The Feldman vs Mexico tribunal also refused to consider the right to receive VAT refund on the basis of expropriation, instead it considered the same under ‘national treatment.’
Plausibly, in response to a series of investor-state disputes initiated by various foreign investors under different investment protection agreements, India unilaterally terminated most bilateral investment treaties (BITs), in specific 58, to which it was a Contracting Party. However, it is evidently becoming difficult for the country to avoid new disputes. The recent controversy is that Nissan, a Japanese automaker, has initiated a claim under the investment chapter of the India-Japan Comprehensive Economic Partnership Agreement (CEPA), seeking compensation of $770 million (Rs 5,000 crore). It is to be noted that India has signed free-trade agreements (FTAs) with four countries—Singapore, Malaysia, Japan and South Korea. Yet this is the first dispute initiated based on a chapter on investment protection under an FTA.
Background of the dispute
In 2010, Nissan and its partner Renault—a French carmaker—set up a manufacturing plant in Oragadam near Chennai. Over the period of seven years, the joint venture (Renault Nissan Alliance Pvt Ltd) invested $946 million (Rs 6,100 crore) with an annual production of 4,80,000 cars. To further promote the investment, the state government of Tamil Nadu assured several fiscal incentives in the form of investment promotion subsidy (IPS) and value-added tax (VAT) refunds. It is understood that the state government had paid the IPS dues, but the dispute arose when Nissan claimed for VAT refund amounting to Rs 2,900 crore along with Rs 2,100 crore in damages, interest and other costs.
Legal analysis of the dispute
From a legal perspective, the dispute will inevitably focus on aspects like (1) the jurisdiction (competence of a body to adjudicate a legal dispute) of the international tribunal; (2) possible violations of the protections granted under the CEPA; and (3) the effect of anti-arbitration injunction (restraining Nissan from pursuing a case before an international arbitral tribunal), if issued, by the Madras High Court. To provide preliminary support to its claim, the Japanese investor has clarified that after exhausting all possible domestic remedies, including several rounds of negotiations with the State and Union government officials, there is no other option but to set in motion the dispute resolution mechanism under the CEPA. In relation to this and from a jurisdictional viewpoint, the Tamil Nadu government makes a reference to Article 96(6) of the Agreement and maintains that as Nissan last year filed petitions against the amendments to the Tamil Nadu Value Added Tax Act, 2006, a claim before an international arbitral tribunal is unsustainable.
In light of the above-mentioned argument by the state government, it would be reasonable to suggest that the same is most unlikely to succeed because (1) the claim before an international arbitral tribunal is initiated against the government of India and not against the state government of Tamil Nadu (which is the respondent in petitions filed against the amendments to the Tamil Nadu Value Added Tax Act, 2006); and (2) the claim relies on protections provided under an international agreement—the CEPA—and not on any domestic law. In relation to the substance of the dispute, as above mentioned, it revolves around the issue of tax credit. The regulation of tax in international investment law is a highly contested issue, and various tribunals have adopted different interpretative approaches to fix the liability of a host state under an investment protection agreement on the issue of VAT refund. In Occidental vs Ecuador, the tribunal found that the failure to refund VAT was not due to any deliberate action on the part of the government, but due to an incoherent tax structure. The tribunal also found that no ‘substantial economic deprivation’ took place. The tribunal did not find an expropriation, but it found that Ecuador breached both ‘national treatment’ and ‘fair and equitable treatment’ obligations guaranteed under Article II of the US-Ecuador BIT.
The Feldman vs Mexico tribunal also refused to consider the right to receive VAT refund on the basis of expropriation, instead it considered the same under ‘national treatment.’ In another case of Encana vs Ecuador, the tribunal focused only on tax refund right per se, instead of looking at the overall economic activity of the investment, and found that failure to refund VAT did not constitute any breach of the Canada-Ecuador BIT. The tribunal also found that there is not sufficient evidence to convince that denial of VAT refunds constituted an expropriation. Considering varying approaches of international arbitral tribunals on the issue of VAT refund, the discussion may not be limited to expropriation, and the liability of the government in the present dispute can be fixed under other provisions of the Agreement like under Article 85 (National Treatment) or Article 87 (General Treatment, which includes fair and equitable treatment) of the CEPA.
