dispute settlement mechanism.380 It is precisely such use of investment arbitration the Advocate General describes in the Ecuador/Chevron case before the Netherlands Supreme Court as being “burdensome” for sovereign States.381 Such a burdensome investment arbitration could have been avoided had the Tribunal simply taken into account the general principle of fiscal sovereignty while interpreting the import of Article 9 of the India-UK BIT. It failed to do so, and this failure resulted in a manifestly erroneous treaty interpretation for completely ignoring Article 31(3)(c) of the VCLT. 265. The third error in the Tribunal’s treaty interpretation results from a combination of its first and second errors. As mentioned above, in singularly focusing on the allegedly “limited tax- related exception” in Article 4(3) of the India-UK BIT, the Tribunal correspondingly also focussed on the absence of an “explicit” tax exclusion in the BIT, or what is generally known in international investment law as a “tax carve-out” (see ¶¶ 239-251 above). Further, in its interpretation exercise, the Tribunal also turned a blind eye to the general principle of fiscal sovereignty (see ¶¶ 252-264 above). In the process, and as a natural corollary of these errors, the Tribunal misunderstood the purpose that tax carve-outs serve in international investment treaties. 266. In this regard, it has already been established that provisions such as Article 4(3) of the India- UK BIT, which also represent a kind of tax carve-out, are conventional manifestations of the general principle of fiscal sovereignty. The same holds true for other kinds of tax carve-outs, or what the Tribunal described as an “explicit exclusion for tax-related investment disputes”.382 This is confirmed by the finding of the tribunal in Murphy Exploration v. Republic of Ecuador, referred in ¶ 263 above, which was rendered in the context of a tax carve-out. The tribunal, while recognizing the principle of fiscal sovereignty, stated that “[t]he purpose of [a tax carve-out] specifically is to preserve the States’ sovereignty in relation to their power to impose taxes in their territory” and it is this interest to preserve fiscal sovereignty that has “led most State parties to modern investment treaties to omit
380 Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains, signed 25 January 1993, Article 27, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/498363/india- dtc_-_in_force.pdf. 381 In fact, his description rings true when assessing the present case. He describes the criticism of investment arbitration “as a means for multinational companies to exert pressure on countries with a low standard of living” (A-G Drijber’s conclusion for for DSC 12 April 2019, ECLI:NL:HR:2019:97 (Ecuador/Chevron II), available at: https://uitspraken.rechtspraak.nl/inziendocument?id=ECLI:NL:PHR:2019:97, ¶¶ 82-85). He also mentions the warning that “countries in which investments are made may experience the arbitrations as burdensome. Several countries (South Africa, India, Indonesia, Bolivia and Venezuela) have unilaterally ended their BITs in recent years.” 382 Exh. RoI-1, Award, ¶ 797. 102
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taxation from a treaty’s ambit”. 383 Thus, it is indisputable that tax carve-outs in treaties are codified manifestations of the general principle of fiscal sovereignty. 267. However, the Tribunal was remiss to conclude that in the absence of a tax carve-out or an “explicit exclusion”, such a general principle of fiscal sovereignty would not be applicable while interpreting Article 9 of the India-UK BIT. As Professor van Raad has explained, the principle of fiscal sovereignty is an “absolute” one, i.e., it exists regardless of a codified manifestation in the treaty by way of a carve-out. To hinge a State’s fiscal sovereignty only on the explicit codification of a tax carve-out is to look at the principle in reverse. It is the codification that confirms the general principle, and not the reverse. 268. Including an explicit tax carve-out merely serves to ensure greater clarity and breadth in terms of the kinds of “taxation measures” that would be excluded or carved out from the BIT. In this regard, it is interesting to take the example of the tax carve-out contained in Article 21(1) of the Energy Charter Treaty 1994 (“ECT”), which provides as follows: “Except as otherwise provided in this Article, nothing in this Treaty shall create rights or impose obligations with respect to Taxation Measures of the Contracting Parties. In the event of any inconsistency between this Article and any other provision of the Treaty, this Article shall prevail to the extent of the inconsistency.”
269. Correspondingly, Article 21(7)(a) of the ECT defines a “Taxation Measure” as follows: “For the purposes of this Article: (a) The term “Taxation Measure” includes: (i) any provision relating to taxes of the domestic law of the Contracting Party or of a political subdivision thereof or a local authority therein; and (ii) any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the Contracting Party is bound.”
270. It is evident from the inclusive definition of “Taxation Measure” in Article 21(7)(a) of the ECT that it was intended to cover a wide array of measures. Similarly, international jurisprudence understands the term “measure” in broad terms, such that it includes legislative, executive or judicial action.384 The travaux préparatoires of the ECT also confirms that the definition of “Taxation Measure” was intentionally kept broad and non-exhaustive because
383 Exh. RoI-4, Exh. RLA-91, Murphy Exploration & Production Company International v. Republic of Ecuador, PCA Case No. 2012-16 (formerly AA 434), Partial Final Award, 6 May 2016, ¶ 165, available at: https://www.italaw.com/sites/default/files/case-documents/italaw7489_0.pdf. 384 Fisheries Jurisdiction (Spain v. Canada), Judgment on Jurisdiction, 1998 I.C.J. Rep. 432 (Dec. 4, 1998), p. 460 ¶ 66, available at: https://www.icj-cij.org/public/files/case-related/96/096-19981204-JUD-01-00-EN.pdf; The Loewen Group, Inc. and Raymond L. Loewen v. United States of America (ICSID ARB(AF)/98/3, Decision on hearing of Respondent’s objection to competence and jurisdiction of 5 January 2001), ¶ 47, available at: https://www.italaw.com/sites/default/files/case-documents/ita0469.pdf; Burlington Resources, Inc v Ecuador (ICSID Case No. ARB/08/5, Decision on Jurisdiction of 2 June 2010), ¶ 168, available at: https://www.italaw.com/sites/default/files/case-documents/ita0106.pdf. 103
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being more precise would be “counterproductive” in light of “the wide variety of taxation measures” that the ECT State parties wished covered under Article 21(1) of the ECT.385 271. The example of the ECT finds resonance in several other BITs and multilateral treaties that contain a definition of “measures” or “taxation measures”. As is evident from Annex C, almost all BITs and multilateral treaties that define “measures” or “taxation measures” do so in a broad-based manner, so as to specify that they include “law, regulation, procedure, requirement, or practice.” Most recently, this exact inclusive definition was included in the United States-Mexico-Canada Agreement and the European Union-Singapore Free Trade Agreement.386 Thus, State practice confirms that the purpose behind tax carve-outs is to ensure clarity and breadth to the general principle of fiscal sovereignty and not to undermine it. 272. The only benefit that the presence of a tax carve-out in a BIT brings to the contracting States to the BIT is that it expands the kinds of taxation measures that would be excluded from protection under the BIT so as to cover a wide array of them in addition to the legislative power to tax, i.e., “regulation, procedure, requirement, or practice”. However, as mentioned above, taxation measures that are based on the domestic legislative process or that implicate the legislative power to tax are, in any event, always covered within the purview of the general principle of fiscal sovereignty. Based on this general principle, tax disputes that directly implicate a State’s fiscal sovereignty manifested in the general exercise of legislative powers are excluded from any offer to arbitrate under a BIT, even in the absence of an explicit tax carve-out. This is the settled legal position in international law, as has been discussed in detail above (see ¶¶ 226-230 above and 252-264 above). That is also in line with India’s stance on this matter, which is best reflected in LCI Report regarding India’s Model BIT 2016. As mentioned, the Law Commission specifically stated that the explicit exclusion of “taxation measures . . . is not necessary . . . The power to tax is an integral part of the State’s police powers in international law . . . The absence of [an explicit exclusion] clause will not affect India’s taxing power”.387
385 Exh. RoI-58, Memorandum from the Chairman of the Legal Sub-Group to the Chairman of Working Group II, Document No. LEG-14 (Mar. 5, 1993), pp. 3-4 (confirming that “‘taxation measure’ is identified only by illustration” and that Art. 21(7)(a) ECT “is an illustrative list, not a definition.”); Exh. RoI-59, Canada Department of Finance, Tax Policy Branch: Fax from A. Castonguay to F. Mullen et al. (Mar. 19, 1993) (“it would be counterproductive to attempt to come up with anything more precise”); Exh. RoI-60, Telefax from Ole Kirkvaag, Advisor - Norwegian Royal Ministry of Finance and Customs, to Leif Ervik, European Energy Charter Secretariat (Mar. 19, 1993), p. 3 (“[there is no] need for a closed definition of tax measures.”); Exh. RoI-61, Memorandum from the Ministère du Budget of France to the ECT Secretariat (Mar. 19, 1993), p. 3 and European Energy Charter Conference Secretariat, Document 30/93 - CONF 54 (April 1, 1993), p. 4 (France’s proposal to replace “includes” with “means,” which was not accepted). 386 United States-Mexico-Canada Agreement 2020, Article 1.5, available at: https://ustr.gov/trade- agreements/free-trade-agreements/united-states-mexico-canada-agreement/agreement-between; European Union- Singapore Free Trade Agreement 2018, Article 1.3 (Annex C), available at: https://www.mti.gov.sg/Improving- Trade/Free-Trade-Agreements/-/media/MTI/Microsites/EUSFTA/EUSFTA-Full-Text_12Oct18.pdf. 387 Exh. RoI-62, Government of India, Law Commission of India, Report No. 260, Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty, ¶ 2.3.5. 104
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273. In light of the above position of international law and State practice, the absence of a broader “explicit” tax carve-out in the India-UK BIT was – contrary to the Tribunal’s determinations – immaterial in the present case, since the tax dispute raised by Cairn directly implicated India’s fiscal sovereignty manifested in the general exercise of its legislative powers through the 2012 Clarification. Such a tax dispute should have, in any event, been considered excluded from India’s offer to arbitrate in the India-UK BIT, and should have accordingly been considered non-arbitrable by the Tribunal. However, the Tribunal did not even show an inclination to appreciate these nuances arising from international law and State practice, let alone abide by them. Far from it, the Tribunal invented the self-serving baseless distinction between “tax disputes” and “tax-related investment disputes” in the erroneous manner that has been discussed above (see ¶¶ 224-237 above). It is amply clear that the only perceivable motivation for the Tribunal to invent this artificial distinction was to find a way to uphold jurisdiction by avoiding these nuances. 274. This self-serving motivation becomes further evident when one realizes, after examining the nuances of international law and State practice, that the artificial distinction created by the Tribunal could serve to render any dispute implicating fiscal sovereignty immune even to the broadest tax carve-out. Going by the Tribunal’s logic, if an investor would challenge any measure of a State related to taxation by invoking the standards of protection under a BIT, the dispute would no longer be a “tax dispute” per se, but would altogether change character and become a “tax-related investment dispute”. As the UNCTAD has hinted at in one of its recent reports, the situation in investment treaty arbitration is such that even the presence of a broad tax carve-out “does not lead to a quasi-automatic dismissal of any claims involving tax-related measures”, since investment arbitration tribunals could discover ways to still uphold jurisdiction if they wish to.388 275. Based on the above considerations that clearly establish the Tribunal’s blatant violation of international law, including the foundational principles of treaty interpretation in the VCLT, the Tribunal’s analysis of India’s jurisdictional objection regarding the non-arbitrability of tax disputes should be set aside in its entirety under Article 1065(1)(a) of the DCCP. (ii) In Deciding India’s Defences, the Tribunal essentially decided “Tax Disputes” as Defined by the Tribunal 276. The second prong of India’s arguments on the non-arbitrability issue proceeds under the assumption that a distinction does exist between “tax disputes” on the one hand and “tax- related investment disputes” on the other hand. Based on this assumption, it is contended that even if the Tribunal was correct in making this distinction in theory (quod non), the Tribunal
388 UNCTAD, “International Investment Agreements and their Implications for Tax Measures: What Tax Policymakers Need to Know: A guide based on UNCTAD’s Investment Policy Framework for Sustainable Development,” (2021), p. 17, available at: https://unctad.org/system/files/official- document/diaepcbinf2021d3_en.pdf. As UNCTAD points out, a typical example of investment arbitration tribunals’ misplaced ingenuity to uphold jurisdiction, come what may, is that tribunals have now added the condition of requiring taxation measures to be “bona fide” in order to be covered within the tax carve-out, even when no such condition exists in the treaty text. 105
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itself did not adhere to the distinction in the Award. This resulted in an obvious internal contradiction in the Award, whereby the Tribunal, despite accepting that “tax disputes” were non-arbitrable, ended up breaching its own categorization and determining non-arbitrable “tax disputes”. 277. Indeed, in a case such as the one between Cairn and India, wherein the disputed issues between the Parties pertain to nothing but the imposition of a tax liability on Cairn, it is impossible to dissociate the elements of the case that were purely “tax disputes” from those that were purely “tax-related investment disputes”. Thus, even though the Tribunal predicated its jurisdiction on this artificial, theoretical distinction, the distinction was never going to work when it came to applying it in practice. In other words, due to the artificiality of this distinction, the Tribunal was bound to step into the territory of non-arbitrable “tax disputes” while rendering its determinations on the merits, and that is precisely what happened. The Tribunal did end up deciding “tax disputes” as defined by the Tribunal itself. 278. In this regard, two preliminary clarifications are important to bear in mind. Firstly, the Tribunal had defined a “tax dispute” as pertaining to “whether and how a particular transaction is taxable under the applicable (municipal) law” (see ¶ 148 above).389 Secondly, the Tribunal had never disagreed that “tax disputes”, as defined by it, were non-arbitrable in investment treaty arbitration. Indeed, as pointed out above, the Award is replete with findings about how a determination of “tax disputes” falls beyond the prerogative of an investment treaty tribunal and, as a matter of policy, falls within the purview of the relevant State’s legislature or judiciary (see ¶¶ 230-231 above). 279. With these clarifications in mind, it shall be established how the Tribunal ended up determining “tax disputes” as defined by the Tribunal itself, which were disputed issues about whether and how Cairn’s 2006 Transactions were taxable under Indian law. The Tribunal ended up determining “tax disputes” when it comprehensively determined India’s two defences as part of its analysis on the merits, i.e., (i) the tax avoidance defence, wherein India had argued that the 2006 Transactions were tax avoidant and therefore taxable independent of the 2012 Clarification; and (ii) the defence regarding the taxability of the 2006 Transactions as constituting an indirect transfer of immovable property under Section 2(47(vi) of the IT Act.390 These aspects of the Tribunal’s determinations, while crucial from the perspective of determining India’s liability for an FET breach on the merits, never properly fell within the jurisdiction of the Tribunal in the first place. Thus, it is not the propriety of these determinations as part of the Tribunal’s analysis of the merits that is being challenged in this Writ of Summons, but the fact that the Tribunal should never have reached the merits of the case because it did not have jurisdiction over non-arbitrable “tax disputes”. In other words, as mentioned above, the moment the Tribunal upheld its jurisdiction on the
389 Exh. RoI-1, Award, ¶ 793. 390 Exh. RoI-1, Award, ¶¶ 1260-1646. 106
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precarious and erroneous predicate of distinguishing “tax disputes” and “tax-related investment disputes”, it was bound to overreach its own distinction. 280. In this framework, it is important to first retrace the structure of India’s tax avoidance and immovable property defences raised in the arbitration: (i) the foundation of India’s argument was that as a matter of Indian law, the 2006 Transactions, in particular the sale of CIHL shares by CUHL to CIL, were always taxable as a matter of Indian law, irrespective of the 2012 Clarification, because the dominant purpose of the 2006 Transactions was tax avoidance, and thus these Transactions were taxable under the “look at” doctrine, which was a judicial anti- avoidance rule in India. Further, the 2006 Transactions were also always taxable as they involved the transfer of immovable property, which is taxable under Section 2(47(vi) of the IT Act;391 (ii) the tax avoidance defence was raised in “various ways” by India, as recognized by the Tribunal,392 but primarily as a “preliminary” or “threshold” matter.393 The Tribunal itself acknowledged this, but nonetheless chose to determine the tax avoidance defence “in the context of the Claimants’ FET claim”, i.e., “after assessing the treatment Claimants contend has been unfair and inequitable” since it could “potentially defeat an FET claim”;394 (iii) similarly, the immovable property defence was also raised as a threshold matter, and it was clarified by India that it was “an issue which goes to the merits of the claim” and “is also jurisdictional in nature”;395 and (iv) moreover, India had described that the role of the Tribunal in determining these defences that went directly to the taxability of the 2006 Transactions was not “to conduct a factual enquiry into the tax avoidant nature of the transaction, or to apply the relevant principles of Indian law to the relevant facts: that is the task of the Indian [c]ourts.”396 It was in this context that India had raised a preliminary objection regarding Cairn’s claims being premature on the ground that the Tribunal cannot determine them “in the absence of determinations regarding whether the 2006 Transactions were chargeable to tax . . . considering that the competence of Indian [c]ourts to adequately respond to these questions remains uncontested”.397 To this end, India had also specifically requested that the Tribunal should “stay [sic] the present proceedings pending consideration thereof by the Indian [c]ourts”.398
391 Exh. RoI-4, SoD, Sections V and VI; Exh. RoI-4, R-SoRj, ¶ 45, Section III and Section IV. 392 Exh. RoI-1, Award, ¶ 1436. 393 Exh. RoI-4, SoD, ¶ 245; Exh. RoI-4, R-SoRj, ¶ 125. 394 Exh. RoI-1, Award, ¶¶ 877, 1018. 395 Exh. RoI-4, SoD, ¶ 245; Exh. RoI-4, R-SoRj, ¶ 125. 396 Exh. RoI-4, SoD, ¶ 76; Exh. RoI-4, R-SoRj, ¶ 257. 397 Exh. RoI-4, SoD, ¶¶ 207-209; Exh. RoI-4, R-SoRj, ¶ 67. 398 Exh. RoI-4, R-SoRj, ¶ 265. 107
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281. Indeed, as shall be explained below, the Indian courts were, and continue to be, seized of the taxability of Cairn’s 2006 Transactions, including from the perspective of whether those Transactions were taxable for being tax avoidant or for qualifying as a transfer for immovable property under Section 2(47)(vi) of the IT Act. On this basis, the Tribunal was asked to, but did not, reject Cairn’s claims as being premature pending the Indian courts’ conclusive determination of the taxability of Cairn’s 2006 Transactions. Instead, the Tribunal simply relegated the issue of the availability of alternative domestic fora to the merits.399 Similarly, the Tribunal was asked to, but did not, stay its proceedings pending the determination of the underlying issues of taxability by the Indian courts.400 282. In the context of the Tribunal’s determinations of India’s tax avoidance and immovable property defences under Indian tax law, it decided issues and determined legal consequences that fell within its own definition of “tax disputes” and were thus not arbitrable. Had the Tribunal acted upon India’s preliminary objection regarding the prematurity of Cairn’s claims, it would have avoided determining India’s tax avoidance and immovable property defences. Accordingly, the Tribunal’s rejection of India’s admissibility objection in combination with the Tribunal’s non-adherence to its own artificial distinction between “tax disputes” and “tax-related investment disputes”, landed the Tribunal in the territory of non- arbitrable “tax disputes”. 283. The Tribunal knew well that it was deciding issues of taxability when purporting to determine India’s defences pertaining to tax avoidance and the taxation of immovable property under Section 2(47)(vi) of the IT Act, and also that such determinations would have implications in terms of the Tribunal’s jurisdiction and the arbitrability of the issues under its scrutiny. This is evident from, at least, two categories of erroneous findings of the Tribunal on these matters. 284. The first category of erroneous finding pertains to the Tribunal’s delineation of the nature of its task while determining India’s defences, keeping in mind the pendency of parallel proceedings before Indian courts, in particular the Delhi High Court. 285. In this connection, from the very outset, the Tribunal delineated the nature of its task in evasive terms. Although, in its determination on India’s preliminary objection on prematurity, the Tribunal had relegated the issue of the availability of alternative domestic fora to the merits (see ¶ 281 above), the Tribunal never really acted upon this relegation as it never decided this issue in its determinations on the merits. Instead, the Tribunal simply referred back to its earlier findings and stated that “[t]o the extent that the Respondent’s position is that the Tribunal should stay this arbitration, the Tribunal rejects it”, since the Tribunal had “already found . . . that the claims are ripe for determination”.401 286. At a subsequent juncture, the Tribunal acknowledged that “it is neither a tax investigator, nor an Indian court, and it ought not to undertake either of the roles associated therewith”.
399 Exh. RoI-1, Award, ¶¶ 868-873. 400 Exh. RoI-1, Award, ¶ 1287. 401 Exh. RoI-1, Award, ¶ 1287. 108
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Surprisingly, in this context, the Tribunal also specifically acknowledged that the Delhi High Court was seized of both sides’ appeals against the Income Tax Appellate Tribunal’s (“ITAT”) Order dated 9 March 2017, wherein the ITAT decided CUHL’s appeal against the FAO (“ITAT Order”), and that it could render potentially contrary determinations on the very issues that the Tribunal was purporting to decide. However, the Tribunal did not derive any consequences whatsoever from these perfunctory acknowledgements. In this regard, the following extract from the Award is particularly appalling: First, the Tribunal agrees with submissions made by both sides that it is neither a tax investigator, nor an Indian court, and it ought not to undertake either of the roles associated therewith. The role of an international tribunal such as the present one is to examine measures taken by the respondent State to adjudge their consistency with the State’s international obligations. Given the absence of a concrete determination of tax avoidance, the Tribunal has doubts about the Respondent’s efforts to particularise a tax avoidance determination in its pleadings that can then be scrutinised. Although the Tribunal has deemed that the defence is admissible, it has also formed the view that without a concrete, reasoned determination by an assessment officer, it is difficult to determine whether, for any one of the theories of avoidance postulated by the Respondent, the Indian courts would uphold such a theory. Second, the Tribunal’s concerns about the speculative nature of a pleaded tax avoidant scheme and the Tribunal’s role and mandate, and the limits thereon, are underscored by developments in the legal proceedings between CUHL and the [Income Tax Department] currently underway in India. Both sides have appealed the ITAT [Order] to the Delhi High Court and, as discussed at some length in the parties’ correspondence, the [Income Tax Department] was permitted to amend its appeal to include the tax avoidance and Section 2(47)(vi) grounds. [sic] Thus, independently of this international proceeding, which has been concerned with the determination of taxability that was actually made by the [Income Tax Department], it appears that the Delhi High Court, and perhaps a higher court will pronounce on whether, among other things, the structure adopted by Cairn in 2006 can be considered to be tax avoidant. The Tribunal cannot anticipate what the Indian courts might or might not do, but the fact that the issue is presently sub judice before a court with the power to apply Indian law fully as well as the power to direct the tax authorities to act in accordance with the court’s directives (i.e., to take action or to refrain to take action) not only underscores the mandate/role and lack of a ‘concrete measure’ issues just discussed, but also, as shall be seen, shows the frailties of determining tax avoidance based upon pleadings rather than on an actual determination by the relevant authority.”402 [emphasis added]
287. This entire extract from the Award, amongst others,403 and in particular the emphasized portion thereof, shows how the Tribunal was blatantly evasive of the real issue regarding the
402 Exh. RoI-1, Award, ¶ 1436. 403 See Exh. RoI-1, Award, inter alia, ¶ 1773 (“The Tribunal cannot but agree that the facts are different and it cannot rule out the possibility that the Delhi High Court (or the Supreme Court, were the matter to go further) could attach significance to certain facts or see a gloss in the Indian caselaw which has not been apparent from the evidence that has been put before this Tribunal.”); Exh. RoI-1, Award, ¶ 1471 (“It is also conceivable that an 109
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nature of the Tribunal’s task. In particular, this extract reflects three related things, i.e., (i) the Tribunal was aware that proceedings were pending before the Indian courts, particularly the Delhi High Court; (ii) it was also aware that the Indian courts, including the Delhi High Court, would render decisions on the very issues that the Tribunal purporting to decide; and (iii) it knew that those issues pertained to the taxability of the 2006 Transactions either as tax avoidant transactions or as immovable property under Section 2(47)(vi) of the IT Act. 288. Being aware of these factors, it was incumbent upon the Tribunal to draw the necessary consequences. These consequences could either amount to declining jurisdiction to determine these issues of taxability, which as per the Tribunal’s own definition of the term, qualified as “tax disputes” (see ¶ 278 above) or to, at the very least, stay the arbitration proceedings pending the Indian courts’ determinations, keeping in mind that India had alerted the Tribunal to this possibility in its submissions (see ¶ 280 above and Section V.C below). The Tribunal was obviously unwilling to draw any material inference from the pendency of the Delhi High Court proceedings and paid only lip service to it. The only inference that the Tribunal chose to draw from the pendency of the Delhi High Court proceedings was that it “underscore[d] the mandate/role” and “show[ed] the frailties of determining tax avoidance”. This finding is incomprehensible. 289. The second category of erroneous findings pertain to the Tribunal’s explicit acknowledgement, on many occasions, that in deciding India’s defences, it was essentially determining non-arbitrable “tax disputes”, as per the Tribunal’s own definition of that term, i.e., a dispute pertaining to “whether and how a particular transaction is taxable under the applicable (municipal) law”. Indeed, from the very onset, when the Tribunal laid the foundation for its findings on India’s tax avoidance defence in the following terms, it knew that it had landed itself in the prohibited territory of non-arbitrable “tax disputes”: “The Tribunal understands the Respondent’s argument to be that, if the 2006 Transactions were tax avoidant and thus taxable in India (even if under different grounds), the fiscal measures actually imposed cannot be characterised as being unfair and inequitable. The Tribunal agrees that had the 2006 Transactions been taxable under different grounds, the analysis as to whether the Respondent’s imposition of a tax under the 2012 [Clarification] (and no other allegedly ‘possible’ basis) would be somewhat different. However, for the Respondent’s argument to succeed, the tax actually imposed and the alternative tax would need to be identical or at least similar, especially in the amount of tax demanded.”404 [emphasis added]
290. From the above extract, it is clear that the Tribunal was aware that in deciding India’s tax avoidance defence, it would be determining the question of whether the 2006 Transactions were “taxable under different grounds”. This squarely fell within the Tribunal’s own definition of non-arbitrable “tax disputes”.
Indian court might find that CIHL’s dominant purpose was to avoid tax (albeit UK tax)”); see also Exh. RoI-1, Award, ¶ 1277. 404 Award, ¶ 1262. 110
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291. The Award is replete with other similar acknowledgements, not only in the Tribunal’s determinations of India’s tax avoidance defence, but also in its determinations of the defence regarding Section 2(47)(vi) of the IT Act. For instance, the Tribunal recognized that since “there can be no tax avoidance without a tax that is being avoided”,405 it was required to determine whether “the transaction could have been taxed on an alternative basis”.406 It also specifically noted that its determination of India’s tax avoidance defence was essentially a determination of whether Cairn was liable to pay any “alternative tax”.407 Similarly, it acknowledged that its determination of the defence regarding taxation of immovable property under Section 2(47)(vi) of the IT Act amounted to a determination of whether India could impose “equivalent measures . . . on other legal grounds”, or in other words, “whether the 2006 Transactions were taxable in India irrespective of the 2012 [Clarification]”.408 292. Each of these findings, amongst others,409 reflects that the Tribunal was conscious of the fact that it was determining disputes that fell squarely within its own definition of the term “tax disputes”. There can be no iota of doubt about this in light of the overlaps in terminology between the Tribunal’s definition of “tax disputes” (i.e., “whether and how a particular transaction is taxable under the applicable (municipal) law”) and the Tribunal’s characterization of its determinations of India’s defences (i.e., the use of qualifiers such as “whether the 2006 Transactions were taxable”). 293. Despite being conscious of the overreaching nature of its findings, the Tribunal went on to determine India’s defences. It did not see fit to even wait for the Delhi High Court to decide the underlying non-arbitrable issues, let alone to decline jurisdiction, which, as mentioned above, would have been the most logical consequence of the inevitability of having to decide non-arbitrable “tax disputes” (see ¶ 288 above). Seldom, if ever, does a tribunal deliberately decide disputes that it knows to be, and has itself characterized as, non-arbitrable disputes. 294. The only hint of a justification that the Tribunal sought to give for its determination of India’s defences regarding the taxability of the 2006 Transactions was to qualify its findings as pertaining “not . . . to . . . what is the appropriate tax rate”, but only to “whether the Respondent’s decision to tax the 2006 Transactions . . . on the basis of the 2012 [Clarification] is fair and equitable because the transaction could have been taxed on an alternative basis”.410 That is an empty justification for three reasons. Firstly, it ignores that the Tribunal’s own definition of “tax disputes” covered two aspects, i.e., “whether” a transaction is taxable and “how” a transaction is taxable. In giving this artificial justification, the Tribunal focused
405 Exh. RoI-1, Award, ¶ 1427. 406 Exh. RoI-1, Award, ¶ 1497. 407 Exh. RoI-1, Award, ¶ 1262. 408 Exh. RoI-1, Award, ¶¶ 1631-1632. 409 Exh. RoI-1, Award, ¶ 1018 (“What it [the Tribunal] is trying to determine is whether the Respondent’s decision to tax the 2006 Transactions in the FAO on the basis of the 2012 Amendment is fair and equitable because the transaction could have been taxed on an alternative basis”); Exh. RoI-1, Award, ¶ 1439 (“To constitute a full defence to the Claimants’ FET claim, the Respondent must also show that the amount of the tax that would have been imposed in the application of a judicial anti-avoidance rule would have been identical, or at least as much as that which was in fact imposed”). 410 Exh. RoI-1, Award, ¶ 1497. 111
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on the “how” aspect of its definition (which the Tribunal may not have decided), but not the “whether” aspect of it (which the Tribunal certainly decided). Secondly, and in any event, the Tribunal’s findings, by its own acknowledgment, also involved an assessment of “the amount of tax”.411 Thirdly, the qualification of its decision on India’s defences as pertaining only to the breach of FET issue paints an incomplete picture. No doubt, India’s two defences, if successful, could “potentially defeat an FET claim”.412 However, that was not the only import of India’s defences. Both those defences clearly, and by the Tribunal’s own admission, pertained to the taxability of Cairn’s 2006 Transactions. In turn, a determination of those defences, which was necessary for a proper and holistic determination of the entire case, fell within the Tribunal’s own definition of non-arbitrable “tax disputes”. Therefore, the only realistic option that the Tribunal had, and should have exercised, was to recognize these disputes as being non-arbitrable and consequently decline jurisdiction over the entire case. Alternatively, it should, at the very least, have stayed the arbitration proceedings pending the determination of the underlying tax disputes by Indian courts. The Tribunal’s disinclination to stay its proceedings shall be discussed below from the perspective of how it violated Dutch public policy (see V.C below). The Tribunal failed to do so, and this failure merits the annulment of the entire Award under Article 1065(1)(a) of the DCCP.
