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Cairn Energy1: when retroactive taxation not justified by prevention of tax avoidance is unfair and inequitable

Cairn Energy1: when retroactive taxation not justified by prevention of tax avoidance is unfair... Arbitration International, 2023, 39, 125–154 https://doi.org/10.1093/arbint/aiad003 Advance access publication 1 March 2023 Recent Development Cairn Energy : when retroactive taxation not justified by prevention of tax avoidance is unfair and inequitable *, † Błażej Kuźniacki and Stef van Weeghel A BS TR AC T In late 2020, the Cairn Tribunal concluded one of the largest investor-state arbitration disputes to date. The core of the dispute was retroactive taxation of offshore indirect transfers of shares of companies with underlying assets situated in India (crude petroleum and natural gas fields). The Tribunal decided that India had violated the fair and equitable standard under the UK–India bilateral investment treaty by the retroactive taxation without a specific justification for doing so. Notably, India failed to persuade the Tribunal that the retroactive tax law aimed against abusive tax avoidance. In the article, the authors aim to partly respond to a call of Professor Thomas Wälde for a systematization of the red flags arising from the conduct of host states in taxation mae tt rs viewed against investment protection mechanisms. By analysing the Cairn Tribunal’s rea- soning, the authors identify and examine two red flags: (i) retroactive taxation and (ii) prevention of tax avoidance. Their conclusion is that states should exercise caution with such red flags rather than rush to ter - minate international investment agreements or carve out tax measures from the fair and equitable standard in remaining and prospective international investment agreements. IN TR OD UC TION The decision of the Tribunal in Cairn v India , declaring the failure of the Respondent (India) to accord the Claimant’s investment fair and equitable treatment (FET) under the UK–India bilateral investment treaty, concluded one of the largest tax-related investor-state Błażej Kuźniacki, Assistant Professor in Tax & Technology at the University of Amsterdam, Research Assistant Professor at the Lazarski University, Advisor at PwC Global Tax Policy, Senior Manager at International Tax Services at PwC Netherlands. Stef van Weeghel, Professor of International Tax Law at the University of Amsterdam, Global Tax Policy Leader at PwC, Chair of Board of Trustees at the International Bureau of Fiscal Documentation (IBFD), immediate past chair of the Permanent Scientific Committee of the International Fiscal Association (IFA). Cairn Energy Plc Cairn UK Holdings Limited v Republic of India, UNCITRAL, PCA Case No. 2016-7, Award (21 December 2020) (Laurent Lévy, President; Stanimir A. Alexandrov; J. Christopher Thomas). Cairn (n 1). Cairn Energy or Cairn (the first Claimant) and CUHL (the second Claimant), a wholly-owned subsidiary of Cairn. The Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Promotion and Protection of Investments (signed 14 March 1994, entered into force 6 January 1995 (UK–India BIT). India unilaterally terminated the UK–India BIT on 22 March 2017. According to its sunset clause in Article 15, the India–UK.BIT will continue to apply for another 15 years beyond its termination to investments made during its time in force. © The Author(s) 2023. Published by Oxford University Press on behalf of the London Court of International Arbitration. This is an Open Access article distributed under the terms of the Creative Commons Attribution License ( https:// creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited. 126 • Cairn Energy arbitrations to date. Indeed, the magnitude of an award in excess of US$ 1.2 billion in favour of the investor, the strategic importance of the energy sector for the host state (extraction of crude petroleum and natural gas from the Indian territory) and developments in interna- tional arbitration make this case impossible to overlook, especially in light of the 2021–23 global energy crisis. With this article, the authors aim to partly respond to a call of the late Professor Thomas Wälde for a systematization of the