OBJECTION: Despite international arbitration award, Amazon was not allowed to enter into a contract with Mukesh Ambani’s Reliance Retail.
By Arvind Pinto
The multiplicity of obstructive laws discourage foreign investors. The latest case in point is the crises caused by retrospective taxation which may lead to the closure of Vodaphone-Idea telecom network, which has been asked to pay not only huge taxes but also backdated license fees to the Telecom Department.
LIVING in a country where the press, sad to say, is not truly exposed to international opinions, it is difficult for us as citizens to realize India’s image from the point of view of international investors. Despite the best intentions of the government, India is not known as a reliable business partner, since international investors are not sure of our oscillating tax policies or the fairness of our judicial systems.
Last week however, in two separate decisions, one by the judiciary and the other by government, India has showed the world that we will stand by the principles of international law of equity and fairness, rather than jingoistic nationality. This was based on the two incidents which impacted the Supreme Court decision, the Amazon case and the decision by the government to withdraw the retro tax principle in regarding income-tax. Let’s look at this and the implications for the country.
The case before the Supreme Court was to determine whether the interim award, delivered by an Emergency Arbitrator under the Arbitration Rules of the Singapore International Arbitration Centre, could be said to be an order under Section 17(1) of the Indian Arbitration & Conciliation Act, 1966 and secondly, whether the order passed under Sec 17(2) of the Arbitration Act in enforcement of the award of the Emergency Arbitrator is appealable.
BASIS OF DECISION
WHAT was the basis of the decision? The Biyani group that controls Further Retail Limited had entered into an agreement with Amazon of Jeff Bezos fame in the year 2019. The agreement was for Amazon to invest in the retailing business with the ultimate intention of selling out to Amazon. On the basis of this agreement Amazon invested a sum of Rs1,431 crore in the company.
Within a few months of this agreement, Kishore Biyani entered into another transaction with Mukesh Ambani to transfer the retailing business to the Reliance Group. Amazon was not a party to this decision. Accordingly, the two groups Future and Amazon decided to settle their dispute through arbitration. This is how an award came to be delivered against the Future group by the Emergency Arbitrator under the Arbitration Rule of the Singapore International Arbitration Centre (SIAC Rules).
Amazon then took the award for enforcement to the Delhi High Court, where a single judge ruled in its favour. Subsequently, on appeal to the Division Bench, this decision was stayed. Against this stay by the Division Bench, Amazon filed a Special Leave Petition to the Supreme Court which gave its historic decision last week.
The judges on hearing the parties to the issue held both the parties FRL and Amazon by agreeing to the application of the Singapore (SIAC) Rules and the Award of the Emergency Arbitrator cannot now renege upon the decision. The judges rejected the argument of Harish Salve that the orders of the Emergency Arbitrator does not come within the ambit of arbitration. The Court held that an Emergency Arbitrator would come within the definition of the arbitral tribunal.
Further it was held that the decision of the Emergency Arbitrator would be binding on the parties and enforceable in India. The Supreme Court held that the Emergency Arbitrator functioned under the Arbitration Act and the interim order is an award that is capable of being enforced.
The decision is indeed, welcome, since it would send a message to the world community that Indian companies would be bound by arbitration agreements when they decide to participate in the same. It cannot be that if a decision goes against the party they would reject it, while accepting only if a decision is in their favor.
THUS, Indian companies are put to notice that they would have to stand by their commitments and would not be able to renege on the same, when entering into an agreement with multinational companies. This case drew much attention since it was widely believed that the Supreme Court would favor an Indian company, namely Reliance, as compared to Amazon. However, the Supreme Court rightly held that companies require to honour their agreements and cannot walk away from them on the plea that these are foreign entities.
In another equally important issue, the government has passed through the Lok Sabha a Taxation Laws (Amendment) Bill, 2021. This act seeks to undo an amendment that was inserted into the income-tax act to nullify the decision of the Supreme Court. The issue was the taxability of gains arising from the transfer of assets located in India, through the transfer of shares of a foreign company.
The Supreme Court in 2012 had held in a verdict that the gains arising from the indirect transfer of Indian assets by foreign companies was not taxable under the then provisions of the Income-Tax Act. In order to nullify this decision of the Supreme Court, the then government amended the law with retrospective effect to make the transfer of shares of a foreign company, whose value is based on the assets in India, taxable as capital gains.
On the basis of the change in law, amended by the Finance Act 2012 with retrospective effect, huge income-tax demands were raised on 17 international companies. In four cases the Bilateral Arbitration Councils ruled against the Tax Department, while two cases were stayed by the High Court. More than this India’s erratic tax policies drew criticism from the world community and many international investors were wary about dealing with India.
With the need for foreign investments, especially when our infrastructural and economic situations which require fresh foreign investments, the government has taken the decision to withdraw the retrograde retrospective tax. With the result that the notice issued will be withdrawn and assessments made will be cancelled and demands nullified.
While India would have to refund several crore worth of taxes, the world comity would look to India as one where equity and justice reign, rather than merely jingoism
CREDIBILITY ON WORLD STAGE
IF India is to be regarded as a destination where the rule of law prevails, the two unrelated processes will go a long way towards enhancing our credibility on the world stage. The decision of the Supreme Court will tell the world that the Judiciary will honour arbitration awards, even if they are by foreign agencies. Further, the Supreme Court in its judgement has shown the world that the court would go by Rule of Law rather than by domestic or nationalistic interests.
While the decision to withdraw the retrospective tax, will show the world that India taxation goes by the principle of certainty, and all those who do business in India would know in advance the taxability of their transactions, rather than be hit by an amendment in law. These two independent processes – one by the Judiciary and the other by Legislation, will show that India is a mature nation not governed by whimsical changes to suit only national self-interest!