C. Jurisdiction Ground 2: Cairn did not Make an “Investment” in India – No “Dispute” in Relation to an “Investment” or an “Investor” 295. India had objected to the Tribunal’s jurisdiction on the grounds that Cairn’s alleged investments (i) did not satisfy the legality requirement under Article 1(b) of the India-UK BIT as they were not in accordance with the laws of India and, therefore, were not protected under the BIT; and (ii) pursuant to the 2006 Transactions were in actuality a divestment and not an investment.413 As CUHL was incorporated in June 2006 and consequently could only have acquired its purported investments after its incorporation,414 India submitted that the legality of CUHL’s purported investments in India—which is a jurisdictional requirement under Article 1(b) of the India-UK BIT—had to be tested in 2006. 296. For the purposes of their claims in the arbitration, CEP and CUHL characterized their alleged investments in India together, as comprising their equity shareholding in CIL, an Indian company, and their rights and interests in various PSCs across India and the JOAs in respect
411 Exh. RoI-1, Award, ¶ 1262 (“However, for the Respondent’s argument to succeed, the tax actually imposed and the alternative tax would need to be identical or at least similar, especially in the amount of tax demanded”. [emphasis added]); Exh. RoI-1, Award, ¶ 1439 (“To constitute a full defence to the Claimants’ FET claim, the Respondent must also show that the amount of the tax that would have been imposed in the application of a judicial anti-avoidance rule would have been identical, or at least as much as that which was in fact imposed.” [emphasis added]); see also Exh. RoI-1, Award, ¶ 1497. 412 Exh. RoI-1, Award, ¶ 1018. 413 India will demonstrate in the following Sections that a divestment cannot satisfy the inherent meaning of an investment under international investment law. 414 As shown in ¶ 30 above, CUHL’s acquisition of the Cairn Group’s oil and gas assets in India and its shareholding in CIL took place between end June-December 2006 through the 2006 Transactions. 112
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of these PSCs.415 Based on this characterization, Cairn argued that their alleged investments were covered by Article 1(b)(ii) and (v) of the India-UK BIT.416 297. The Tribunal erroneously accepted CEP’s and CUHL’s’ characterization of their alleged investments without independently and objectively assessing the legal foundation of the claims submitted before it, including the nature and timing of the alleged investments. More importantly, the Tribunal failed to afford any significance to the fact that (i) CUHL was incorporated in 2006 and that its alleged investment also came into existence only in 2006; and (ii) since 2006, CEP’s alleged investment in India had changed form and was exclusively through CUHL. Instead, the Tribunal blindly accepted Cairn’s own characterisation of its investment on the flawed basis that CEP and CUHL had presented their claims together in the arbitration.417 298. By failing to give due significance to the fact that CUHL’s alleged investment came into existence in 2006, causing a change in the form of CEP’s original investment, the Tribunal erred by not conducting a complete jurisdictional inquiry to assess whether CUHL’s alleged investment and CEP’s change in the form of its investment was made “in accordance with the national laws of [India]”. Importantly, it was undisputed amongst the Parties, and was also accepted by the Tribunal, that the legality of Cairn’s alleged investments is a jurisdictional prerequisite under Article 9 read with Article 1(b) of the India-UK BIT.418 299. Had the Tribunal conducted this necessary jurisdictional inquiry, it would have arrived at the only possible, undeniable conclusion that CUHL’s incorporation was “bound up with, and part and parcel of, an aggressive tax abusive avoidance scheme”.419 Consequently, any alleged investments by CUHL in India were violative of Indian tax laws and were not protected under the India-UK BIT. This would also have a bearing on CEP’s alleged investment in India as, since 2006, CEP’s investment in India was through CUHL. 300. The Tribunal’s erroneous finding that Cairn’s assets “meet the economic criteria of an investment as recognized in the jurisprudence of investment treaty tribunals”,420 is also a consequence of its failure to independently characterize and assess, for CEP and CUHL individually, whether its alleged investments were protected under the India-UK BIT. Had the Tribunal conducted a complete jurisdictional inquiry, without accepting as is Cairn’s characterisation of its alleged investments, it would have been faced with the incontrovertible fact that the 2006 Transactions, which entailed CUHL’s incorporation and establishment of its alleged investment in India, were in the nature of a divestment and not an investment. Whilst the latter might have merited protection under the India-UK BIT, subject to the satisfaction of all other conditions under the BIT, there was no cogent basis for the Tribunal,
415 Exh. RoI-4, SoC, ¶ 433; Exh. RoI-4, RoI-4, C-SoRj, ¶¶ 233-234. 416 Exh. RoI-1, Award, ¶ 688 417 Exh. RoI-1, Award, ¶ 712. 418 Exh. RoI-1, Award, ¶¶ 709-710. 419 Exh. RoI-4, R-PHB, ¶ 676. 420 Exh. RoI-1, Award, ¶ 706. 113
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either under the India-UK BIT or under international law, to assert jurisdiction over a divestment, which is essentially the reverse of an investment. 301. In this Section, it will be shown that the Tribunal erroneously assumed jurisdiction under Article 9 read with Article 1(b) of the India-UK BIT as: (i) it failed to independently characterise CEP and CUHL’ alleged investments, relying solely on their own characterisation of their investment and claims (Sub-Section (i) below); (ii) it failed to conduct a complete jurisdictional inquiry into the legality of Cairn’s alleged investments in India (Sub-Section IV.C(ii) below); (iii) in any event, to the extent that the Tribunal did address India’s assertions on tax avoidance, it erroneously found that the 2006 Transactions were not tax avoidant (Sub- Section IV.C(iii) below); and (iv) the 2006 Transactions were in the nature of a divestment and not an investment (Sub- Section (iv) below). (i) The Tribunal Erred in Not Independently Characterizing Cairn’s Claims 302. The Tribunal determined in the Award that CEP and CUHL had made valid “investments” in India, which are covered by the definition under Article 1(b) of the India-UK BIT.421 It arrived at this conclusion on the flawed basis that its “jurisdictional inquiry as to whether a dispute relates to an investment should proceed by looking at the investment as a whole”. At the same time, it noted that its assessment and jurisdictional inquiry “might have been different had the different Claimants in this arbitration presented different claims”.422 The relevant finding by the Tribunal is extracted below: “It is well established that the jurisdictional inquiry as to whether a dispute relates to an investment should proceed by looking at the investment as a whole. That the present dispute relates to the Claimants’ overall investment is not altered by the fact that one of the Claimants may have been established in the process of the alteration of the form of that investment. The language of the BIT is unequivocal that an investment includes ‘changes in the form of such investment’. The assessment might have been different had the different Claimants in this arbitration presented different claims. However, the legal dispute over which this Tribunal is seized does not differ by claimant. CUHL does not present claims that are separate or unrelated to the remaining overall investment that had been in place since 1996. As both Claimants’ claims relate to Cairn Energy’s original investment, which has changed form over time, these claims fall within the subject-matter scope of the Tribunal’s jurisdiction.”423
303. The Tribunal’s approach was erroneous and finds no support in international law.
421 Exh. RoI-1, Award, ¶¶ 711-712. 422 Exh. RoI-1, Award, ¶ 712. 423 Exh. RoI-1, Award, ¶ 712. 114
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304. An assessment of whether there exists a protected investment and investor under a treaty is critical for determining the existence of the host State’s consent to arbitrate under the treaty, which, in turn, forms the basis for an arbitral tribunal’s jurisdiction under the treaty.424 The existence of a protected investment and investor under a treaty goes to the standing of a claimant in the arbitration and is essential for establishing the ratione materiae and ratione personae jurisdiction of an international court or tribunal. It is for an international court or tribunal to independently assess the existence of these jurisdictional elements for the purposes of establishing its jurisdiction.425 Moreover, the obligation to independently and objectively assess whether it has jurisdiction, including by examining the existence of a protected investor and investment under a treaty, is particularly important in investment treaty arbitration, where an arbitral tribunal’s jurisdiction is derived from the terms of the treaty.426 305. Furthermore, it is widely accepted in case law and legal commentary that an international court or tribunal is obliged to independently and objectively assess the legal foundation of the claims submitted to it, i.e., regardless of how the claims are presented by a claimant. This principle of international law has been upheld repeatedly by the ICJ, through its refusal to “confine itself to the formulation by the Applicant when determining the subject of the dispute” at the jurisdictional stage.427
424 Exh. RoI-4, Exh. RLA-218, Metal-Tech v. Uzbekistan (ICSID Case No. ARB/10/3, Award, 4 October 2013), ¶ 373, available at: https://www.italaw.com/sites/default/files/case-documents/italaw3012.pdf: (“Uzbekistan’s consent to ICSID arbitration, as expressed in Article 8(1) of the BIT, is restricted to disputes ‘concerning an investment’. Article 1(1) of the BIT defines investments to mean only investments implemented in compliance with local law. Accordingly, the present dispute does not come within the reach of Article 8(1) and is not covered by Uzbekistan’s consent. . . failing consent by the host state under the BIT and the ICSID Convention, this Tribunal lacks jurisdiction over this dispute.”); Case Concerning The Factory at Chorzów, P.C.I.J., Judgment, 26 July 1927, Series A, No. 9, p. 32, available at: https://www.icj-cij.org/public/files/permanent-court-of- international-justice/serie_A/A_09/28_Usine_de_Chorzow_Competence_Arret.pdf (“When considering whether it has jurisdiction or not, the Court’s aim is always to ascertain whether an intention on part of the Parties exists to confer jurisdiction upon it”). 425 Fisheries Jurisdiction (Spain v. Canada), Judgment on Jurisdiction, 1998 I.C.J. Rep. 432 (Dec. 4, 1998), ¶ 37, available at: https://www.icj-cij.org/public/files/case-related/96/096-19981204-JUD-01-00-EN.pdf: (“establishment or otherwise of jurisdiction is not a matter for the parties but for the Court itself”); 426 Exh. RoI-63, Zachary Douglas, The International Law of Investment Claims (CUP 2009) ¶ 503: (“an investment treaty tribunal is not a court of general jurisdiction with adjudicative power to determine any disputes between investors and states”); Exh. RoI-4, Exh. RLA-214, Phoenix Action Ltd v. Czech Republic (ICSID Case No. ARB/06/5, Award, 15 April 2009), ¶¶ 61-64, available at: https://www.italaw.com/sites/default/files/case- documents/ita0668.pdf (“. . . if jurisdiction rests on the existence of certain facts, they have to be proven at the jurisdictional stage. For example, in the present case, all findings of the Tribunal to the effect that there exists a protected investment must be proven . . . when a particular circumstance constitutes a critical element for the establishment of the jurisdiction itself, such fact must be proven, and the Tribunal must take a decision thereon when ruling on jurisdiction.”); Exh. RoI-4, Exh. CLA-182, Inceysa Vallisoletana S.L. v. Republic of El Salvador (ICSID Case No. ARB/03/26, Award, 2 August 2006), ¶ 155, available at: https://www.italaw.com/sites/default/files/case-documents/ita0424_0.pdf (“If, in order to rule on its own competence, the Arbitral Tribunal is obligated to analyse facts and substantive normative provisions that constitute premises for the definition of the scope of the Tribunal’s competence, then it has no alternative, but to deal with them, under penalty of infringing its obligation under Article 41 of the ICSID Convention.”). 427 Fisheries Jurisdiction (Spain v. Canada), Judgment on Jurisdiction, 1998 I.C.J. Rep. 432 (Dec. 4, 1998), ¶ 30, available at: https://www.icj-cij.org/public/files/case-related/96/096-19981204-JUD-01-00-EN.pdf. See also, Oil Platforms Case (Iran v USA) 1996 ICJ Rep 803 (Preliminary Objection), ¶ 16, available at: https://www.icj- cij.org/public/files/case-related/90/090-19961212-JUD-01-00-EN.pdf. 115
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
306. In the present case, India’s consent to arbitrate disputes under the India-UK BIT is contained in Article 9(1) read with 9(3)(c) of the BIT. Pursuant to these provisions, for the purposes of establishing its jurisdiction, the Tribunal was required to assess whether (i) there was a dispute under the India-UK BIT; (ii) such dispute was between an “investor” of the United Kingdom and India; and (iii) such dispute related to an “investment” by the “investor” in India.428 In turn, the assessment of whether there exists a protected “investment” and “investor” under the India-UK BIT had to be done in accordance with the definitions of those terms under Articles 1(b) and 1(c), respectively, of the BIT (see ¶ 62 above). 307. It is undisputed that pursuant to Article 9(1) read with 9(3)(c) of the India-UK BIT, the existence of an “investment” under Article 1(b) of the BIT is a pre-condition for India’s consent to investor-State dispute settlement through arbitration under the BIT. 308. Thus, notwithstanding that CEP and CUHL had together raised claims against India in the arbitration, it was incumbent on the Tribunal to ascertain the existence of a covered investment by each CEP and CUHL under the BIT, in order to establish its jurisdiction over both of them. The Tribunal has erred by failing to dissociate CEP and CUHL in the arbitration and independently assess for each of them whether it had made investments in India that were “in accordance with the national laws of [India]”, which might warrant protection under the India-UK BIT. The error in the Tribunal’s approach and jurisdictional findings is manifest from the following. 309. In the Award, the Tribunal, for no apparent reason, had adopted different approaches to analyse the different parts of the definition of “investment” under Article 1(b) of the BIT. In particular, the Tribunal dissociated CEP and CUHL when analysing whether Cairn’s alleged investments fell within the list of investment categories enumerated under Article 1(b) of the India-UK BIT.429 However, for no explicable reason, the Tribunal applied the unity of investment principle when examining the legality of Cairn’s alleged investments, stating that “the jurisdictional inquiry as to whether a dispute relates to an investment should proceed by looking at the investment as a whole”.430 310. Similarly, the Tribunal had independently and objectively examined whether each of CEP’s and CUHL’s alleged investments were covered under the list of investment categories
428 Exh. RoI-2, India-UK BIT, Articles 9(1), 9(3)(c). 429 Exh. RoI-1, Award, ¶ 705: (“Cairn Energy thus owned, either directly or indirectly, shares in companies and rights in PSCs . . . CUHL owned common shares in VIL (formerly CIL) worth US$ 1 billion”). 430 The Tribunal’s invocation of the unity of investment principle was further erroneous in the facts of this case. The cases relied upon by the Tribunal in support of its reliance on this principle were rendered in the entirely different context of whether separate components of a transaction must be examined independently to assess whether each component constitutes an independent investment. (See Exh. RoI-1, Award, ¶ 712, citing Holiday Inns, Occidental Petroleum and others v. Kingdom of Morocco, ICSID Case No. ARB/72/1, Decision on Jurisdiction, 12 May 1974, excerpt quoted in Pierre Lalive, “The First ‘World Bank’ Arbitration (Holiday Inns v. Morocco) - Some Legal Problems,” British Yearbook of International Law 51, no. 1, (1980): 123-162, p. 159; Inmaris Perestroika Sailing Maritime Services GmbH and others v. Ukraine (ICSID Case No. ARB/08/8, Decision on Jurisdiction, 8 March 2010), ¶ 92.) That the issue in the present case does not relate to different transactions of the same investment is clear from the fact that Second Claimant came into existence 10 years after First Claimant’s investment. 116
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enumerated under Article 1(b) of the India-UK BIT and were existing on the date of initiation of the arbitration.431 However, without providing any reason, it failed to undertake the same independent, objective analysis when assessing whether each of their alleged investments satisfied the legality requirement under Article 1(b) of the BIT. This is notwithstanding the undisputed fact that legality of the investment was a pre-condition for such investment to be regarded as a protected investment under the BIT. For this particular aspect of its jurisdictional inquiry, the Tribunal relied erroneously on the fact that the “different Claimants in this arbitration [had not] presented different claims”.432 311. The disassociation of CEP and CUHL in this case was particularly necessary considering that (i) Article 1(b) of the India-UK BIT contains a legality requirement, which required the Tribunal to assess whether each of CEP’s and CUHL’s alleged investments had been established or acquired in accordance with the laws of India;433 and (ii) CEP and CUHL came into existence 10 years apart from each other and consequently they would necessarily have “established or acquired” their alleged investments in India at different points in time. 312. That the Tribunal’s failure to take into consideration the aforementioned factors, referred to in ¶¶ 306-311 above, was fatal to a complete jurisdictional inquiry is further clear from its acknowledgement in the Award that its jurisdictional inquiry and assessment might have been different had CEP and CUHL presented different claims (see ¶ 302 above). 313. Had the Tribunal assessed individually the legality of both CEP’s and CUHL’s’ investments in India also in 2006 (when CUHL acquired its investment and CEP’s investment underwent a change in form), it would have had to decline jurisdiction over CUHL, which was constituted to facilitate abusive tax avoidance by Cairn. This would have a cascading impact on the remainder of the Tribunal’s findings on liability and on quantum. For instance, on liability, the Tribunal’s analysis would necessarily have been different had it not exercised jurisdiction over CUHL, since most of the challenged measures of the Income Tax Department, including the DAO and the FAO, were issued against CUHL only.434 Similarly, on quantum, certain damages that were payable only to CUHL, for instance, the tax refunds allegedly due to CUHL with respect to the sale of the CIL shares to Vedanta Resources Plc and Petronas International Corporation Ltd., would have congruently been excluded from consideration.435
431 Exh. RoI-1, Award, ¶ 705. See also, ¶¶ 704, 706. 432 Exh. RoI-1, Award, ¶ 712. 433 Exh. RoI-2, India-UK BIT, Article 1(b), which states in relevant part: “‘investment’ means. every kind of asset established or acquired, including changes in the form of such investment, in accordance with the national laws of the Contracting Party in whose territory the investment is made . . .”. 434 Exh. RoI-4, C-31, Draft Assessment Order to CUHL dated 9 March 2015; Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016; Exh. RoI-4, C-71, Notice of Demand under Section 156 dated 25 January 2016; Exh. RoI-4, C-324, Letter from the Assistant Commissioner of Income Tax to CUHL dated 1 March 2017; Exh. RoI-4, C-382, Penalty Order for A.Y. 2007-08 issued against CUHL dated 29 September 2017; Exh. RoI-4, C-327, Notice of Demand to the Defaulter dated 16 June 2017; Exh. RoI-4, C-326, Notice under Section 226(3) of the ITA 1961 dated 16 June 2017; Exh. RoI-4, C-383, Warrant of Attachment of Movable Property dated 26 July 2017. 435 Exh. RoI-1, Award, ¶¶ 1910-1918. 117
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
314. India submits that the Tribunal’s failure to independently characterize CEP’s and CUHL’s claims and alleged investments by examining whether each of their alleged investments were “established or acquired . . . in accordance with the national laws of [India]” led to it wrongfully assuming jurisdiction, where there was none. Accordingly, the Award must be annulled under Article 1065(1)(a) of the DCCP. (ii) The Tribunal did Not Conduct a Complete Jurisdictional Inquiry into the Legality of Cairn’s Alleged Investments 315. It is undisputed that (i) Article 1(b) of the India-UK BIT imposed a legality requirement for an investment to qualify for protection under the India-UK BIT; (ii) this legality requirement imposed subject matter and temporal limitations on the Tribunal’s jurisdiction under the BIT; and (iii) in this case, the legality requirement under Article 1(b) was to be tested under Indian law through the operation of the renvoi under Article 1(b) to “the national laws of the Contracting Party in whose territory the investment is made”.436 316. The Tribunal determined that the alleged investments of CEP and CUHL were in accordance with Indian law as (i) “both Claimants’ claims relate to Cairn Energy’s original investment, which has changed form over time”;437 and (ii) CEP’s acquisition of Command Petroleum in 1996 and its subsequent acquisition of various assets, including PSCs and JOAs in Rajasthan and the Krishna-Godavari Basin were not challenged as unlawful by Respondent.438 317. The Tribunal did not consider it relevant to examine the legality of the 2006 Transactions, which formed the basis of CUHL’s alleged investment in 2006, as, in its view, “Claimants’ overall investment [wa]s not altered by the fact that one of the Claimants may have been established in the process of alteration of the form of that investment”.439 The Tribunal continued to hold that: “even if it were assumed, for the sake of argument, that the Claimants engaged in an abusive tax avoidance during the 2006 Transactions, this would not affect the Claimants’ title over their shares and other assets comprising their investment; it would instead result in Claimants’ liability to pay relevant taxes and penalties . . . while a violation of the SEBI DIP Guidelines could give rise to severe sanctions being imposed on the issuer of the intermediary, they would not involve the cancellation of CUHL’s shares in CIL, nor would they render their subscription invalid or voidable. While these alleged illegalities could be relevant, and perhaps even fatal, to the merits of the Claimants’ claims, they would not place the present dispute outside of the Tribunal’s jurisdiction”.440
318. For the reasons that follow, it is clear that the Tribunal’s jurisdictional inquiry into the legality of Cairn’s alleged investments in India was riddled with significant legal errors.
436 Exh. RoI-1, Award, ¶ 709. 437 Exh. RoI-1, Award, ¶ 712. 438 Exh. RoI-1, Award, ¶ 711. 439 Exh. RoI-1, Award, ¶ 712. 440 Exh. RoI-1, Award, ¶ 713. 118
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
319. First, the Tribunal limited its inquiry into the legality of Cairn’s investments to the point in time when CEP established its original investment in India in 1996. By doing so, the Tribunal ignored the plain text of Article 1(b) of the India-UK BIT, which stipulates that the legality requirement applies not only to the establishment or acquisition of an investment, but also to the “changes in the form of such investment”. Consequently, to complete its jurisdictional inquiry, the Tribunal was required to assess the legality of CUHL’s and CEP’s respective investments in India as they stood pursuant to the 2006 Transactions, i.e., after CUHL was constituted and CEP’s investment changed in form. 320. The above interpretation of Article 1(b) of the India-UK BIT is consistent with a good faith interpretation of the provision in accordance with (i) the ordinary meaning of the terms; (ii) in their context; and (iii) the object and purpose of the treaty, pursuant to Article 31(1) of the VCLT (see ¶ 240 above).441 321. Article 1(b) of the India-UK BIT defined “investment” as: “every kind of asset established or acquired, including changes in the form of such investment, in accordance with the national laws of the Contracting Party in whose territory the investment is made . . .”
322. On a plain reading of Article 1(b), two matters are clear: (i) the definition of “investment”, includes “changes in the form of such investment”; and (ii) the requirement for an investment to be established or acquired in accordance with the laws of the host State extends both to the original investment and to the changes in the form of that investment. Point (i) is not in dispute and was also recognized by the Tribunal in the Award.442 The Tribunal, however, failed to apply and give effect to point (ii) above. 323. India submits that the placement of the phrase “in accordance with the national laws of the Contracting Party in whose territory the investment is made” at the end of the sentence, i.e., after both (i) “every kind of asset established or acquired”; and (ii) “including changes in the form of such investment”, is reflective of the contracting State parties’ intention that the legality requirement under Article 1(b) applied both to the establishment or acquisition of an investment and to the change in form of that investment.443 To limit the application of the phrase “in accordance with the national laws” only to the establishment or acquisition of the investment, and not apply it to the changes in the form of such investment, fails to give the phrase “changes in the form of such investment”, in the context of its placement under Article 1(b) complete meaning, for reasons that are further elaborated below.444
441 The rules of interpretation under the VCLT apply in the present case, despite India not having signed or ratified it, since they constitute customary international law. See Exh. RoI-4, SoD, ¶ 239. 442 Exh. RoI-1, Award, ¶ 712: (“The language of the BIT is unequivocal that an investment includes ‘changes in the form of such investment’”.) 443 See Aegean Sea Continental Shelf (Greece v. Turkey) [1978] ICJ Rep 3, Judgement, 19 December 1978, ¶¶ 53-57, available at: https://www.icj-cij.org/public/files/case-related/62/062-19781219-JUD-01-00-EN.pdf, where the ICJ emphasized the importance of punctuation and syntax for interpretation. 444 Cairn argued in the arbitration that the legality requirement is limited to the establishment of CEP’s original investment in 1996 as everything post that, including CUHL’s formation and acquisition of its alleged investments 119
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
324. The context of a treaty, for the purposes of interpretation, may be derived from the text of the treaty and the additional factors referred in Article 31(2) and (3) of the VCLT. In Land, Island and Maritime Frontier Dispute (El Salvador v Honduras), the ICJ held that the structuring of a sentence is relevant for the context of the terms. The ICJ had to decide upon its authority to delimit disputed maritime boundaries, for which purpose it had to interpret the phrase “to determine the legal situation”. Placing reliance on the structure of the sentence, the ICJ held that: “If account be taken of the basic rule of Article 31 of the Vienna Convention on the Law of Treaties. . . No doubt the word ‘determine’ in English (and, as the Chamber is informed, the verb ‘determinar’ in Spanish) can be used to convey the idea of setting limits, so that, if applied directly to the ‘maritime spaces’ its ‘ordinary meaning’ might be taken to include delimitation of those spaces. But the word must be read in its context; the object of the verb ‘determine’ is not the maritime spaces themselves but the legal situation of these spaces. No indication of a common intention to obtain a delimitation by the Chamber can therefore be derived from this text as it stands”.445 325. Further context regarding the intention to protect lawfully made investments can be gathered from Article 3 of the India-UK BIT, which stipulates that each contracting State to the BIT “shall admit [. . .] investments in accordance with its laws and policy”. As the term investment, also includes changes in the form of such investment, it follows that such changes in investment must also be admitted in accordance with the laws and policy of the host State.446 326. The above interpretation of Article 1(b), referred to in ¶ 319 above, is also consistent with the object and purpose of the India-UK BIT, which is to offer protections under the BIT and
in India and the change in form of CEP’s investment in 2006 was a part of the operation of CEP’s original investment. This conflates two distinct issues: (i) operation of an investment; and (ii) change in the form of the investment. 445 Land, Island and Maritime Frontier Dispute (El Salvador v Honduras) [1992] ICJ Rep 351, ¶ 373, available at: https://www.icj-cij.org/public/files/case-related/75/075-19920911-JUD-01-00-EN.pdf. 446 Investment arbitration jurisprudence is mostly settled that an investor’s illegality affects a tribunal’s jurisdiction only if it pertains to the making or establishment of the investment, and not if it relates to the performance or operation of the investment. The latter kind of illegality goes towards the merits or admissibility of a claim (see, for e.g., Gustav F W Hamester GmbH & Co KG v. Republic of Ghana (ICSID Case No. ARB/07/24, Award, 18 June 2010), available at: https://www.italaw.com/sites/default/files/case-documents/ita0396.pdf; Ocus Gold v. Republic of Uzbekistan (UNCITRAL, Award, 17 December 2015), available at: https://www.italaw.com/sites/default/files/case-documents/italaw7238_2.pdf; Phoenix Action Ltd v. Czech Republic (ICSID Case No. ARB/06/5, Award, 15 April 2009), available at: https://www.italaw.com/sites/default/files/case-documents/ita0668.pdf). This position was also unequivocally accepted by the CoA in its judgment dated 18 February 2020 in Hague Court of Appeal, 18 February 2020, Case 200.197.079/01, Judgment (Russian Federation/Hulley Enterprises Limited, Veteran Petroleum Limited and Yukos Universal Limited), ¶ 5.1.11.2, available at: https://www.italaw.com/sites/default/files/case- documents/italaw11186.pdf. In many of these cases, including the Yukos case, the investment treaty appears to have included the clause commonly found in investment treaties, which prescribes that “[a] change in the form in which assets are invested does not affect their character as investments”. This clause is different in its import from Article 1(b) of the India-UK BIT, which prescribes that “‘investment’ means every kind of asset established or acquired, including changes in the form of such investment, in accordance with the national laws . . .”. As noted in fn. 453 above, in the arbitration, Claimant erroneously treated the phrase “changes in the form of such investment” as relating to the operation of the investment. 120
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admit investments in the host State, where they have been made in accordance with the laws of the host State. If an investment has been changed in form, such that it falls foul of the laws of the host State, this would run counter to the object and purpose of the BIT to protect lawfully made investments. The preamble to the India-UK BIT, encapsulates the object and purpose of the BIT to “create conditions favourable for fostering greater investment by investors of one State in the territory of the Other State” in the recognition that “the encouragement and reciprocal protection under international agreement of such investment will be conducive to the stimulation of individual business initiative and will increase prosperity in both States”. The achievement of these objectives is only possible by permitting lawfully made investments, both, when the investment is originally established or acquired and when it undergoes a change in form. 327. Thus, India submits that a good faith interpretation of Article 1(b) in accordance with the ordinary meaning of the terms, read in their context and in light of the object and purpose of the treaty, makes it clear that the legality requirement under Article 1(b) applies not only to the establishment or acquisition of an investment, but also to the “changes in the form of such investment”. 328. The above interpretation of Article 1(b) is supported by the preparatory work (travaux préparatoires) of the India-UK BIT, which is relevant as a treaty interpretative tool pursuant to Article 32 of the VCLT. The travaux préparatoires of the India-UK BIT reveals that the original draft text of the proposed BIT provided by the United Kingdom to India on 18 November 1992 did not include any requirement for the investment to be made in accordance with the laws of the host State. The definition of investment specified, after enlisting the various categories of investments, that “[a] change in the form in which assets are invested does not affect their character as investments and [the] term ‘investment’ includes all investments, whether made before or after the date of entry into force of this Agreement”.447 Subsequently, pursuant to negotiations between India and United Kingdom between 26 – 31 January 1994 and 24 – 25 February 1994, the two States agreed to revise the definition of “investment” as “mean[ing] every kind of asset established or acquired, including changes in the form of such investment, in accordance with the national laws of the Contracting Party
447 Exh. RoI-4, CLA-250, Letter dated 18 November 1992 enclosing Model Text of the Indo-British Investment Promotion and Protection Agreement: “Investment” was defined in the draft text under Article 1(a) as follows: “‘investment’ means every kind of asset and in particular, though not exclusively, includes: (i) movable and immovable property and any other property rights such as mortgages, liens or pledges; (ii) shares in and stock and debentures of a company and any other form of participation in a company; (iii) claims to money or to any performance under contract having a financial value; (iv) intellectual property rights, goodwill, technical processes and know-how; (v) business concessions conferred by law or under contract including concessions to search for, cultivate, extract or exploit natural resources. A change in the form in which assets are invested does not affect their character as investments and the term ‘investment’ includes all investments, whether made before or after the date of entry into force of this agreement;”. 121
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in whose territory the investment is made . . . ”, which formulation remains in the final text of Article 1(b) of the India-UK BIT.448 329. It is clear from the travaux préparatoires of the India-UK BIT that a conscious, negotiated decision was taken by the contracting States and an agreement was reached that (i) the definition of “investment”, includes “changes in the form of such investment”; and (ii) the requirement for an investment to be established or acquired in accordance with the laws of the host State extends both to the original investment and to the changes in the form of that investment. Had it been the intention of the contracting States to only clarify that the definition of investment under the treaty includes a change in the form of such investment, there would have been no need to make “changes in the form of such investment” subject to the “in accordance with the national laws” requirement in the chapeau of Article 1(b). Rather, in such case, the original formulation under the draft text proposed by the United Kingdom on 18 November 1992, referred to in ¶ 328 above, stipulating only that “[a] change in the form in which assets are invested does not affect their character as investments”, would have sufficed.449
448 Exh. RoI-4, RLA-539, Unexecuted versions of the UK-India Agreement for promotion and protection of investments dated 25 February and 4 March 1994; Exh. RoI-4, CLA-253, Letter dated 4 February 1994 enclosing a draft agreement pursuant to negotiations between the two countries. 449 On a review of the definition of “investments” in BITs, where the definition of “investment” includes changes in the form of investment and the BIT also contains an “in accordance with national laws” requirement in the definition of investment, two types of practices are witnessed: (i) the definition of “investment” simply clarifies that changes in the form of investment are included within the definition of “investment”: For example (a) BLEU (Belgium-Luxembourg Economic Union) - China BIT, 4 June 1984, available at: https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/340/download: “‘Investments’ means every kind of asset or property used as investments or reinvestment, in particular, though not exclusively, includes [. . . ] The above asset or property used as investment shall be in conformity with the laws of the Contracting Party accepting the investment. Any change in the form in which assets or property are invested does not affect their character as ‘investments’ defined in this Agreement”; (b) Canada-Argentina BIT, 5 November 1991, available at: https://investmentpolicy.unctad.org/international-investment-agreements/treaty- files/77/download: Investment means “any kind of asset defined in accordance with the laws and regulations of the Contracting Parties – in whose territory the investment is made, held or invested either directly, or indirectly through an investor of a third State, by an investor of one Contracting Party in the territory of the other Contracting Party, in accordance with the latter’s laws. It includes in particular, though not exclusively: [. . . ]. Any change in the form of an investment does not affect its character as an investment.”; (c) Iceland-Lebanon BIT, 24 June 2004, available at: https://investmentpolicy.unctad.org/international-investment-agreements/treaty- files/1561/download: “1. the term ‘investment’ shall mean every kind of asset invested in connection with economic activities by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the legislation of the latter and shall include, in particular, though not exclusively [. . .]. Any alteration of the form in which assets are invested shall not affect their character as investment.”; (d) Ireland-Czech Republic BIT, 28 June 1996 [no longer in force], available at: https://investmentpolicy.unctad.org/international-investment- agreements/treaty-files/942/download: “the term ‘investment’ shall comprise every kind of asset investment in connection with business activities by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter and shall include, in particular, though not exclusively: [. . .]. Any alteration of the form in which assets are invested does not affect their character as investments.” (ii) the definition of “investment” clarifies that the changes in the form of investment are included within the definition of investment, provided that the changes in the investment are in accordance with national laws of the host State: For example: (a) France-Mexico BIT, 12 November 1998, available at: https://investmentpolicy.unctad.org/international-investment-agreements/treaty-files/1253/download: “1. the term ‘investment’ means every kind of asset, such as goods, rights and interest of whatever nature, including property rights, acquired or used for the purpose of economic benefit or other business purposes, and in particular though not exclusively: [. . .]. In accordance with the definition here above, any alteration of the form in which assets are 122
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330. Thus, a complete jurisdictional inquiry under the terms of Article 1(b) of the India-UK BIT required the Tribunal to examine (i) the legality of CEP’s investments in 1996, which the Tribunal did; and (ii) CEP’s and CUHL’s alleged investments in 2006, which the Tribunal did not do. To recall, 2006 is the time of creation of CUHL and of its acquisition of its alleged investment in India when the change in the form of CEP’s investment occurred, following which CEP held its investments in India exclusively through the newly created CUHL. 331. Second, whilst the Tribunal recognized that the legality of Cairn’s alleged investments was to be tested as a matter of Indian law through the operation of the renvoi under Article 1(b) of the India-UK BIT to the national laws of the host State, it failed to give effect to and apply the renvoi.450 332. The Tribunal devoted one paragraph in the Award to an assessment of whether CUHL’s acquisition of its investment in India was in accordance with Indian law. This was in complete disregard of the relevance of Indian law, which operates through a renvoi for the purposes of the jurisdictional inquiry under Article 1(b) of the India-UK BIT.451 As noted in ¶ 317 above, the Tribunal observed that even if it were to be established that Cairn had engaged in abusive tax avoidance during the 2006 Transactions, it would not affect the title over their shares and other assets in India but would rather result in their liability to pay taxes and penalties. For this reason, the Tribunal determined that an affirmative finding of tax avoidance would not place the dispute outside the remit of its jurisdiction pursuant to the legality requirement under Article 1(b) of the India-UK BIT. 333. The Tribunal’s aforementioned reasoning was bereft of any grounding or implementation of Article 1(b) of the India-UK BIT or Indian law. 334. There is no requirement under Article 1(b) of the India-UK BIT that the illegality under the law of the host State must be capable of rendering the transaction or the investment invalid, invested shall not affect their qualification as investments provided that such alteration is nor in conflict with the legislation of the Contracting Party in the territory of in the maritime area of which the investment is made.”; (b) Greece-Korea BIT, 25 January 1995, available at: https://investmentpolicy.unctad.org/international-investment- agreements/treaty-files/1467/download: “1. ‘investments’ shall mean every kind of asset invested by investor of one Contracting Party in the territory of the other Contracting Party, and in particular, though not exclusively, include: [. . .]. Any alteration of the form in which assets are invested shall not affect their character as investments, provided that such a change does not contradict the laws and regulations of the relevant Contracting Party.”; (c) Portugal-Mexico BIT, 11 November 1999, available at: https://investmentpolicy.unctad.org/international- investment-agreements/treaty-files/2000/download: “1. The term ‘investment’ shall mean every kind of asset and rights invested by investors of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the latter including, in particular, though not exclusively: [. . .]. Any alteration on the form in which assets are invested does not affect their character as investments, provided that such alteration is included in the aforesaid definition and do not contradict the laws and regulations of the Contracting Party in whose territory the investment was made.”. It is submitted that the formulation of the chapeau of Article 1(b) of the India-UK BIT is akin to the second category hereinabove. This is pursuant to a good faith interpretation of Article 1(b) in accordance with the ordinary meaning of the terms, in their context and in light pf the object and purpose of the BIT. 450 Exh. RoI-1, Award, ¶ 650. 451 It is well-established in investment treaty jurisprudence that “a failure to comply with the national law to which a treaty refers will have an international legal effect”: Exh. RoI-4, Exh. CLA-177, Fraport AG Frankfurt Airport Services Worldwide v. The Republic of the Philippines (ICSID Case No. ARB/03/25, Award, 16 August 2007), ¶ 394, available at: https://www.italaw.com/sites/default/files/case-documents/ita0340.pdf. 123
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null, void or voidable under its domestic law. The only requirement under Article 1(b) of the India-UK BIT is that the investment, including changes in the form of such investment, had been established or acquired in accordance with the laws of the host State. Thus, once it is established that there was a violation of India’s domestic law rules in the establishment or acquisition of the investment, that would suffice for rendering such investment outside the remit of the BIT’s protection. 335. This approach has been followed by several arbitral tribunals when interpreting a legality requirement under a treaty, with respect to the existence of an investment. For instance, in the case of Alasdair Ross Anderson et al. v. Costa Rica, Award, 19 May 2010, the arbitral tribunal held as follows:452 56. Claimants’ counsel argued that in judging whether the Claimants’ deposits were owned in accordance with the laws of Costa Rica, this Tribunal should look only to whether the Claimants ownership rights in their claim to be paid the agreed-upon interest and principal were legal obligations under Costa Rican law. By accepting the deposits under the conditions outlined earlier in this decision, Enrique Villalobos clearly became subject to that legal obligation. However, this Tribunal believes that the approach suggested by Claimants’ counsel is too narrow and not a correct interpretation of the treaty language “owned … in accordance with the law” of Costa Rica.