red flags arising from the conduct of host states in taxation mae tt rs viewed against investment protection mechanisms. They will look closely at the red flags, that is, the two overarching and intertwined tax-related themes dealt with in the Cairn decision: (i) expanding the tax base with retroactive effect and (ii) the identifying and preventing of tax avoidance. The first theme (retroactive taxation) required a two-step analysis. In the first step, the Tribunal analysed whether or not the analysed amendment to Indian tax law was substantive and retroactive, or was it a mere clarification of already existing law. This question is important not only for taxation but for all investment treaty arbitration which deals with defenses based on ‘clarifications of law’. In the second step, the Tribunal focussed on the question of whether, by imposing retroactive taxation, India treated the Claimants unfairly and inequitably in breach of its obligation under Art. 3(2) of the UK–India BIT (FET standard). The second theme (tax avoidance) was relevant to the examination of the Respondent’s defence of retroactive taxation—had the transactions at issue (in 2006) been characterized as tax avoidance, they would have to be ignored and tax could have been imposed in the absence of retroactive taxation measures introduced (in 2012) by India. It was also relevant as a spe- cific public policy justification for the retroactive taxation (the need to prevent abusive tax avoidance). The Tribunal scrutinized both themes in order to conclude whether or not the retroactive taxation imposed by India violated the FET standard under the UK–India BIT. The depth of the Tribunal’s exploration of Indian tax law, retroactive taxation, and the concept of tax avoidance, was noteworthy. It probably constitutes the most comprehensive analysis of taxation measures in international arbitration case law so far. This includes the compensation to the investor in the amount of nearly US$ 990 million for the net proceeds that would have been earned from the planned 2014 sale of CIL shares and the restitution in the amount close to US$ 250 million in order to withdraw the wrongful tax demand by the Indian tax authorities. For more on the reparation (compensation and restitution) in that case see Prabhash Ranjan, ‘Cairn Energy v India: Continuity in the Use of ILC Articles on State Responsibility’ (2022) ICSID Rev—FILJ 4–9. For the crucial role played by energy disputes in shaping the constant development and evolution of international investment law, arbitration and their exposition on political risks see Elena Cima, ‘Investment Arbitration in the Energy Sector: Past, present, and future’ in Thomas Schultz, Federico Ortino (eds), The Oxford Handbook of International Arbitration (Oxford University Press 2020) 815–842. For an analysis of international arbitration in investment tax-related cases in energy sector see Cornel Marian, The State’s Power to Tax in the Investment Arbitration of Energy Disputes: Outer Limits and the Energy Charter Treaty (Kluwer Law International International 2020) 1–292. For the reasons why projects in the oil and gas sector are particularly prone to dis - putes and how to mitigate the risks associated with such disputes see Elina Aleynikova, Tuuli Timonen and E. G. Pereira (eds), Governing Law and Dispute Resolution in the Oil and Gas Industry (Edward Elgar Publishing 2022). Wikipedia, ‘2021–2022 global energy crisis’ <https://en.wikipedia.org/wiki/2021%E2%80%932022_global_energy_cri - sis#Responses> accessed 16 March 2022. Thomas Wälde, ‘National Tax Measures Affecting Foreign Investors Under the Discipline of International Investment Treaties’, Proceedings of the Annual Meeting, Am. Soc’y Int’l L. Proc., 102. (9–12 April 2008) 59. Cairn (n 1) paras 1260 et seq. The Cairn Tribunal also examined other potential justifications for the retroactive taxation, that is, correcting inadvertent technical errors of new legislation and avoiding the ‘announcement effect’ of new legislation. None of them, however, was relevant in Cairn case. Ibid paras 1798–1800. Stef van Weeghel, ‘Tax and Investment Treaties: Further Thoughts’ in Pasquale Pistone (ed.) Building Global International Tax Law, Essays in Honour