Further, with the rise of international arbitration, anti-arbitration injunctions have become increasingly popular. These injunctions are sought to restrain the initiation or continuation of arbitration proceedings. In relation to the dispute in hand, the government of Tamil Nadu has approached the Madras High Court to restrain the CEPA arbitration. Analysing the situation in light of international investment jurisprudence (SGS vs Pakistan, where the international arbitral tribunal exercised its jurisdiction irrespective of an order passed by the Supreme Court of Pakistan restraining the foreign investor to pursue an investment treaty arbitration), it is unlikely that such a proceeding before the Madras High Court will have any impact on the functioning of the international arbitral tribunal established under the CEPA. Moreover, it is to be noted that a similar request was filed before the Delhi High Court in relation to the Vodafone case, where the Court ultimately passed an order restraining the foreign investor from pursuing BIT arbitration on the issue of retrospective taxation. It is to be kept in mind that, in this case, it is the state government of Tamil Nadu which is a party to the anti-arbitration injunction proceeding before the Madras High Court and not the government of India. Even if a favourable order is passed, its effectiveness remains unclear.
Now coming to the stand taken by the state government in response to the claim made by Nissan, a state government official says that according to the MoU signed between Renault-Nissan and the government of Tamil Nadu in February 2008, tax incentives are to be paid over a period of 21 years. The official further added that tax benefit of about `1,600 crore was given to Nissan this financial year, but the foreign investor is trying to extract the subsidy in an accelerated fashion, which could disrupt the government’s reserves. The state government further asserted that the car manufacturer could claim 14.5% VAT refund only for car sales within Tamil Nadu, and the refund would be permitted till the ‘accruals’ reached the level of investment. The state government has rejected Nissan’s claim on the ground that the company was seeking VAT benefits for ‘exported’ cars as well; it is an attempt of claiming ‘double benefits.’ To analyse the content when the authors tried to get the official copy of the concerned 2008 MoU, it was informed that the same is ‘confidential’ and cannot be shared. Though it is unimaginable to consider a document of such a nature as ‘confidential,’ the approach (adopted by the state government of Tamil Nadu) certainly gives rise to a larger debate about overall transparency and accountability in the investment regime in the country.
India’s policy gap
In 2015, the Model BIT was promulgated in response to various investment claims initiated against India. However, considering the text, most developed countries are hesitant to comply with new standards because the revised Model BIT discourages investors and aggravates more regulatory risk by removing ‘most favoured nation’ clause, and imposing a mandatory requirement of ‘exhaustion of local remedies’ for five years before resorting to an international forum. It is also evident that the US, Canada and the EU have raised serious concern over these provisions and they are unenthusiastic to go with a BIT/FTA on these conditions. It is to be acknowledged that international investment protection agreements play a key role in attracting foreign capital, and such agreements become inevitable when the country is competing with other similarly-situated economies for becoming the most preferred investment destination. The incumbent government is making all possible efforts to effectively implement flagship programmes like ‘Make in India,’ yet it decides to terminate most BITs. The absence of these legal protections adversely affects investor confidence in the Indian market and is sufficient to derail the government from its objective of making India a manufacturing hub.
It is further evident from the Quarterly Fact Sheet on Foreign Direct Investment (FDI, updated up to March 2017; before which the Prime Minister had already visited countries like Belgium, France, Switzerland and the US primarily for attracting investments) published by the Department of Industrial Policy & Promotion that India is certainly not a favoured investment destination, specifically for potential investments from around the globe, including from continental Europe (with considerable number of traditionally capital-exporting countries). As per the report, around 60% of the total FDI inflow is from Mauritius and Singapore. This data must be examined in light of the fact that both Mauritius and Singapore impose lower corporate tax rates as compared to India. Many domestic investors route their capital investments through Mauritius and Singapore to take benefit from such tax rates. The same data further indicates that the combined foreign investment in construction (infrastructure projects), petroleum and natural gas, and mining sectors (where there is scope for job creation) is less than 6% of the total FDI inflow in the country.
It would not be unreasonable to suggest that ‘actions are against intentions.’ If the country aims to address larger issues like unemployment, a practicable revision of the Model BIT is the need of the hour. Moreover, in furtherance of the right of ordinary citizens to be informed about such critical issues, the Union government may also contemplate the possibility of establishing a central repository for all relevant data and documents related to investment landscape in India.
Somesh Dutta & A Saravanan
Dutta is an international dispute settlement lawyer based in Paris. Saravanan is a PhD candidate at the Rajiv Gandhi School of Intellectual Property Law, IIT Kharagpur