57. The ordinary dictionary meaning of the verb “own” is “to have or hold a property” or “to have or possess a property.” In order to determine whether the ownership of a property is in accordance with the law of a particular country, one must of necessity examine how the possession or ownership of that property was acquired and in particular whether the process by which that possession or ownership was acquired complied with all of the prevailing laws. In the present case, it is clear that that the transaction by which the Claimants obtained ownership of their assets (i.e. their claim to be paid interest and principal by Enrique Villalobos) did not comply with the requirements of the Organic Law of the Central Bank of Costa Rica and that therefore the Claimants did not own their investment in accordance with the laws of Costa Rica. That being the case, the obligations of the Villalobos brother held by the Claimants do not constitute “investments” under the Canada-Costa Rica BIT and therefore this Tribunal lacks jurisdiction to hear the Claimants’ claims against Costa Rica under the BIT. [emphasis added]
452 Alasdair Ross Anderson et al v. Republic of Costa Rica (ICSID Case No. ARB(AF)/07/3, Award, 19 May 2010), ¶¶ 56-57, available at: https://www.italaw.com/sites/default/files/case-documents/ita0031.pdf. See also, Exh. RoI-4, Exh. RLA-214, Phoenix Action Ltd v. Czech Republic (ICSID Case No. ARB/06/5, Award, 15 April 2009), available at: https://www.italaw.com/sites/default/files/case-documents/ita0668.pdf; Exh. RoI-4, Exh. CLA-177, Fraport AG Frankfurt Airport Services Worldwide v. The Republic of the Philippines (ICSID Case No. ARB/03/25, Award, 16 August 2007), available at: https://www.italaw.com/sites/default/files/case- documents/ita0340.pdf; Exh. RoI-4, Exh. RLA-354, Vladislav Kim, Pavel Borissov, Aibar Burkitbayev, Almas Chukin, Lyazzat Daurenbekova, Adal Issabekov, Damir Karassayev, Aidan Karibzhanov, Aigul Nurmakhanova, Kairat Omarov, Nikolay Varenko And Gulzhamash Zaitbekova v. Republic of Uzbekistan (ICSID Case No. ARB/13/6, Decision on Jurisdiction, 8 March 2017) ¶¶ 463-465, available at: https://www.italaw.com/sites/default/files/case-documents/italaw8549.pdf. 124
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336. Furthermore, the conditions regarding the legality requirement under BITs derived from case law with respect to the “subject-matter scope of the legality requirement” include “non-trivial violations” or “violations of the host State’s foreign investment regime” and allegations such as fraud or corruption are condemned.453 Such conditions are satisfied in the present case where the illegality involved was deliberate and massive tax avoidance, concealed from the authorities, and confirmed in the course of the arbitral proceedings when Cairn finally disclosed its internal documents under compulsion of the orders from the Tribunal. Importantly, CUHL, whose tax liability was in question, was created for the sole purpose of facilitating Cairn’s abusive tax avoidance. 337. The Tribunal’s approach in the Award, basing its findings on legality of Cairn’s investment on the fact that their investment has not been rendered null and void or voidable under Indian law is inconsistent with the approach adopted by other investment tribunals. India submits that the Tribunal erred by conflating two distinct issues: (i) the existence of an illegal or unlawful investment under Indian law; and (ii) the consequence of such illegality or unlawfulness under Indian law. 338. Furthermore, there is also no requirement under Indian law, pursuant to which the transaction or the investment must be declared invalid, null, void or voidable under its domestic law, in order to be regarded as having been undertaken contrary to or in violation of Indian law. In the present case, the Income Tax Department had imposed a fine on CUHL for non-payment of the due capital gains tax, which is compliant with the procedure under Indian law. 339. Thus, India maintains that the Tribunal wrongly exercised jurisdiction over Cairn’s claims in the arbitration. Accordingly, the Award must be annulled under Article 1065(1)(a) of the DCCP. (iii) In any event, the Tribunal Erroneously Found that there was No Tax Avoidance 340. Whilst the Tribunal purported to address India’s contentions on tax avoidance as a part of its analysis on the merits of Cairn’s claims regarding the alleged breach of India’s FET obligation under the BIT, it will be demonstrated below that its analysis was erroneous under Indian law and as a matter of fact and that, therefore, the Tribunal had no jurisdiction. 341. In particular, whilst the Tribunal rightly noted in the Award that the “applicable standard to determine whether there was tax avoidance is to be found in Indian law”,454 it fell short of
453 See for example Exh. RoI-4, Exh. RLA-217, Quiborax SA v Bolivia (ICSID Case No ARB/06/2, Decision on Jurisdiction, 27 September 2012), ¶ 266, available at: https://www.italaw.com/sites/default/files/case- documents/italaw1098.pdf; Exh. RoI-4, Exh. RLA-218, Metal-Tech v. Uzbekistan (ICSID Case No. ARB/10/3, Award, 4 October 2013), ¶ 165, available at: https://www.italaw.com/sites/default/files/case- documents/italaw3012.pdf; Exh. RoI-4, Exh. CLA-311, Saba Fakes v. Republic of Turkey (ICSID Case No. ARB/07/20, Award, 14 July 2010), ¶ 120, available at: https://www.italaw.com/sites/default/files/case- documents/ita0314.pdf; Exh. RoI-4, Exh. CLA-86, Desert Line Projects LLC v. The Republic of Yemen (ICSID Case No. ARB/05/17, Award, 6 February 2008), available at: https://www.italaw.com/sites/default/files/case- documents/ita0248_0.pdf. See also other case law cited in Exh. RoI-4, R-SoRj, ¶¶ 140-148. 454 Exh. RoI-1, Award, ¶ 1298. 125
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applying the correct legal standards under Indian law, leading to its erroneous conclusion that the 2006 Transactions were not tax-avoidant. 342. As the tax avoidant nature of the 2006 Transactions is a matter affecting the existence of a protected “investment” under Article 1(b) of the India-UK BIT, it is one of the conditions for India’s consent to arbitrate and goes to the root of the Tribunal’s jurisdiction under Article 9 of the BIT. Accordingly, pursuant to Article 1065(1)(a) of the DCCP, India reiterates its jurisdictional objection regarding the absence of a protected “investment” under India-UK BIT, which was not considered by the Tribunal as part of its jurisdictional inquiry. 343. For the reasons set out below, Your Court will appreciate that it is undeniable that the 2006 Transactions—pursuant to which CUHL and its alleged investment came into existence and CEP’s investment changed in form—were part of an abusive tax avoidance scheme on the part of Cairn, directed at siphoning off billions of dollars from India’s economy, without paying the due capital gains tax.455 This was a gross violation of Indian tax laws, thereby depriving Cairn’s alleged investments of any protection under the India-UK BIT. Indian Law on Tax Avoidance 344. Under the judicial anti-avoidance rules devised by Indian courts, tax avoidant transactions are taxable under the “look at” doctrine, which focuses on “substance over form”. Under the “substance over form” doctrine, a transaction could be taxed in accordance with its substance (in the present case, this would imply taxing the transactions on the basis of them involving a transfer of Cairn’s Indian oil and gas assets) rather than its form (in this case, this would refer to the purported formal transfer of CUHL’s shares in CIHL to CIL).456 345. To assess whether a transaction is tax avoidant or not, the relevant test that is applied under Indian law is the “dominant purpose” test, which entails an inquiry into whether the dominant purpose of the structure used for the transaction was the avoidance of tax or if it was a legitimate business purpose. Importantly, under Indian law, in order to apply the “substance over form” doctrine, it is not essential for the transaction to constitute a “sham”; if the dominant intention behind the transaction is proven to be tax avoidance, notwithstanding that it might be a genuine transaction that has been acted upon, that will suffice for the purposes of applying the “substance over form” doctrine.457
455 Notably, in addition to avoiding the payment of taxes in India, Cairn took steps to ensure that it did not have to pay taxes anywhere in the world on the gains made by them through the 2006 Transactions (see Section IIA(ii)(b) above and Section V.B). 456 Exh. RoI-4, R-SoRj, ¶ 268, where India explained the “substance over form” test as follows: “[t]he correct legal test as a matter of Indian law is that, if a particular form for a transaction is chosen by the taxpayer with the dominant motive of avoiding taxes, it is then open to the Revenue to disregard the particular form of the transaction and to instead visit the tax consequences on the taxpayer based on the underlying economic realities”. 457 Exh. RoI-4, R-75, McDowell and Co. Ltd. v. CIT [1985] 3 SCC 230, J. Reddy’s Separate Opinion, ¶ 46 (“while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax”); Exh. RoI-4, R-126, Twinstar Holding Ltd v. Anand Kedia 260 ITR 6 (Bom), 985 (“we may refer to the judgment of the Supreme Court in the case of Mc. Dowell & Co. Limited v. Commercial Tax Officer [citation omitted] in which it has been held that even if a transaction is genuine and even if it has been 126
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346. The adoption of a purposive approach over a formalistic approach in relation to tax avoidance has been the legal position in India since before CEP’s investment in India in 1996. In fact, already in 1986, a five-judge Constitutional Bench of the Indian Supreme Court upheld the application of the “substance over form” doctrine in relation to tax avoidant transactions in the case of McDowell and Co. Ltd. v. CIT (“McDowell Judgment”), as follows:458 “46. . . .In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. . ..
47. It is neither fair nor desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock and to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of ‘emerging’ techniques of interpretation [as] was done in Ramsay 1982 AC 300, Burma Oil 1982 STC 30 and Dawson 1984-1 All ER 530, to expose the devices for what they really are and to refuse to give judicial benediction.459 [emphasis added]
347. Justice Reddy, with whom the other four members of the Bench unanimously agreed on this aspect, eloquently explained the need for implementation of a purposive approach in relation to tax avoidance: “The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is ‘the large hidden loss’ to the community (as pointed out by master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his
actually acted upon, but if the transaction is entered into with the intention of tax avoidance, then the transaction would constitute a colourable device (sic). That the Courts are now concerned not merely with the genuineness of the transaction, but with the intended effect of the transaction on the fiscal purpose”); Exh. RoI-4, Exh. R-127, CIT v. Abhinandan Investments, 381 ITR 139 (Del), ¶ 45 (“. . .in order to examine whether a transaction is a subterfuge the answer to the question whether the transaction has any reasonable business purpose would be a vital consideration. Clearly, the use of corporate form to evade tax would be impermissible . . . ”). 458 Exh. RoI-4, R-75, McDowell and Co. Ltd. v. CIT [1985] 3 SCC 230, ¶¶ 46-47. 459 Exh. RoI-4, R-75, McDowell and Co. Ltd. v. CIT [1985] 3 SCC 230, J. Reddy’s Separate Opinion, ¶¶ 46- 47. The other four judges of the Constitutional Bench expressly concurred with Justice Reddy’s opinion in this regard at ¶¶ 26-27 of J. Misra’s Judgment (“Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. On this aspect one of us, Chinnappa Reddy, J., has proposed a separate and detailed opinion with which we agree . . .”). There are two decisions by the Supreme Court (Exh. RoI-4, C-285, Mathuram Agarwal v. State of Madras [1999] 8 SCC 667, ¶ 12; Exh. RoI-4, C-159, Union of India v. Azadi Bachao Andolan (2004) 10 SCC 1, ¶ 38), which appear to revert to a pre-McDowell formalistic approach of interpretation of taxation statutes. However, neither of these decisions were rendered in the context of tax avoidance. Moreover, at least one of the decisions (Azadi Bachao) was a smaller two-judge Bench of the Supreme Court and cannot be regarded as overturning the McDowell case. 127
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perhaps not so skillful advisers on the other side . . . Then again there is the ‘sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it’. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guileless good citizens from those of the ‘artful dodgers’. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmers, who said, ‘Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization’. But, surely it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance, we now live in a welfare State whose financial needs, if backed by the law, have to be respected and met.”460
348. In the 2012 Vodafone Judgment of the Supreme Court, which was relied on by both Parties in the arbitration in relation to various issues, a three-judge Bench of the Indian Supreme Court,461 endorsed the general “judicial anti-avoidance rule” and upheld the application of the “substance over form” doctrine under Indian law. The Supreme Court held that if a transaction was found to be a tax avoidant, it was open to the Revenue to tax the said transaction applying the “substance over form” doctrine. The burden lay on the Revenue to identify the scheme and its dominant purpose. Notably, the Court determined that the incorporation of a company outside India did not preclude the Revenue from investigating the transaction for its potential taxability in India. The relevant findings of the Supreme Court on the legal principles applicable in India towards tax avoidance, the “judicial anti-avoidance rule” and the application of the “substance over form” doctrine, rendered in the context of a holding company-subsidiary company relationship, are extracted below: “67. . . . whether a transaction is used principally as colourable device for the distribution of earnings, profits and gains, is determined by a review of all the facts and circumstances surrounding the transaction. It is in the above cases that the principle of lifting the corporate veil or the doctrine of substance over form or the concept of beneficial ownership or the concept of alter ego arises. . .
68. It is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as Cayman Islands or Mauritius based company for both tax and business purposes. . . . However, taxation of such Holding Structures very often gives rise to issues such as double taxation, tax deferrals and tax avoidance. In this case, we are concerned with the concept of GAAR. In this case, we are not concerned with treaty-shopping but with anti- avoidance rules. The concept of GAAR is not new to India since India already has a judicial anti-avoidance rule, like some other jurisdictions. . . When it comes to taxation of a Holding Structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may invoke the ‘substance over form’ principle or ‘piercing the corporate veil’ test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a
460 Exh. RoI-4, R-75, McDowell and Co. Ltd. v. CIT [1985] 3 SCC 230, J. Reddy’s Separate Opinion, ¶ 46. 461 Pursuant to the doctrine of precedents in India, it may be noted that the three-judge Bench in Vodafone case was bound by the findings of the five-judge Constitutional Bench in McDowell case. 128
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sham or tax avoidant . . . In this connection, we may reiterate the “look at” principle enunciated in Ramsay (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. . . and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment / saving device but that it should apply the “look at” test to ascertain its true legal nature. . . . Applying the above tests, we are of the view that every strategic foreign direct investment coming to India, as an investment destination should be seen in a holistic manner. While doing so, the Revenue/Courts should keep in mind the following factors: the concept of participation in investment, the duration of time during which the Holding Structure exist; the period of business operations in India; the generation of taxable revenues in India; the timing of the exit; the continuity of business of such exit. In short, the onus will be on the Revenue to identify the scheme and its dominant purpose. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate purpose must exist to overcome the evidence of a device.462 [emphasis added]
349. The Supreme Court applied the “dominant purpose” test to the facts of the Vodafone case, emphasizing the “conceptual difference” between a “preordained transaction which is created for tax avoidance purposes” and “a transaction which evidences investment to participate in India”: 73. . . . There is a conceptual difference between [a] preordained transaction which is created for tax avoidance purposes, on the one hand, and a transaction which evidences investment to participate in India. In order to find out whether a given transaction evidences a preordained transaction in the sense indicated above or investment to participate, one has to take into account the factors enumerated hereinabove, namely duration of time during which the holding structure existed, the period of business operations in India, generation of taxable revenue in India during the period of business operations in India, the timing of the exit, the continuity of business on such exit, etc. . . .”.463 [emphasis added]
350. The Tribunal rightly recognized in the Award that the legal position in India in relation to tax avoidant transactions, emanating from the Vodafone Judgement is that: “a. The exercise of determining whether a transaction is tax avoidant is a fact- intensive one and is not restricted to identifying a sham; b. The Revenue is to focus on the facts and circumstances surrounding the transaction; c. Only after it has determined that the scheme is tax avoidant, can the Revenue invoke the ‘substance over form’ principle or ‘piercing the corporate veil’ test. d. The onus of showing a scheme and its dominant purpose is on the Revenue. e. Finally, although Indian law recognizes the situs rule, and the consequences that ordinarily follow from the separate legal personality of a company, the fact
462 Exh. RoI-4, C-59, Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613, ¶ 68. 463 Exh. RoI-4, C-59, Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613, ¶ 73. 129
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that a transaction involves the purchase and sale of shares of a company incorporated outside of India does not preclude the Revenue from investigating the transaction for its potential taxability in India.”464 351. However, as will be shown in Section (b) below, the Tribunal failed to apply the “judicial anti-avoidance rule” and the “dominant purpose” test, while assessing whether or not the 2006 Transactions were tax avoidant, which it was required to do as a matter of Indian law. Importantly, the Tribunal itself recognized that its inquiry into the tax avoidance rules under Indian law (i) “is not as comprehensive as the Tribunal believes the briefing of the law would be, were an allegedly tax avoidant transaction to once again go before the Supreme Court or the Constitutional Court”; and that (ii) “it has [not] been exposed to the full range of Indian jurisprudence and academic commentary that it would be open to an Indian court, hearing a similar matter, to consult”. The Tribunal was however satisfied that “it has been able to identify the general rules and approaches taken by the Indian courts”.465 352. The acknowledgements by the Tribunal regarding the shortcomings of its inquiry into Indian law on tax avoidance highlight the deficiency of the Tribunal’s findings on tax avoidance. This is particularly problematic in the context of a jurisdictional inquiry, where the Tribunal was obliged to apply Indian law not as a matter of fact, but through the operation of the renvoi under Article 1(b) of the India-UK BIT. The Tribunal’s Erroneous Findings on Tax Avoidance – Failure to Apply Dominant Purpose Test in Accordance with Indian Law 353. The dispute in the arbitration related to India’s taxation of the capital gains that CUHL (a Scotland company) made through the sale of shares of CIHL (a Jersey company) to CIL (an Indian company) pursuant to the 2006 Transactions. In particular, the elements of the 2006 Transactions that were subjected to a short-term capital gains tax concerned Steps 4 and 6 of the 2006 Transactions described above, i.e., the four tranches through which CUHL sold its shares in CIHL to CIL (see ¶¶ 30 and 45 above). 354. Cairn had structured the 2006 Transactions such that they would avoid paying the short-term capital gains tax, which would otherwise be payable on the capital gains accrued by CUHL in the amount of USD 5.5 billion, as a consequence of the sale transaction referred to in the preceding paragraph.466 Overall, when the IPO proceeds that were transferred to CUHL and CEP as consideration for further CIHL shares are accumulated with the values of the
464 Exh. RoI-1, Award, ¶ 1416. 465 Award, ¶ 1424. 466 Specifically, the tax sought to be avoided by Cairn was “the capital gains tax on the pre-IPO capital gains in the ‘offer for sale’ element of the listing i.e., on the sale by Cairn Energy of its shares in CIL to the public, which would have represented approximately 90% of the total value of the underlying assets (i.e., all but the $600 m which were to be raised directly by CIL by way of a fresh issue of shares)”. See Respondent’s Response to Tribunal Questions, Question 2, p. 28. See also, Exh. RoI-4, C-363, Slide 8: With reference to Plan A, RSM advised that “the structure envisaged PLC directly holding shares in India Co. In the event of sale of Indian Company shares under offer for sale, there would be substantial tax implications in India”; Exh. RoI-4, C-363, Slide 15: With reference to Plan B, RSM advised that “[s]ale of Indian company by way of an offer for sale in an IPO would be subject to short [term] capital gains, if the same is made within twelve months, taxable @41.82%”. 130
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additional cash and shares against which all of the CIHL shares were purchased by CIL from CUHL (in a total of four tranches), the total consideration amounts to USD 5.8 billion.467 Out of this total consideration, the capital gains of CUHL amounted to around USD 5.5 billion.468 Although the existence of such capital gains was disputed by Cairn in the arbitration,469 , the Tribunal ruled against Cairn in that respect.470 The fact that no tax has ever been paid on the amount of USD 5.5 billion (including the IPO proceedings of USD 1.35 billion) is not disputed.471 355. For the purposes of assessing the Tribunal’s jurisdiction over Cairn’s claims, the relevant inquiry is whether the 2006 Transactions, which entailed the incorporation of CUHL and the acquisition of its alleged investments in India, were structured with a view to avoid payment of short-term capital gains tax in India. Should the answer to this question be in the affirmative, Cairn’s investments would not merit protection under the Article 1(b) of the India-UK BIT with the consequence that the Tribunal lacked jurisdiction. As will be shown below, this is indeed the case here. 356. Objective Behind the 2006 Transactions. The timing of the 2006 Transactions was motivated by CEP’s discovery of the MBA Fields in Rajasthan in 2004. As was acknowledged by Cairn’s witness, Ms. Brown, it was following this discovery that “[t]he Cairn board began considering a restructuring in order to best realise this value for its shareholders”.472 357. Although Cairn’s stated objective was that “[t]he IPO was intended to raise additional capital for further investments in India and to recognise some of the existing value of the group’s Indian assets and operation for Cairn Energy’s shareholders”,473 the documentary record in the arbitration evidences that, in actuality, only USD 600 million out of the total USD 1.98 billion raised by the IPO was retained by CIL; the remaining USD 1.35 billion was transferred back to CUHL and CEP as consideration for further CIHL shares.474 The remaining amount of USD 3.5 billion approximately from the total capital gains of USD 5.5 billion, referred to in ¶ 354 above was realised by Cairn over the next years, entirely for the benefit of Cairn and its shareholders.475 358. Structuring of the 2006 Transactions. Cairn’s structuring of the 2006 Transactions was motivated by the following parallel considerations of their divestment strategy: (i) realizing the best value of the Cairn group’s Indian oil and gas assets for Cairn’s shareholders. Cairn determined that the floatation of an IPO on Indian stock exchanges with a view to “tap the
467 Exh. RoI-4, Brown WS-2, ¶ 121; Exh. RoI-1, Award, ¶ 1035. 468 Exh. RoI-1, Award, ¶ 1042; Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016, ¶¶ 2.2.8, 12. 469 Exh. RoI-4, C-PHB, ¶¶ 194-204. 470 Exh. RoI-1, Award, ¶¶ 1042. 471 Exh. RoI-1, Award, ¶¶ 1043-1044. 472 Exh. RoI-4, Brown WS-2, ¶ 37. See also, ¶ 12 above. 473 Exh. RoI-4, Brown WS-2, ¶ 43. 474 Exh. RoI-4, Brown WS-1, ¶ 91; Exh. RoI-4, CWS-Brown-42, Cairn Energy PLC, Annual Report & Accounts 2006. See also, Exh. RoI-4, SoD, ¶ 106; Exh. RoI-4, R-PHB, ¶ 191. 475 See ¶ 389 below. 131
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burgeoning Indian capital market” would offer it the best value for its assets;476 (ii) structuring the transaction as a transfer of shares by non-residents in non-Indian companies which indirectly held assets in India (i.e., transfer of CUHL’s (Scotland) shares in CIHL (Jersey) to CIL (India)), as opposed to the transfer of the Cairn group’s Indian oil and gas assets. Cairn did so under the asserted basis—albeit mistaken—that indirect transfers of such nature would not be taxable under Indian law;477 and (iii) avoid payment of taxes on the flow back of dividends from CIL to its subsidiaries.478 359. Each of the aforementioned steps were structured, with the dominant purpose of avoiding an expressly and clearly identified liability to capital gains tax on the massive capital gains which the Cairn group made in India between 1996 (when it entered the Indian market) and 2006 (when it started its exit through its IPO).479 360. Options considered by CEP for the Structuring of the 2006 Transactions and the Indian IPO. This section provides an overview of the various options considered by CEP, which led to the implementation of the 2006 Transactions. Section II.A(i)(b) above describes in detail the step-wise structuring and implementation of the 2006 Transactions, which is not being repeated here. 361. Soon after CEP’s discovery of the MBA Fields in Rajasthan in January 2004 (see ¶¶ 25-26 above), CEP began exploring options to realise the value of its assets in India.480 362. Between April 2004 and April 2005, CEP explored various options with Ernst & Young and ABN Amro to “[t]ap the burgeoning Indian capital market”,481 in order to realise the value of the Cairn group’s Indian oil and gas assets through a listing on the Indian stock exchanges.482 363. Subsequently, on 8 March 2006, representatives of ABN Amro, Hoare Govett and Merill Lynch gave presentations to the Board of Directors of CEP, highlighting the benefits of a
476 Exh. RoI-4, C-358, Slides 6, 10; Exh. RoI-1, Award, ¶ 1499; Exh. RoI-4, Brown WS-2, ¶ 43; Exh. RoI-4, CWS-Brown-45, Cairn Energy Board Committee Meeting Minutes Dated 8 March 2006, p. 5; Exh. RoI-4, CWS- 139, Board Presentation: Project Sapphire – Options dated 6 April 2005 (without appendices). 477 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 5, 243:19-244:11; 247:10-22. Cairn’s witness, Ms. Brown, admitted during cross-examination that the advice she had received on the exposure to capital gains tax when structuring the 2006 Transactions was unreasoned, one-sentence advice from accountants without reference to authority. 478 Exh. RoI-4, R-PHB, ¶ 191(d). 479 Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slides 8 and 15. The liability to pay capital tax was identified by RSM in its 3 May 2006 presentations to Cairn. 480 As early as April 2004, Ms. Brown had met with Mr. Rajiv Memami, CEO and Country Managing Partner of Ernst & Young seeking “preliminary advice” regarding the available options to realise the value of the Cairn group’s Indian assets. 481 Exh. RoI-4, C-358, Email from Ernst & Young to Cairn dated 8 April 2004, Slide 5; Exh. RoI-4, CWS- Brown-139, Board Presentation: Project Sapphire – Options dated 6 April 2005 (without appendices), Slides 3, 4 and 7. 482 Exh. RoI-4, C-358, Email from Ernst & Young to Cairn dated 8 April 2004, Slides 2, 3 and 5. 132
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public listing on the Indian stock exchanges for realisation of the best value of the Cairn group’s Indian oil and gas assets.483 364. Cairn had sought to portray in the arbitration that they had pursued a listing in India with a view to “Indianise” their assets and “to raise funds to reinvest in India, to fund [its operations in] Rajasthan and to fund other 12 operations in India”.484 However, as noted in ¶ 40 above, this was myth. Contrary to Cairn’s stated objective, only a “relatively small amount” of USD 600 million, out of the total USD 1.98 billion raised by the IPO was retained by CIL and the remaining USD 1.35 billion was transferred back to CUHL and CEP in the UK.485 Cairn's decision to proceed with an Indian IPO listing was solely with a view to maximize the value of the Cairn group’s assets in India. CEP’s instructions to its advisors regarding its divestment objective was: “[t]ap the burgeoning Indian capital market”.486 The Minutes of Meeting of CEP’s Board of Directors, dated 8 March 2006, also make it clear that the decision to pursue an Indian listing was taken with a view to maximise the value of the Cairn group’s assets in India: “. . . it was reasonably clear that a new Indian (IPO) company would represent an attractive value proposition. In particular, the Ctee noted that in the event a partial IPO was implemented, eg 40% a substantial amount of value would remain in the UK listed company through the shareholding in the company listed in India. The Committee noted that the starting point recommended by the advisers was, broadly speaking, to raise approximately US$1.5 – US2 billion through an IPO. An initial amount in excess of this would potentially risk a diminution in value. After careful and detailed consideration, it was resolved to proceed with a partial IPO on the MSE raising approximately US$ 1.5-US$ 2 billion and retaining a majority interest in Cairn India.”487
365. Until 3 May 2006, CEP was primarily exploring two options, described as Plan A and Plan B below, for the purposes of achieving the Cain group’s divestment objective in India:
483 Exh. RoI-4, CWS-Brown-45, Meeting of Committee of Board of Directors dated 8 March 2006, p. 5. 484 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 40:10-40:14 (Claimants’ Opening Statement). 485 Exh. RoI-4, SoD, ¶ 106; Exh. RoI-4, R-PHB, ¶ 191. 486 Exh. RoI-4, C-358, Email from Ernst & Young to Cairn dated 8 April 2004, Slide 5. 487 Exh. RoI-4, CWS-Brown-45, Meeting of Committee of Board of Directors of Cairn Energy, 8 March 2006, p. 5 133
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(i) Plan A:488
366. With respect to Plan A, CEP was advised that it (i) “entailed an exposure to capital gains tax in India, on shares offered for sale under the IPO”; (ii) “involve[d] seeking consents/exemptions from SEBI for deviations from the guidelines governing the IPOs specifically concerning [a] Minimum promoter’s contribution of 20% of the post IPO capital to be bought in as prescribed [; and (b)] Offer for sale of shares for less than a year”.489
488 Exh. RoI-4, C-363, RSM, Project Gin Presentation dated 3 May 2006, Slide 7. See also, Exh. RoI-4, C- 358, Email from Ernst & Young to Cairn dated 8 April 2004, Slide 4, where E&Y had proposed a similar option in April 2004. 489 Exh. RoI-4, CWS-Brown-49A, RSM, Phase I Plan C – Concept Paper dated 11 May 2006, p. 4; Exh. RoI- 4, C-363, RSM, Project Gin Presentation dated 3 May 2006, Slide 8. 134
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(ii) Plan B:490
367. With respect to Plan B, CEP was advised that “Plan B mitigated the issue regarding promoter’s contribution of Plan A, but would yet entail seeking exemption for offering shares held for a period less than one year under the IPO”.491 CEP was further advised that the “[s]ale of Indian Company shares by way of an offer for sale in an IPO would be subject to short capital gains tax, if the same is made within twelve months, taxable @ 41.82%. However, since in the current structure, the shares of Indian company would be held by Mauritian Company M1, the benefits of Double Taxation avoidance Agreement (DTAA) between Indian and Mauritius could be availed” provided that for the Mauritius company there was “tax residency in Mauritius” and “Substance in the Mauritius like holding important board meetings, compliance of the Mauritius laws, etc.”492
490 Exh. RoI-4, C-363, RSM, Project Gin Presentation dated 3 May 2006, Slide, 9. See also, Exh. RoI-4, C- 365, RSM, Project Gin Presentation dated 19 April 2006, Slide 7 and Exh. RoI-4, C-366, RSM, Project Gin Phase I – pre-IPO dated 21 April 2006, Slide 7, where a similar option was proposed by RSM. 491 Exh. RoI-4, CWS-Brown-49A, RSM, Phase I Plan C – Concept Paper dated 11 May 2006, p. 4. 492 Exh. RoI-4, C-363, RSM, Project Gin Presentation dated 3 May 2006, Slide 15. 135
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368. Importantly, under both Plans A and B, CEP was advised of the levy of capital gains tax following the IPO listing of the proposed Indian company holding the Cairn group’s shares.493 Under Plan A, RSM had highlighted that “[t]his plan entailed an exposure to capital gains tax in India, on shares offered for sale under the IPO”.494 For Plan A, RSM further highlighted for CEP that the Plan A structure could lead to “substantial tax leakages”495 as it “envisages PLC directly holding shares in Indian Co.”.496 Under Plan B, RSM had highlighted that “[s]ale of Indian Company shares by way of an offer for sale in an IPO would be subject to short capital gains tax, if the same is made within twelve months, taxable @ 41.82”.497 369. As will be demonstrated below, Cairn continued to explore options to avoid the payment of any taxes arising from the transfer of CUHL’s (Scotland) shares in CIHL (Jersey) to CIL (India), referred to in ¶ 358 above. Cairn explored—and eventually implemented—devices that would enable it to avoid (i) the levy of capital gains tax on the “offer for sale” element of the IPO listing of the proposed Indian company; (ii) the tax leakages identified by RSM under Plan A; and (iii) overcome mandatory regulations of the SEBI. Cairn’s conduct at the time of structuring the 2006 Transactions demonstrates its dogged pursuit to avoid payment of any applicable taxes on the transfer of CUHL’s shares in CIHL to CIL. It lays bare the falsity of the assertions by Cairn’s witness that Cairn, “as a guest in India . . . prided [itself] on being fully compliant with all regulations”.498 As noted in ¶ 40 above, this was a myth perpetuated by Cairn, which the Tribunal also did not accept. 370. On 3 May 2006, to avoid the levy of capital gains tax on Cairn’s “offer for sale” element of the IPO listing of the proposed Indian company, RSM presented to CEP an alternative option, Plan C-1,499 which sought to avoid the capital gains tax that would have been levied on the “offer for sale” element of Plans A and B (see ¶¶ 366 and 367 above):500
493 Exh. RoI-4, C-363, RSM, Project Gin Presentation dated 3 May 2006, Slides 8 and 15; Exh. RoI-4, CWS- Brown-49A, RSM, Phase I Plan C – Concept Paper dated 11 May 2006, p. 4; Exh. RoI-4, CWS-Brown-50A, RSM, Phase I Plan C – Concept Paper dated 19 May 2006, p. 4. 494 Exh. RoI-4, CWS-Brown-49A, RSM, Phase I Plan C – Concept Paper dated 11 May 2006, p. 4; Exh. RoI- 4, CWS-Brown-50A, RSM, Phase I Plan C – Concept Paper dated 19 May 2006, p. 4. 495 Exh. RoI-4, C-363, RSM, Project Gin Presentation dated 3 May 2006, Slide 6. 496 Exh. RoI-4, C-363, RSM, Project Gin Presentation dated 3 May 2006, Slide 8. 497 Exh. RoI-4, C-363, RSM, Project Gin Presentation dated 3 May 2006, Slide 15. 498 Exh. RoI-4, Brown WS-1, ¶ 41; Exh. RoI-4, Brown WS-2, ¶ 48. 499 Plan C-1 is mentioned to provide complete picture of the evolution of Cairn’s tax avoidance planning. In fact, Cairn had quickly moved on from Plan C-1 to Plan C-2 (discussed below), which was ultimately implemented. 500 Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some Thoughts Presentation dated 3 May 2006, Slides 4-6. 136
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371. On 11 May 2006, RSM proposed Plan C-2 (hereinafter referred to as “Plan C” in accordance with the terminology used in the Arbitration), which was ultimately adopted by Cairn for the purposes of the 2006 Transactions:501
501 Exh. RoI-4, CWS-Brown-49A, RSM, Phase I Plan C – Concept Paper dated 11 May 2006, p. 7. See also, Exh. RoI-4, CWS-Brown-51A, RSM, Structure Concept Paper dated 16 June 2006. 137
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372. As Respondent had submitted in the arbitration, Plan C had the following distinguishing features, when compared to Plans A and B: “a. It incorporates an infusion of case representing 20% of the value of the Indian Company, CIL (thereby apparently complying with the Minimum promoter Contribution); and
b. The IPO takes place in the middle of the structure – so that cash from the IPO is used by CIL to purchase shares in the intermediary company from Cairn”.502
373. The following incontrovertible facts emerge from a comparison of the aforementioned Plans that had been considered by CEP at the time of structuring the 2006 Transactions and other evidence tendered in the arbitration: (i) Both Plans A and B identified the substantial capital gains tax that would be levied on the “offer for sale” element of the proposed Indian company IPO (see ¶ 368 above). The significant difference between Plan C on the one hand, and Plans A and B on the other, was that the IPO under Plan C was structured in a manner to avoid the imposition of capital gains tax on the “offer for sale” element of Cairn’s shares in CIL. Under Plan C, Cairn structured the IPO transaction such that newly issued shares of CIL were floated on the market instead of offering the shares of the promoter (CUHL). If shares of the promoter were “offered for sale”, the public issue proceeds would be subject to
502 Exh. RoI-4, R-PHB, ¶ 248. See also, Exh. RoI-4, CWS-Brown-51A, RSM Structure Concept Paper dated 16 June 2006, pp. 4-5. 138
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capital gains tax, but as new shares were issued and offered in an IPO, the proceeds would not attract capital gains tax in India.503 (ii) From a regulatory perspective, in order to launch an IPO on Indian stock exchanges, CEP was advised that certain requirements in SEBI’s Disclosure and Investor Protection Guidelines (“SEBI DIP Guidelines”) needed to be satisfied, two of which are significant in this case: (a) the so-called “Minimum Promoter Contribution” requirement or MPC Requirement, according to which the promoters of an IPO “shall contribute not less than 20% of the post issue capital”, which contribution was required to be kept in “escrow account” to be released with the public issue proceeds;504 and (b) the so-called “lock-in” requirement, according to which “[i]n case of any issue of capital to the public the minimum promoters’ contribution . . . shall be locked in for a period of 3 years” and any contribution exceeding the same “shall also be locked in for a period of (one year)”.505 These requirements could be waived or exempted by SEBI in certain situations upon request;506 (iii) Plan C shared the same regulatory issues that had been identified for Plan A. In addition, Plan C had its own regulatory issues. For instance, the MPC Requirement under the SEBI DIP Guidelines, which was identified as a regulatory issue in Plan A (see ¶ (ii) above), equally applied to Plan C. However, in the implementation of Plan C, Cairn shrewdly side-stepped the MPC Requirement by availing the “unique and untested” Daylight Loans.507 As noted in ¶ 30 above, as part of Step 4 of the 2006 Transactions, Cairn availed two Daylight Loans which were designed to facilitate same-day, round-tripping of funds to and from India by CUHL and CIL. Importantly, Cairn’s witness, Ms. Brown, accepted during the arbitration that the end result of the Daylight Loans “look[ed] very much like a share swap”, which was prohibited under Section 4.6.1 of the SEBI DIP Guidelines.508 As regards the second regulatory issue pertaining to the one-year “lock-in” requirement, referred to in the preceding paragraph, Cairn’s witness, Ms. Brown, admitted during the arbitration that it was a non-issue.509 However, Cairn chose not to approach SEBI for the necessary exemptions and waivers identified by their advisers under Plan A, whilst readily approaching other regulatory bodies in India for requisite approvals in relation to the implementation of Plan C. (iv) According to Ms. Brown, Cairn abandoned Plan B—which had no alleged regulatory issues unlike Plan A—as “[t]he Mauritius option would have required [them] to
503 Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, Slide 6; Exh. RoI-4, R-SoRj, ¶ 325. 504 Exh. RoI-4, R-131, SEBI (Disclosure and Investor Protection) Guidelines, Sections 4.1.1 and 4.9.1. 505 Exh. RoI-4, R-131, SEBI (Disclosure and Investor Protection) Guidelines, Sections 4.11.1 and 4.12.1. 506 Exh. RoI-4, C-363, Presentation on Project Gin, Phase I – Pre IPO, Slide 8; Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slide 5. 507 Exh. RoI-4, R-133, Email trail from David Kahn to Jann Brown titled “Investment Commission note (comments)”. 508 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 5, p. 103:19-104:21. 509 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 5, p. 92:9-22. 139
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maintain some corporate presence in Mauritius”.510 Ms. Brown, however, accepted during the arbitration that Cairn could have implemented Plan B by incorporating a holding company elsewhere than in Mauritius, which they did not do.511 However, the objective of avoiding payment of the applicable capital gains tax on the “offer for sale” element of the proposed Indian company IPO (see ¶ 368 above), would not have been achieved if Cairn were to implement this modified version of Plan B. 374. As mentioned above, Plan C (specifically the positioning of the IPO as an issuance of new shares as opposed to an offer for sale of the promoter’s shares) was devised by Cairn’s advisers with a view to avoid payment of capital gains tax that would have been payable on the “offer for sale” element of the IPO listing of the proposed Indian Company. Additionally, to side-step the MPC Requirement under SEBI-DIP Guidelines, Cairn availed of two Daylight Loans, which were essentially a means of camouflaging the share swap arrangements between CUHL and CIL under Step 4 of the 2006 Transactions. This is one of the artificial devices, as understood within the meaning of the Vodafone test512 employed by Cairn as part of the 2006 Transactions. The Daylight Loans and other artificial devices employed by Cairn for the structuring of the 2006 Transactions are detailed below: (i) Daylight Loan: In order to enable a successful IPO of newly issued shares of CIL, the first two tranches of the transfer of Cairn’s Indian assets to CIL were arranged through the transfer of 21.85% of CIHL to CIL by CUHL. As CIL had no financial means of its own, it first issued shares to CUHL in exchange for which CUHL paid the borrowed amounts of USD 1.1 billion and USD 392 million to CIL, which have been referred to as the “Daylight Loans” (see ¶ (iv) above). These amounts were paid on the same day by CIL to CUHL as consideration for the 21.85% shares in CIHL.513 In this fashion, nearly USD 1 billion was round-tripped within a 24-hour period courtesy of Citibank. Although this was structured as two share transfers against respective cash considerations in order to satisfy the MPC Requirement, it was essentially a share swap. This was recognized by (a) India’s legal expert during the arbitration, Professor David Rosenbloom;514 (b) Cairn’s own advisors, RSM;515 and (c) Ms. Brown during cross- examination.516 Importantly, the Daylight Loans were “unique and untested”517 and entailed a serious risk that the “cash [might] [] get stuck in India”.518 Notwithstanding
510 Exh. RoI-4, Brown WS-3, ¶ 44. 511 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 5, p. 148:11-21. 512 Exh. RoI-4, C-59, Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613, ¶ 68, for the meaning of what constitutes an “artificial device”. 513 Exh. RoI-1, Award, ¶¶ 57-66; Exh. RoI-4, Brown WS-1, ¶¶ 83-86; Exh. RoI-4, CWS-Brown-63, Letter from Royal Bank of Scotland to Cairn Energy PLC dated 12 September 2006. 514 Exh. RoI-4, Rosenbloom ER-1, ¶ 30-31. 515 Exh. RoI-4, CWS Brown-69, Letter dated 11 October 2006 to CIL; Exh. RoI-1, Award, fn. 1957. 516 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 5, p. 103:19-104:21. 517 Exh. RoI-4, R-133, Email trail from David Kahn to Jann Brown titled “Investment Commission note (comments)”. 518 Exh. RoI-4, R-100A, Email trail from Ashish Patil to Jann Brown and others with subject “Re: RBI and Daylight” dated 09 September 2006. 140
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this, the allegedly “fiscally conservative”519 Cairn availed the Daylight Loans solely to side-step the MPC Requirement under the SEBI DIP Guidelines. Indeed, Cairn and its advisers were structuring this element of the transaction with the objective to “exploit[] [the] provision in the [SEBI] DIP Guidelines which has not been used before”,520 to camouflage an essentially share swap transaction through the use of the Daylight Loans. The Tribunal’s finding that this transaction was motivated by bona fide regulatory concerns represents what Professor Rosenbloom refers to as a “slavish adherence to form [that] would ascribe legal effect to such a meaningless gesture”.521 In addition to being a violation of the MPC Requirement, this element of the transaction was also an artificial device. (i) Siphoning off IPO Proceeds without Payment of Any Taxes in India: The other obvious element of the artificial device in the 2006 Transactions was the positioning of the IPO as an issuance of new shares as opposed to an offer for sale of the promoter’s shares, which would have been subject to capital gains taxes in India.522 Notably, RSM’s alternative plans that Cairn ultimately rejected (Plans A and B) had proposed a public offer of the latter kind.523 However, since it was Cairn’s objective to avoid tax liability, it chose to structure the transaction in a manner that capital gains amounting to USD 5.5 billion would escape—and did in fact escape—taxation anywhere in the world. (ii) Siphoning off IPO Proceeds without Payment of Any Taxes in the United Kingdom: By virtue of the 2006 Transactions, Cairn undisputedly siphoned off USD 1.38 billion outside India. Since this amount was paid as consideration for the last tranche of CIHL shares and not as dividend to CUHL in its capacity as CIL’s shareholder, Cairn avoided the payment of corporation tax in the United Kingdom.524 Notably, one of RSM’s alternative plans that Cairn ultimately rejected (Plan B) included the payment of the IPO proceeds to CUHL as dividend, which would have been subjected to corporation taxes.525 Further, it was not disputed that neither CEP nor CUHL paid any capital gains tax in the United Kingdom either based on the so-called substantial shareholders’ exemption, of which they were advised already before setting the 2006 Transaction in motion.526 This was another element of the artificial device in the 2006 Transactions.