of Guglielmo Maisto (IBFD 2022) sec. 26.2.3. For a thorough analysis of international arbitration case law in tax-related cases see: William W. Park, ‘Tax and Arbitration’ (2020) 36 Arbitration International 166–197. To some extent, the Ascom Tribunal dealt with retroactive tax measures. It was, however, a tangential issue and not related to retroactive tax law by design but to retroactive tax assessments of the Kazakh tax authorities. Ascom Group S. A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan, SCC Case No. 116/2010, Award (19 December 2013) para 1799. The Yukos Tribunal, in turn, dealt with the question of abusive tax avoid- ance under the Russian tax law and the Agreement between the Government of the Russian Federation and the Government of the Republic of Cyprus on Avoidance of Double Taxation of Income and Capital (signed 5 December 1998; entered into force 17 Cairn Energy • 127 ‘The dispute between Cairn Energy and India’, Tax-related investment disputes are arbitrable unless IIAs state otherwise, and ‘Retroactive tax law and the FET standard: legal effects of the 2012 amendment and Relevance of FET’ sections examine the Tribunal’s analysis of retroactive taxation and the notion of tax avoidance for the purposes of determining whether or not India violated the UK–India BIT. ‘The dispute between Cairn Energy and India’ section summarizes the dispute while the Tax-related investment disputes are arbitrable unless IIAs state othe-r wise section presents key aspects of the decision, with a focus on arbitrability of tax-related investment disputes. ‘The retroactive tax law and the FET standard: legal effects of the 2012 amendment and Relevance of FET’ section and its subsections look closely at the substantive and temporal scope of the examined taxation measures introduced in India in 2012. Ae ft r con- cluding that the Tribunal correctly determined the change in the Indian tax law in 2012 was substantive and retroactive, we present the Tribunal’s explanations of the relevance of the FET standard and the principle of legal certainty in the context of retroactive taxation. The Tribunal acknowledged that although the principle of legal certainty is the core principle relevant to assessing the compatibility of retroactive taxation with the FET standard, it is not absolute and thus retroactive taxation which upsets legal certainty may be justified, in particular by preven- tion of abusive tax avoidance. The decoding tax avoidance under domestic (Indian) tax law to determine whether retroactive taxation was fair and equitable section, therefore, turns to the notion of tax avoidance under Indian law. The examination of that notion was pivotal not only to (i) assess the major defence of the Respondent but also (at least partly) to (ii) examine the main justification for the violation of the principle of legal certainty by the retroactive taxation. Finally, the ‘Lesson to tax and investment policy makers: avoiding red flags in fiscal conduct’ section accentuates the high relevance of the Cairn decision for tax and investment policy mak- ers, underscoring the need to avoid red flags in a state’s power to tax. THE DIS P U TE B E T WEEN C A IR N ENER G Y A ND INDI A The mae tt r in Cairn v. India can be traced back to the early 1990s. The significant increase in the cost of oil due to the Persian Gulf crisis, in combination with the very limited development of India’s domestic petroleum industry and high levels of public spending and debt, created a major financial crisis in India in 1991. With financial support and assistance of the International Monetary Fund (IMF) and the World Bank Group (WBG), India implemented major infra- structural and legal changes to become a free-market economy open to foreign investment. Throughout the 1990s, India ae tt mpted to attract foreign investment in the oil and gas sec - tor. One of the investors was Cairn Energy. From 1996 to 2006, Cairn acquired a number of August 1999) (Russia-Cyprus DTAA). See a series of Yukos v Russia cases – Yukos Universal Ltd (Isle of Man) v Russian Federation, PCA AA 227 (Final Award) (18 July 2014); Veteran Petroleum Ltd (Cyprus) v Russian Federation, PCA AA 228 (Final Award) (18 July 2014); Hulley Enterprises