CA Shagun Mahajan
While the Indian Government is going all out to create a positive India outline, however, it is a reality that the World Bank’s Ease of Doing Business 2015 report puts India as low as 186 on the criteria of contract enforcement. India strongly believes in the rule of law but an important aspect in doing business is factored out of the ease of settling disputes which is relevant to strategize future action plan for any business. It is no doubt an important element before making any large outbound investment.
Going into the meaning of the term ‘arbitration’, the same is derived from old French term ‘arbitracion’ meaning ‘absolute decision’. The meaning attached to arbitration i.e. ‘settlement of a dispute by a third party’ goes as early as 1630’s. Understanding and realizing the practical challenges of judicial mechanism in India, more foreign soiled entities are willing to access the arbitration route through bilateral investment treaties (BIT). BIT is an agreement signed between two countries to promote and protect investment made by each other in the respective countries. The agreement promotes fair and equitable approach for investments, protection and security of investments and dispute settlement mechanism between the states as well as between the host state and investor.
A. Ambit of BIT’s
Considering the increasing awareness around BIT’s to resolve disputes with the host nations including tax disputes, more companies are interested to know about the scope and applicability of bilateral investment treaty. The edge of having a bilateral investment treaty is that the company can directly involve itself with the host nation and issue a notice initiating arbitration which is otherwise not possible without involving the Government of the Investing nation.
In India, British Oil Explorer resorted to Arbitration citing its tax dispute with the Indian tax authorities over its 2006 reorganization. While the Indian Government still maintains that the current dispute is not an arbitrable dispute under the India-UK BIT, but the British Giant Cairn chose to approach the International Court of Justice for appointment of an arbitrator on behalf of India. Subsequently though, the Government cleared its stand on appointment of an arbitrator on a without prejudice basis qua its non-maintainability position.
The most eye-catching India tax dispute involving UK telecom major Vodafone also seeks resolution through arbitration. The Government had appointed its arbitrator alongside Vodafone’s arbitrator. However, the Panel could not survive long after the India arbitrator recused himself and declined to arbitrate in the near 20,000 crore tax dispute.
B. International Acceptance – Tryst with Arbitration over tax disputes
Internationally, there have been instances where companies have come to the aid of BIT’s and adopted arbitration as an efficient basis to put an end to tax disputes. The settlement of tax disputes through arbitration was formally adopted by the European Union as a dispute resolution mechanism in the event the matter remains unresolved through the mutual agreement procedure specifically involving transfer pricing related disputes.
Later on, the Organization for Economic Cooperation and Development inserted Article 25(5) providing for arbitration procedures where the issue remains unresolved post two years of negotiation between competent tax authorities of the two states.
Article 25(5) of the OECD model convention added on 17 July 2008 by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008 is reproduced below:
Where,
a) under paragraph 1, a person has presented a case to the competent authority of a Contracting State on the basis that the actions of one or both of the Contracting States have resulted for that person in taxation not in accordance with the provisions of this Convention, and
b) the competent authorities are unable to reach an agreement to resolve that case pursuant to paragraph 2 within two years from the presentation of the case to the competent authority of the other Contracting State,
any unresolved issues arising from the case shall be submitted to arbitration if the person so requests. These unresolved issues shall not, however, be submitted to arbitration if a decision on these issues has already been rendered by a court or administrative tribunal of either State. Unless a person directly affected by the case does not accept the mutual agreement that implements the arbitration decision, that decision shall be binding on both Contracting States and shall be implemented notwithstanding any time limits in the domestic laws of these States. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this paragraph.
Considering the nascent stages of Article 25(5), the OECD Model convention recognizes that there may be states that may not be completely in consonance with adopting Article 25(5). Further, adequate liberty has been granted to modify the contents suitably as may be agreed between two countries negotiating bilateral tax treaty. Further, OECD also highlights the importance of arbitration in cases where the competent authorities are unable to agree on a particular issue. Additionally, the confidentiality clause gives a comfort to the concerned parties on maintaining secrecy of proceedings such that the future court proceedings are unaffected by the basis of the judgment under arbitration.
Under the US Model Convention, although a similar provision akin to Article 25(5) of the OECD Model is absent, however, the U.S. has amended its tax treaties with Canada, Germany and Belgium offering an important example of providing MAP as an integrated code to settle international tax disputes.
C. Supportive Legislation in India and internationally
The arbitration landscape has witnessed marked changes considering some important decisions that clearly affirming a pro-arbitration outlook in the way arbitration and allied laws are interpreted by the country’s Apex Court. The Apex Court has delivered very important landmark rulings pointing towards a very cooperative and supportive environment where Indian arbitration can flourish in the coming future. While it is not difficult to acknowledge the distance we as a country need to travel in establishing India as an arbitration hub inviting global giants to India. Some of the positive trends supporting commercial arbitration in India are tabulated below:
| 246th Law Commission Report | Large scale amendments proposed to plug major gaps in the Arbitration & Conciliation Act, 1996 |
| World Sports Group (Mauritius) V. MSM Satellite (Singapore) Pte. Ltd. | Supreme Court held that allegations of fraud are not a bar to foreign seated arbitration |
| Union of India v. UP State Bridge Corp Ltd. | Supreme Court rules on independence and conduct of government arbitrators. |
| Bharat Aluminum Co. V. Kaiser Aluminum Technical Service | Supreme Court removed interference of Indian Courts in foreign seated arbitration |
| Antrix Corp Ltd. V. Devas Multimedia P. Ltd. | Supreme Court clarifies its power to appoint an arbitrator |
D. Conclusion
While the tax administrator still maintains that arbitration is not a suitable mechanism for tax disputes involving sovereign rights of the nation, it must be kept in mind that such bold steps project the country’s image as a business friendly destination keeping in mind the real long run benefits to the country. As a first step, Indian authorities should have a relook at the possible issues faced by investing foreign company keeping all the modes of resolution thrown open to the taxpayers and instilling confidence in institutions supporting arbitration which is a very well established resolution mechanism prevalent in today’s world.
