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Undeniable Sovereign Right to Legislate

Undeniable Sovereign Right to Legislate

INTRODUCTION

Sometimes, an institution takes a step, which the successor in the office has to defend to save the reputation of the institution. This is exactly what happened in the retro-tax case. Despite, Vodafone winning the case at the highest level, the Government of the day took extreme step of amending the law with retrospective effect to tax a transaction, which was hitherto not taxable. To overrule the judgment of the Hon’ble Supreme Court, it brought in the amendment in the Income Tax Act with a validation clause. While the debate on the tenability of validation clause remains, the government suffered a big blow when the Permanent Court of Arbitration (“the Arbitral Tribunal”) decided against Government of India in Vodafone as well as in Cairn energy. What is more intriguing is that the Award was unanimous. However, the fallout is that while in Vodafone case, Government of India loses the right to tax but in Cairn Energy case, it would have to actually shell out $ 1.2 Billion besides the cost imposed.

In this article, we are discussing that whether by entering into an international treaty, the host country loses its sovereignty to legislate something contrary to the treaty. In the instant case, Vodafone invoked Bilateral Investment Treaty (“BIT/Treaty”) with Netherland against India before the Arbitral Tribunal. While the exact details of the proceedings are not available, it appears that the grievance was raised on account of denial of Fair and Equitable Treatment (FET) promised under Treaty.

The other major premise, which emerges consequential to the Arbitral Award, is whether it is obligatory on the nation or is more of binding nature when it comes to sanctions, which emanates as a consequence of exercise of sovereign power by the host nation, causing damage to the party to the BIT. In order to decipher the previously mentioned premise, let us first understand ‘What does fair and Equitable Treatment (“FET“) mean and then its parallel implication on the sovereign rights of the host nation’.

FAIR AND EQUITABLE TREATMENT – A SWORD OF AN INVESTOR

The doctrine remains undefined in the arena of public international law or in treaty. In order to understand the concept of FET we need to examine judgments, where the judges have tried to explain FET pertaining to the factual matrix of particular case. It could be understood as a treatment in an even-handed manner and just manner by the host nation to foster the promotion of foreign investment [1]MTD Equity Sdn. Bhd. and MTD Chile S.A. vs. Republic of Chile, Award, 25th May 2004, 12 ICSID Reports 6; an ad hoc committee upheld the decision, see Decision on Annulment, 21 March 2007 @ Para 113. Few determinants could be deciphered from the judgments, to define and understand the concept of FET, ‘any ministerial action being manifestly inconsistent, non- transparent, unreasonable, or discriminatory would be determined as in violation of treaty pertaining to FET.’[2]Saluka Investments BV (The Netherlands) vs. The Czech Republic, Partial Award, 17th March 2006 @ Para 309

Therefore, any ministerial act that is arbitrary, highly unfair, idiosyncratic, or discriminatory consequently exposes the party to the treaty to immense loss on both substantive and procedural side, which would come under the circumference of FET violation [3]See, Waste Management, Inc. v. United Mexican States, Final Award, 30th April 2004, 43 ILM (2004) 967. In Occidental case [4]Occidental Explorations and Production Company vs. The Republic of Ecuador, Award, 1 July 2004, 12 ICSID Reports 59, tribunal observed that “The tax line was changed without providing any clarity about its meaning and extent and the practice and regulations were also inconsistent with such changes.”[5]Ibid at Para 184 When the ministerial act is pertaining to change in laws while the BIT was executed, certainly it is not at all fair to alter the legal and business environment in which the investment was made[6]Ibid at Para 191.

The investor nation expects that the host nation would comply with the agreed consistency of policies and administrative regulations in furtherance of the investment [7]Tecnicas Medioambientales Tecmed S.A. V. The United Mexican States, Award, 29th May 2003, ICSID CASE No. ARB (AF)/00/2. However, failure by the host nation to comply with the agreed terms of policies and regulations would make the investor measure the treatment and protection awarded by the host nation whether action of the host nation is in compliance with FET principle [8]Ibid at Para 154.

In the instant case, India vehemently argued that they are inconformity with FET principle, and it is sovereign right to legislate in furtherance to strengthen nation’s economy and barring any perception of becoming a tax heaven.

INTERSECTION OF BIT AND SOVEREIGN RIGHT

There is no doubt with the fact that sovereign rights of the nation are not affected or compromised as an impact of execution of BIT. Neither BIT imposes any restriction on the sovereign right of the nation. The major concern, which is taken care by BIT between the host nation and investor, is regarding the consistency of the ministerial schemes agreed there under the BIT. It is primarily taken care that certainly, if the laws pertaining to the scheme is changed the investor shall not be under any loss or such change should not be in contradiction with the FET principle.