Ltd (Cyprus) v Russian Federation, PCA AA 226 (Final Award) (18 July 2014). The analysis of abusive tax avoidance in Yukos, v. Russia constituted a basis for the Tribunal’s conclusion that of contributory fault on damages of the claimants, noting that they ‘have contributed to the extent of 25 percent to the prejudice which they suffered as a result of Respondent’s destruction of Yukos’; that is, the Tribunal’s identification of abusive tax avoidance on the side of the claimants led to the reduction of the award by 25 per cent. Presumably, the Tribunal reached that conclusion to a significant extent based on the experts, reports of David Rosenbloom and Stef van Weeghel, since they observed that the Yukos structure and transactions with the Cypriot entities were a sham and constituted the abuse of the Russia-Cyprus DTAA. Ibid paras 204–210, 244–246, 1549, 1615–1621. See also Stef van Weeghel, ‘Tax and Investment Treaties: A few Observations’ in Georg Kofler, Ruth Mason and Alexander Rust (eds.) ‘Thinker, Teacher, Traveler: Reimagining International Tax’ (IBFD 2021) sec. 49.3. Another interesting example of dealing with abusive tax avoidance by an arbitral tribunal is case LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No ARB/12/37 (Award on 30 August 2022), effectively decided in favour of the Respondent since the Tribunal awarded US Investor Lone Star just 4.6 per cent of its damages claim against South Korea. The Ascom and Yukos cases regarded investments in the oil and gas sector while LSF-KEB case was related to investments in the financial, real estate, engineering, and construction manufacturer sectors. Cairn’s first investment in the Indian oil and gas sector was the acquisition of Command Petroleum Limited in 1996, an Australian company that held interests in a 1994 production sharing contracts (PSC) for the Ravva oil and gas field in India. See Cairn (n 1) para 18. 128 • Cairn Energy interests in India’s oil sector, some of which appeared to be very successful. As a result of a series of intra-group transactions (mainly share transfers), these interests were eventually held by 27 subsidiaries incorporated outside of India. In 2006, Cairn consolidated all 27 subsidia-r ies under a single Indian company, Cairn India Limited (CIL), a wholly-owned subsidiary of Cairn UK Holdings Limited (CUHL). The purpose of this consolidation was to offer CIL shares to the public. Ae ft r this public offering, CUHL continued to own the majority of CIL shares while the minority was held by the public. It is important to note that the consolidation of the 27 subsidiaries involved the transfer of shares in non-Indian companies that owned assets in India. These shares were initially transferred to CUHL and then by CUHL to Cairn India Holdings Limited (CIHL), Cairn Energy ’s wholly-owned subsidiary incorporated in Jersey. The final step of the consolidation involved the acquisition of CIHL’s shares by CIL from CUHL (the CIHL Acquisition). These transactions are further also collectively referred to as ‘the 2006 Transactions’. Ae ft rwards, that is, between 2009 and 2014, CUHL sold most of the shares in CIL to other investors. The Indian tax authorities did not challenge the intra-group transactions and their tax con- sequences at the time they were undertaken and in the following years. The challenge occurred later following considerable changes in the Indian tax environment regarding taxation of off - shore indirect transfers (OITs). These changes were triggered by the Supreme Court of India’s judgment in favour of Vodafone in a tax dispute with the Indian tax authorities. Indeed, this judgment prompted the Indian legislature to amend Section 9(1)(i) of the Income Tax Act (ITA) in 2012 with retroactive effect from 1 April 1962 making it applicable to OITs (the 2012 Amendment). The 2012 Amendment introduced the possibility to retroactively tax in India a gain stemming from a transfer by a non-resident of a share in a company incorporated abroad, Cairn’s exploration activities led, among the others, to a discovery in 2004 the Mangala oil field in Rajasthan, the largest onshore discovery in India in over two decades at the time, accounting for nearly 25 per cent of India’s entire