519 Exh. RoI-4, Brown WS-1, ¶¶ 37, 53, 131; Exh. RoI-4, Brown WS-2, ¶¶ 7-8. 520 Exh. RoI-4, R-100A, Email trail from Ashish Patil to Jann Brown and others with subject “Re: RBI and Daylight” dated 09 September 2006. 521 Exh. RoI-4, Rosenbloom ER-1, ¶ 38. 522 Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, Slide 6; Exh. RoI-4, R-SoRj, ¶ 325. 523 Exh. RoI-4, C-363, Presentation on Project Gin, Phase I – Pre IPO, slides 7 and 8; Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, Slide 6; Exh. RoI-4, R- SoRj, ¶ 325. 524 Exh. RoI-4, R-SoRj, ¶¶ 326-327. 525 Exh. RoI-4, C-363, Presentation on Project Gin, Phase I – Pre IPO, slides 18 and 32; Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slide 17. 526 Exh. RoI-1, Award, ¶¶ 1041, 1044; Exh. RoI-4, CWS-Brown-49A, RSM Concept Paper, 11 May 2006, Annexures; Exh. RoI-4, CWS-Brown-50A, RSM Concept Paper, 19 May 2006, Annexures. 141
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375. It is apparent from the aforementioned events leading up to the 2006 Transactions and the artificial devices, which were put in place for implementing the 2006 Transactions that the 2006 Transactions were formulated and structured by Cairn with the dominant purpose to avoid the payment of capital gains tax in India.527 As noted in ¶ 12 above, Professor Kees van Raad, the renowned tax law expert has concluded upon a review of the 2006 Transactions that “it appears that the dominant purpose pursued – and effectively accomplished – with the 2006 transactions has been the avoidance of Indian capital gains taxation”.528 The Tribunal erred in the Award by failing to recognize that the 2006 Transactions were a “preordained device created for tax avoidance purposes”. India submits that had the Tribunal looked at the 2006 Transactions thoroughly and holistically, as it was obliged to under Indian law, it would have been clear to it that the 2006 Transactions were an abusive tax avoidance device. 376. The Tribunal’s determinations in the Award that the 2006 Transactions were not tax avoidant appears to be a result of the Tribunal’s reliance on the Vodafone Judgment out of context. In the Award, the Tribunal limited its analysis on whether the 2006 Transactions constituted a “preordained transaction” to the examination of whether CUHL and CIIHL were sham structures. The Tribunal did not consider this from the perspective of whether the 2006 Transactions were structured with the dominant purpose of tax avoidance.529 Although India had consistently pointed out to the Tribunal that, from a factual perspective, Cairn’s case differed significantly from Vodafone’s case (see ¶ 117 above), the Tribunal failed to appreciate the divergences between the two cases. Further, whilst the Tribunal recognized the existence of the judicial anti-avoidance rule and of the dominant purpose test in India, affirmed in the Vodafone Judgment, it failed to correctly apply this rule to Cairn’s case. 377. First, when analysing the dominant purpose of the 2006 Transactions, the Tribunal accepted at face value Ms. Brown’s assertions in her witness statements that her intentions were an alleged commercial purpose to “comply” with Indian regulatory requirements.530 However, by doing so, the Tribunal ignored Cairn’s own internal documentation which contradicted Ms. Brown’s self-serving statements, demonstrating that Cairn’s objective dominant purpose of the transaction was the avoidance of Indian capital gains tax on the transfer of Cairn’s Indian assets.531 Ms. Brown’s stated subjective motives were, thus, both contradictory to the contemporaneous documentary evidence and irrelevant under Indian law. 378. Second, the Tribunal misunderstood the Supreme Court’s application of the dominant purpose test to the specific facts of the Vodafone case as setting out legal tenets, which the Tribunal was required to apply restrictively to Cairn’s case. Consequently, the Tribunal applied those tenets without appreciating the real essence of the judicial anti-avoidance rule
527 Cairn ultimately ensured through the 2006 Transactions that they would not pay tax anywhere in the world (see Section VI.B. below) 528 Exh. RoI-5, Expert Opinion by Professor Kees van Raad. 529 Exh. RoI-1, Award, ¶¶ 1461-1462, 1470-1471. 530 Exh. RoI-1, Award, ¶ 1522. 531 Exh. RoI-4, R-100A, Email trail from Ashish Patil to Jann Brown and others with subject “Re: RBI and Daylight” dated 09 September 2006. 142
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that the Supreme Court endorsed. Indeed, the Tribunal’s overall conclusion and finding that Cairn’s 2006 Transactions represented a “triumph of form over substance”532 is the very antithesis of the Indian Supreme Court’s judicial anti-avoidance test, which entails the application of the “substance over form” principle.533 The Tribunal’s slavish reliance on the tenets specific to Vodafone’s case was improper, especially when juxtaposed against the liberal contours of the overall judicial anti-avoidance rule that the Indian Supreme Court set down in the Vodafone Judgment. 379. Furthermore, as a general point, it is important to bear in mind that the transaction at issue in Vodafone’s case was a transaction in the Indian telecommunications sector.534 As incidentally indicated by the Indian Supreme Court,535 sector-specific considerations could merit treating transactions in the telecommunications sector differently from transactions in the oil and gas sector, including from the perspective of scrutinizing whether transactions evidence “tax avoidance purposes” or an “investment to participate”. In this regard, India’s expert, Professor David Rosenbloom, pointed out in the arbitration that, unlike Cairn’s business in India, “Vodafone did not involve oil and gas assets, a type of asset that a country has the strongest and most widely accepted basis for taxing on a source basis”.536 After all, oil and gas assets constitute sacred natural resources of a country, over which it arguably enjoys a stronger claim of “permanent sovereignty” in comparison to any other resources. The concept of “permanent sovereignty” over natural resources such as oil and gas has been widely recognized in international law,537 as well as by the Indian Supreme Court (and other courts on multiple occasions). In particular, in proceedings involving CIL as a party, the Delhi High Court held that the Indian Government holds the oil and gas natural resources of the country
532 Exh. RoI-1, Award, ¶ 1588. 533 Exh. RoI-4, C-59, Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613, ¶¶ 68 and 73. The Tribunal applied the list of factors referred to in these paragraphs particularly the criteria of (i) duration of time; (ii) generation of taxable revenue; (iii) the timing of the exit; and (iv) the continuity of the business and found that the “2006 Transactions were not a ‘preordained transaction’ structured with the dominant purpose of avoiding tax”. While the Tribunal was not per se incorrect in having regard to those factors, the Tribunal’s error lies in (i) losing sight of the fact that those factors were no more than factual elements in determining the overarching question of whether the dominant purpose of the transaction was the avoidance of tax, a question which in the present case was amply answered by Cairn’s own documents; and (ii) focussing too restrictively on these factors as if they were legal tenets without appreciating the liberal essence of the “substance over form” principle endorsed by the Vodafone Judgment and without appreciating the factual distinctions between Vodafone’s case and Cairn’s case. Indeed, the liberal essence of the Indian Supreme Court’s judicial anti- avoidance rule required the Tribunal to prioritize the substance of Cairn’s 2006 Transactions over their form, while examining whether their dominant purpose was tax avoidance. 534 Exh. RoI-4, Rosenbloom ER-1, ¶ 47 (“Unlike the transaction analyzed in Vodafone, the underlying assets here are natural resource interests”). 535 Exh. RoI-4, C-59, Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613, ¶ 126 (“Sale of CGP share, for exiting from the Indian Telecommunication Sector, in our view, cannot be considered as pre-ordained transaction, with no commercial purpose, other than tax avoidance.”) 536 Exh. RoI-4, Second Expert Report of H. David Rosenbloom dated 23 June 2017 (“Rosenbloom ER-2”), ¶ 20. 537 Exh. RoI-64, P. Gümplová, “Sovereignty over natural resources – A normative reinterpretation,” Global Constitutionalism 9, no. 1, (2020): 7-37; General Assembly Resolution 1803 (XVII) of 14 December 1962, “Permanent sovereignty over natural resources”, available at: https://www.ohchr.org/EN/ProfessionalInterest/pages/NaturalResources.aspx. 143
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“in fiduciary capacity for and on behalf of its citizens and cannot in any way, give away such permanent sovereignty.”538 380. Therefore, when viewed in light of the actual context of the 2006 Transactions engineered by Cairn, it is apparent that (i) on the basis of Cairn’s own internal documents, the dominant purpose of the 2006 Transactions was very clearly tax avoidance; and (ii) ignoring this and taking the specific factual factors of the Indian Supreme Court’s judgment in the Vodafone Judgment, referred to in ¶ 378 above, out of context, as the Tribunal did, and applying them mechanically to Cairn’s case, is problematic. The Tribunal’s heavy reliance on the Vodafone judgment is even more problematic when juxtaposed against the Tribunal’s half-hearted acknowledgement, at a subsequent juncture in the Award, that it “cannot but agree that the facts [of the Vodafone v. India case] are different and it cannot rule out the possibility that the Delhi High Court (or the Supreme Court, were the matter to go further) could attach significance to certain facts or see a gloss in the Indian caselaw which has not been apparent from the evidence that has been put before this Tribunal.”539 381. India submits that it is clear from the above that the 2006 Transactions were tax avoidant in nature and contrary to Indian law. Cairn’s investments pursuant to the 2006 Transactions were, therefore, not protected under Article 1(b) of the India-UK BIT. Thus, the Tribunal erred in assuming jurisdiction over Cairn’s claims under the India-UK BIT. Accordingly, the Award must be annulled under Article 1065(1)(a) of the DCCP. (iv) Cairn’s Alleged Investment was Actually a Divestment – As Such it was Not an “Investment” 382. The Tribunal’s finding in the Award that Cairn’s assets satisfied the “economic concept of investment”540 was erroneous as the 2006 Transactions, pursuant to which CUHL acquired its alleged investment and CEP’s investment underwent a change in form, were aimed at divesting CEP’s investments in India. Considering that a divestment is the exact opposite of and therefore reverse of an investment, it is inconceivable that any assets established or acquired by Cairn in India, as part of their divestment strategy, could merit protection under the India-UK BIT. 383. The Tribunal’s finding regarding the nature of Cain’s investment was the consequence of its failure to conduct a complete and temporally accurate jurisdictional inquiry, by independently characterizing and assessing whether each of CEP and CUHL had a protected investment in India (see ¶¶ 302-314 above). The Tribunal erroneously characterised the 2006 Transactions
538 Exh. RoI-65, Cairn India Limited & Ors vs Directorate General of Foreign Trade, in W.P.(C), 11600,30709 of 2015, Delhi High Court Judgment dated Oct 18, 2016, ¶ 49; See also, Exh. RoI-66, Vedanta Limited & Ors vs Directorate General of Foreign Trade, LPA 48/2017, CM APPL. 2395/2017, CM APPL. 27489/2017; Exh. RoI-67, Reliance Industries Limited v. Reliance Natural Resources Limited (2010) 7 SCC 1; Exh. RoI-68, Hossain, Zoheb, Kumar, Alok Prasanna, “The New Jurisprudence of Scarce Natural Resources: An Analysis of the Supreme Court’s Judgment in Reliance Industries Limited v. Reliance Natural Resources Limited (2010) 7 SCC 1,” Indian Journal of Constitutional Law 4, (2010): 105. 539 Exh. RoI-1, Award, ¶ 1773. 540 Exh. RoI-1, Award, ¶ 706. 144
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as a “change in the form” of CEP’s existing investments, failing to appreciate in the context of CUHL that it was incorporated and it acquired its alleged investments pursuant to the 2006 Transactions.541 384. Had the Tribunal conducted a correct and complete jurisdictional inquiry, it would have realized that (i) the 2006 Transactions were aimed at divesting CEP’s existing investments in India; and (ii) that CUHL had come into existence with the sole objective of facilitating CEP’s divestment strategy. 385. However, as the Tribunal refused to examine the tax avoidant nature of the 2006 Transactions as part of its jurisdictional inquiry, it failed to draw the appropriate and necessary jurisdictional consequence of Cairn’s divestment strategy through the 2006 Transactions. Indeed, it failed to recognize that Cairn could not be regarded as having protected “investments” in India following the 2006 Transactions. Such finding would have robbed the Tribunal of its jurisdiction under the India-UK BIT. 386. India argued in the arbitration that Cairn’s claims in the arbitration were outside the scope of the India-UK BIT as they related to India’s actions in connection with the 2006 Transactions, which concerned Cairn’s returns on their investments pursuant to their divestment strategy in India, and not any alleged investments. Whilst the Tribunal rejected India’s argument on the basis that Article 9 of the India-UK BIT was broadly worded to include all disputes “in relation to an investment”,542 it failed to draw the necessary jurisdictional consequence from the fact that the 2006 Transactions were aimed at divesting Cairn’s assets in India. The Tribunal erred by failing to appreciate that any assets arising out of a divestment process, instead of an investment process, are not protected under the India-UK BIT. CUHL’s Alleged Investment was Actually a Divestment 387. It is accepted by Cairn, as established by the documentary record of the arbitration, that the 2006 Transactions were aimed at divesting CEP’s investments in India. 388. First, even Ms. Brown, Cairn’s key fact witness who was intrinsically involved in the structuring and implementation of the 2006 Transactions,543 accepted during the arbitration that the 2006 Transactions were structured “with an eye towards eventual divestment . . .”.544 389. Second, as mentioned in the preceding Sub-Section, it is a matter of record that out of the total IPO proceeds of USD 1.98 billion only USD 600 million were retained by CIL, and the remaining USD 1.35 billion were transferred back to CUHL and CEP as consideration for further CIHL shares.545 This undermines Cairn’s position that the reason for the IPO was to increase Cairn’s capital, which as per Cairn’s witness, Ms. Janice Brown, “would allow
541 Exh. RoI-1, Award, ¶¶ 705, 712. 542 Exh. RoI-1, Award, ¶¶ 745-762. 543 Exh. RoI-4, Brown WS-1, ¶ 3. 544 Exh. RoI-4, Brown WS2, ¶ 47. 545 Exh. RoI-4, Brown WS1, ¶ 91; Exh. RoI-4, CWS-Brown-42, Cairn Energy PLC, Annual Report & Accounts 2006. 145
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further investment in Rajasthan and other locations in India”546 and would also allow “return[ing] any surplus capital to Cairn’s shareholders”.547 Instead, it corroborates India’s position throughout the Arbitration that the 2006 Transactions were primarily a “divestment strategy” pursuant to which “[t]he Claimants wanted to cash in on the gains in value of the Indian oil and gas assets which they owned, through the Indian Operating Subsidiaries, by way of a public sale on the Indian markets”.548 Throughout the arbitration, Cairn emphasized that following the IPO, CUHL (and in turn CEP) retained about 69% of CIL, which according to Cairn, evidenced their intention to continue their operations and alleged investments in India. Cairn, however, omitted the fact that its stay in India was not pursuant to Cairn’s alleged desire to continue operations and alleged investments but rather pursuant to the SEBI DIP Guidelines, under which it was subject to a “lock-in”, which precluded them from (i) selling their MPC for a period of three years; and (ii) selling anything in CIL for a period of one year.549 A review of CIL’s financial statements for the period between 2007-2009, i.e., after the implementation of Cairn’s divestment plan in India through the 2006 Transactions, demonstrates that there were no investments from Cairn into CIL to further Cairn’s alleged investments in India. To the extent that CIL continued operations in Rajasthan after the IPO in 2006, it appears to have done so by availing external borrowings and not by reinvesting the significant capital gains amounting to USD 5.5 billion that it had accrued in India. This exposes the fallacy of Cairn’s assertions that the capital gains realized by Cairn in India were intended to be utilised for the benefit of its Indian operations.550 390. Third, importantly, the Assessing Officer’s DAO dated 9 March 2015,551 the order by the DRP dated 31 December 2015,552 as well as the Income Tax Department’s FAO dated 25 January 2016553 all specifically recognized the distinction between an investment and divestment and characterized the 2006 Transactions as a divestment of assets.554 The DRP’s findings in this regard are the most telling: “To finance the acquisition of CIHL as per the 10th August 2006 Term-Sheet filed by the assessee company to obtain FIPBs permission, CIL brought an IPO in the Indian Capital Market and the proceeds of this IPO and the money invested by qualified institutional investors and general public in the shares of CIL was paid to the taxpayer for acquiring shares of CIHL. It is thus that the AO has asserted
546 Exh. RoI-4, Brown WS1, ¶ 40. 547 Exh. RoI-4, Brown WS2, ¶ 44. The Tribunal also recognized that Claimants’ objective with the 2006 Transactions “was to put the Indian oil and gas assets into a company which in turn would be listed in the Indian stock exchanges, in order to realise value for Cairn’s shareholders” (Exh. RoI-1, Award, ¶ 1499). 548 Exh. RoI-4, SoD, ¶¶ 5, 96, 105-106; Exh. RoI-4, R-SoRj, ¶ 334. 549 Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, p. 119:2-8. 550 Exh. RoI-4, C-548, Cairn India Limited – Annual Report and Financial Statements 2009-10 pp. 6, 26 and 92; Exh. RoI-69, Extract of CIL’s Annual Report and Audited Accounts for the Financial Year ending on 31 March 2007; Exh. RoI-70, Extract of CIL’s Annual Report and Audited Accounts for the Financial Year ending on 31 March 2009. 551 Exh. RoI-4, C-31, Draft Assessment Order to CUHL dated 9 March 2015. 552 Exh. RoI-4, C-69, Directions of the DRP under Section 144C(5) of the ITA 1961 dated 31 December 2015. 553 Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016. 554 Exh. RoI-4, C-31, Draft Assessment Order to CUHL dated 9 March 2015, ¶ 9.1.9; Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016, ¶ 9.1.9. 146
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that CUHL divested a part of its stake in the Indian oil and gas business to Indian Co. i.e. CIL and received adequate, substantial and market-discovered consideration for the same. Therefore, the claim of the Assessee Company that these transactions were part of internal reorganization of the group and are revenue neutral has been rejected by the AO. There is No Foreign Direct Investment (FDI) only Net Cash Outflow. The narrative of facts by [sic] the Assessing Officer is supported by the 10th August 2006 Term-Sheet filed by the assessee company to obtain FIPBs permission and a part of Form 35A filed before DRP. A bare perusal of the date-wise transactions will show that taxpayers/assessee’s claim that CUHL will subscribe in cash for equity shares in CIL under the automatic route for Foreign Direct Investments into India and based on current market valuations such subscription would exceed USD 1 billion is an illusion. While CUHL has subscribed to the equity of CIL the subscription money has been returned/ remitted back on the same date by way of payment for shares of CIHL. At the end of the completed transactions marked by 4th tranche there is a net outflow of cash from India of Rs 6100.8 crores from CILs private placement of its shares on 23.11.2006 (Pre IPO placement @ Rs. 160/share) which raised Rs. 3354,73,46,080/- on 29.12.2006 and Indian Market General Public Issue which raised Rs. 5260,79, 48,000 i.e. [sic] a total Cash chest of 8615,5294080 cr. Thus no Foreign Direct Investment came from CUHL the Taxpayer as per its 10th August 2006 Term-Sheet filed to obtain FIPBs permission. And the 4th tranche, was direct cash payment of Rs 6100.8 crores of money raised from Indian Public by selling 30% shares of CIL only.”555 [emphasis in original]
391. The Tribunal acknowledged the findings of the DAO, DRP and FAO regarding Cairn’s divestment strategy in India.556 However, it failed to draw the obvious jurisdictional consequence from them, i.e., that Cairn’s 2006 Transactions resulted in a divestment and not an investment of assets. As mentioned above, the reason for the Tribunal’s failure to appreciate the jurisdictional consequence of Cairn’s divestment strategy was that the Tribunal erroneously limited its analysis on this issue to the merits, rather than conducting the requisite jurisdictional inquiry. This is clear from the following finding by the Tribunal in the Award: “[T]here is nothing intrinsically wrong in divesting an asset. One of the essential attributes of property is the right to alienate it. Investors may legitimately choose to invest in a particular country or to divest themselves of such investments. The fact that their ultimate objective might be to ‘realise value’ or ‘cash in’ those investments does not make such a divestment illegitimate, objectionable or, most importantly, unlawful. Having said this, the 2006 Transactions were only a partial divestment of Cairn’s investments in India.”557
392. The Tribunal’s observation that there is nothing wrong with the divesting assets, while it might have been appropriate as part of its assessment of Cairn’s claims on merits, is erroneous
555 Exh. RoI-4, C-69, Directions of the DRP under Section 144C(5) of the ITA 1961 dated 31 December 2015, pp. 4-5. 556 Exh. RoI-1, Award, ¶¶ 1442, 1478. 557 Exh. RoI-1, Award, ¶¶ 1478-1479. 147
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and flawed for a jurisdictional inquiry, which ought to have been undertaken by the Tribunal on this issue. It is axiomatic that an investor cannot make an investment and divest its investment at the same time. As will be demonstrated in the next Section, irrespective of whether a divestment may be a legitimate objective to pursue or not, it cannot qualify as an investment under the India-UK BIT specifically, and the inherent economic understanding of that term in international investment law generally. Assets Acquired During a “Divestment” Cannot Qualify as an “Investment” Under International Law 393. The Tribunal erroneously determined in the Award that Cairn’s assets acquired satisfy the “economic concept of investment”. The Tribunal’s relevant finding in this regard is extracted below: “To the extent relevant here, the Claimants’ assets also satisfy the economic concept of investment. It is undisputed that in order to acquire these assets, the Claimants made a substantial contribution of capital and other resources over a significant period, and in doing so, they assumed considerable risk in the expectation of profit. Nor does the Respondent dispute that the Claimants’ activities contributed to the development of the Indian economy. The Claimants’ assets therefore meet the economic criteria of an investment as recognized in the jurisprudence of investment treaty tribunals”.558
394. The Tribunal arrived at this incorrect finding due to an inherently flawed underlying premise to its jurisdictional inquiry, namely that it considered CEP’s and CUHL’s alleged investments together. Despite India’s submissions to that effect, the Tribunal failed to dissociate Cairn’s claims and individually assess whether each of them had a protected investment under Article 1(b) of the India-UK BIT in 2006, i.e., at the time of the acquisition or establishment of CUHL’s alleged investment and the changes in the form of CEP’s investment. This was particularly necessary in the present case as (i) Article 1(b) of the India-UK BIT contained a legality requirement, which required the Tribunal to assess whether each of CEP’s and CUHL’s alleged investments had been established or acquired in accordance with the laws of India; and (ii) CEP and CUHL came into existence 10 years apart from each other and consequently they would necessarily have “established or acquired” their alleged investments in India at different points in time. 395. In the immediately preceding Section, India has demonstrated that any assets acquired by CUHL were pursuant to Cairn’s divestment strategy in India. In this Section, it will be demonstrated that as a matter of international law, assets acquired by Cairn pursuant to a divestment process cannot be regarded as satisfying the meaning of “investment”. 396. The India-UK BIT does not provide for any independent understanding of the term “investment” other than a non-exhaustive list of examples of investments under Article 1(b). Therefore, the term “investment” needs to be interpreted under Article 31(1) of the VCLT in accordance with its inherent or ordinary meaning. It is widely accepted by investment treaty
558 Exh. RoI-1, Award, ¶ 706. 148
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tribunals that the concept of investment under international law has an inherent meaning, which requires the existence of certain objective criteria, such as “[i] contributions, [ii] a certain duration of performance of the contract [iii] a participation in the risks of the transaction [and] [iv] the contribution to the economic development of the host State of the investment as an additional condition”.559 These objective criteria were developed by the arbitral tribunal in Salini v. Morocco and have been regularly adopted by investment treaty tribunals, both where the underlying treaty does not contain a definition of investment and even where it does.560 Thus, it cannot be denied that the four-fold criteria laid down in the Salini v. Morocco case constitute a general principle of international law that should be taken into account pursuant to Article 31(3)(c) of the VCLT while interpreting the term “investment” in any treaty. 397. Recently, the Advocate General of the Court of Justice of the European Union endorsed the four-fold criteria laid down in the Salini v. Morocco case as being representative of the objective or inherent meaning of the term “investment”.561 398. In the arbitration as well, the Tribunal recognized the relevance of these conditions for an “investment”, in its finding referred to in ¶ 393 above, and thereby implicitly their relevance in UNCITRAL arbitrations, too.562 399. Notably, several arbitral tribunals have gone beyond the Salini criteria and have considered that an assessment of whether an investment was bona fide or made in good faith, with a view
559 Salini Costruttori S.P.A. and Italstrade S.P.A. v. Kingdom of Morocco (ICSID Case No. ARB/00/4, Decision on Jurisdiction, 16 July 2001), ¶ 52, available at: https://www.italaw.com/sites/default/files/case- documents/ita0738.pdf. 560 See Alapli Elektrik B.V. v. Republic of Turkey (ICSID Case No. ARB/08/13, Award, 16 July 2012), ¶ 350, available at: https://www.italaw.com/sites/default/files/case-documents/italaw4306.pdf (“To be an investor a person must actually make an investment, in the sense of an active contribution”); Joy Mining machinery Limited v. The Arab Republic of Egypt (ICSID Case No. ARB/03/11, Award on Jurisdiction, 6 August 2004), ¶¶ 53-63, available at: https://www.italaw.com/sites/default/files/case-documents/ita0441.pdf (“‘the project in question should’ among other requirements, ‘constitute a significant contribution to the host State’s development”); Exh. RoI-4, Exh. RLA-242, Alps Finance and Trade AG v. Slovak Republic (UNCITRAL, Award, 5 March 2011), ¶¶ 240-241, available at: https://www.italaw.com/sites/default/files/case-documents/ita0027.pdf (“A more than abundant number of cases have contributed to elucidate the notion of investment under […] international customary law. It is now common ground that the necessary conditions or characteristics to be satisfied for attributing the quality of ‘investment’ to a contractual relationship include: (a) a capital contribution to the host- State by the private contracting party; (b) a significant duration over which the project is implemented and (c) a sharing of the operational risks inherent to the contribution together with long-term commitments”); Tomasz Czescik and Robert Aleksandrowicz v. Republic of Cyprus (SCC Case No. V2014/169, Final Award, 11 February 2017), ¶¶ 192-196, available at: https://www.italaw.com/sites/default/files/case-documents/italaw10243_0.pdf (holding that “arbitral tribunal have at the disposal the possibility to use” the Salini criteria regardless of the treaty at issue); Exh. RoI-4, Exh. RLA-451, Romak S.A. v. The Republic of Uzbekistan (PCA Case No. AA280, Award, 26 November 2009), ¶ 207. See also, generally, ¶¶ 176-206, available at: https://www.italaw.com/sites/default/files/case-documents/ita0716.pdf. 561 Affaire C-741/19, République de Moldavie contre Société Komstroy, venant aux droits de la société Energoalians, AG Opinion, 3 March 2021, ¶ 115. 562 Exh. RoI-1, Award, ¶ 706. 149
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to contribute to the economy of the host State is also a relevant factor for determining whether an asset satisfies the ordinary meaning of investment, to warrant protection under a treaty.563 400. India submits that the first and fourth Salini criteria, i.e., “contributions” and “contribution to the economic development of the host State” are not met in this case as the 2006 Transactions were entered into with the objective of divesting CEP’s assets in India. The ordinary meaning of the term divestment is to take out monies or liquidate assets as opposed to contribute assets, which is an inherent requirement of investment. The Tribunal’s finding in the Award that Cairn’s assets satisfy the “economic concept of investment”, referred to in ¶ 393 above, was erroneous as it was rendered only on the basis of CEP’s investment in 1996. The Tribunal ignored the fact that CUHL came into existence only in 2006 and, therefore, any alleged investment by it could not have been established or acquired prior to 2006. 401. Moreover, as CUHL was constituted as a conduit to facilitate the divestment of CEP’s Indian oil and gas assets, it cannot be regarded as having made a bona fide investment, made in good faith, with a view to contribute to this economic development of the host State. 402. Thus, India maintains that CUHL’s assets acquired as part of the 2006 Transactions, do not fall within the ordinary meaning of the term “investment” under international law, and are therefore, not covered under the India-UK BIT. CEP’s Alleged Investment does not Survive Absent CUHL’s Investment 403. It is undisputed that following the 2006 Transactions, CEP’s investment in India underwent a change in form, pursuant to which CEP held its investments in India exclusively through CUHL. It is also undisputed that each of the measures that Cairn had relied upon to argue alleged breach(es) of the India-UK BIT by India, was issued in or after 2012.564 404. India has demonstrated in Sub-Sections (i) and (ii) above that the Tribunal had a legal duty to assess the existence and scope of each of CEP’s and CUHL’s alleged investments independently. Pursuant to Article 1(b) of the India-UK BIT, the Tribunal was bound to examine the legality of CUHL’s alleged investments and the change in form of CEP’s alleged investment in 2006, as both were established through the 2006 Transactions. 405. The India-UK BIT does not provide guidance on the appropriate temporal limit for examining the existence and scope of an “investment”. With respect to determining the existence and scope of an investment, it is widely accepted in investment treaty case law and scholarly writings that the assessment of whether, and to what extent, an “investment” exists, should be conducted from the temporal perspective of when the alleged breach(es) of the relevant BIT
563 Exh. RoI-4, Exh. RLA-214, Phoenix Action Ltd v. Czech Republic (ICSID Case No. ARB/06/5, Award, 15 April 2009), available at: https://www.italaw.com/sites/default/files/case-documents/ita0668.pdf; Exh. RoI-4, Exh. RLA-253, Société Générale v. Dominican Republic (UNCITRAL, LCIA Case No. UN7927, Preliminary Objections to Jurisdiction, 19 September 2008), available at: https://www.italaw.com/sites/default/files/case- documents/ita0798.pdf; Exh. RoI, Exh. CLA-182, Inceysa Vallisoletana S.L. v. Republic of El Salvador (ICSID Case No. ARB/03/26, Award, 2 August 2006), available at: https://www.italaw.com/sites/default/files/case- documents/ita0424_0.pdf. 564 Exh. RoI-1, Award, ¶¶ 1021-1025 150
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are said to have arisen. The relevant point of time in reference to which the existence and scope of an “investment” should be assessed is the time when the host State’s measures said to be in breach of the relevant BIT are issued.565 406. India submits that the Tribunal’s assessment of whether CEP’s alleged investments satisfied the economic or inherent understanding of an “investment” in international law should have necessarily taken into account the change in form of CEP’s alleged investment that was effectuated through the 2006 Transactions. The Tribunal, however, incorrectly limited its jurisdictional inquiry to 1996, stating that CEP “owned, either directly or indirectly, shares in companies and rights in PSCs” since 1996,566 and that “the language of the BIT is unequivocal that an investment includes ‘changes in the form of such investment’”.567 As was the case for CUHL, such characterization constituted an incorrect and incomplete analysis of the issue even for CEP. 568 407. Considering that following the 2006 Transactions, CEP’s alleged investments in India were held exclusively through CUHL, which was its 100% owned subsidiary, the treatment meted to CUHL’s investment would necessarily also extend to CEP. Thus, if Your Court were to find that CUHL’s investments, stemming from the 2006 Transactions, did not satisfy the inherent economic understanding of an “investment” in international law (see ¶ 402 above), this would also deprive CEP’s alleged investments of any protection under the India-UK BIT with effect from 2006. In this regard, Your Court’s attention is drawn to the findings of the arbitral tribunal in the case of HICEE B.V. v. The Slovak Republic: “147. […] As the Tribunal has interpreted the Agreement, it plainly admits a company like Dôvera Holding [a subsidiary of the claimant] as an investment in its own right. The consequence is that a claim under the Agreement would lie (in appropriate circumstances) in respect of losses sustained by Dôvera Holding. But it is equally plain that the losses would have to have been sustained as a result of treatment of Dôvera Holding by the Respondent State or its agencies that is found to be in breach of the guarantees which the Agreement establishes. Once the subsidiary/sub-subsidiary structure is found to lie outside the Agreement’s field of protection, it becomes obvious that treatment meted out to Dôvera Holding’s own investments through one of its local subsidiaries does not meet this requirement, whether or not treatment of that kind might otherwise fall foul of the substantive standards under the Agreement.”569 [Emphasis added].
