Taxman’s right: Arbitration is a windfall gain in India!

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Published: September 13, 2019 1:39:50 AM

Indeed, in the Tata-Docomo case, where the government was not even a party, it argued that while it was true that an arbitration court had asked Tatas to pay Docomo damages based on a contract they had signed, since the contract was not permitted under Indian law, the damages couldn’t be paid.

Taxman, Taxman right, Arbitration, windfall gain, tax Swiss, Dalmia Bharat, opinion newsArbitration is the result of a dispute between two contracting parties.

Given how the taxman wanted to tax Swiss firm Xstrata’s arbitration award—against Delhi-based Dalmia Bharat—as ‘windfall gains’, the firm has to be happy with the rap the taxman received from the Delhi High Court. While it is not clear whether the taxman will appeal the ruling all the way to the Supreme Court in time-honoured fashion, the taxman’s behaviour only underscores the pitfalls that firms doing business in India have to live with. Arbitration is the result of a dispute between two contracting parties, and as the judgment said, cannot possibly be considered to be ‘windfall gains’ as has been described in Article 22(3) of the Double Taxation Avoidance Agreement between India and Switzerland—the Article talks of income from lotteries, races, card games, gambling, betting … So, is the taxman, even if unknowingly, saying that enforcing arbitration awards in India is really a matter of luck, a lottery?

Certainly, India’s recent history would seem to suggest this is true. In several cases, like Reliance-ONGC and Antrix-Devas, where the government (or PSU) has lost an arbitration case, instead of paying up, the government has challenged this in a local court even though, under the law, arbitration awards are only to be challenged rarely, and on very limited grounds like fraud in the award. Indeed, in the Tata-Docomo case, where the government was not even a party, it argued that while it was true that an arbitration court had asked Tatas to pay Docomo damages based on a contract they had signed, since the contract was not permitted under Indian law, the damages couldn’t be paid. Fortunately for Docomo, the judge would have none of this, and insisted the award be paid; if this meant the Tatas had violated the Fema law, he ruled, the group could be penalised for that separately. And, in other cases, like Vodafone and Cairn Energy, where the foreign firms took the government to global arbitration forums on the retrospective tax, despite then-finance minister Arun Jaitley saying the government would respect arbitration/court rulings on the tax, the government’s stand has all along been that the cases cannot even be arbitrated. In several other cases, such as the ones involving Reliance Industries, the government kept delaying appointing arbitrators, and, finally, the courts had to step in. And, in the case of NHAI’s disputes with contractors—it has disputes of around Rs 50,000 crore—even after Jaitley promised that, once contractors had won an arbitration, NHAI would pay 75% of the amount, it did nothing of the sort. Instead, it asked the contractors to give it bank guarantees for the amount—in case NHAI managed to get the courts to reverse the awards—which negated the FM’s promise.

As this newspaper has repeatedly suggested, the direct and indirect tax boards need to look into the actions of the taxmen since this is a big problem area for most firms; apart from the specifics of cases, their implications need to be clearly discussed. The taxman, though, is not the only guilty party; challenging arbitration awards seems to be par for the course for most government departments. In this case, though, even the private sector Dalmia Cement tried the same tactic.

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