domestic oil pro - duction. See Cairn (n 1) para 23. In its turn a wholly-owned subsidiary of Cairn Energy Plc. Cairn Energy Plc and CUHL were the Claimants in the arbitration. For the detailed description of all steps see Cairn (n 1) paras 32–78. In October 2009, CUHL sold 2.3 per cent of CIL’s issued share capital to Petronas and in December 2011 CUHL sold 40 per cent of such shares to Vedanta. In June and September 2012 and in January 2014, CUHL sold additional shares in CIL in on-market transactions, amounting to 3.5 per cent, 8 per cent, and 2.5 per cent, respectively. On the date of the Notice of Arbitration (22 September 2015), CUHL held 9.82 per cent of the issued share capital of CIL. See Cairn (n 1) paras 84–93. In international tax jargon, OITs are transfers of shares in a non-resident company that owns assets in a country by another non-resident company. Non-resident company means a company not resident under the applicable tax rules of the country in which the assets are located. Oe ft n tax residence in a country is a consequence of incorporation or registration under the laws of that country. Accordingly, non-resident is often used interchangeably with incorporated in a foreign country. See also, for OITs, a joint initiative of the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), United Nations (UN) and World Bank Group (WBG), e T Th axation of Offshore Indirect Transfers—A Toolkit (2020) 5, 7. The Vodafone case regarded the acquisition of Indian assets of Hong Kong-based Hutchison Telecom Limited (HTL) by Vodafone International Holdings, a Dutch subsidiary of Vodafone Group Plc, in 2007 for US$ 11 billion. The Indian assets were hold by HTL indirectly via its wholly-owned subsidiary from the Cayman Islands. Following this transaction, the Indian tax authorities imposed a capital gains tax of US$ 2.2 billion on Vodafone. For the judgment see Vodafone International Holdings BV v Union of India (2012) 6 SCC 613, Judgment, Supreme Court of India (20 January 2012) (Kapadia, Radhakrishnan, Kumar). In particular, the Court confirmed that Section 9(1)(i) of ITA does not impose a charge to tax on the sale of shares in foreign incorporated companies since these shares are not ‘assets situate in India’ even though the assets owned by such companies may be so situate. To substantiate its finding, the Court applied the principle stemming from the UK House of Lords’ landmark judg - ment in Salomon v Salomon [1897] AC 22 (16 November 1896) according to which the corporation is ‘a person’ that is separate from its member. In the Court’s view, there was no basis for piercing the corporate veil. The Court pointed out that ‘shareholdings in companies incorporated outside India is property located outside India’ (para 89). Accordingly, it rejected ‘the arguments of the Indian Tax Authority that the situs of the Cayman shares was situated in the place (India) where the underlying assets stood situated’. (para 82). In practice, the tax liability could arise ‘retrospectively’, albeit only for six years, given that Section 161 of the ITA pro - vides that no tax can be levied beyond the six-year time limit. Thus the Indian Tax Department (ITD) could only pursue to tax retroactively transactions occurring ae ft r 1 April 2006. The 2006 Transactions of Cairn Energy and CUHL took place between October and December 2006, which means that they felt within the limitation period. Thus the mentioned retroactive amendment in tax law applied to the Claimants. Cairn (n 1) paras 1066, 1255–1259. Likewise, this amendment grasped the transactions of Vodafone. Cairn Energy • 129 if the share derived, directly or indirectly, its value substantially from assets located in India. The transactions in the Vodafone case and the 2006 Transactions regarding the consolidation in the Cairn case, in particular the CIHL Acquisition, felt squarely into scope of this retroactive legislation. Relying on the new legislation, in 2014, the Indian Tax Department (ITD) initiated an inves- tigation into Cairn’s restructuring from 2006 and prevented CUHL from selling its shares in CIL, eventually demanding approximately US$ 4.4 billion (including interest) from CUHL to be paid in tax on the income (gains) stemming from