565 Exh. RoI-63, Zachary Douglas, The International Law of Investment Claims (CUP 2009), Rule 32; Exh. RoI-4, Exh. RLA-92, Waste Management, Inc. v. United Mexican States ("Number 2") (ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004), ¶ 85, available at: https://www.italaw.com/sites/default/files/case- documents/ita0900.pdf; Exh. RoI-4, Exh. RLA-253, Société Générale v. Dominican Republic (UNCITRAL, LCIA Case No. UN7927, Preliminary Objections to Jurisdiction, 19 September 2008), ¶ 107, available at: https://www.italaw.com/sites/default/files/case-documents/ita0798.pdf. 566 Exh. RoI-1, Award, ¶ 705. 567 Exh. RoI-1, Award, ¶ 712. 568 Exh. RoI-1, Award, ¶¶ 705, 712. 569 HICEE B.V. v. The Slovak Republic (PCA Case No. 2009-11, Partial Award, 23 May 2011), ¶ 147, available at: https://www.italaw.com/sites/default/files/case-documents/ita0404_0.pdf. 151
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408. Thus, India submits that CUHL’s and CEP’s assets acquired through the 2006 Transactions, which were aimed at divesting CEP’s investments in India, do not qualify as “investments”, in the ordinary sense of the term under international law. 409. The natural corollary to a finding that CUHL’s and CEP’s assets acquired through the 2006 Transactions are not “investments” in the ordinary sense of the term under international law, and consequently for the purposes of the India-UK BIT, is that there was no “dispute . . . in relation to an investment of [an investor]” under Article 9 of the India-UK BIT. 410. CUHL, in particular, was incorporated with the primary objective of facilitating the divestment of CEP’s assets in India. It was not making an “investment” in India. In these circumstances also, CUHL cannot be regarded as an investor for the purposes of raising disputes under Article 9 of the India-UK BIT. Thus, should Your Court agree with India that CUHL did not have an “investment” under the BIT, as any assets acquired by it pursuant to the 2006 Transactions were part of CEP’s divestment strategy in India, the consequence to this would be that CUHL could not be regarded as an “investor”, which has “established or acquired” an “investment” in India. 411. In the Award, the Tribunal perfunctorily found that it undisputedly had “jurisdiction ratione personae”, since “Claimants are companies incorporated in Scotland, United Kingdom, and thus qualify as ‘[I]nvestors’ under Article 1(c) of the BIT”.570 The Tribunal, however, failed to consider the jurisdictional implications of CUHL’s role in the divestment of CEP’s assets under the 2006 Transactions. The Tribunal should have done so proprio motu.571 412. For the above reasons, India submits that the Tribunal wrongly exercised jurisdiction over CEP and CUHL, when there was none. Accordingly, the Award must be annulled under Article 1065(1)(a) of the DCCP.
V. GROUND FOR SETTING ASIDE 2: VIOLATION OF PUBLIC POLICY (ARTICLE 1065(1)(E) OF THE DCCP) 413. As part of the second ground for setting aside, it shall be established that the Tribunal’s Award violated fundamental notions of public policy. In order to establish that the contents of the Award violated public policy, two independent arguments shall be advanced, i.e., (i) pertaining to the Tribunal’s violation of public policy in the substantive sense, resulting from its endorsement of Cairn’s Double Non-Taxation (Section B below); and (ii) pertaining to the Tribunal’s violation of public policy in the procedural sense, resulting from its determination of non-arbitrable “tax disputes” without affording the Parties a full opportunity to be heard and without waiting for the determination of the underlying issues of taxability by the exclusively competent Indian courts (Section C below). Prior to that the legal framework
570 Exh. RoI-1, Award, ¶ 668. 571 See, inter alia, Exh. RoI-4, Exh. CLA-171, Bernardus Henricus Funnekotter and others v. Republic of Zimbabwe (ICSID Case No. ARB/05/6, Award, 22 April 2009), ¶¶ 94-95, available at: https://www.italaw.com/sites/default/files/case-documents/ita0349.pdf; Anglo-Iranian Oil Co. case (United Kingdom v. Iran), I.C.J. Reports 93 (1952), p. 27, available at: https://www.icj-cij.org/public/files/case- related/16/016-19520722-JUD-01-00-EN.pdf. 152
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surrounding the invocation of Article 1065(1)(e) of the DCCP shall be explained (Section A below).
A. Legal Framework 414. Pursuant to Article 1065(1)(e) of the DCCP, an arbitral award can be set aside if it violates public policy. A violation of public policy exists if the award itself or the manner in which it was made violates mandatory law of a fundamental character.572 Both violations of public policy in the contents of the award (public policy in the substantive sense), as well as in the manner in which the award was made (public policy in the procedural sense) give rise to a ground for annulment.573 415. Because public policy has many facets the meaning of the standard needs to be assessed on the basis of the specific circumstances of a given case. 574 (i) Substantive Public Policy 416. Public policy in the substantive sense encompasses violations of mandatory law of a fundamental nature, including the rules on the arbitrability of certain subject matters. It pertains not only to violations of fundamental norms of national law, but also to violations of EU law to the extent they constitute mandatory law that is considered to be of a fundamental nature.575 While arbitrability is a requisite for jurisdiction, it can also give rise to a violation of substantive public policy under Article 1065(1)(e) of the DCCP. 417. As addressed in Section IV.B(a) above, according to Article 1020(3) of the DCCP, an arbitration agreement may not lead to the determination of legal consequences of which the parties cannot freely determine.576 For example, matters of family law, bankruptcy law and matters that involve a certain degree of state coercion (e.g., claims regarding attachments and executory measures) are considered non-arbitrable.577 418. Although Article 1020(3) of the DCCP does not specify which legal consequences can be freely determined by parties and which cannot,578 three indicators can be discerned from the case law of the Netherlands Supreme Court and the legislative history of Book IV of the DCCP to establish whether matters are arbitrable:
572 Supreme Court, 12 April 2019, ECLI:NL:HR:2019:565, NJ 2020 (Republic of Ecuador/Chevron Corporation), 15, ¶ 4.3.2; Supreme Court, 21 March 1997, ECLI:NL:HR:1997:AA4945, NJ 1998, 207 (Eco Swiss China Time/Benetton International), ¶ 4.2; Parliamentary Papers II 1983/84, 18 464, No. 3, pp. 29-30 (Explanatory Memorandum). 573 G.J. Meijer, Tekst & Commentaar Rv, art. 1020, ¶ 6. 574 H.J. Snijders, “Openbare orde, rechtspersonen en mensenrechten: Enige observaties naar aanleiding van de zaak Martijn,” NJB 2014/1174. 575 European Court of Justice, 1 June 1999, ECLI:EU:C:1999:269, NJ 2009, 339 (Eco Swiss China Time/Benetton International). 576 DCCP, Article 1020(3): “The arbitration agreement shall not serve to determine legal consequences of which the parties cannot freely dispose.” 577 H.J. Snijders, Note in response to Supreme Court 10 November 2006, ECLI:NL:HR:2006:AY4033, NJ 2007/561 (Spee c.s. en Groenselect/Van den Boogaard), ¶ 2. 578 Parliamentary Papers II 2012/13, 33 611, 3, p. 3 (Explanatory Memorandum); G.J. Meijer, Tekst & Commentaar Rv, art. 1020, ¶ 6. 153
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1. First, the attribution of exclusive competence to specific courts to hear certain disputes indicates that such disputes are non-arbitrable;579 2. Second, if an arbitral decision undermines legal certainty, this is an indicator that the matter is considered to be of a public policy nature and thus non-arbitrable.580 An example can be that it creates conflicting legal facts; and 3. Third, whether a decision in an arbitral award has the potential of affecting the interests of third parties is also an indicator that a matter is of a public policy nature. In Spee c.s. en Groenselect/Van den Boogaard, the Netherlands Supreme Court held that the fact that an arbitral decision may trigger legal consequences for third parties (erga omnes effect) is a circumstance that demonstrates that a decision concerns a matter of public policy.581 419. For the reasons set forth in Section V.B below, the contents of the Award violate substantive public policy, including because they constitute a determination of non-arbitrable issues. (ii) Procedural Public Policy 420. Violation of procedural public policy essentially concerns due process violations, involving procedural rules of a fundamental nature. 421. The manner in which the Tribunal made the Award in this case violated two such procedural rules of a fundamental nature: (a) India’s right to be heard; as well as (b) the requirement of equal treatment of the Parties, the legal frameworks for which are set forth below. The Right of Both Parties to Be Heard 422. The fundamental right of the parties to an arbitration to be heard and their right to equal treatment are provided for in Article 1036(2) of the DCCP: “The parties shall be treated equally. The arbitral tribunal shall give the parties the opportunity to set out and explain their positions and to comment on each other’s positions and on all documents and other information brought to the attention of the arbitral tribunal during the proceedings. The arbitral tribunal shall not base its decision, where it is unfavourable for one party, upon documents and other information on which that party was not sufficiently able to comment.”582
423. Article 1036(2) of the DCCP is a rule of public policy that must be applied ex officio by tribunals seated in The Netherlands.583 424. Because of their fundamental importance to the arbitral process, the right to be heard and the right to equal treatment are also provided for in Article 15(1) of the UNCITRAL Rules:
579 Parliamentary Papers II 2012/13, 33 611, 3, p. 4 (Explanatory Memorandum). 580 Supreme Court, 10 November 2006, ECLI:NL:HR:2006:AY4033, NJ 2007/561 (Spee c.s. en Groenselect/Van den Boogaard), ¶ 3.5. 581 G.J. Meijer, Tekst & Commentaar Rv, art. 1020, ¶ 6. 582 Also compare 1976 UNCITRAL Rules, Article 15 as discussed below. 583 G.J. Meijer, Tekst & Commentaar Rv, art. 1036, ¶ 3. 154
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“Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at any stage of the proceedings each party is given a full opportunity of presenting his case.”
425. The right to be heard not only requires that both parties must have had an opportunity to present their arguments, but also that the arbitral tribunal must actually reflect on those arguments in its decision-making process. The parties’ right to be heard includes the right to respond to the arguments and evidence relied on by the opposing party.584 If an arbitral tribunal failed to do so, the arbitral award can be annulled. 426. Furthermore, the right to be heard also prevents arbitral tribunals from rendering surprise decisions. A surprise decision exists if the tribunal bases its decision on grounds that the parties did not advance in support of their specific claims or defenses during the procedural debate and, as a result, have not had an opportunity to express themselves upon. A decision may not violate the “fundamental principle of due process that the parties must have been heard sufficiently in respect of the essential elements on which the judicial decision is based and may not be surprised by a judicial decision, which they – in view of the procedural debate – should not have had to take into account”.585 [emphasis added] 427. As the Netherlands Supreme Court held in the case of Poort c.s./Stoppers, “a judge is not at liberty to base his decision on legal grounds or defenses that could be inferred from the facts and circumstances known in the proceedings but have not been advanced as the basis for a claim or defense. That would compromise the opponent’s right to defend itself properly in that respect.”586 The Supreme Court’s requirement to ensure the right to be heard applies equally in arbitration. 428. In particular, the parties must be afforded a timely opportunity to supplement their positions in respect of legal grounds that the tribunal may ex officio consider basing its decision on.587 An arbitral award that includes a surprise decision can therefore be set aside for violation of public policy on the basis of Article 1065(1)(e) of the DCCP. 429. In its judgment dated 25 May 2007 in Spaanderman/Anova, the Netherlands Supreme Court held that the fundamental right to be heard in arbitral proceedings is of such importance that a restrictive review of this right in annulment proceedings would be inappropriate: “However, a restrictive application of this provision [Article 1065(1)(e) of the DCCP] is inappropriate if it must be determined whether the arbitral tribunal in deciding the matter violated the fundamental right to be heard. That right is of at least the same importance for arbitration proceedings as it is for proceedings before a regular court.”588
584 G.J. Meijer, Tekst & Commentaar Rv, art. 1036, ¶ 3. 585 Supreme Court, 31 January 2014, ECLI:NL:HR:2014:212, NJ 2014/89 (Koolman/Arubags), ¶ 3.5.1. 586 Supreme Court, 1 October 2004, ECLI:NL:HR:2004:AO9900, NJ 2005, 92 (Poort/Stoppels), ¶ 3.4. 587 H.J. Snijders, Groene Serie Burgerlijke Rechtsvordering, Art. 1036 DCCP, ¶ 3. Amsterdam District Court, 15 March 2006, ECLI:NL:RBAMS:2006:AV7057, TvA 2007, 41 (Hillen & Roosen BV/ De Delta Eilanden BV). 588 Supreme Court, 25 May 2007, ECLI:NL:HR:2007:BA2495, NJ 2007, 294 (Spaanderman/Anova), ¶ 3.5. 155
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430. Consequently, the annulment court must review in full whether India’s right to be heard was violated in the arbitration. If so, the arbitral award must be set aside. Equal Treatment 431. Both Article 1036(2) of the DCCP and Article 15(1) of the UNCITRAL Rules not only provide for the right of parties to be heard, but also for the closely related right to equal treatment. 432. The European Court of Human Rights described the right to equality of arms in Dombo Beheer/Nederland in the following terms: “‘equality of arms’ implies each party must be afforded a reasonable opportunity to present his case – including his evidence – under conditions that do not place him at a substantial disadvantage vis-à-vis his opponent.”589
433. In the IMS/Modsaf ruling, the Netherlands Supreme Court confirmed that it is “established case law” that a violation of equal treatment safeguarded by Article 1039(1) of the DCCP (now Article 1036(2) of the DCCP) can lead to the setting aside of the award for violation of public policy.590 434. As the Spaanderman/Anova ruling of the Netherlands Supreme Court was based on the same Article 1039(1) of the DCCP (now Article 1036(2) of the DCCP), it must be assumed that in setting aside proceedings a restrictive review of the question as to whether parties were treated equally is inappropriate. Therefore, a full judicial review by Your Court is required to assess whether the principle of equal treatment of Cairn and India has been violated in this case. For the reasons set forth in Section V.C C below, the manner in which the Award was made violates procedural public policy and must therefore be set aside pursuant to Article 1062(1)(e) of the DCCP.
B. Public Policy Ground 1: The Tribunal’s Violation of Substantive Public Policy 435. The Tribunal’s Award amounts to a violation of substantive public policy in two respects: (i) due to its endorsement of Cairn’s tax avoidant conduct that had the intended ramification of Double Non-Taxation; and (ii) because it decided on matters that are not arbitrable. (i) Double Non-Taxation 436. It is evident from the description of the various elements of Cairn’s artificial and colourable devices in the 2006 Transactions, discussed in Section IV.C above, that its dominant purpose was tax avoidance. Indeed, the 2006 Transactions were engineered in such an adroit and dexterous manner that their intended ramification was the avoidance of payment of any taxes anywhere in the world. In this Section, it shall be established that Cairn’s tax avoidance pertained not only to capital gains taxes in India, the deliberate avoidance of which has
589 European Court of Human Rights, 27 October 1993, ECLI:NL:XX:1993:AD1977, NJ 1994, 534 (Dombo Beheer/Nederland), ¶ 33. 590 Supreme Court, 24 April 2009, ECLI:NL:HR:2009:BH3137, NJ 2010, 171 (IMS/Modsaf), ¶ 4.3.1. 156
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already been discussed above, but also to three types of taxes in the UK, namely (i) capital gains tax; (ii) stamp duty; and (iii) corporation tax. 437. As mentioned above (see ¶¶ 49-50 above), the Indian Income Tax Department saw the 2006 Transactions for what they were, i.e., transactions that had the intended ramification of avoiding the payment of taxes anywhere in the world. In particular, the Income Tax Department’s DAO,591 the DRP Order,592 and most importantly, the FAO, all specifically mentioned the phenomenon of “Double Non-Taxation” in support of their decision to impose capital gains tax on CUHL for the gains realized through the 2006 Transactions. Indeed, at the risk of repetition, the FAO’s findings in this regard are important to reproduce for Your Court’s ease of reference: “This analysis clearly points out to the arrangement structured by the Cairn Energy Group to systematically divest its stake in Indian Oil and Gas business. As a result of this arrangement, even though the assessee had earned substantial capital gains, it did not pay any taxes in any territory in the world. This makes it a classic case of double non taxation which is biggest area of concern to International community and policy makers. The affairs of the Group were structured in such a manner that the shares of companies which are operating and using and owning the assets involved in Oil and Gas business enterprise were transferred first to a UK based holding company from where they were transferred to the Jersey based another holding company the shares of which are ultimately sold to an Indian Company for a substantial cash consideration. All this happened in preplanned sequential steps within a period of three months. The physical operations of the enterprise were not affected at all during this period. The money was remitted out of the country bypassing or circumventing all procedural requirements. The transaction did not attract any tax liability in UK probably because of CFC regime, as the assets changing hands were not in UK. For India, where they (the business operations as well as assets) were located, the transaction was given the colour of a share sale transaction of a Foreign company incorporated in a Low Tax Jurisdiction. The liberalized economic regime of India was taken advantage of for making hassle free remittance on the basis of perfunctory legal opinion of a Tax Consultant without withholding any due taxes and following automatic approval route.”593 [emphasis in original]
438. The principal basis for the Income Tax Department to impose the said capital gains tax on CUHL was Section 9(1)(i) of the IT Act as clarified by Explanation 5 added through the 2012 Clarification. As discussed above (see ¶ 51 above), India’s Finance Minister, while introducing the 2012 Clarification in the Parliament, had also noted the relevance of this Clarification to combat notorious instances of double non-taxation by investors. Specifically, he had cautioned against “declar[ing] India as a tax haven simply to attract the foreign investment” and had stated that the intention behind the 2012 Clarification was that “[e]ither you pay tax here or you pay tax in your own country with which we have a Double Taxation
591 Exh. RoI-4, C-31, Draft Assessment Order to CUHL dated 9 March 2015, ¶ 9.1.9. 592 Exh. RoI-4, C-69, Directions of the DRP under Section 144C(5) of the ITA 1961 dated 31 December 2015, pp. 37-38. 593 Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016, ¶ 9.1.9. 157
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Avoidance Agreement. It is as simple as that.”594 Cairn did neither. Instead, it devised a scheme so complicated and shrewd that it managed to sneak past the taxation regimes of both countries, i.e., the home State (the UK) and the host State (India). Cairn’s conduct in this regard was, thus, violative of international and the EU’s public policy. This violation of public policy shall be established in this Section, first by highlighting certain specifics of Cairn’s colourable device and the Tribunal’s treatment thereof (Sub-Section (a) below), followed by the aspects of international public policy (Sub-Section (b) below and the EU’s public policy (Sub-Section (c) below) on Double Non-Taxation. Cairn’s Double Non-Taxation 439. As mentioned, the various elements of the colourable device employed by Cairn’s 2006 Transactions with the dominant purpose, and intended ramification, of avoiding Indian capital gains tax, have already been discussed in Section IV.C above. There is no need to reiterate those elements in this Sub-Section. It suffices to refer back to those elements and consider them incorporated in this ground for setting aside as well. 440. In addition to the deliberate avoidance of Indian capital gains tax, there are certain other specific factors regarding Cairn’s colourable device employed for avoiding the payment of taxes anywhere in the world that merit discussion in this Sub-Section. In particular, the focus of these additional factors of Cairn’s colourable device is that the intended ramification of the 2006 Transactions was not only the avoidance of Indian capital gains tax, but also various types of taxes in the UK. In this regard, the following two specific factors need to be borne in mind. 441. First, it is crucial to emphasize that the Tribunal explicitly acknowledged the fact that Cairn’s 2006 Transactions resulted in Double Non-Taxation, i.e., avoidance of tax liabilities in Cairn’s home State and their host State. India had, indeed, consistently pointed the Tribunal’s attention to this fact.595 The Tribunal was also made aware of the fact that the Indian Parliament’s intention behind introducing the 2012 Clarification was to combat “a situation where somebody will make money on an asset located in India and will not pay tax either to India or to the country of its origin”.596 It is amply clear that the Tribunal was cognizant of Cairn’s Double Non-Taxation. In this regard, the Tribunal specifically acknowledged the following “undisputed” facts: “a. No capital gains tax has ever been paid on the gains of around US$5 billion made by Cairn on its Indian assets between 1996 and 2006; and
594 Exh. RoI-4, R-165, Shri Pranab Mukherjee, Minister of Finance, Transcript of Speech before Lok Sabha (Parliament), 7 May 2012, pp. 30-31. 595 Exh. RoI-4, SoD, ¶¶ 8, 114, 214; Exh. RoI-4, R-SoRj, ¶¶ 50, 528; Exh. RoI-4, R-PHB, ¶¶ 88, 236, 248, 592; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 1, pp. 116:23-117:3, pp. 123:13-123:21 (Respondent’s Opening Statement). 596 Exh. RoI-4, R-165, Shri Pranab Mukherjee, Minister of Finance, Transcript of Speech before Lok Sabha (Parliament), 7 May 2012, pp. 30-31. 158
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b. In 2006, the Claimants extracted US$1.35 billion from India without paying a single dollar of tax on those proceeds anywhere.”597
442. However, despite being cognizant of these undisputed facts and also knowing that the FAO itself had described Cairn’s 2006 Transactions as a “classic case” of Double Non-Taxation,598 the Tribunal drew no material inferences in this regard. In fact, the Tribunal was completely dismissive of, and consciously turned a blind eye to, the phenomenon of Double Non- Taxation. In this regard, the Tribunal noted that “[p]laintive though it may be . . . [t]he mere fact that a transaction does not result in taxes being paid anywhere in the world is insufficient to establish tax avoidance”.599 In a similar vein, the Tribunal found, at another juncture that: “As for the ‘Cairn paid no capital gains tax anywhere in the world’ line of argument, this, in the Tribunal’s view, really goes to matters of tax policy, not law, which are matters for legislators, not the Tribunal. The Tribunal must decide on the basis of the law, irrespective of what its members’ views may be as to the overall fairness of the transaction from a policy perspective. In the end, Cairn and its advisors spent considerable effort and no doubt money devising a creative structure that met the company’s commercial objectives. If some aspects of the structure seem to be a triumph of form over substance, it is because corporations law attaches much significance to matters of form. This, in the Tribunal’s opinion, is the stuff of solicitors’ work in complex commercial affairs.”600 [emphasis added]
443. Thus, not unlike its treatment of “tax disputes”, which it acknowledged were non-arbitrable matters of sovereign policy but nonetheless adjudicated, the Tribunal also shirked its responsibility to derive the appropriate consequences from Cairn’s conduct that was doubly tax avoidant. 444. Second, when it comes to the specifics of which types of taxes Cairn deliberately avoided in the UK, over and above the avoidance of Indian capital gains tax, it must be borne in mind that India does not consider it within its remit to comment on the UK’s policy or practice of taxation. Indeed, whether and to what extent the UK decides to tax transactions that have a nexus to the UK is purely a matter that falls within the exclusive fiscal sovereignty of the UK. The central issue, in respect of establishing Double Non-Taxation, is not whether the UK did or should have taxed any aspects of Cairn’s 2006 Transactions, but whether Cairn’s conduct in engineering those Transactions reflected a purpose of avoiding taxes in the UK and whether the ultimate consequence of Cairn’s engineered Transactions was that it did not pay any taxes even in the UK, in addition to not paying capital gains taxes in India. The latter aspect, i.e., the fact that Cairn did not pay any taxes anywhere in the world on the capital gains derived out of the 2006 Transactions is undisputed, as mentioned in ¶¶ 441-443 above. 445. It is with respect to the former aspect, i.e., Cairn’s conduct in engineering the 2006 Transactions in a manner and with the purpose that Cairn would somehow manage to avoid
597 Exh. RoI-1, Award, ¶ 1043. 598 Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016, ¶ 9.1.9. 599 Exh. RoI-1, Award, ¶ 1455. 600 Exh. RoI-1, Award, ¶ 1588. 159
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paying taxes anywhere in the world that merits some elaboration, especially from the perspective of the types of UK taxes that were avoided. 446. In this regard, the preliminary matter that needs to be borne in mind is that when it comes to establishing the existence of tax avoidance as a matter of international law and public policy, the legal standard differs considerably from the standard under Indian law. While Indian law requires establishing that the dominant purpose of the transaction under scrutiny was tax avoidance (see Section IV.C(iii)(a) above), the legal instruments in international law appear to stipulate a lower standard. In particular, the OECD has proposed the insertion of a provision in the 2017 edition of its Model Tax Convention on Income and on Capital (“OECD Model Tax Convention”), specifically Article 29 thereof, for limiting benefits of the Convention in cases of tax avoidance. This paragraph provides as follows: “9. Notwithstanding the other provisions of this Convention, a benefit under this Convention shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of this Convention.”601 [emphasis added]
447. The OECD has specifically clarified that Article 29 of the Model Tax Convention “reflects the intention of the Contracting States, incorporated in the preamble of the Convention, to eliminate double taxation without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance, including through treaty shopping arrangements. This intention and the wording of the Article correspond to the minimum standard that was agreed to as part of the OECD/G20 Base Erosion and Profit Shifting Project . . .”602 [emphasis added] In respect of the emphasized part of paragraph 9 of Article 29 (quoted in ¶ 446 above), i.e., “one of the principal purposes”, the OECD has clearly explained in its commentary on the Model Tax Convention that: “The reference to ‘one of the principal purposes’ in paragraph 9 means that obtaining the benefit under a tax convention need not be the sole or dominant purpose of a particular arrangement or transaction. It is sufficient that at least one of the principal purposes was to obtain the benefit.”603
448. The OECD’s practice also aligns with the practice of the EU. In particular, the limitation on benefits provisions in the European Council’s Directive 2009/133/EC of 2009 also requires
601 OECD Model Tax Convention, Article 29(9), available at: https://read.oecd-ilibrary.org/taxation/model- tax-convention-on-income-and-on-capital-2017-full-version_g2g972ee-en#page1. 602 OECD Model Tax Convention, pp. 48, 519, available at: https://read.oecd-ilibrary.org/taxation/model-tax- convention-on-income-and-on-capital-2017-full-version_g2g972ee-en#page1. 603 OECD Model Tax Convention, pp. 591, available at: https://read.oecd-ilibrary.org/taxation/model-tax- convention-on-income-and-on-capital-2017-full-version_g2g972ee-en#page1; see also Exh. RoI-71, OECD (2015), Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, Section A, p. 44. 160
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tax avoidance to be either a transaction’s “principal objective or . . . one of its principal objectives”.604 449. In light of the above position in international law and practice, Your Court need not apply the “dominant purpose” test while assessing whether Cairn’s 2006 Transactions engaged in Double Non-Taxation, or tax avoidance in India and in the UK. Instead, it suffices, for the purposes of Double Non-Taxation and tax avoidance as a matter of international law, to apply the “one of the principal purposes” test, as per which Cairn’s 2006 Transactions would qualify as doubly tax avoidant if it is established that one of their principal purposes was to avoid the payment of taxes in the home State and the host State. There is no doubt that Cairn’s 2006 Transactions easily satisfy this lower standard of tax avoidance. This is for the following reasons: (i) As mentioned, it has already been established, in Section IV.C above, that Cairn’s 2006 Transactions were engineered with the dominant purpose to avoid Indian capital gain tax. Given that the avoidance of Indian capital gains tax satisfies the “dominant purpose” test, it is undeniable that it also satisfies the lower threshold of the “one of the principal purposes” test. (ii) With respect to the UK capital gains tax, Cairn claimed during the arbitration that it was entitled to a so-called “substantial shareholders’ exemption” with respect to the 2006 Transactions, which was allegedly available to it under Schedule 7AC of the Taxation of Chargeable Gains Act, 1962.605 Cairn essentially sought to use this exemption in order to justify the non-payment of capital gains tax in the UK, on the pretext that it held a “substantial shareholding” (i.e., more than 10%) in the company whose shares were being transferred. Notably, it appears that Cairn would only have been entitled to this exemption had it held the substantial shareholding in the company whose shares were being transferred “throughout a twelve-month period beginning not more than two years before the day on which the disposal takes place”.606 The Tribunal appears to have endorsed Cairn’s claim in this regard when it stated that “[t]he fact that the Claimants did not pay capital gains tax in the UK is a consequence of the substantial shareholder exemption provided in the UK tax regime”.607 However, Cairn had at no point established how that exemption was applicable to the 2006
604 Council Directive 2009/133/EC of 19 October 2009 on the common system of taxation applicable to mergers, divisions, partial divisions, transfers of assets and exchanges of shares concerning companies of different Member States and to the transfer of the registered office of an SE or SCE between Member States OJ L 310, 25.11.2009, Article 15, available at: https://eur-lex.europa.eu/legal- content/EN/TXT/PDF/?uri=CELEX:32009L0133&from=EN. 605 Exh. RoI-4, Merits/Evidentiary Hearing, December 2018, Hr. Tr. Day 1, pp. 35:6-36:16 (Claimants’ Opening Statement); see Exh. RoI-4, DR-05, Schedule 7AC of the Taxation of Chargeable Gains Act, 1962. 606 Exh. RoI-4, DR-05, Schedule 7AC of the Taxation of Chargeable Gains Act, 1962, Article 7. 607 Exh. RoI-1, Award, ¶ 1044(a). 161
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Transactions, in particular in light of the requirement to have held the substantial shareholding over a twelve-month period.608 Moreover, it is clear from the contemporaneous documents on the record that Cairn had taken advice on exploiting the substantial shareholders’ exemption in the UK before engineering the 2006 Transactions, together with the advice on the Indian tax implications.609 Indeed, many of the presentations and concept papers prepared by RSM in respect of the three plans in consideration for structuring the 2006 Transactions, i.e., Plans A, B and C, contained advice on the UK tax implications separately.610 Thus, notwithstanding whether the substantial shareholders’ exemption was legitimately applicable to Cairn in respect of the 2006 Transactions, it is evident that while structuring the 2006 Transactions, Cairn had contemplated and was certainly driven by one of the principal purposes of avoiding the UK capital gains tax as well. (iii) With respect to the UK stamp duty, as mentioned in ¶ 55 above, Cairn never disputed in the arbitration that the incorporation of CIHL in the tax haven of Jersey was intended primarily to avoid paying stamp duty in the UK.611 Thus, this tax avoidance was admittedly one of the principal purposes behind structuring the 2006 Transactions. (iv) With respect to the UK corporation tax, it is important to bear in mind that one of the three plans in consideration in 2006, i.e., Plan B, had specifically recommended that the IPO in India is structured as an “offer for sale” by CUHL of its existing shareholding in CIL as opposed to a fresh issue of new shares by CIL.612 The two-fold consequences of this, which had also been communicated to Cairn by RSM, were that the IPO proceeds that would have resulted from this different kind of IPO would have (i) attracted Indian capital gains tax, unless the shares in the Indian company would be held by a Mauritian entity, which admittedly would have opened Cairn up to “tax litigation” in India;613 and (ii) would have attracted UK corporation tax, since the
608 While Cairn did attempt to establish that it would have been entitled this exemption had it sold CUHL’s shares in CIL in 2014 (Exh. RoI-4, C-PHB, ¶¶ 751-759), which argument was also rejected by the Tribunal (Award, ¶¶ 1926-1930), Cairn never explained how the substantial shareholders’ exemption would be applicable to the 2006 Transactions, in particular in light of the requirement to have held the substantial shareholding over a twelve- month period. 609 Exh. RoI-1, Award, ¶¶ 1041, 1044; Exh. RoI-4, CWS-Brown-49A, RSM Concept Paper dated 11 May 2006, annexures; Exh. RoI-4, CWS-Brown-50A, RSM Concept Paper dated 19 May 2006, annexures. 610 Exh. RoI-4, C-363, Presentation on Project Gin, Phase I – Pre IPO, slides 18 and 32; Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slide 17. 611 Exh. RoI-4, C-PHB, Appendix, Claimants’ Response to Questions from the Tribunal, ¶¶ 35, 41; Exh. RoI- 4, Brown WS-2, ¶¶ 67, 89; Exh. RoI-4, C-371, Email from RSM attaching Modified RSM Concept Paper dated 9 June 2006, pp. 28-29; Exh. RoI-4, CWS-Brown-51A, RSM, Structure Concept Paper 16 June 2006, p. 30. 612 Exh. RoI-4, R-SoRj, ¶¶ 316-333; Exh. RoI-4, C-363, Presentation on Project Gin, Phase I – Pre IPO, slides 18 and 32; Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slide 17. 613 Exh. RoI-4, C-363, Presentation on Project Gin, Phase I – Pre IPO, slides 8 and 15 (“In the event of sale of Indian Company shares under offer for sale, there would be substantial tax implications in India”); Exh. RoI-4, C- 364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slide 6; Exh. RoI-4, Brown WS-3, ¶ 44. 162
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proceeds would have been transferred to CUHL in the form of dividends and not in the form of consideration for sale of shares.614 Cairn was well aware of this. It is to avoid these twin ramifications of paying taxes in India and in the UK that Cairn rejected RSM’s Plan B and adopted Plan C instead. This was the most notorious aspect of Cairn’s Double Non-Taxation.615 Based on Plan C, the IPO was planned as a fresh issue of new shares by CIL, the proceeds of which would not be subject to Indian capital gains tax. Further, Cairn would then be able to ensure that the IPO proceeds were transferred in a hassle-free manner by CIL to CUHL in the form of consideration for the further sale to CIL of CUHL’s shares in CIHL (the fourth tranche discussed in ¶ 30 above). This consideration would thus avoid the tax net of UK corporation tax. It is through this aggressive tax avoidance scheme that Cairn achieved its twin purpose of avoiding taxes that would otherwise have been due in the home State and/or the host State. In the process, it siphoned off the IPO proceeds in the amount of USD 1.35 billion from India to the UK, and in turn to CEP’s shareholders. In the face of the above factual context, Cairn can simply not deny that one of the principal purposes of adopting RSM’s proposal of Plan C, instead of Plan B, was to avoid the payment of UK corporation tax together with Indian capital gains tax. However, Cairn’s shameless conduct of siphoning off money from the Indian revenue did not stop in 2006. It is worth recalling that in the arbitration, Cairn had specifically requested the Tribunal to gross up its award of damages with the applicable UK corporation tax, since Cairn would apparently be obliged to pay such corporation tax on the damages awarded by the Tribunal (see ¶ 30 above). Although this request was declined by the Tribunal,616 it only proves to show that Cairn was, and remains, principally motivated to avoid bearing any tax responsibility whatsoever. 450. Thus, when all of Cairn’s above described deliberate conduct is put together, there can be no doubt that one of Cairn’s principal purposes – in fact, the one and only principal purpose – behind engineering the 2006 Transactions in a convoluted and shrewd manner was to avoid the payment of taxes anywhere in the world. This proves that the Indian Income Tax Department’s foresight was right – Cairn’s represents a “classic case” of Double Non- Taxation. Transnational Public Policy on Double Non-Taxation 451. As has already been mentioned above (see ¶¶ 57-58 above), Double Non-Taxation, in today’s times, is a central topic of discourse in international tax policy that has received the attention of various States and intergovernmental bodies.
