The slugfest involving the retrospective application of taxation norms began in 2010 when The Ministry of Finance's Department of Revenue decided to tax indirect transfers of shares of overseas companies, provided they had equity stakes in businesses in India. Hence, in pursuance of such claims, the Ministry launched a "test case" against Vodafone. However, the Supreme Court quashed the tax claim and ruled in favour of Vodafoneby observing that "it would be bogus to lift the corporate veil to delve into different elements" and allowing such transfers would be ultra vires of the taxation laws. But, the Ministry of Finance circumvented the Supreme Court decision by introducing the Finance Act, 2012.Therein the Ministry amended section 9(1)(i)of the Income Tax Act 1961 vide the Finance Acts opening the Pandora's Box. The amendment made clear that if the value of an overseas company's shares is generated in large part from underlying Indian assets, it is to be always understood that they are located in India. Moreover, the said amendment was said to have come into effect right from 1 April 1962, i.e. from 50 years earlier. But, this retrospective amendment was coloured as "clarificatory" to avoid getting into legal hassles. As a consequence, Hutchison Essar's purchase by Vodafone for $11.2 billion was declared taxable.

Nevertheless, such moves did not serve India's interest in the long run. India not only lost the arbitration against Vodafone at an international arbitration tribunal in The Hague but also made itself vulnerable to an entire range of claims.The recent loss in international arbitration in cases like Cairn has put New Delhi on the back foot. Cairn Energy can be said to be in the process of achieving two goals. Firstly, it is filing lawsuits to securethe tribunal's award amount by seizing Indian assets abroad. Secondly, by moving courts in countries across the globe it is more likely to get recognition of the tribunal's awards in different jurisdictions.As of now, it has filed suits in the United States, the United Kingdom, France, Canada, the Netherlands, Singapore, Mauritius, and two other countries and notably, all of them are signatories of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. These claims come in the backdrop of an arbitration tribunal's ruling from December 2020 that, firstly, turn down the Indian government's demand for Rs 10,247 crore plus interest as a penalty forCairn's reorganization tied to floatation on BSEin 2006 prompted byretroactive taxation amendment. Secondly, asked India to return the value of dividends seized,shares sold, and tax refunds that it had withheld to restore the tax demand.

Cairn Energy can be said to be relying on the Bancec Guidelines (Guidelines) to pierce the corporate veil and get a favourable order for seizing Indian assets. The Guidelines are the product of a US Supreme Court case of First National City Bank v Banco Para el ComercioExterior de Cuba[5] (Bancec).Here according to the court, corporations or government instrumentalities are deemed to have a separate legal existence under the general rule. However, this norm can be broken in certain circumstances thereby allowing a judgement creditor to claim instrumentalities of a nation, i.e. when they are classified as a particular nation's "alter ego", or when the presence of the corporate veil leads to injustice. These Guidelines were applied in the Crystallex International Corporation v Bolivarian Republic of Venezuela , (Crystallex) a case similar to Cairn. There Crystallex Corporation sought enforcement of a 1.2 billion USD award by attaching the shares of a state-owned oil company Petroleos de Venezuela, S.A (PDVSA). As the state had authority over the company it fulfilled the requirements of alter ego test otherwise knownas the test of extensive control. So,Crystallex's demands were passed allowing it the recover the amount. Cairn Energy too is running the alter ego test to recover the award. In furtherance of the same it had bought a lawsuit in a New York District Court for seizing Air India's planes. Cairn Energy based its claim of establishing the airline company as India's alter ego as the government owns and operates the carrier's business. The company aims to establish a principal-agent relationship between India and Air India by citing a 1983 US Supreme Court case. But in the end, the court's decision is likely to transcend beyond ownership or control, as both of them are insufficient to fulfill the test. Withal, if Cairn manages to get a successful outcome to seize the carriers,then the government won't be able to privatize Air India leaving its ambitions in the doldrums.

However, the Bancec Guidelines are not entirely clear. There is no precise definition of what conditions help classify an instrumentality as an alter ego. The Court in Crystallex didn't address the level of control a sovereign must exercise over its possessions to fulfill the alter ego test. This makes predicting the outcome of the ongoing clash difficult. Furthermore, almost all jurisdictions where Cairn has filed lawsuits follow the State immunity doctrine restrictively. Resultantly this defenestrates claims related to immunity from commercial activities allowing immunity only in cases of sovereign functions. But, India's argument that taxation is a sovereign function and hence it is immune to obligations under investment agreements has been rejected twice (in Vodafone &Cairrn) by arbitration tribunals. This thus makes the overall situation critical from an Indian standpoint.

Another retrospective taxation claim that is brewing is of a company named Earlyguard, formerly Mitsui, a British subsidiary of Japanese giant Mitsui& Co. They have filed for arbitration claim in pursuance of the India-UK Bilateral Investment Treaty. The case surfaced after income tax authorities issued a claim for Rs 2,400 crore for a deal that occurred in 2007.Herein, the taxis demanded on the capital gains acquired by selling shares of Finsider International Co. Finsiderowned a 51% stake in Earlyguard'siron ore miner Sesa Goa.

Cases likeVodafone, Cairn and Earlyguardare besmirching India's image at an international forum as an investor-friendly nation. Expensive arbitration losses are detrimental to the nation's interest and warrant our immediate attention.

Views are personal