The Arbitration and Conciliation (Amendment) Act, 2021 has been notified by the Central Government. It replaces an Ordinance and took effect from 4th November, 2020. It seeks to amend the Arbitration and Conciliation Act of 1996
to provide for an automatic stay on awards if it is prima facie satisfied that the applicable arbitration arrangement or contract/ making of the award was caused by fraud or corruption, and
to omit Schedule VIII of the Act and define qualifications, experience, and norms for arbitrator accreditation by regulations.
The legislation on the surface is presented as an effort to transform India into a major hub for commercial arbitration. Many Members of Parliament applauded the decision to abolish Schedule VIII of the 1996 Act (which sets certain qualifications, experience, and accreditation requirements for arbitrators) ostensibly because it will help India attract eminent foreign arbitrators and encourage institutional arbitration.
Some MPs, on the other hand, were against the automatic stay provision, arguing that it was unnecessary because Section 34(2)(b) of the Act already protects agreements caused by fraud or corruption. Members also raised concerns that the clause could be abused by the losing party to prolong the case by falsely alleging corruption or fraud, thus destroying the intent of the Alternative Dispute Resolution mechanism – which is to settle disputes quickly.
Significantly, the automatic stay clause goes into effect from October 23, 2015. Some members believe that implementing the amendment retroactively would results in a flood of suits. Despite the use of the terms "fraud/ corruption" in section 34, the Government argues somewhat lamely that an amendment to section 36 of the Act was required because it does not allow for an “automatic stay” of the award – which in itself is a very strange justification. If a dispute resolution mechanism can be derailed by one party simply saying that there has been fraud or corruption, then such a mechanism can be considered as completely ineffective, notwithstanding the high-quality arbitrators which the Government seems to promise will set up shop in India.
It also specified that the said stay on the award may not be indefinite, but will only be effective until the Court has made a request for cancellation pursuant to section 34 of the Act. In addition, the parties can file an appeal for cancellation of such a stay.
The Statement of Objects attached to the Amendment Bill has said is that it will empower Indian courts to set aside arbitration awards if it believes that there is a prima facie reason to believe that these have been “induced by fraud or corruption”. This somehow does not seem to be the real reason. For this, we need to understand why the amendment is retroactive from the odd date of October 23, 2015. What happened before or after that date?
For this, we need to understand some background (we are simplifying the explanation). When the ownership of Vodafone India changed hands, the seller and buyer, both being foreign-owned companies, India wanted to somehow tax the transaction. Their chief argument was that a significant part of the transaction value resided in India. They could not recover tax from the buyer or seller, so it decided to recover tax from the Indian company though it wasn’t even a party to the transaction. This was an entirely novel argument and was not supported by any taxing provision in the existing Indian income-tax law. So they raised a demand saying that the Indian company should have deducted tax at source under section 195 of the Income-Tax Act. Since they hadn’t, the penalty for the offence of non-deduction of tax at source was the amount of tax not so deducted. The tax demand raised was over Rs.22,000 crores. Vodafone India and the purchasing entity vociferously objected to this demand, and said that it was violated the Bilateral Investor Protection Agreement (BIPA) signed between the Netherlands (where the buying company Vodafone plc was incorporated) and India. It also began international arbitration proceedings. Vodafone received an international award in its favor in The Hague in September 2015 (note the date) that quashed the Indian tax demand for Rs 22,100 crore related to its purchase of 67% of Vodafone India.
To pre-empt the inevitable loss of the Cairn and other Income-tax cases in Indian Courts, the Indian Government brought in a retrospective amendment to the Income-tax Act taxing the value of such transactions. However, because of the tremendous pressure brought to bear by Vodafone using its global political connects, the Government changed the law retrospectively but quietly agreed not to implement the new law in Vodafone’s case. Why? Because there were several other cross-border large deals where the Indian business changed hands – in case of companies like Cairn Energy, Sanofi and Pfizer.
In Cairn Energy’s 2015 tax assessment, which came up next, the Government demanded $1.2 billion, but the Income-Tax Department managed to recover the demand by (i) confiscating Rs.1,140 crores of dividend the parent company was to receive from its Indian operations, and (ii) setting off a refund of tax due from an earlier year of Rs.1,590 crores against the 2015 tax demand. Cairn Energy also, like Vodafone earlier, disputed this demand tooth and nail, but the Government decided not to budge from its stand, relying on the amended income-tax law which put the burden of deducting tax at source on the Indian company. Meanwhile, Cairn Energy, filed for arbitration in 9 countries. The first of these arbitration cases began in end-October 2015 (again, note the date). It has so far won the arbitration awards in its favor in 5 of the 9 countries, including in the US and UK.
The date on which the retrospective change takes effect pre-dates Cairn Energy’s first arbitration application, but does not affect the Vodafone case, where it had filed for arbitration much earlier than Cairn Energy. Thus, now, the Government will rely on the fig leaf provided by the retrospective amendment of the Arbitration and Conciliation Act to argue that the law applicable to Vodafone is different from the law that applies to Cairn Energy and other companies which followed these two with similar deals. The amendment now brought in will supposedly empower Indian courts to set aside any arbitration award if it believes that there is a prima facie reason to believe that these have been “induced by fraud or corruption” – and it will conveniently so believe.
So see what has happened:
The Indian Government has in recent times, made two retrospective amendments – one to the income-tax law and another to the arbitration law, to try and tax transactions which were not really within its power to tax.
It is analogous to changing the rules of the game to show that the Indian Government won, after the result – that India had lost the game, had already been declared! This goes beyond even the Duckworth-Lewis Rules! This is certainly not cricket!
Cairn Energy has begun strong efforts to enforce the awards it has won (5 out of 9) by seeking to seize properties belonging to the Indian government in these nations, as India has refused to pay the amount it has wrongfully withheld. It is to pre-empt this embarrassing series of actions in developed countries that the amendment to the Arbitration & Conciliation Act has been rushed through.
Even more embarrassing is the fact that before the Permanent Court of Arbitration at Hague, the 3-member Tribunal cited public statements made by PM Modi and the then FM Arun Jaitley to justify dropping of the tax demand based on retrospective amendment to the tax law.
Rajesh is a qualified CA & CWA. He has served as a Director of PricewaterhouseCoopers, a Director of a large urban co-operative bank and Dean of a B-School over the years. He has taught Finance for over 20 years & trained participants from several Companies and B-Schools. He is an educator and a learner (he believes both are inextricably intertwined), and a knowledge product developer. Law Gyani, which he has founded to help Law Students with their exam preparations, and to understand nuances of the law.
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