614 Exh. RoI-4, C-363, Presentation on Project Gin, Phase I – Pre IPO, slides 18 and 32 (“Dividend received by UK company would be chargeable to UK corporation tax rate @ 30%”); Exh. RoI-4, C-364, RSM, Project Gin, Phase I Pre-IPO, Plan C – Some thoughts Presentation dated 3 May 2006, slide 17. 615 Exh. RoI-4, R-SoRj, ¶ 327. 616 Exh. RoI-1, Award, ¶¶ 1919-1930. 163
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452. The OECD has indeed taken the lead to establish a regime to tackle the ever-growing phenomenon of Double Non-Taxation, especially at the hands of corporate giants that structure their transactions as disguised intra-group transactions in order to realize gains that evade taxation all around the world. 453. Starting from 2011, the OECD has been working towards tackling tax avoidance by multinational corporations actively. For instance, in its 2011 Report on “Tackling Aggressive Tax Planning through Improved Transparency and Disclosure”,617 the OECD has specifically mentioned and prioritized the phenomenon of Double Non-Taxation in its works. Similarly, in its 2012 Report on “Hybrid Mismatch Arrangements Tax Policy and Compliance Issues”, the OECD described “hybrid mismatch arrangements” as “arrangements exploiting differences in the tax treatment of instruments, entities or transfers between two or more countries [which] often lead to ‘double non-taxation’ that may not be intended by either country”.618 454. Most importantly, the OECD has gathered States around the world to devise a global strategy to combat such exploitative tax avoidance strategies of multinational corporations as part of its initiatives on base erosion and profit shifting, i.e., BEPS, which is undoubtedly one of the leading causes of Double Non-Taxation. In 2013, the OECD initiated the Action Plan on its BEPS initiative (“OECD BEPS Action Plan”), which aims to tackle “tax planning strategies used by multinational enterprises that exploit gaps and mismatches in tax rules to avoid paying tax”.619 [emphasis added] Amongst other aspects, the OECD BEPS Action Plan aims to tackle “instances where the interaction of different tax rules leads to double non- taxation”.620 [emphasis added] It recognizes that “[f]undamental changes are needed to effectively prevent double non-taxation” and that “[t]here is a need to complement existing standards that are designed to prevent double taxation with instruments that prevent double non-taxation in areas previously not covered by international standards and that address cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it”. [emphasis added]621 455. In 2016, the OECD took its fight against the phenomenon of Double Non-Taxation forward by establishing the OECD/G20 Inclusive Framework on BEPS (“Inclusive Framework”), which brings together more than 130 States to collaborate on the Action Plan measures to tackle tax avoidance. In 2019, this Inclusive Framework issued a Policy Note on Addressing the Tax Challenges of the Digitalization of the Economy, wherein a two-pillared approach
617 OECD, “Tackling Aggressive Tax Planning through Improved Transparency and Disclosure: Report on Disclosure Initiatives,” (2011), available at: http://www.oecd.org/ctp/exchange-of-tax-information/48322860.pdf. 618 OECD, “Hybrid Mismatch Arrangements Tax Policy and Compliance Issues,” (2012), ¶ 3, available at: https://www.oecd.org/ctp/aggressive/HYBRIDS_ENG_Final_October2012.pdf. 619 OECD, “What is BEPS?” available at: http://www.oecd.org/tax/beps/about/#mission-impact; See also, OECD, “BEPS Frequently Asked Questions,” available at: https://www.oecd.org/ctp/BEPS-FAQsEnglish.pdf. 620 Exh. RoI-4, RLA-66, OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing; see also Exh. RLA-67, Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, OECD Base Erosion and Profit Shifting Project. 621 Exh. RoI-4, RLA-66, OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing, Chapter 3, p. 13 (see Actions 3 and 3 specifically amongst others). 164
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was adopted. Pillar Two of the Inclusive Framework’s Policy Note, which “calls for the development of a coordinated set of rules to address ongoing risks from structures that allow [multi-national corporations] to shift profit to jurisdictions where they are subject to no or very low taxation” is directly relevant to the present case.622 456. In this context, it must be noted that one of the goals of the Pillar Two is to combat profit shifting in connection with profits relating to intangibles, particularly in the broader context of “group entities that are financed with equity capital and generate profits, from intra-group financing or similar activities, that are subject to no or low taxes in the jurisdictions where those entities are established”.623 [emphasis added] In other words, Pillar Two is “designed to ensure that large internationally operating businesses pay a minimum level of tax regardless of where they are headquartered or the jurisdictions they operate in”.624 457. Cairn’s 2006 Transactions are the quintessential kind of transactions that the OECD aims to tackle, i.e., intra-group transactions that siphon off profits by taking advantage of gaps and mismatches in tax rules to avoid paying taxes anywhere in the world. In fact, the OECD has shown an inclination to assist developing countries in particular in this regard, since they lie at the centre of the global taxation crisis arising from such incidents of shameless profit shifting without the payment of any taxes to their revenues.625 458. The OECD is not alone in taking up the mantle against Double Non-Taxation. As mentioned above (see ¶ 58 above), the UN has also established a Subcommittee on BEPS Issues for Developing Countries in 2013, i.e., the UN BEPS Subcommittee, with a view to engaging with developing countries that face the maximum issues as a result of aggressive tax planning by multinational corporations.626 As mentioned earlier, various countries, including India, have responded to the UN’s initiative.627 In this regard, India has taken a leading role in engaging with the UN BEPS Subcommittee, and in its response has highlighted the problems that “developing economies and low income countries” face due to their “inherent vulnerability” regarding taxation revenues, which is exploited by multinational corporations in the guise of investments intended to benefit the economy. In this context, India has
622 OECD, “Public consultation document: Global Anti-Base Erosion Proposal (“GloBE”) – Pillar Two,” (2019), p. 5, available at: https://www.oecd.org/tax/beps/public-consultation-document-global-anti-base-erosion- proposal-pillar-two.pdf.pdf. 623 OECD, “Public consultation document: Global Anti-Base Erosion Proposal (“GloBE”) – Pillar Two,” (2019), p. 28, available at: https://www.oecd.org/tax/beps/public-consultation-document-global-anti-base- erosion-proposal-pillar-two.pdf.pdf. 624 Exh. RoI-72, OECD, “Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint: Inclusive Framework on BEPS,” OECD/G20 Base Erosion and Profit Shifting Project, 2020, p. 14. 625 See generally, OECD, “OECD secretariat invites public input on the Global Anti-Base Erosion (GloBE) Proposal under Pillar Two,” (2019) available at: https://www.oecd.org/tax/oecd-secretariat-invites-public-input- on-the-global-anti-base-erosion-proposal-pillar-two.htm; Exh. RoI-4, RLA-66, OECD (2013), Action Plan on Base Erosion and Profit Shifting, OECD Publishing. 626 See generally, Committee of Experts on International Cooperation in Tax Matters, “Subcommittee on Base Erosion and Profit Shifting for Developing Countries: Report by the Coordinator,” (2015), available at: https://www.un.org/esa/ffd/wp-content/uploads/2015/10/11STM_CRP11_beps.pdf. 627 See generally, Committee of Experts on international Cooperation in Tax Matters, “Responses to questionnaire for developing countries from the UN Subcommittee on Base Erosion and Profit Shifting,” (2014), available at: https://www.un.org/esa/ffd/wp-content/uploads/2014/10/10STM_CRP12_BEPS1.pdf. 165
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highlighted the “detrimental effect on the Indian economy” arising from such blatant tax avoidance by investors “because it reduces the tax revenues that could be collected in the absence of BEPS”, which “tax revenues are crucial for reducing poverty and inequality” in economies around the world.628 459. Several other countries have resonated with precisely the above concerns pointed out by India and have highlighted growing need to forbid and penalize Double Non-Taxation. For instance, in response to the UN BEPS Subcommittee, Mexico has pointed out that “[t]he current global international tax system has opened up opportunities for [m]ultinational [e]nterprises to greatly minimize their tax burden. This undermines the integrity of the tax system and requires a higher cost to ensure compliance.”629 [emphasis added] Similarly, while reacting to the OECD BEPS Action Plan, the Japanese Minister of Finance emphasized that the measures taken by the OECD “are required in order to prevent MNEs from exploiting such gap [between the rules and the economic substance of their activities] to artificially manipulate their taxable profits and thereby avoid taxation”.630 Likewise, many developing countries, such as Lesotho,631 Bangladesh,632 Ghana633 and Zambia634 have also mentioned how multinational companies, in the guise of investing in their economies, “engage in serious tax planning to avoid paying the relevant taxes”, which affects the countries “significantly through reduced tax revenue payments, increase in the tax burden on easy to collect taxes and creates an atmosphere of unfairness as some companies are paying more taxes than others.” 460. This atmosphere of unfairness created by aggressive tax avoidant schemes of multinational investors has been discussed in TWAIL scholarship as well as in case law. As mentioned above, scholars have spoken about how tax avoidance by multinational investors causes the tax burden to be “removed from . . . foreign investors” and get “shifted to the very Third World peoples that the ‘development project’ is meant to protect”.635 Similarly, case law,
628 United Nations, “Questionnaire: Countries’ experiences regarding base erosion and profit shifting issues” (2014), p. 2, available at: https://www.un.org/esa/ffd/wp-content/uploads/2014/10/ta-BEPS-CommentsIndia.pdf. 629 United Nations, “Questionnaire: Mexico´s experiences regarding base erosion and profit shifting issues,” p. 1, available at: https://www.un.org/esa/ffd/wp-content/uploads/2014/10/ta-BEPS-CommentsMexico.pdf. 630 Japanese Ministry of Finance, “Statement by Minister Aso on the publication of the final reports on BEPS Action Plan,” (2015), ¶ 2, available at: https://www.mof.go.jp/english/tax_policy/others/20151005.htm. 631 United Nations, “Responses to questionnaire: Countries experience regarding BEPS issues,” p. 1, available at: https://www.un.org/esa/ffd/wp-content/uploads/2014/12/ta-BEPS-CommentsLesotho.pdf. 632 United Nations, “Answers from Bangladesh to the questionnaire set by the UN about Base Erosion and Profit Shifting,” available at: https://www.un.org/esa/ffd/wp-content/uploads/2015/04/ta-BEPS- CommentsBangladesh.pdf. 633 United Nations, “Questionnaire,” available at: https://www.un.org/esa/ffd/wp-content/uploads/2014/10/ta- BEPS-CommentsGhana.pdf. 634 United Nations, “Zambia’s Tax Administration Response to the BEPS Questionnaire regarding Country experiences with base erosion and profit shifting issues,” (2014), available at: https://www.un.org/esa/ffd/wp- content/uploads/2014/10/ta-BEPS-CommentsZambia.pdf. 635 Exh. RoI-14, Jalia Kangave, “Taxing TWAIL: A Preliminary Inquiry into TWAIL’s Application to the Taxation of Foreign Direct Investment,” International Community Law Review 10, (2008): 389-400, 395; Exh. RoI-15, Jalia Kangave, “The Dominant Voices in Double Taxation Agreements: A Critical Analysis of the “Dividend” Article in the Agreement between Uganda and the Netherlands,” International Community Law Review 11, (2009): 387-407. 166
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especially in Europe, has addressed the issues arising out of aggressive tax avoidance under Article 14 of the ECHR. Courts across Europe have held in many instances that the practice of tax avoidance violates the fundamental principle of non-discrimination in Article 14 of the ECHR since it undermines a fair allocation of tax burdens.636 Article 14 of the ECHR, in the words of the European Court of Human Rights, is “a constitutional instrument of . . . public order”.637 461. In light of the above, it is evident that combatting the phenomenon of Double Non-Taxation has reached the level of transnational public policy. With multiple States voicing their concerns against the phenomenon and leading international organizations, such as the OECD and the UN, launching global initiatives to tackle it, it is fair to say that there is a universal consensus that the phenomenon of Double Non-Taxation needs to be prohibited. European Union’s Public Policy 462. The legal and policy situation in continental Europe is in line with the universal consensus against Double Non-Taxation. The phenomenon of Double Non-Taxation has been widely discussed in the EU across the past decade, having been recognized as a patently unfair practice.638 In this regard, the EU’s (previous) Commissioner of Taxation, Customs, Anti- fraud and Audit specifically recognized that “[f]airness must be at the heart of our tax policies” and “double non-taxation” clearly undermines the objective of fairness.639 463. To tackle the growing concerns around Double Non-Taxation, the European Commission and the European Council have also launched initiatives that are attuned to the OECD’s and the UN’s initiatives discussed above. For instance, the European Council, in June 2011, asked the Commission to ensure “the avoidance of harmful practices and proposals to fight tax fraud and tax evasion”,640 further to which the Commission launched an initiative titled “Tackling Double Non-Taxation for fairer and more robust tax systems” in 2012. As part of
636 Bundesverfassungsgericht, 27 June 1991, 2 BvR 1493/89, discussed in Exh. RoI-10, Victor Thuronyi, Comparative Tax Law (Alphen aan den Rijn: Kluwer Law International, 2003), p. 83; Exh. RoI-11, Bundesfinanzhof 10 January 2012, I R 66/09, ¶ 25; See also, European Commission, “The internal market: factual examples of double non-taxation cases,” Staff Working Paper, European Commission, 2012, p. 4, available at: https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/consultations/tax/double _non_tax/consultation_paper_en.pdf; Exh. RoI-12, Luc Hinnekens, “La prévention de la double non-imposition dans les conventions bilatérales suivant le modèle de l’OCDE,” in Mélanges John Kirkpatrick (Brussels: Bruylant, 2004), 385; Exh. RoI-13, Anne Van de Vijver, “International Double (Non-)taxation: Comparative Guidance from European Legal Principles,” EC Tax Review 24, No. 5 (2015): 240-257, 243. 637 European Court of Human Rights, 23 February 1995, 40/1993/435/514 (Loizidou v. Turkey), ¶ 75. 638 European Commission, “The internal market: factual examples of double non-taxation cases,” Staff Working Paper, European Commission, 2012, p. 4, available at: https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/consultations/tax/double _non_tax/consultation_paper_en.pdf; Exh. RoI-12, Luc Hinnekens, “La prévention de la double non-imposition dans les conventions bilatérales suivant le modèle de l’OCDE,” in Mélanges John Kirkpatrick (Brussels: Bruylant, 2004), 385; Exh. RoI-13, Anne Van de Vijver, “International Double (Non-)taxation: Comparative Guidance from European Legal Principles,” EC Tax Review 24, No. 5 (2015): 240-257, 243. 639 European Commission, “Tackling double non-taxation for fairer and more robust tax systems,” Press Release (2012), available at: https://ec.europa.eu/commission/presscorner/detail/es/IP_12_201. 640 European Council, “Conclusions – 23/24 June 2011,” (2011), available at: https://data.consilium.europa.eu/doc/document/ST-23-2011-INIT/en/pdf. 167
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this initiative, a public consultation process was initiated “to gauge the full scale of the problem and see where the main weaknesses lie”, based on which further policies are currently under works.641 464. Similarly, in 2015, the European Commission presented its own package of transparency measures aimed at tackling corporate tax avoidance and harmful tax competition within the EU. The Commission emphasized in this context that corporate tax avoidance is thought to deprive EU Member States of billions of euros per year. Furthermore, according to the Commission, corporate tax avoidance “undermines fair burden-sharing among tax-payers and fair competition between businesses”. Noting that multinational corporations rely on the complexity of tax rules and the lack of cooperation between Member States to shift profit and minimize their taxes, the Commission stressed the vitality of “the battle against aggressive tax planning and abusive tax practices”.642 465. Along these lines, significant attention is presently being devoted, at the European level, to multinational corporations such as Google, Amazon and Starbucks and their use of complex mechanisms known as “the Double Irish scheme to achieve double non-taxation and to generate the so-called stateless income within a multinational group in onshore or offshore low tax jurisdictions”.643 466. The above policy stance of the EU resonates in Member States’ practice. For instance, in March 2019, the German Finance Minister and the Dutch State Secretary for Finance issued a joint statement reaffirming their commitment to combat tax avoidance. Acknowledging that “major milestones” had already been achieved by implementing the OECD and EU standards against BEPS, the ministers recognized that the challenges that need urgent attention relate to “entities that are subject to no or low taxation”.644
641 European Commission, “Tackling double non-taxation for fairer and more robust tax systems,” Press Release (2012), available at: https://ec.europa.eu/commission/presscorner/detail/es/IP_12_201; See also, European Commission, “The internal market: factual examples of double non-taxation cases,” Staff Working Paper, European Commission, 2012, p. 4, available at: https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/consultations/tax/double _non_tax/consultation_paper_en.pdf. For the “Summary report of the responses received on the public consultation on factual examples and possible ways to tackle double non-taxation cases”, see https://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/common/consultations/tax/double _non_tax/summary_report.pdf. 642 European Commission, “Combatting corporate tax avoidance: Commission presents Tax Transparency Package,” Press Release (2015), available at: https://ec.europa.eu/commission/presscorner/detail/en/IP_15_4610. 643 European Parliament Directorate General for Internal Policies, “Tax Challenges in The Digital Economy: Study for the TAXE 2 Committee,” Policy Department A: Economic and Scientific Policy (2016), p. 16, available at: https://www.europarl.europa.eu/RegData/etudes/STUD/2016/579002/IPOL_STU(2016)579002_EN.pdf; See also, Exh. RoI-73, E. C. C. M. Kemmeren, “Where is EU law in the OECD BEPS Discussion?” EC Tax Review 23, no. 4, (2014): 190-193. 644 German Federal Ministry of Finance, “Germany and Netherlands reaffirm their commitment to combating tax avoidance,” Taxation (2019), available at: https://www.bundesfinanzministerium.de/Content/EN/Standardartikel/Topics/Taxation/Articles/2019-03-27- NLD-GER-statement.html. 168
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467. Similarly, in January 2021, a Protocol to the UK-Germany Double Taxation Convention was signed by these States with the intention to modify the existing UK-Germany Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital. This Protocol explicitly states in its preamble, borrowing language that is referenced in the OECD’s initiative, that the purpose of the Convention is to “eliminate double taxation with respect to taxes on income and on capital without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance”. [emphasis added] It is noteworthy that the original preamble referred only to the “avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital”.645 468. Likewise, in The Netherlands, the Deputy Minister of Finance has confirmed, in a Memorandum on Fiscal Treaty Policy prepared in May 2020, that The Netherlands also intends to reorient its treaty practice to ensure that tax treaties “prevent double taxation without creating possibilities to generate double non-taxation or lower taxation”.646 469. Recent case law in the EU and in the UK has also recognized the need to combat the phenomenon of Double Non-Taxation. For instance, in the UK, in the case of Weiser v Revenue and Customs Commissioners, the First-Tier Tribunal confirmed that the purpose of the UK-Israel tax treaty is “not to enable double non-taxation” of the income in question.647 Similarly, the German Bundesfinanzhof has confirmed that the non-application of exemptions or benefits under tax treaties is justified if double non-taxation would otherwise result.648 470. In light of the above, it is clear that not only Member States’ practice in the EU, but also case law has moved towards recognizing the fundamental importance of avoiding the phenomenon of Double Non-Taxation. As mentioned above, Double Non-Taxation has been recognized as a patently unfair practice, which must be condemned as discriminatory under Article 14 of the ECHR. Moreover, the global initiatives of the OECD and the UN to tackle BEPS and Double Non-Taxation have found fervent resonance in the EU. All these factors establish that the need to condemn incidents of Double Non-Taxation is at the heart of European public policy today, and by extension at the heart of Dutch public policy.649 With respect to the public policy implications of Double Non-Taxation, Professor Kees van Raad states the following: “While the avoidance of double taxation is important for taxpayers, the avoidance of double non-taxation is equally important for States in the operation of their tax systems. Whereas these two sides of international tax policy were already reflected in the first tax treaties that were concluded over a century ago, initially the focus was mostly on the elimination of international double taxation.
645 Protocol to the UK/Germany Double Taxation Convention, signed 12 January 2021, p. 3, available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/955611/Germa ny-UK-2021-Protocol-to-the-Double-Taxation-Convention-not-in-force_01_14_21.pdf. 646 Dutch Deputy Minister of Finance, Memorandum on Fiscal Treaty Policy (2020), p. 8, available at: https://www.rijksoverheid.nl/documenten/rapporten/2020/05/29/notitie-fiscaal-verdragsbeleid. 647 Exh. RoI-74, Weiser v Revenue and Customs Commissioners, [2012] STI 3238. 648 Exh. RoI-11, Bundesfinanzhof, 10 January.2012 - I R 66/09. 649 European Court of Justice, 1 June 1999, ECLI:EU:C:1999:269, NJ 2009, 339 (Eco Swiss China Time/Benetton International). 169
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Since the 1970s, however, awareness has been growing that the fair functioning of national tax systems has become increasingly endangered through the exploitation by big business of the disparities that exist between the tax rules of individual states. Through the use of entities and transactions that taxwise are treated divergently among states, multi-nationally operating enterprises have increasingly been successful in adopting corporate structures that aggressively take advantage of such differences. According to a recent estimate by the OECD, currently USD 240 billion are annually lost due to tax avoidance by multinational companies. After the first initiatives taken by the OECD and the EU in the 1980s and 1990s to contain such developments, since the beginning of this millennium these efforts have been stepped up and joined by the UN, IMF and World bank. They culminated in the initiative launched in 2013 by the OECD and G20 countries and supported by the other international organizations to establish the Base Erosion and Profit Shifting project (BEPS). At the same time, at a European level, the Council and Commission of the EU have become increasingly vocal about the need to fight aggressive tax planning strategies that result in double non-taxation. And subsequently, the movement against double non-taxation that developed at a global level has indeed become particularly prominent within the European Union and its Member States. This European development is fully reflected in the policy choices The Netherlands has made in recent years by embarking on a crusade against international tax avoidance. In addition to the actions it has taken within the framework of EU initiatives, The Netherlands has also developed on its own a range of measures to counter double non-taxation and other forms of international tax avoidance, such as the recent introduction of source taxation of cross-border interest and royalty payments in suspect situations. In light of the above situation around the globe, the avoidance of double non-taxation can be said to qualify as a matter of international and European public policy, and by extension, also Dutch public policy.”650
471. The Tribunal’s callous attitude towards Cairn’s Double Non-Taxation (see ¶ 442 above),651 coupled with its unconcealed endorsement of Cairn’s tax avoidant conduct as being a “a triumph of form over substance” enabled by advisors who “spent considerable effort and no doubt money devising a creative structure that met the company’s commercial objectives”,652 is as appalling as Cairn’s underlying conduct of engineering the 2006 Transactions. Thus, the Award must be set aside under Article 1065(1)(e) of the DCCP for being violative of transnational and European public policy because it not only endorsed but rewarded conduct that deliberately avoided taxes in India as well as around the globe. (ii) Non-Arbitrability of Tax Disputes 472. As set out above in Section V.A above, there are three key factors that indicate that a matter is considered to be of a public policy nature and therefore not arbitrable: (a) the exclusive competence of a specific court, (b) the impact on legal certainty, and (c) the erga omnes effect. As demonstrated in this Section, each of these indicators is present in this case and therefore leads to the unequivocal conclusion that tax disputes are not arbitrable pursuant to
650 Exh. RoI-5, Expert Opinion by Professor Kees van Raad. 651 Exh. RoI-1, Award, ¶ 1455. 652 Exh. RoI-1, Award, ¶ 1588. 170
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Article 1020(3) of the DCCP. As will be demonstrated in this Section, because the Tribunal did consider and decide non-arbitrable issues in its Award, Your Court should set it aside pursuant to Article 1065(1)(e) of the DCCP. The Exclusive Competence of the Indian Courts 473. First, as set out in ¶ 418.1 above, the attribution of exclusive jurisdiction to a specific court in and of itself indicates that the matter cannot be freely disposed of by the parties and accordingly renders the matter non-arbitrable on the basis of statute. Moreover, it follows from the legislative history that the attribution of exclusive competence is also an indicator that the matter is deemed to be of a public policy nature.653 474. As stated in ¶ 177 above, as a matter of Dutch law, tax courts are exclusively competent to hear and decide tax disputes654 and civil courts have no role to play in that respect.655 If there is a specific public or administrative legal avenue available that meets the due process requirements, and the claimant has not availed itself of that legal avenue, the claims brought before a civil court are inadmissible.656 475. As the Attorney General explained in the Abacus case, the reasons why parties must seize the exclusively competent tax court provided by law, and not a civil court, are fourfold: (i) the necessity of a clear delimitation between the competence of the civil courts and the administrative courts; (ii) the necessity of avoiding inconsistent decisions;657 (iii) the necessity of safeguarding legal certainty;658 (iv) the benefit of specialized subject-matter expertise of the exclusively competent courts. 476. With its Award, the Tribunal undermined each of these objectives. 477. Cairn commenced arbitration proceedings against India under the India-UK BIT well before its tax liability was determined by the Income Tax Department of India. Cairn’s Notice of Arbitration was filed on 22 September 2015 when there existed merely a Draft Assessment Order of 9 March 2015.659 The Income Tax Department only issued its Final Assessment Order, i.e., the FAO on 25 January 2016.660 The FAO formed the actual determination of
653 Parliamentary Papers II 2012/13, 33 611, 3, pp. 3-4 (Explanatory Memorandum). 654 Dutch State Taxes Act (Algemene wet inzake rijksbelastingen), Article 26; General Administrative Law Act (Algemene Wet Bestuursrecht), Article 8:1. 655 Supreme Court, 21 April 2006, ECLI:NL:HR:2006:AU4548, NJ 2006, 271 (Abacus), ¶ 3.4.2. 656 Supreme Court, 21 April 2006, ECLI:NL:PHR:2006:AU4548, Opinion of Advocate General Wattel, ¶ 5.1. 657 Supreme Court, 16 May 1986, ECLI:NL:HR:1986:AC9347, NJ 1986, 723 (Heesch/Van de Akker), ¶ 3.3.2; Supreme Court, 17 December 2004, ECLI:NL:PHR:2004:AO9556, NJ 2005 (OZB/Staat), ¶ 3.3.1. 658 Supreme Court, 2 June 1995, ECLI:NL:HR:1995:ZC1744, NJ 1997, 164 (Aharchi/Bedrijfsvereniging), ¶ 3.3. 659 Exh. RoI-4, C-31, Draft Assessment Order to CUHL dated 9 March 2015. 660 Exh. RoI-4, C-70, Final Assessment Order dated 25 January 2016. Similarly, the majority of the other challenged measures of the Income Tax Department, including the DRP Order, were issued only after Cairn had already initiated arbitration (see Exh. RoI-4, C-69, Directions of the DRP under Section 144C(5) of the ITA 1961 dated 31 December 2015). 171
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CUHL’s tax liability by the Income Tax Department. However, it was far from a conclusive determination within the Indian judicial system as there were three further appellate instances available to CUHL, in which the determination of tax liability in the FAO would be reviewed, i.e., (i) the ITAT under Section 253 of the IT Act, including a full review of factual issues; (ii) followed by the Delhi High Court under Section 260A of the IT Act; and (iii) ultimately the Indian Supreme Court under Section 261 of the IT Act. 478. Thus, before seizing the Tribunal under the India-UK BIT, Cairn did not even wait for the actual determination of their tax liability by the Income Tax Department, let alone for a conclusive legal determination of their case by the exclusively competent Indian courts. 479. Cairn’s prematurely triggered arbitration ran its course in parallel with the legal proceedings concerning CUHL’s tax liability before the exclusively competent Indian courts. Despite the obvious need to, at least, stay the arbitration661 until the tax liability of CUHL would have been determined by the exclusively competent Indian courts in a final and binding manner (see ¶ 288 above), the Tribunal chose not to bifurcate the arbitration to deal with India’s admissibility and jurisdictional objections on a preliminary basis. During the course of the arbitration, the ITAT issued the ITAT Order on 9 March 2017 deciding CUHL’s appeal against the FAO on 9 March 2017, which led to an appeal initiated against the ITAT Order by both CUHL and the Income Tax Department before the Delhi High Court. 480. At present, the appeal is pending before the Delhi High Court. Importantly, the pending appeal before the Delhi High Court concerns, inter alia, the question of whether Cairn’s conduct in engineering the 2006 Transactions was tax avoidant.662 These are the very proceedings which the Tribunal recognised in its Award could legitimately lead to a different result than the one it purported to reach in its Award.663 481. Thus, Cairn prematurely seized the Tribunal without CUHL’s tax liability even having been determined by means of a Final Assessment Order of the Indian Income Tax Department, let alone a final and binding judicial decision of the exclusively competent Indian courts. 482. Cairn jumped the gun and the Tribunal erroneously allowed it to do so. The Tribunal proceeded to comprehensively determine issues that went to the taxability of the 2006 Transactions itself. What is shocking is that the Tribunal knew fully well what it was doing.
661 Indeed, investment treaty tribunals have in the past recognized and exercised their duty to stay the arbitration proceedings before them “pending the determination, by some other competent forum, of an issue relevant to its own decision” because “justice would be better served” in adopting this course of action (see SGS Société Générale de Surveillance S.A. v. Republic of the Philippines (ICSID Case No. ARB/02/6, Decision of the Tribunal on Objections to Jurisdiction), ¶¶ 172-176, available at: https://www.italaw.com/sites/default/files/case- documents/ita0782.pdf; Bureau Veritas, Inspection, Valuation, Assessment and Control, BIVAC B.V. v. The Republic of Paraguay (ICSID Case No. ARB/07/9, Decision of the Tribunal on Objections to Jurisdiction), ¶¶ 154-160, available at: https://www.italaw.com/sites/default/files/case-documents/ita0103.pdf; The MOX Plant Case (Ireland v. United Kingdom), PCA Case 2002-01, Order No. 3, 24 June 2003, available at: https://pcacases.com/web/sendAttach/867. 662 Exh. RoI-4, RCom-391, 14.01.2020 Email to AT with attachment. 663 Exh. RoI-1, Award, ¶ 1436. 172
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Determinations on Indian tax law running over 100 pages664 are obviously not a mere slip of the pen. 483. Moreover, the Tribunal recognized that it was ill-equipped to comprehensively assess the applicable Indian tax law. In admitting Cairn’s claims and deciding them on the merits, the Tribunal increased the likelihood that the exclusively competent Indian courts that actually do have the requisite subject-matter expertise will indeed reach a different conclusion: “The Tribunal cannot anticipate what the Indian courts might or might not do, but the fact that the issue is presently sub judice before a court with the power to apply Indian law fully as well as the power to direct the tax authorities to act in accordance with the court’s directives (i.e., to take action or to refrain to take action) not only underscores the mandate/role and lack of a ‘concrete measure’ issues just discussed, but also, as shall be seen, shows the frailties of determining tax avoidance based upon pleadings rather than on an actual determination by the relevant authority.” 665
“It has [engaged in its analysis of Indian tax law] with full knowledge that it is not an Indian court and that the exercise just completed is not as comprehensive as the Tribunal believes the briefing of the law would be, were an allegedly tax avoidant transaction to once again go before the Supreme Court or the Constitutional Court. The Tribunal has heard no expert evidence on the Indian law on tax avoidance and has been limited to those cases which the Parties put into the record. Nor has it been exposed to the full range of Indian jurisprudence and academic commentary that it would be open to an Indian court, hearing a similar matter, to consult.”666 [emphasis added]
484. To conclude, the Tribunal’s regrettable course of action is a prime illustration of the importance of adhering to the jurisdiction of the exclusively competent courts before deciding any related claims in arbitration proceedings. As the legal consequences of taxation matters cannot be freely determined by parties, exclusive jurisdiction has been attributed to specialized courts that have a specific subject-matter expertise. These are all strong indicators of the fact that tax disputes are deemed to be of a public policy nature and accordingly, not arbitrable. 485. Because the Tribunal decided these non-arbitrable issues nonetheless, its Award violates substantive public policy. Therefore, Your Court should set the Award aside on the basis of Article 1065(1)(e) of the DCCP.
