The concerns are on a rise ever since the evolution of arbitration. With expansion comes loopholes.

Let's talk about the Tata-Docomo Case, where the Govt was not even a party. The argument was 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, the group could be penalised for that separately, he ruled.

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.

It is though yet not clear as to whether the taxman will appeal against the verdict in Supreme Court or not, the taxman’s behaviour only underscores the problem that firms doing business in India have to deal with.

Arbitration is the result of a dispute between two contracting parties, and as the judgement states, 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 precisely talks about 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 that this is true. In several cases, like Reliance-ONGC and Antrix-Devas, where the Govt (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.

In other cases, like Vodafone and Cairn Energy, where the Foreign Firms took the Government to Global Arbitration forums on the retrospective tax, despite the then FM 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.

Not only these, in several other cases also, such as the ones involving Reliance Industries, the Government kept delaying appointing the arbitrators, and, finally, the Courts had to step in. And, in the case of NHAI’s disputes with contractors—it has disputes of around ₹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.

Suggestively, 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. Taxman, though, isn't the only guilty party; challenging arbitration awards seems to be par for the course for most government departments. In this case, though, even the Pvt Sector Dalmia Cement tried the same tactic.

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