It is settled principle that prescribing particular rates for different entities is well within in the domain of parliament [9]Chohung Bank v. DDIT, 25th November 2005, (2006) 6 SOT 144 (Mum). The power of Parliament is not compromised by the virtue of treaty in force favoring assessee and if the source of such treaty is modified in such scenario, the assessee cannot claim such preference there under [10]Credit Agricole Indoaseuz vs. JCIT, 28th February 2007, (2007) 14 SOT 246 (Mum) @ Para 23. It was every country’s undeniable privilege and right to use its sovereign legislative authority. A country has the freedom to pass, alter or abolish legislation through its own discretion. Except for the presence of an agreement, as in manner of a specific provision or otherwise, and there’s nothing inappropriate about the amendment introduced to the legal regime present at the time an investor made its investment. In reality, any business person or investor understands that regulations will change over time. What is banned how is for a country to act unjustly, irrationally, or inequitably in the use of its legislative authority [11]Parkerings-Compagniet AS v. Republic of Lithuania, 11 September 2007, ICSID Case No. ARB/05/8 @ Para 332. The rule of pacta sunt servanda, ‘an agreement should be honoured,’ as expressed in Article 26 of the Vienna Convention [12]Vienna Convention on the Law of Treaties 1969, balances against the dangers of instability emerging from the host state’s behaviour in the execution of contractual requirements [13]AGIP SPA (General Oil Company of Italy) v Congo, 1979; and the Libyan American Oil Company (LIAMCO) v Government of the Libyan Arab Republic, 1977. Economic decisions are nation’s sovereign activities that are governed by significant international treaties that typically restrict the targeting of overseas investors and their ventures [14]Chapter II Article 1 of the Charter of Economic Rights and Duties of States, 1974.

CONCLUSION

The premises, which could be, inferred from the above-cited international law principles that there is no binding nature of the treaty though the high table of comity of nation creates an implied obligation. The obligation to keep the promise, which has been made by the host nation awarding protection and favorable treatment to the foreign investor. The treaty imposes no restriction on the parliamentary powers of the host nation. The sovereign power of the host nation remains intact with the parliament and it never gets compromised. However, any modification, cancellation or alteration affecting the interest of the foreign investor would be determined as violation of the Treaty. Therefore, there is no ex-facie intersection or restriction where the host nation has to compromise its sovereign power to legislate. In fact, a nation is inherent power to collect tax, revenue and change such laws from time to time with the change of diaspora. Such alteration or modification affecting the terms of BIT would only lead to an international obligation, which is again not mandatory to be performed. Nevertheless, in order to have FET from the comity of nation such obligations need to be fulfilled. Therefore, in the retro-tax case India has been put on back foot because India did not honour the terms of BIT and other principles as envisaged under the Public International Law.

 

 

 

Kalash Bakliwal

5th Year, B.Com., LL.B (Hons), Tamil Nadu National Law University, Trichy

References

References
1 MTD Equity Sdn. Bhd. and MTD Chile S.A. vs. Republic of Chile, Award, 25th May 2004, 12 ICSID Reports 6; an ad hoc committee upheld the decision, see Decision on Annulment, 21 March 2007 @ Para 113
2 Saluka Investments BV (The Netherlands) vs. The Czech Republic, Partial Award, 17th March 2006 @ Para 309
3 See, Waste Management, Inc. v. United Mexican States, Final Award, 30th April 2004, 43 ILM (2004) 967
4 Occidental Explorations and Production Company vs. The Republic of Ecuador, Award, 1 July 2004, 12 ICSID Reports 59
5 Ibid at Para 184
6 Ibid at Para 191
7 Tecnicas Medioambientales Tecmed S.A. V. The United Mexican States, Award, 29th May 2003, ICSID CASE No. ARB (AF)/00/2
8 Ibid at Para 154
9 Chohung Bank v. DDIT, 25th November 2005, (2006) 6 SOT 144 (Mum
10 Credit Agricole Indoaseuz vs. JCIT, 28th February 2007, (2007) 14 SOT 246 (Mum) @ Para 23
11 Parkerings-Compagniet AS v. Republic of Lithuania, 11 September 2007, ICSID Case No. ARB/05/8 @ Para 332
12 Vienna Convention on the Law of Treaties 1969
13 AGIP SPA (General Oil Company of Italy) v Congo, 1979; and the Libyan American Oil Company (LIAMCO) v Government of the Libyan Arab Republic, 1977
14 Chapter II Article 1 of the Charter of Economic Rights and Duties of States, 1974

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