664 Exh. RoI-1, Award, pp. 275-341, 386-443, 453-458. 665 Exh. RoI-1, Award, ¶ 1436. 666 Exh. RoI-1, Award, ¶ 1424; See also, Exh. RoI-1, Award, ¶ 1773 (“The Tribunal cannot but agree that the facts are different and it cannot rule out the possibility that the Delhi High Court (or the Supreme Court, were the matter to go further) could attach significance to certain facts or see a gloss in the Indian caselaw which has not been apparent from the evidence that has been put before this Tribunal.”); Exh. RoI-1, Award, ¶ 1471 (“It is also conceivable that an Indian court might find that CIHL’s dominant purpose was to avoid tax (albeit UK tax)”); Exh. RoI-1, Award, ¶ 1277. 173
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Undermining Legal Certainty 486. Second, the impact of a decision in an arbitral award on legal certainty is another important indicator that a matter is deemed to be of a public policy nature and therefore not arbitrable, as follows from the Netherlands Supreme Court judgment in Spee c.s. en Groenselect/Van den Boogaard.667 487. As set out in the preceding Section V.B(ii)(a) above, the Tribunal’s choice to ignore the exclusive jurisdiction of the Indian courts and not to await their final and binding determination of CUHL’s tax liability created major legal uncertainty. By admitting and awarding claims that involved an assessment of the questions as to whether (i) the 2006 Transactions were taxable for the purposes of Indian capital gains tax (including under Section 2(47)(vi) of the IT Act as transfer of immovable property); and (ii) Cairn’s conduct aimed at avoiding the payment of any tax anywhere in the world is abusive as a matter of Indian law, the Tribunal actually created a significant potential for contradictory decisions. Because legal proceedings are ongoing before the exclusively competent Indian court, the Tribunal directly undermined the legal certainty that needs to be provided in the first place by the exclusively competent Indian courts. 488. The Tribunal determined a matter that was pending before the exclusively competent Indian courts, despite its acknowledgement of the serious limitations of its own analysis compared to the comprehensive assessment carried out by the Indian courts. In so doing, the Tribunal has all but ensured that its misguided analysis will diverge from that of the exclusively competent Indian courts. Consequently, its course of action creates significant legal uncertainty and the Tribunal has thereby undermined every single one of the fundamental policy aims served by the attribution of exclusive competence over tax disputes to courts. Accordingly, the Award violates substantive public policy and ought to be set aside pursuant to Article 1065(1)(e) of the DCCP. The Erga Omnes Effect of the Award 489. Third, a final relevant indicator is whether a decision in an arbitral award would affect the interests of third parties. In Spee c.s. en Groenselect/Van den Boogaard, the Netherlands Supreme Court considered legal consequences for third parties (erga omnes effect) to be a circumstance demonstrating that a decision concerns a matter of public policy.668 490. The pertinent question thus is whether the dispute decided by the Tribunal in its Award generated legal consequences for third parties. This is actually the one aspect of (non-)arbitrability under Dutch law that the Tribunal did consider in its Award, notwithstanding the wrong conclusion: “Once again, the provisions invoked by the Respondent relate to tax disputes, not tax-related investment disputes. In the former, the dispute concerns the taxability
667 Parliamentary Papers II 2012/13, 33 611, 3, pp. 3-4 (Explanatory Memorandum); Supreme Court, 10 November 2006, ECLI:NL:HR:2006:AY4033, NJ 2007/561 (Spee c.s. en Groenselect/Van den Boogaard), ¶ 3.5. 668 G.J. Meijer, Tekst & Commentaar Rv, art. 1020, ¶ 6. 174
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of a given transaction, and the determination may indeed potentially have erga omnes effect vis-à-vis other taxpayers in like circumstances. Article 9(3)(v) of the BIT provides that the decision of the arbitral tribunal is binding on the disputing parties. It has no erga omnes effect. (…) The mandate of this Tribunal is different from that of a domestic tax court, which may determine with an erga omnes or at least precedential effect whether particular types of transactions are taxable as a matter of municipal law.”669
491. The Tribunal rightly considered that if “the dispute concerns the taxability of a given transaction . . . the determination may indeed potentially have erga omnes effect vis-à-vis other taxpayers in like circumstances” and will, at least, generate a “precedential effect [as to] whether particular types of transactions are taxable as a matter of municipal law”. However, it seems that the Tribunal forgot that it could not make findings on issues that can create erga omnes effect, when declaring in paragraph 5 of the dispositif section of the Award that “the Claimants are relieved from any obligation to pay [the tax demand set forth in the Final Assessment Order]” and ordering “the Respondent to neutralise the continuing effect of the Demand, by permanently withdrawing the Demand and refraining from seeking to recover further the alleged tax liability or any interest (…).”670 492. In light of the far-reaching order mentioned in the preceding paragraph, there is no doubt that the Award will be used by “other taxpayers in like circumstances” to pursue their claims against India. Those third parties are likely to use the Award as legal authority – which they will claim has “precedential effect” – to pursue their own illegitimate Double Non-Taxation and tax avoidance interests, which violate public policy. Like the Tribunal, those third parties will take the position that neither the absence of an assessment of the taxability of their transaction by the Indian Income Tax Department, nor of a final and binding decision of the highest Indian court with exclusive competence on tax disputes forms a hurdle for a finding of a breach of international law and attendant liability. 493. The undesirable erga omnes effect of this Award is precisely the reason why the Tribunal ought to have recognized the non-arbitrability of Cairn’s prematurely brought claims. The Tribunal’s ignorance in this respect is all the more egregious in view of its own repeated orders, effectively preventing India from adducing Cairn’s submissions and evidence in this arbitration in the pending tax proceedings before the Delhi High Court and in another related ongoing arbitration between Vedanta and India.671 494. On the basis of the foregoing, it must be concluded that the Tribunal knowingly disregarded the exclusive jurisdiction of the Indian courts, knowingly created legal uncertainty and knowingly proceeded to render a decision from which third parties will undoubtedly seek to derive an erga omnes effect. Accordingly, the Tribunal ignored all three indicators of the non- arbitrability of the dispute and, as a result, the Award itself violates substantive public policy,
669 Exh. RoI-1, Award, ¶ 825. 670 Exh. RoI-1, Award, ¶ 2032, sub. 5. 671 Exh. RoI-4, Procedural Order No. 16 of 18 March 2019; Exh. RoI-4, Procedural Order No. 2 of 12 August 2016. 175
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which should lead Your Court to set aside the Award on the basis of Article 1065(1)(e) of the DCCP.
C. Public Policy Ground 2: The Tribunal’s Violation of Procedural Public Policy 495. In addition to the violations of substantive public policy, the Tribunal’s Award also violates procedural public policy in three respects: (i) a violation of the fundamental right to be heard; (ii) a violation of the fundamental right to equal treatment of the parties; and (iii) a violation of due process by issuing a surprise decision. (i) Violation of Right to Be Heard 496. As set out above in Section V.A(ii)(a) above, the right to be heard is of such fundamental importance that the annulment court is to perform the review without any restraint. 497. In the present case, the Tribunal violated India’s right to be heard by declaring Cairn’s prematurely-instituted claims admissible, as a result of which India was forced to defend itself while hamstrung by the lack of a final determination on the taxability of the 2006 Transactions by the exclusively competent Indian courts. 498. Pursuant to Article 1036(2) of the DCCP and Article 15(1) of the UNCITRAL Rules, it was incumbent on the Tribunal to afford India a full opportunity to present its case, to set out its position and to comment on all relevant information brought to its attention during the arbitral proceedings. 499. The Tribunal curtailed India’s opportunity to fully present its case by reference to all pertinent information because there was no final and binding determination by the exclusively competent Indian courts in respect of the taxability of the 2006 Transactions, whether their tax-avoidant purpose was abusive as a matter of Indian law and whether they were taxable under Section 2(47)(vi) of the IT Act as a transfer of immoveable property. In the absence of such determination, the Tribunal (i) effectively prevented the relevant facts of the case from being fully settled; and (ii) precluded India from invoking the final determination of CUHL’s tax liability by the exclusively competent Indian court in support of its defence against Cairn’s claims in the arbitration. 500. Instead, on the basis of its own shallow analysis of the taxability of the 2006 Transactions under Indian law, the Tribunal decided to substitute the outcome of the judicial review of the exclusively competent Indian courts by what it imagined or speculated the outcome of such analysis should be. 501. Therefore, in the circumstances of this particular case – where the final determination of the tax liability and the judicial review by the exclusively competent courts was taking place in parallel to the arbitration – India’s right to be heard was violated. As the final and binding determination of CUHL’s tax liability is yet to be issued by the highest Indian court, and the Tribunal has already rendered its final Award, it is undeniable that crucial information relevant to the assessment of Cairn’s claims in the arbitration was lacking.
176
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502. In fact, the Tribunal acknowledged the lack of essential information on the record of the arbitration, as well as the fact that this missing information prevented it from assessing one of India’s essential defences: “First, the Tribunal agrees with submissions made by both sides that it is neither a tax investigator, nor an Indian court, and it ought not to undertake either of the roles associated therewith. […] Given the absence of a concrete determination of tax avoidance, the Tribunal has doubts about the Respondent’s efforts to particularise a tax avoidance determination in its pleadings that can then be scrutinised. Although the Tribunal has deemed that the defence is admissible, it has also formed the view that without a concrete, reasoned determination by an assessment officer, it is difficult to determine whether, for any one of the theories of avoidance postulated by the Respondent, the Indian courts would uphold such a theory.”672 [emphasis added]
503. However, the truth of the matter is that those limitations were self-inflicted: they were a direct consequence of the Tribunal’s decision to admit Cairn’s prematurely brought claims in the arbitration. Had the Tribunal stayed the arbitral proceedings pending the outcome of the Indian tax proceedings, it would not have ended up deciding unripe investment treaty claims about a tax measure that was yet to be determined in a final and binding form by the exclusively competent Indian courts. 504. It is important to note that the Tribunal knew full well that it was short-circuiting the decision- making process of the Indian courts and acknowledged the very possibility that those courts would pronounce themselves differently on the matter before it: “Both sides have appealed the ITAT [Order] to the Delhi High Court and, as discussed at some length in the parties’ correspondence, the [Income Tax Department] was permitted to amend its appeal to include the tax avoidance and Section 2(47)(vi) grounds. Thus, independently of this international proceeding, which has been concerned with the determination of taxability that was actually made by the ITD, it appears that the Delhi High Court, and perhaps a higher court will pronounce on whether, among other things, the structure adopted by Cairn in 2006 can be considered to be tax avoidant.”673 (emphasis added).
505. As a result, India was deprived of the full opportunity to timely defend its case, which it is entitled to as part of the right to be heard under Article 1036(2) of the DCCP and Article 15(1) of the UNCITRAL Rules. In so doing, the Tribunal violated procedural public policy, which is sanctioned by the setting aside of the Award pursuant to Article 1065(e) of the DCCP. (ii) Equal Treatment 506. In addition, the absence of the final and binding determination of the highest Indian court also constitutes a violation of the right of equal treatment, protected by the same Article 1036(2) of the DCCP and Article 15(1) of the UNCITRAL Rules.
672 Exh. RoI-1, Award, ¶ 1436. 673 Exh. RoI-1, Award, ¶ 1436. 177
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
507. As the European Court of Human Rights held in the Dombo Beheer/Nederland case, the right to equal treatment requires that (i) a party must be afforded an opportunity to present its case, which also includes the opportunity to adduce evidence; and (ii) a party must be afforded an opportunity to present its case under conditions that do not place it at a disadvantage vis-à- vis its opponent.674 508. These two requirements were not met in this case. 509. First, it is a matter of record that India could not adduce the final determination on CUHL’s tax liability of the exclusively competent Indian court in support of its defense in the arbitration for the simple reason that tax proceedings leading to that final determination are still ongoing and are yet to produce a final outcome. Hence, the Tribunal failed to afford India a timely opportunity to present the evidence it required in order to defend itself properly against Cairn’s claims. 510. Second, by admitting Cairn’s premature claims and by forcing India to defend itself on the merits despite the absence of a final determination of CUHL’s tax liability by the exclusively competent Indian court, the Tribunal conducted the arbitral proceedings under conditions that placed India at a disadvantage towards Cairn. No element of Cairn’s case on their claims under the BIT suffered from any equivalent or similar constraint. 511. Equal treatment in this case would have required the Tribunal, at the very minimum, to stay the arbitral proceedings pending the final outcome of the proceedings before the exclusively competent Indian courts so that both Parties could have an opportunity to make their submissions and adduce evidence on the basis of a complete and settled factual basis. The fact that the Tribunal chose to continue and finish the arbitration before the exclusively competent Indian courts made their final determination in respect of CUHL’s tax liability is conclusive evidence that India’s right to equal treatment was violated. Accordingly, the Award was made in a manner that violates procedural public policy, which leads to the setting aside of the Award in accordance with Article 1065(1)(e) of the DCCP. (iii) The Surprise Decision 512. As explained in Section IV.B above, the Tribunal’s determination to the effect that the dispute is arbitrable is solely based on its self-invented distinction between “tax disputes” and “tax- related investment disputes”, which constitutes the lynchpin of its reasoning.675 513. In this respect, three points merit attention. 514. First, the Tribunal’s reasoning is devoid of legal foundation. In the sole paragraph on which the entire Award hinges, the Tribunal did not cite any legal authority under any applicable law. That is because none exists. There is not one published investment treaty award, nor any other source of law, supporting the distinction invented by the Tribunal. This is not surprising,
674 European Court of Human Rights, 27 October 1993, ECLI:NL:XX:1993:AD1977, NJ 1994, 534 (Dombo Beheer/Nederland), ¶ 33. 675 Exh. RoI-1, Award, ¶ 793. 178
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
as the Tribunal’s invented distinction obliterates any prohibition on the arbitration of tax disputes, because any “tax dispute” would become a “tax-related investment dispute” simply by virtue of framing the State’s actions as inconsistent with its obligations under an investment treaty (see ¶¶ 233-236 above and ¶ 274 above). 515. Second, the Parties did not rely on or refer to the supposed distinction between “tax disputes” and “tax-related investment disputes”. India’s jurisdictional objection was founded on the proposition that all tax-related claims that implicated a State’s fiscal sovereignty to tax were not arbitrable. In response to that objection, Cairn never distinguished the non-arbitrability of tax disputes, from the (wrongly) presumed arbitrability of tax-related investment disputes. In their updated Statement of Reply, Cairn responded to India’s jurisdictional objection under the heading “India’s Objections That the Treaty Excludes all Tax-Related Claims”,676 and nowhere in that (or any other) submission did Cairn seek to draw a conceptual distinction between the tax-related claims at the heart of India’s objection and the category of “tax- related investment claims” that the Tribunal came up with in the Award. 677 In the sole instance where the term “tax-related investment disputes” is actually employed,678 Cairn also refers to “taxation disputes.” The interchangeable use of terminology confirms that Cairn did not advance their case on jurisdiction on the basis of a conceptual distinction between “tax disputes” and “tax-related investment disputes.” It is therefore apparent from Cairn’s written submissions on jurisdiction that Cairn rightly understood India’s jurisdictional objection to be based on an exclusion of all tax-related claims from the Tribunal’s jurisdiction and responded to India’s pleaded case in that respect. 516. Nor did Cairn articulate and develop the distinction between “tax disputes” and “tax-related investment disputes” as a self-standing ground for its case on jurisdiction at either of the hearings. 517. Third, and most importantly for the ground, the Tribunal failed to put the conceptual distinction – that it apparently deemed relevant – to the Parties before, during or after the hearings. As both Parties’ submissions on jurisdiction were focussed on “India’s Objections That the Treaty Excludes all Tax-Related Claims”, 679 it was incumbent upon the Tribunal to put its invented conceptual distinction to the Parties and give them an opportunity to make submissions in this respect. It did not. 518. Although the Tribunal was aware that its purported distinction between “tax disputes” and “tax-related investment disputes,” would form an indispensable part of its reasoning, it failed to give the Parties any opportunity to express themselves on the distinction. As a result of the omission, the Tribunal issued a surprise decision, which is based on grounds that none of the Parties advanced in support of their respectively pleaded cases on jurisdiction during the procedural debate.
676 Exh. RoI-4, SoRy, p. 105. 677 Exh. RoI-4, SoRy, pp. 105-115. 678 Exh. RoI-4, SoRy, ¶ 303. 679 Exh. RoI-4, SoRy, p. 105. 179
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
519. Consequently, India was deprived of its right to be heard in this respect and to address this distinction that the Tribunal deemed essential. The Tribunal thus failed to administer due process, which requires that “the parties must have been heard sufficiently in respect of the essential elements on which the judicial decision is based and may not be surprised by a judicial decision, which they – in view of the procedural debate – should not have had to take into account.” 680 That is exactly what happened here. India has had no opportunity to express itself on the essential purported distinction between “tax disputes” and “tax-related investment disputes”, on which the Tribunal based its entire jurisdictional decision and premised the relevant findings on liability.681 520. Pursuant to Article 1036(2) of the DCCP, the Tribunal was not allowed to base its decision against India on a matter on which India was unable to comment on. As the Netherlands Supreme Court held in the case of Poort c.s./Stoppers, a tribunal is “not at liberty to base its decision on legal grounds that have not been advanced as the basis for a claim or defense. That would compromise the opponent’s right to defend itself properly in that respect.”682 521. By placing determinative importance on a distinction between “tax disputes” and “tax-related investment disputes” for both jurisdiction and liability without having administered a procedural debate between the Parties on that essential element, the Tribunal violated India’s right to be heard. Accordingly, the Award should be set aside on the basis of Article 1065(1)(e) of the DCCP for violation of procedural public order.
VI. CONCLUSION 522. For the reasons set out above, the Republic of India requests that the Award dated 21 December 2020 be set aside on each ground separately and on all grounds jointly on the basis of Article 1065(1)(a) of the DCCP and/or Article 1065(1)(e) of the DCCP.
VII. EVIDENCE 523. In support of its arguments, India will enter the exhibits mentioned in this summons into the proceedings by the first docket date. 524. Insofar as Your Court would find that India bears (counter-)evidentiary burden, India offers to prove its claims through the hearing of fact witnesses and/or expert witnesses, including for example, but not limited to, the following person: Professor Kees van Raad (Professor of International Tax Law at the University of Leiden).
680 Supreme Court, 31 January 2014, ECLI:NL:HR:2014:212, NJ 2014/89 (Koolman/Arubags), ¶ 3.5.1. 681 Also, in C-PHB, no conceptual distinction was drawn between “tax disputes” and “tax-related investment disputes.” In the few instances where the term “tax-related investment dispute” is employed, it is used interchangeably with the terms “tax disputes” and “tax-related disputes.” (Exh. RoI-4, C-PHB, ¶¶ 653, 659, 666, 670-672). 682 Supreme Court, 1 October 2004, ECLI:NL:HR:2004:AO9900, NJ 2005, 92 (Poort/Stoppels), ¶ 3.4. 180
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
525. Given that Cairn’s defences against the claim for setting aside are unknown, India is not able to specify any exhibits or witnesses it has at its disposal to substantiate the grounds on the basis of which Cairn may dispute the application for setting aside. 526. India relies on the exhibits submitted in the Arbitration proceedings, as well as the additional exhibits listed in the List of Exhibit hereto.
VIII. CONDUCT OF THE PROCEEDINGS 527. In light of the factual and legal complexity of the dispute, as well as the high financial interest involved in the Award, the setting aside of which is sought in this proceeding, and India's cross-appeal for a declaration of confidentiality (see Section IX below), India requests Your Court to order an oral hearing at short notice after the first day of service under Article 87 of the DCCP in order to consult with the Parties on the course of the proceedings and the further conduct of the case. 528. In view of the above, India requests Your Court to give the Parties, in any event, the opportunity to file a Reply and a Rejoinder in the proceedings on the merits, and subsequently to give the Parties the opportunity to explain the grounds for annulment orally in oral hearing.
IX. INCIDENTAL CLAIM PURSUANT TO ARTICLE 27 AND 28 OF THE DCCP READ WITH ARTICLE 208 OF THE DCCP 529. India refers to the facts and circumstances described above, which should be regarded as repeated and incorporated here, where relevant. 530. India lodges incidental claims under Article 208 of the DCCP and requests your Court of Appeal to decide on these first and foremost under Article 209 of the DCCP. The incidental claims are based on Articles 27 and 28 of the DCCP, whereby India requests the CoA to: (i) determine that the hearing(s) to be held will take place in camera (only with the admission of the Parties and their lawyers); and/or (ii) prohibit the defendants from disclosing to third parties any information from the present proceedings and the arbitration proceedings, or from providing such information, on pain of a penalty; and/or (iii) to order the defendants to ensure that the directors and/or others who are (or have been) affiliated with the defendants (such as, but not limited to, employees) do not disclose to third parties (i) any proceedings, which took place in a closed session and/or (ii) a session to which only certain persons were admitted and/or (iii) any information from the present proceedings and the arbitration proceedings and/or to disclose such information, on pain of a penalty. 531. India has a strong and urgent interest in ensuring the highest possible level of confidentiality of these proceedings and the arbitral proceedings (within the limits explained below). That interest includes the fact that there are other proceedings pending and likely to be initiated concerning similar tax disputes that were the subject of the Cairn arbitration proceedings. The
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
urgent interest in a decision first and foremost (Article 209 of the DCCP) is that if a decision on these claims is only made at a later stage in the proceedings, the damage would have already been suffered because the information would have reached entities for whom it was not intended. India therefore has an interest in the incidental claims being decided first, i.e., before a meeting in chambers takes place and before Cairn is in a position to deliver its reply. The interest in confidentiality and the legal basis of the incidental claims are further explained as follows.
A. Importance of Confidentiality 532. The nature and grounds of the interests have already been explained and developed in the arguments underlying the claims for annulment, and are contained therein. To these the following are added. 533. For India, it is (presently) of great importance to prevent third parties from learning about the arguments raised in the arbitral proceedings and the arguments that have been and will be raised in the present annulment proceedings. There are several third parties who have indirectly transferred interests in India during the period between 2006 and 2012 and have accrued capital gains in India and accordingly have been subjected to capital gains tax in that regard. India has a legitimate interest that those third parties, amongst others, will not, with a “copy paste” click of the button, be in a position to access and adopt the arguments and defenses raised by Cairn, as well as the considerations and decisions of the Tribunal, which might lead them to commence similar arbitration proceedings against India or embellish their arguments based on the Cairn arbitration. This could cause a cascade of proceedings against India, notwithstanding that those arbitrations will suffer from the same defects as the present one (including, inter alia, conflict with the scope of Section 9(1)(i) of the Indian Income Tax Act 1961 and the interpretation of the concept of immovable property under Section 2(47)(vi) of the Indian Income Tax Act 1961). 534. In short, India has a strong interest in preserving the confidentiality of these proceedings and the arbitration proceedings. As opposed to this, there are no legally cognizable interests of Cairn that would militate against the adjudication of these incidental claims.
B. Legal Framework 535. The starting point, the main rule as formulated under Article 27 of the DCCP, is that the hearing is public. In practice, this means that, for example, a personal appearance before court is, in principle, also public.683 536. An exception to the principle of publicity is a situation where that right is waived.684 In this case, that waiver is contained in the arbitration proceedings. At Cairn’s very urgent request
683 Asser Procesrecht/Giesen 1 2015/356. 684 Asser Procesrecht/Giesen 1 2015/358, with reference to HR 18 April 1986, NJ 1987/314, m.n.. E.A. Alkema (Notary X.), section 3.3: "After all, Art. 6 ECHR does not preclude that in disciplinary proceedings the person whose conduct is being assessed voluntarily waives his right to public treatment, in which case a non- public treatment does not constitute a violation of the Convention (. . .).” 182
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
and detailed arguments to that effect, the arbitration proceedings were conducted behind closed doors. As follows from PO 2, the Tribunal has explicitly determined “that the proceedings, including any hearings, shall not be open to the public”.685 537. That confidentiality extends, by the very nature of the prohibition, to the present annulment proceedings. Accordingly, the present proceedings should take place under the same regime. 538. In addition, Cairn itself had requested in the arbitration that the proceedings be held in camera, which implies a waiver of rights also with regard to possible annulment proceedings arising out of the arbitration. In any case, also in view of the secrecy that was already ordered to be maintained by the Tribunal, no legitimate interest of Cairn would be impacted if hearings were to take place behind closed doors (with the admission of the Parties and lawyers) in the annulment proceedings. 539. As far as the grounds mentioned in Article 27 of the DCCP are concerned, the Court is vested with a wide discretion.686 The interests of India qualify as interests of public order or morality, interests of State security of India, interests of protection of the right to privacy and the interest of due process (Article 27 paragraph 1 sub a, b, c, d of the DCCP). 540. Privacy also extends to legal persons. See in this context, for example: “[. . .] If, as a result of a public hearing, an undertaking risks suffering damage beyond repair by virtue of the disclosure of hitherto unknown information about that undertaking, the court may order the doors to be closed. Such damage may result, first and foremost, from a deterioration in the competitive position as a result of the disclosure of information on production costs or technology. It may also be damage caused by the fact that the functioning of the company is hampered by the disclosure of internal deliberations. Another example is the release of price-sensitive information, which may jeopardise the economic position of the company.”687
541. The public nature of the hearing in this case goes far beyond the ordinary inconvenience, given the major (financial and public) interests of India at stake and the nature and scope of the grounds for annulment at issue. 542. With regard to the request for prohibition on disclosure of information to be exchanged in these annulment proceedings, such as procedural documents and exhibits, it implies that these are not public.688 Therefore, the principle of publicity does not preclude the granting of an injunction against the defendants to provide such information to third parties and/or to make announcements about it.
685 Exh. RoI-4, Procedural Order No. 2, 12 August 2016, ¶ 59(d). 686 Parliamentary Papers II 1999/2000, 26 855, no. 5, p. 30: The grounds mentioned in article 1.3.9, which also occur in the current article 429g, first paragraph, Rv, are derived from article 6, first paragraph, ECHR, we answer the members of the PvdA fraction; precisely because of their rather general formulation, they may be applied by the judge in very different circumstances, also in the light of case law of the European Court of Human Rights. 687 T.F.E. Tjong Tjin Tai, Groene Serie Burgerlijke Rechtsvordering, art. 27 Rv, ¶ 5. 688 Article 29 (3) Rv, see also Asser Procesrecht/Giesen 1 2015/356. 183
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
543. In this respect, the orders of the Tribunal in PO 2 are also relevant, which states, inter alia, the following: “a. DIRECTS that the Parties are in no way restricted from making public (including through publication on the website of the Permanent Court of Arbitration, their own websites or otherwise) the name of the disputing parties (i.e., Cairn Energy PLC, Cairn UK Holdings Limited, and the Republic of India), the economic sector involved (i.e., oil and gas exploration and production), the treaty under which the claim is being made (i.e., the UK-India BIT), and summaries of their positions (including the relief requested). If a Party wishes to publish a summary of its position, it shall first provide the other Party with the proposed text. If the other Party expresses no objection within one week of receiving the proposed summary, the first Party may proceed with the publication. If there is an objection and the Parties are unable or unwilling to resolve the difficulty through negotiation, the first Party shall submit the proposed summary to the Tribunal who, after hearing both Parties, will issue a decision.
b. DIRECTS that the Parties are in no way restricted from making public on the website of the Permanent Court of Arbitration any and all awards (including interim and final awards) and orders (including procedural orders), subject to the Parties' right to redact any commercially sensitive and/or confidential information. Prior to such publication, the Party intending to publish the order, decision or award will consult with the other Party with respect to the necessary redactions. If the Parties are unable or unwilling to solve any redaction issues, the first Party shall apply to the Tribunal who, after hearing both Parties, will then make a decision. In case of a final award, upon request from either Party prior to the rendering of such award or on its own motion, the Tribunal will issue appropriate directions together with the award.
c. ORDERS that neither Party shall make public, in part or in whole, any other document submitted, produced or created in connection with this proceeding, including but not limited to procedural correspondence, the Notice of Dispute, the Notice of Arbitration, the Statement of Claim, the Statement of Defence, any other written submissions by the Parties, any transcripts of hearings, any and all witness statements, expert reports, or documentary exhibits.”689
544. In short, the Parties are bound to observe secrecy (unless there is an agreement to the contrary or a decision is made by the Tribunal). For the record, it is noted that such a decision was made by the Tribunal in Procedural Order No. 18 dated 9 August 2019 (“PO 18”), with respect to PO 2 and PO 16. For the rest of the record, there is no agreement between the Parties (to the extent relevant here), nor has the Tribunal reached a decision in this respect (whereby, with regard to the Award, it also applies that the request referred to in point b, referred to in ¶ 543 above has not been made, let alone that the Tribunal has given appropriate directions in this respect). The secrecy applicable between the Parties to the arbitration therefore also extends to the secrecy of the decisions made therein and the procedural
689 Exh. RoI-4, Procedural Order No. 2, 12 August 2016, ¶¶ 59(a)-(c). 184
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
documents and exhibits exchanged in the arbitration proceedings. Under these circumstances, the setting aside proceedings also cannot be conducted otherwise than in camera and with an order for confidentiality; otherwise they would be in breach of the regime that applied during the arbitration proceedings. That would not be any different if publication of the judgment to be delivered in this case were to be anonymised or otherwise restricted. 545. The scope of the secrecy applicable between the Parties during the arbitration also includes the documents that have been and will be exchanged in these annulment proceedings. 546. In addition, a balancing of interests between the Parties requires that the requested injunction be granted. India's interests in an injunction outweigh Cairn’s interests in not having one, especially since Cairn is attempting to cause as much nuisance as possible by going public and putting India under undue pressure. It is in India’s interest that these annulment proceedings can be conducted without the publicity pressure and Cairn has no legitimate interest to the contrary. India has a right and an interest in this injunction being instituted with a penalty payment, as an incentive to comply. 547. If and insofar as it is determined that the hearing will take place in camera or only with the admission of certain persons, it will also imply (Article 28 paragraph 1 sub a of the DCCP) that the Parties will be prohibited from communicating with third parties about the proceedings at the hearing. In that case, India will also have an interest in seeing a prohibition order made against the directors and others, as well as a penalty payment imposed on both defendants as an incentive to comply. 548. Because the injunctions sought will be a toothless tiger if directors or persons associated with the defendants are allowed to breach the injunction imposed on the defendants, India has a right and an interest in ensuring that the defendants will be required to impose effective confidentiality clauses on their directors and such persons, which clauses should continue if such persons are no longer associated with the defendants. Also in this regard, the defendants’ obligations should be reinforced by periodic penalty payments as an incentive to comply.
C. Request to the CoA in Connection with the Provisions of Article 28 of the DCCP 549. Article 29 of the DCCP stipulates who (other than the parties themselves), and under what conditions, may receive a copy of a judgment, whether or not anonymised. The judge may censor data in the decision. In addition, the court clerk may refuse to issue a copy on the grounds of the compelling interests of others.690 550. India requests Your Court of Appeal to make the names of the Parties anonymous in Your Judgment (including the incidental judgment and any interlocutory judgments), in so far as it would be published and/or supplied in copies, and/or not to publish and/or not to include in
690 R.F. Groos, JPBR 2010/901 Keeping or disclosing secrets in civil proceedings, notes to art. 22, 27, 28 and 29 Rv. 185
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
copies (summaries of) the positions taken by the Parties, the arbitral awards rendered691 and/or quotations from them or from productions submitted. 551. After all, the so-called anonymization directives do not provide a sufficient guarantee in this case because they are limited to measures that should prevent the direct identification of natural persons.
X. REQUEST FOR RELIEF 552. May it please the Court: Primarily: (i) to set aside the Award dated 21 December 2020 rendered in PCA Case No. 2016-7 between Cairn Energy PLC and Cairn UK Holdings Ltd. as the Claimants and the Republic of India as the Respondent; and (ii) to order Cairn Energy PLC and Cairn UK Holdings Ltd., jointly and severally, to reimburse any and all amounts that may have been executed pursuant to the enforcement of the Award, together with legal interest accruing from the day of the execution to the day of the reimbursement; and In the incident of Articles 27 and 28 of the DCCP: (iii) order that the hearing to be held shall take place in camera (only with the admission of the Parties and their lawyers); and/or (iv) prohibit each of the defendants from communicating to third parties any information from the present proceedings and the arbitration proceedings between the Parties (including, but not limited to, the Award rendered in the arbitration (with the exception of PO 2 and PO 16 (see ¶ 544 above)) and information mentioned in the procedural documents, including submitted exhibits, to disclose such information or documents (not including information of which defendants can demonstrate that it is or has become publicly known, other than through breach by defendants or any of them of this prohibition), on penalty of a fine of EUR 5 million to be forfeited jointly and severally for each time, day or part of a day that defendants or any of them act in breach of this obligation; and/or (v) order each of the defendants to ensure that the directors of and/or others who are or have been affiliated with the defendants (such as, but not limited to, employees) do not disclose to third parties (i) any proceedings held in a closed session and/or (ii) a session to which only certain persons are admitted and/or (iii) any information from the current arbitration proceedings and those conducted between the Parties (including, but not limited to, the arbitral awards rendered between the Parties (with the exception of PO 2 and PO 16) and information that is mentioned in the procedural documents, including submitted exhibits, to disclose such information or documents (not including
691 Noting again that PO 2 and PO 16 are exempted from this pursuant to PO 18. 186
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
information of which defendants can demonstrate that it is or has become publicly known, other than through breach by defendants or any of them of this prohibition), on penalty of forfeiture of a fine of EUR 5 million to be paid by defendants jointly and severally for each time, day or part of a day that defendants or any of them fail to comply with this order and/or one or more of the directors or other persons (formerly) affiliated or connected with defendants act in breach of that obligation; In the alternative: make such provisions as Your Court of Appeal may deem appropriate in view of the foregoing; Primarily and in the alternative: order the defendants jointly and severally to pay the costs of these proceedings, as well as the incidental claims, including the subsequent costs of EUR 163, to be increased by EUR 85 if service is effected, and, if payment is not made within fourteen days, to be increased by the statutory interest pursuant to Section 6:119 of the Dutch Civil Code, to be calculated from the fifteenth day after the judgment.
Bailiff
The cost of this is, including VAT:
19x writ: € 1972,77 Costs of registered mail: P.M. Cost of shipment by courier: P.M.
The undersigned hereby declares that the above expenses were incurred for the proper performance of the official act and were necessary, and that he has no direct or indirect interest in the company or third party invoicing the above expenses.
The creditor cannot offset the calculated VAT within the meaning of the Turnover Tax Act 1968.
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
LIST OF EXHIBITS
RoI Exhibits
1. Award dated 21 December 2020 issued in PCA Case No. 2016-7 Cairn Energy PLC and Cairn UK Holdings Limited v. Republic of India
2. Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Promotion and Protection of Investments, which entered into force on 6 January 1995
3. Index to the Entire Case File of PCA Case No. 2016-7 Cairn Energy PLC and Cairn UK Holdings Limited v. Republic of India
4. Entire Case File of PCA Case No. 2016-7 Cairn Energy PLC and Cairn UK Holdings Limited v. Republic of India
5. Expert Opinion by Professor Kees van Raad
6. The Telegraph, Cairn's Indian oil find comes in at the top end of City forecasts, 5 September 2004
7. Cairn Energy PLC – Interim Report and Accounts 2004
8. Cairn Energy PLC – Interim Report and Accounts 2005
9. Cairn Energy PLC – Interim Report and Accounts 2006
10. Victor Thuronyi, Comparative Tax Law (Alphen aan den Rijn: Kluwer Law International, 2003)
11. Bundesfinanzhof, 10 January 2012, I R 66/09
12. Luc Hinnekens, “La prévention de la double non-imposition dans les conventions bilatérales suivant le modèle de l’OCDE,” in Mélanges John Kirkpatrick (Brussels: Bruylant, 2004) 385-424
13. Anne Van de Vijver, “International Double (Non-)taxation: Comparative Guidance from European Legal Principles,” EC Tax Review 24, No. 5 (2015): 240-257
14. Jalia Kangave, “‘Taxing’ TWAIL: A Preliminary Inquiry into TWAIL’s Writ of Summons to the Taxation of Foreign Direct Investment,” International Community Law Review 10, No. 4 (Dec. 2008): 389-400
15. Jalia Kangave, “The Dominant Voices in Double Taxation Agreements: A Critical Analysis of the “Dividend” Article in the Agreement between Uganda and the Netherlands,” International Community Law Review 11, No. 4 (Nov. 2009): 387-407
188
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
16. Christoph Schreuer, “At What Time Must Jurisdiction Exist?,” in Practising Virtue: Inside International Arbitration, ed. David D. Cameron et al. (Oxford: Oxford University Press, 2015): 264-279
17. Markus Burgstaller and Agnieszka Zarowna, “Effects of Disposal of Investments on Claims in Investment Arbitration,” in ed. Maxi Scherer, Journal of International Arbitration 36, No. 2 (2019): 231-258
18. Vimal Kishor Shah & Ors v. Jayesh Dinesh Shah & Ors, Civil Appeal 8164 of 2016 (arising out of SLP(C) No. 13369 of 2013), 2016 (8) SCALE 116
19. A. Ayyasamy v. A. Paramasivam & Ors, Civil Appeals 8245-8246 of 2016, 2016 SCC OnLine SC 1110
20. Vidya Drolia and Ors. v. Durga Trading Corporation, Civil Appeal 2402 of 2019
21. Hannah Woolaver, “From Joining to Leaving: Domestic Law’s Role in the International Legal Validity of Treaty Withdrawal,” European Journal of International Law 30, No. 1 (February 2019): 73-104
22. Jeeja Ghosh v. Union of India, Writ Petition (C) 98 of 2012, (2016) 7 SCC 761
23. Chapters on Articles 27, 31 and 46 in Vienna Convention on the Law of Treaties: A Commentary, eds. Oliver Dörr and Kirsten Schmalenbach (Berlin: Springer, 2018)
24. Richard Kearney, “Internal Limitations on External Commitments - Article 46 of the Treaties Convention,” International Lawyer 4, No. 1 (October 1969): 1-21
25. Indira Nehru Gandhi vs Shri Raj Narain & Anr, Appeal (Civil) 887 of 1975, 1976 (2) SCR 347
26. Kesavananda Bharati Sripadagalvaru and Ors v. State of Kerala and Anr, Writ Petition (Civil) 135 of 1970, (1973) 4 SCC 225
27. Constitution of India 1950 (Relevant Extracts)
28. VS Mani, “Effectuation of International Law in the Municipal Legal Order – The Law and Practice in India,” Asian Yearbook of International Law 5, No. 1 (1997): 145-174
29. Aparna Chandra, “India and International Law: Formal Dualism, Functional Monism,” Indian Journal of International Law 57, No. 1 (2017): 25-45
30. Bhavesh Lakhani v. State of Maharashtra, Criminal Appeal 1452 of 2009 (arising out of SLP (Crl.) No. 6407 of 2008), (2009) 9 SCC 551
31. State of West Bengal v. Kesoram Industries, Appeal (Civil) 1532 of 1993, (2004) 10 SCC 201
32. Jolly George Varghese v Bank of Cochin, 1980 AIR SC 470
33. Maganbhai Ishwarbhai Patel v Union of India, (1970) 3 SCC 400
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Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
34. Ministry of Finance, Note for the Cabinet, Approval of a Bilateral Investment Promotion and Protection Agreement with the United Kingdom, D.O. No. F.26/1/93-FI&T
35. Letter by Ministry of External Affairs regarding ratification process, 7 April 1994
36. Instrument of Ratification of the India-UK BIT.
37. Union of India v. Agricas LLP, Transfer Petition (Civil) 496-509 of 2020, 2020 SCC OnLine SC 675
38. Gramophone Company of India Ltd. v Birendra Bahadur Pandey, Civil Appeals 3216 to 3218 of 1983, (1984) 2 SCC 534
39. “Internal Limitations on External Commitments - Article 46 of the Treaties Convention,” International Lawyer 4, No. 1 (October 1969): 1-21
40. R (Miller) v. Secretary of State for Exiting the European Union [2017] UKSC 5, 24 January 2017
41. Arabella Lang, Briefing Paper Number 5855, House of Commons, 17 February 2017, Parliament’s role in ratifying treaties
42. S. L. Verma, “Installation of Federal Authority in the Indian Political System: Quest for a Real Federation,” The Indian Journal of Political Science 47, No. 2 (April - June 1986): 247-257
43. Ministry of External Affairs, Letter dated 1 March 1994, No.1320/AS(ER)/94
44. James Crawford, “International Law and Foreign Sovereigns: Distinguishing Immune Transactions,” British Yearbook of International Law 75, no. 96 (1984)
45. Zachary Douglas, “State Immunity for the Acts of State Officials,” British Yearbook of International Law 82, no. 1 (2012): 281–348
46. Roger O’Keefe, Christian J. Tams, Antonios (eds), The United Nations Convention on Jurisdictional Immunities of States and Their Properties (OUP, 2012)
47. Hazel Fox, The Law of State Immunity 515 (3rd ed., OUP 2013)
48. Abdulqawi A. Yusuf and Daniel Peatp, “A Contrario Interpretation in the Jurisprudence of the International Court of Justice,” CJCCL 3, no. 1 (2017)
49. Liliana E. Popa, “The Holistic Interpretation of Treaties at the International Court of Justice,” Nordic Journal of International Law 87 (2018): 249-343
50. C. McLachlan, “The Principle of Systemic Integration and Article 31(3)(c) of the Vienna Convention,” International and Comparative Law Quarterly 54, (2005): 279
51. Note Verbale, Embassy of Italy, 23 February 1995
52. Government of India, Law Commission of India, Report No. 260, Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty
190
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
53. Diane M Ring, “What’s at Stake in the Sovereignty Debate?: International Tax and the Nation State,” Va J Intl L 49, (2008-2009): 155
54. Roland Paris, “The Globalization of Taxation? Electronic Commerce and the Transformation of the State,” International Studies Quarterly 47, (2003): 153
55. Allison Christians, “Sovereignty, Taxation, and Social Contract,” Legal Studies Research Paper Series 7-8, Paper No. 1063 (2008)
56. Charles E McLure, “Globalization, Tax Rules and National Sovereignty,” BFIT 55, (2001): 328
57. Jennifer Bird-Pollan, “The Sovereign Right to Tax: How Bilateral Investment Treaties Threaten Sovereignty,” Notre Dame Journal of Law Ethics & Public Policy 32, no. 1 (2008): 107-133
58. Memorandum from the Chairman of the Legal Sub-Group to the Chairman of Working Group II, Document No. LEG-14 (Mar. 5, 1993)
59. Canada Department of Finance, Tax Policy Branch: Fax from A. Castonguay to F. Mullen et al. (Mar. 19, 1993)
60. Telefax from Ole Kirkvaag, Advisor - Norwegian Royal Ministry of Finance and Customs, to Leif Ervik, European Energy Charter Secretariat (Mar. 19, 1993)
61. Memorandum from the Ministère du Budget of France to the ECT Secretariat (Mar. 19, 1993) and European Energy Charter Conference Secretariat, Document 30/93 - CONF 54 (April 1, 1993)
62. Government of India, Law Commission of India, Report No. 260, Analysis of the 2015 Draft Model Indian Bilateral Investment Treaty
63. Zachary Douglas, The International Law of Investment Claims (CUP 2009)
64. P. Gümplová, “Sovereignty over natural resources – A normative reinterpretation,” Global Constitutionalism 9, no. 1, (2020): 7-37
65. Cairn India Limited & Ors vs Directorate General of Foreign Trade, in W.P.(C), 11600,30709 of 2015, Delhi High Court Judgment dated Oct 18, 2016
66. Vedanta Limited & Ors vs Directorate General of Foreign Trade, LPA 48/2017, CM APPL. 2395/2017, CM APPL. 27489/2017
67. Reliance Industries Limited v. Reliance Natural Resources Limited (2010) 7 SCC 1
68. Hossain, Zoheb, Kumar, Alok Prasanna, “The New Jurisprudence of Scarce Natural Resources: An Analysis of the Supreme Court’s Judgment in Reliance Industries Limited v. Reliance Natural Resources Limited (2010) 7 SCC 1,” Indian Journal of Constitutional Law 4, (2010): 105
191
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69. Extract of CIL’s Annual Report and Audited Accounts for the Financial Year ending on 31 March 2007
70. Extract of CIL’s Annual Report and Audited Accounts for the Financial Year ending on 31 March 2009
71. OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, Action 6 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris.
72. OECD, “Tax Challenges Arising from Digitalisation – Report on Pillar Two Blueprint: Inclusive Framework on BEPS,” OECD/G20 Base Erosion and Profit Shifting Project, 2020.
73. E. C. C. M. Kemmeren, “Where is EU law in the OECD BEPS Discussion?” EC Tax Review 23, no. 4, (2014): 190-193
74. Weiser v Revenue and Customs Commissioners, [2012] STI 3238
192
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ANNEX A
Figure 2 and Figure 6 of Writ of Summons
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Structure of Cairn’s Indian Assets as of June 2006 (Figure 2 of Writ of Summons)
194
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Timeline of Cairn’s Key Transactions (Figure 6 of Writ of Summons)
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ANNEX B
The Tribunal’s Failure to Apply Indian Law to the Merits of the Claim
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1. The structure and substance of the Tribunal’s reasoning on the merits of the claim are characterized by the deliberate avoidance of the application of the legal standards that properly governed central issues in dispute, including in particular Indian law. In doing so, the Tribunal violated Article 11(1) of the Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland (“UK”) and the Government of the Republic of India (“India”) for the Promotion and Protection of Investments, which entered into force on 6 January 1995 (“India-UK BIT”), which provides that “all investments shall be governed by the laws in force in the territory of the Contracting Party in which such investments are made”, i.e., in the present case, Indian law. 2. As described in the Writ of Summons, the primary stated basis of the Income Tax Department’s imposition of capital gains tax upon Cairn UK Holdings Ltd. (“CUHL”) was Section 9(1)(i) of the Indian Income Tax Act 1961 (“IT Act”), which was the subject of the Finance Act 2012 (Act No. 23 of 2012) (“2012 Clarification”).1 In the Arbitration, India had made several important submissions on the nature of Section 9(1)(i) and the 2012 Clarification (including in particular the latter’s constitutionality as a matter of Indian law), and how those issues of Indian law fundamentally undermined Cairn Energy PLC’s (“CEP”) and CUHL’s (together “Cairn”) claims that India’s conduct breached the Fair and Equitable treatment (“FET”) standard in the India-UK BIT contained in Article 3(2)2 thereof: 2(a) the scope of Section 9(1)(i) of the IT Act was not settled at the time of Cairn’s investment, prior to the Supreme Court’s decision in Vodafone International Holdings B.V. v. Union of India & Anr. (the “Vodafone Judgment”);3 2(b) India has a long and transparent history of retroactive taxation, with accompanying constitutional standards as to the permissibility of such measures which was clear for any investor in India to see;4 2(c) the constitutionality of the 2012 Clarification applying those standards was not disputed:5
1 Exh. RoI-4, C-53, Finance Act 2012 [Act No. 23 of 2012]. 2 Exh. RoI-2, India-UK BIT: “Article 3. Promotion and Protection of Investment . . . (2) Investments of investors of each Contracting Party shall at all times be accorded fair and equitable treatment and shall enjoy full protection and security in the territory of the other Contracting Party.” 3 Exh. RoI-4, C-59, Vodafone International Holdings B.V. v. Union of India & Anr. [2012] 6 SCC 613; Exh. RoI-4, R-PHB, Section III; Exh. RoI-4, Merits/Evidentiary Hearing, December 2018, Hr. Tr. Day 1, pp. 85:14- 87:23 (Respondent’s Opening Statement); Exh. RoI-4, Merits/Evidentiary Hearing, December 2018, Hr. Tr. Day 1, pp. 94:24-97:8 (Respondent’s Opening Statement). 4 Exh. RoI-4, R-PHB, ¶ 376(a); Exh. RoI-4, R-SoRj, ¶¶ 466-501; Exh. RoI-4, SoD, ¶¶ 150-162; Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 6, pp. 11:13-12:1 (Respondent’s Opening Statement); Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 6, pp. 168:18-169:3 (Respondent’s Opening Statement); Exh. RoI-4, Merits/Evidentiary Hearing, August 2018, Hr. Tr. Day 6, p. 182:1-182:21 (Respondent’s Opening Statement). 5 See Exh. RoI-4, R-PHB, ¶¶ 378-379; Exh. RoI-4, R-SoRj, Section V.B; Exh. RoI-4, Evidentiary/Merits Hearing, August 2018, Hr. Tr. Day 1, pp. 120:15-121:22 (Respondent’s Opening Statement); Exh. RoI-4, Evidentiary/Merits Hearing, August 2018, Hr. Tr. Day 1, pp. 129:24-130:1 (Respondent’s Opening Statement); Exh. RoI-4, Evidentiary/Merits Hearing, Hr. Tr. Day 1, pp. 231:1-232:4 (Respondent’s Opening Statement). For the presumption of constitutionality and the substantive standards of constitutionality in Indian law, see Exh. RoI- 4, SoD, ¶ 158 and the case law summarized in Annex E thereto. 197
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(i) no constitutionality challenge has ever been made in India, and therefore a presumption of constitutionality (which is an established rule of Indian law) applied; and (ii) in any event, the 2012 Clarification is constitutional, because the interpretation of Section 9(1)(i) was unsettled and unclear, with the result that (applying established standards of Indian constitutional law) the Indian Parliament was entitled to step in to clarify the meaning of the provision irrespective of what the Indian Supreme Court had held to be its proper meaning in the Vodafone Judgment; and 2(d) Cairn’s failure to challenge the constitutionality of the 2012 Clarification, and the undisputed constitutionality thereof, is irrefragable proof that, applying the relevant standard (Indian law), the 2012 Clarification was truly clarificatory of the meaning of Section 9(1)(i) of the IT Act as a rule based on substance and economic reality (as opposed to pure form and formal conflicts rules as determined by the Indian Supreme Court in the Vodafone Judgment) and not an impermissible “expansion of the tax base”. 3. The Tribunal purported to reject those arguments on the merits, but was only able to do so as a result of a series of manoeuvres,6 the combined effect of which was to avoid application of the applicable legal standard (Indian law) entirely because doing so could only lead to one result: the dismissal of the claim. That outcome was inevitable, were the correct legal standards to have been applied, because Cairn did not invest in a country that banned retroactive taxation, but instead in one where the same was permissible and permitted (particularly to combat tax abuse) within a transparent and settled constitutional framework where the meaning of the relevant legislative provision was unclear and unsettled (as it was here). There are three stands to the Tribunal’s avoidance of the applicable legal standard. 4. First, the Tribunal deliberately side-stepped the established Indian law test for whether a legislative measure is properly characterized as “clarificatory”, by instead purporting to decide the issue as a purported question of fact, applying a supposed public international law standard of its own invention. Despite acknowledging that its own “review of the Indian case law” disclosed a clear and applicable Indian law standard,7 it re-framed the issue in terms that circumvented any Indian law analysis and instead simply asked “whether that Amendment
6 The Tribunal while considering India’s submissions (see para 2(b) above), failed to take into account several legal authorities relied upon by India (see Exh. RoI-4, R-207, Empire Industries Ltd. v. Union of India, [1985] 3 SCC 314; Exh. RoI-4, R-81, Entertainment Tax Officer v. Ambae Picture Palace (1994) 1 SCC 209; Exh. RoI-4, R-58, National Agricultural Co-operative Marketing Federation of India Ltd. & Anr. v. Union of India & Ors., AIR 2003 SC 1329; Exh. RoI-4, R-79, R C Tobacco Pvt Ltd & Anr. etc v Union of India & Ors, AIR 2005 SC 4203; Exh. RoI-4, R-157, Shubh Timb Steels Limited v. Union of India and Anr. High Court of Punjab and Haryana, (2010) 236 CTR (P&H) 562; Exh. RoI-4, R-158, Retailers Association of India v. Union of India and Ors, High Court of Bombay, Judgment 2011(7) ALL MR 461; Exh. RoI-4, R-182, State of Karnataka v Karnataka Pawn Brokers Association, 2018 SCC Online SC 231; Exh. RoI-4, R-82, CIT v. Gold Coin Health Food (P) Ltd, (2008) 9 SC 622. 7 Exh. RoI-1, Award, ¶ 1085. 198
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(and its application to the Claimants) violated the BIT”.8 In answering that question the Tribunal then applied what appears to be a purported public international law standard (albeit citing no authority), of whether the 2012 Clarification was a permissible “true clarification” or an impermissible “expansion of the tax base”, which, in turn, it answered by reference to purported purely “factual” enquiries as to whether it “merely clarified the existing legislation or expanded its scope”, or whether it did “not expand the scope and the effects of a provision beyond what its reasonable and objective interpretation could have established in its previous text”.9 5. What is more, in conducting that purported public international law or “factual” enquiry, the Tribunal entirely avoided and ignored the central aspect of India’s case noted above, namely that (as a matter of Indian law) the meaning of Section 9(1)(i) of the IT Act was unclear and unsettled, and that the Vodafone Judgment could have gone either way so that (i) the relevant legislative provision was indeed unclear; (ii) the Parliament was entitled to intervene as it did; and (iii) the 2012 Clarification was a permissible true clarification and not an impermissible expansion of the tax base. Indeed, the Tribunal went so far as to state expressly that “[w]hether the provision could potentially have been interpreted otherwise prior to the Vodafone decision is irrelevant”.10 Not only is that statement at odds with established Indian constitutional law, it is irreconcilable with later findings by the Tribunal (i) that, supposedly, Section 9(1)(i) of the IT Act “could not by way of interpretation, extend to indirect transfers”,11 and that was “the only objectively reasonable interpretation” it could bear;12 and (ii) that “there was no authoritative judicial ruling at the time of the Transaction that definitively held that Section 9(1)(i) must be read literally” and that “[t]he best evidence that the law was not so clearly settled is the fact that in Vodafone the Bombay High Court interpreted Section 9(1)(i) expansively”.13 6. Secondly, the Tribunal expressly disclaimed analysis of constitutionality as a matter of Indian law (including the question of whether the 2012 Clarification was clarificatory in the Indian law sense), concluding that “it need not enter into the issue of constitutionality of the 2012 Amendment”, because “[e]ven if the 2012 Amendment was found to be constitutional under Indian law, the Tribunal would still have to examine the measure and its application to the Claimants under the BIT’s FET obligation”.14 However, that conclusion (i) followed from the mischaracterization of India’s case as arguing that constitutionality as a matter of Indian law would be “determinative” of liability under the India-UK BIT15 (no such argument was
8 Exh. RoI-1, Award, ¶ 1089. 9 Exh. RoI-1, Award, ¶ 1089; see also Exh. RoI-1, Award, ¶ 1091. 10 Exh. RoI-1, Award, ¶ 1230. 11 Exh. RoI-1, Award, ¶ 1250. 12 Exh. RoI-1, Award, ¶ 1256. 13 Exh. RoI-1, Award, ¶ 1766. Notably, prior to the Vodafone Judgment by the Indian Supreme Court, the High Court of Bombay had rendered a decision wherein it had, indeed, interpreted the fourth limb of Section 9(1)(i) of the IT Act expansively as being applicable to indirect transfers (see Exh. RoI-4, C-161, Vodafone International Holdings B.V. v. Union of India & Anr. [2010] Writ Petition No. 1325/2010). 14 Exh. RoI-1, Award, ¶ 1694. 15 Exh. RoI-1, Award, ¶¶ 1687-1688. 199
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advanced); and (ii) ignored the relevance of constitutionality to the substantive enquiry as to whether the FET standard had been breached in this case, proving – as it did – that when applying the relevant standard (Indian law) the 2012 Clarification was truly clarificatory and legitimate, and not an impermissible expansion of the tax base. 7. Indeed, the Tribunal itself acknowledged that a finding of constitutionality “would … provide some evidence possibly relevant to the application of the treaty standards”,16 but nevertheless refused to consider the issue, and did so without explaining how or why it was free to ignore such a relevant matter that had been clearly pleaded and dealt with in detail in the Parties’ submissions. 8. Thirdly, the Tribunal took a highly selective approach to the substantive content of the FET standard, expressly excluding from its enquiry consideration of the investor’s legitimate expectations.17 While the content of the FET standard admits of various interpretations, the Tribunal’s clear-cut refusal to determine whether Cairn had any legitimate expectation (in 2006) that capital gains arising from the 2006 Transactions18 would not be taxed under Section 9(1)(i) of the IT Act, provided cover for its refusal to apply Indian law as explained above. If, on the other hand, the Tribunal had considered whether Cairn held any such legitimate expectations, it would have been forced to engage with India’s transparent history of retroactive taxation, the unsettled scope of Section 9(1)(i) of the IT Act, and the constitutionality of the 2012 Clarification (including the application of the presumption of constitutionality in the absence of any constitutional challenge in the Indian courts, which demonstrated that the 2012 Clarification was truly clarificatory applying the correct legal standard, i.e., Indian law). The Tribunal’s bright-line exclusion of legitimate expectations enabled it to avoid those issues, and the proper application of relevant Indian legal standards thereto, entirely. 9. Furthermore and finally, having ignored the Parties’ pleaded cases on legitimate expectations, the Tribunal purported to find liability on the basis of concepts of “legal certainty”, “stability” and “predictability” which it assumed – without any justification or explanation – could (unlike the concept of legitimate expectations) be disconnected from the applicable law (Indian law) and from the legal framework in which Cairn invested. Thus, no explanation is given in the Award as to how what was predictable for a party in Cairn’s position in 2006 or what sort of stability it was entitled to, can be dissociated from the legal system governing its purported investment and ignore the fact that that legal system expressly and transparently allowed retroactive taxation in clearly defined and regulated circumstances. Similarly, the Tribunal purported to decide what was legally certain without any reference to Indian law, and in particular the established principle of Indian law (which was never contested by Cairn)
16 Exh. RoI-1, Award, ¶ 1693. 17 Exh. RoI-1, Award, ¶¶ 1762 and 1771. Instead, the Tribunal’s analysis turned exclusively on legal certainty, transparency and predictability. 18 Defined in ¶ 28 of the Writ of Summons. 200
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that the Parliament, not the Supreme Court, has the final say with regard to the meaning of truly unclear Indian legislation. 10. The overall effect of the above features of the Tribunal’s Award was that it side-stepped the application of the Indian legal standards that were clearly and mandatorily applicable to central issues in the case and relied upon by India. In doing so, it acted inconsistently with Article 11(1) of the India-UK BIT, and therefore failed to apply the law mandated in the BIT. 11. While the Tribunal’s failure to apply the law it was mandated to apply is not relied upon by India in these setting aside proceedings as a ground for annulment, for the purposes of these proceedings it does show that the Tribunal’s erroneous understanding of the relevant issues in dispute tainted not only the jurisdictional matters but also the merits of the case. Furthermore and generally, the position taken by India in this respect is firmly maintained and will be invoked again, as appropriate, in the context of any proceedings arising from or related to the matters covered in the Award, including but not limited to proceedings regarding the recognition and enforcement of the Award in any jurisdiction.19
19 See f.n. 197 of the Writ of Summons. 201
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ANNEX C
Examples of Investment Treaties with Taxation Carve-Outs and Definitions of “Measures” or “Taxation Measures”
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A. Examples of Bilateral Investment Treaties Stipulating Taxation Carve-Outs and Defining “Measures”
Contracting States Taxation Carve-Out Definition of “Measure” (Year) 1. Canada -Ukraine Art. XII(1): “Except as set out in this Article, nothing in this Art. I(h): “‘measure’ includes any (1994) Agreement shall apply to taxation measures.” [emphasis law, regulation, procedure, added] requirement, or practice.” 2. Canada-Trinidad and Art. XII(1): “Except as set out in this Article, nothing in this Art. I(h): “‘measure’ includes any Tobago (1995) Agreement shall apply to taxation measures.” [emphasis law, regulation, procedure, added] requirement, or practice”
3. Canada-Philippines Art. XII(1): “Except as set out in this Article, nothing in this Art. I(h): “‘measure’ includes any law, (1995) Agreement shall apply to taxation measures.” [emphasis rule, regulation, requirement, or added] established governmental procedure or practice; ‘existing measure’ means a measure existing at the time this Agreement enters into force.” 4. Canada-Romania Art. XII(1): “Except as set out in this Article, nothing in this Art. I(i): “‘measure’ includes any (1996) Agreement shall apply to taxation measures.” [emphasis law, regulation, procedure, added] requirement, or practice.”
5. Canada-Ecuador Art. XII(1): “Except as set out in this Article, nothing in this Art. I(i): “‘measure’ includes any (1996) Agreement shall apply to taxation measures.” [emphasis law, regulation, procedure, added] requirement, or practice.” 6. Canada-Barbados Art. XII(1): “Except as set out in this Article, nothing in this Art. I(h): “‘measure’ includes any (1996) Agreement shall apply to taxation measures.” [emphasis law, regulation, procedure, added] requirement, or practice.”
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Contracting States Taxation Carve-Out Definition of “Measure” (Year) 7. Canada -Venezuela Art. XI(1): “This Agreement shall apply to taxation measures Art. I(h): “‘measure’ includes any (1996) only to the extent set out in this Article and in paragraph (14) law, regulation, procedure, of Article XII [investor-State dispute settlement].” [emphasis requirement, or practice.” added]
8. Canada-Egypt Art. XII(1): “Except as set out in this Article, nothing in this Art. I(h): “‘measure’ includes any (1996) Agreement shall apply to taxation measures.” [emphasis law, regulation, procedure, added] requirement, or practice.” 9. Canada-Armenia Art. XII(1): “Except as set out in this Article, nothing in this Art. I(h): “‘measure’ includes any (1997) Agreement shall apply to taxation measures.” [emphasis law, regulation, procedure, added] requirement, or practice.” 10. Canada-Uruguay Art. XI(1): “Except where express reference is made thereto, Art. I(f): “‘measure’ includes any (1997) nothing in this Agreement shall apply to taxation measures. law, regulation, procedure, For further certainty, nothing in this Agreement shall affect requirement, or practice.” the rights and obligations of the Contracting Parties under any tax convention. In the event of any inconsistency between the provisions of this Agreement and any such convention, the provisions of that convention shall apply to the extent of the inconsistency.” [emphasis added]
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Contracting States Taxation Carve-Out Definition of “Measure” (Year) 11. Canada -Lebanon Art. XI(1): “Except where express reference is made thereto, Art. I(f): “‘measure’ includes any law, (1997) nothing in this Agreement shall apply to taxation measures. regulation, procedure, requirement, or For further certainty, nothing in this Agreement shall affect the practice.”
rights and obligations of the Contracting Parties under any tax convention. In the event of any inconsistency between the provisions of this Agreement and any such convention, the provisions of that convention shall apply to the extent of the inconsistency.” [emphasis added]
12. Canada-Croatia Art. XI(1): “Except where express reference is made thereto, Art. I(f): “‘measure’ includes any law, (1997) nothing in this Agreement shall apply to taxation measures. regulation, procedure, requirement, or For further certainty, nothing in this Agreement shall affect the practice.”
rights and obligations of the Contracting Parties under any tax convention. In the event of any inconsistency between the provisions of this Agreement and any such convention, the provisions of that convention shall apply to the extent of the inconsistency.” [emphasis added]
13. Canada-Thailand Art. XII(1): “Except as set out in this Article and Article VIII Art. I(h): “‘measure’ includes any law, (1997) [expropriation], nothing in this Agreement shall apply to regulation, procedure, requirement, or taxation measures.” [emphasis added] practice. ‘existing measure’ means a measure existing on the date of entry into force of this Agreement.”
205
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Contracting States Taxation Carve-Out Definition of “Measure” (Year) 14. Canada -Costa-Rica Art. XI(1): “Except where express reference is made thereto, Art. I(i): “‘measure’ includes any law, (1998) nothing in this Agreement shall apply to taxation measures. regulation, procedure, requirement, or For further certainty, nothing in this Agreement shall affect the practice.” rights and obligations of the Contracting Parties under any tax convention or existing tax laws. In the event of any inconsistency between the provisions of this Agreement and any such convention or law, the provisions of that convention or law shall apply to the extent of the inconsistency.” [emphasis added]
15. U.S.-Uruguay Art. 21: “Except as provided in this Article, nothing in this Art. 1: “‘measure’ includes any law, (2005) Treaty shall apply to taxation measures.” [emphasis added] regulation, procedure, requirement, or practice.” 16. Canada-Latvia Art. XII(1): “Except as set out in this Article, nothing in this Art. I(i): “‘measure’ includes any law, (2009) Agreement shall apply to taxation measures.” [emphasis regulation, procedure, requirement, or added] practice.”
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B. Examples of Multilateral Investment Treaties and Free Trade Agreements Stipulating Taxation Carve-Outs and Defining “Measures”
Treaty Taxation Carve-Out Definition of “Measure”
1. United States-Canada- Art. 2103(1): “Except as set out in this Article, nothing in this Art. 201: “measure includes any law, Mexico North Agreement shall apply to taxation measures.” [emphasis regulation, procedure, requirement or American Free Trade added] practice” [emphasis in original] Agreement (1994)
2. Energy Charter Treaty Art. 21(1): “Except as otherwise provided in this Article, Art. 21(7)(a): “For the purposes of this (1994) nothing in this Treaty shall create rights or impose obligations Article: with respect to Taxation Measures of the Contracting Parties. (a) The term “Taxation Measure” In the event of any inconsistency between this Article and any includes: other provision of the Treaty, this Article shall prevail to the (i) any provision relating to taxes of the extent of the inconsistency.” domestic law of the Contracting Party or of a political subdivision thereof or a local authority therein; and (ii) any provision relating to taxes of any convention for the avoidance of double taxation or of any other international agreement or arrangement by which the Contracting Party is bound. [emphasis added]
3. United States- Art. 21.3(1): “Except as set out in this Article, nothing in this Art. 2.1: “’measure includes any law, Dominican Republic- Agreement shall apply to taxation measures.” [emphasis regulation, procedure, requirement, or Central America Free added] practice” [emphasis in original] Trade Agreement (2004)
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This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
Treaty Taxation Carve-Out Definition of “Measure”
4. EU-Canada CETA (2016) Art. 28.7: “1. Nothing in this Agreement shall be construed to Art. 1.1: “measure includes a law, prevent a Party from adopting or maintaining any taxation regulation, rule, procedure, decision, measure that distinguishes between persons who are not in the administrative action, requirement, same situation, in particular with regard to their place of practice or any other form of measure by residence or with regard to the place where their capital is a Party” [emphasis in original] invested. 2. Nothing in this Agreement shall be construed to prevent a Party from adopting or maintaining any taxation measure aimed at preventing the avoidance or evasion of taxes pursuant to its tax laws or tax conventions. [. . .] 4. Nothing in this Agreement or in any arrangement adopted under this Agreement shall apply: (a) to a taxation measure of a Party that provides a more favourable tax treatment to a corporation, or to a shareholder of a corporation, on the basis that the corporation is wholly or partly owned or controlled, directly or indirectly, by one or more investors who are residents of that Party; (b) to a taxation measure of a Party that provides an advantage relating to the contributions made to, or income of, an arrangement providing for the deferral of, or exemption from, tax for pension, retirement, savings, education, health, disability or other similar purposes, conditional on a requirement that that Party maintains continuous jurisdiction over such arrangement; (c) to a taxation measure of a Party that provides an advantage relating to the purchase or consumption of a particular service,
208 Case 1:21-cv-00396-RJL Document 18-1 Filed 08/13/21 Page 210 of 211
Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
Treaty Taxation Carve-Out Definition of “Measure”
conditional on a requirement that the service be provided in the territory of that Party; (d) to a taxation measure of a Party that is aimed at ensuring the equitable and effective imposition or collection of taxes, including a measure that is taken by a Party in order to ensure compliance with the Party's taxation system; (e) to a taxation measure that provides an advantage to a government, a part of a government, or a person that is directly or indirectly owned, controlled or established by a government; (f) to an existing non-conforming taxation measure not otherwise covered in paragraphs 1, 2 and 4(a) through (e), to the continuation or prompt renewal of such a measure, or an amendment of such a measure, provided that the amendment does not decrease its conformity with the provisions of this Agreement as it existed immediately before the amendment.” [emphasis added]
5. EU-Japan FTA (2018) Art. 1.4(2): “This Agreement applies to taxation measures only Art. 1.4: “(c) "taxation measure" means a in so far as such application is necessary to give effect to the measure in application of the tax legislation provisions of this Agreement. [emphasis added] of the European Union, of its Member States or of Japan”
4. EU-Singapore FTA Art. 16.6(1): “This Agreement shall only apply to taxation Art. 1.3: “‘measure’ means any law, (2019) measures insofar as such application is necessary to give effect to regulation, procedure, requirement or the provisions of this Agreement. [emphasis added] practice”
209 Case 1:21-cv-00396-RJL Document 18-1 Filed 08/13/21 Page 211 of 211
Translation
This text is a translation of the Dutch original. In case of any discrepancies, the Dutch original shall prevail.
Treaty Taxation Carve-Out Definition of “Measure”
6. US-Canada-Mexico Art. 32.3(2): “Except as provided in this Article, this Agreement Art. 1.5: “measure includes any law, Agreement (2020) does not apply to a taxation measure. regulation, procedure, requirement, or [emphasis added] practice” [emphasis in original]
7. US-Korea FTA (2019) Art. 23.3(1): “Except as set out in this Article, nothing in this Art. 1.4: “measure includes any law, Agreement shall apply to taxation measures. [emphasis added] regulation, procedure, requirement, or practice” [emphasis in original]
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