transactions conducted in 2006. Upon CUHL’s refusal to pay the tax India forced a sale of CUHL’s shares in CIL in order to collect the 22 23 tax. In December 2015, Cairn Energy and CUHL filed a notice of arbitration claiming that India significantly damaged their investment by the retroactive taxation. In December 2020, the Cairn Tribunal decided that India had violated the FET standard under the UK–India BIT by retroactively taxing the transactions at issue without a specific justification for doing so, thereby compromising the principle of legal certainty and the rule of law more generally. TA X- R EL ATED INVE S TM EN T DIS P U TE S A R E A R B ITR A B L E UNL E S S II A S S TATE O THER WIS E In line with previous arbitral decisions in which some of the largest arbitral awards to inves - tors have been based on tax-related (mis)conduct of host states towards investors, the Cairn Tribunal observed that tax-related investment disputes, by contrast to tax disputes, do not fall outside the scope of the Tribunal’s jurisdiction, unless this is explicitly stated in a given intern- a tional investment agreement (IIA). Finance Act 2012 [Act No. 23 of 2012]. For a detailed description of this investigation see Cairn (n 1) paras 146–186. The shares, as of November 2018, amounted to 98.72 per cent of CUHL’s shareholding in CIL. Ibid paras 197–205, 1837, Pursuant to Article 9(3)(c) of the UK–India BIT and Article 3(1) of the United Nations Commission on International Trade Law Arbitration Rules 1976 (the UNCITRAL Rules). Cairn (n 1) para. 208. Cairn (n 1) paras 1816–1822. A similar decision was rendered a few months earlier by the arbitral tribunal in Vodafone International Holdings BV v. India (I) (PCA Case No. 2016-35) (Award) (25 September 2020). The award is not publicly available. Interestingly, Vodafone filled two separate notices for arbitration: (i) on 17 April 2012 the Netherlands–India BIT (Vodafone Group plc, Annual Report (2015) 169) and (ii) on 15 June 2015 under the UK–India BIT (Vodafone Group plc, Annual Report (2016) 150). From August 2017, India pursued before the High Court of Delhi an antiarbitration injunction against Vodafone’s second notice of arbitration under the UK–India BIT, arguing that Vodafone’s strategy of filing separate claims based on identical facts by two companies in the same vertical corporate chain (controlled by the Vodafone Group) was an abuse of process. The Delhi High Court ultimately held that there was no abuse of process in the facts of the case because the multiple claims of Vodafone were not ‘per se vexatious’ and Vodafone did not seek double recovery of damages. The second arbitration was initiated by Vodafone only ae ft r India had raised an objection against the first tribunal under the Netherlands India BIT. See Union of India v Vodafone Group plc United Kingdom and ANR, Judgment, High Court of Delhi (7 May 2018) paras 120, 125–226, 150. See more on this case, Constantinos Salonidis and Sudhanshu Roy, ‘Union of India v Vodafone Group plc:1 One Step Closer to Reconciling the Jurisdictional Competence of Domestic Courts and Investment Treaty Tribunals?’ 34 ICSID Review–FILJ 585–594. For example, in a series of Yukos v Russia cases (n 11) arbitration led to the total award of around US$ 50. It was reputedly rd the largest award ever rendered. See Jeswald W. Salacuse, The Law of Investment Treaties (3 edn) (Oxford University Press 2021) 128. See more literature on Yukos v Russia in relation to analysis of international arbitration and taxation: Ali Lazem and Ilias Bantekas, ‘The treatment of tax as expropriation in international investor–state arbitration’ (2022) 38 Arbitration International 119–123; Sebastian G. Martinez, ‘Taxation Measures under the Energy Charter Treaty ae ft r the Yukos Awards Articles 21(1) and 21(5) Revisited’, (2019) 34(1) ICSID Review 85–106; Ruth Teitelbaum, ‘W hat’s Tax Got to Do with It? The Yukos Tribunal’s Approach to Motive and Treaty Interpretation’ (2015) 12(5) Transnational Dispute Management (TDM, OGEMID). See also Occidental Petroleum Corporation and Occidental Exploration and Production Company v Republic of Ecuador, ICSID Case No ARB/06/11, Award (5 October 2012) with an original award on damages of US$1.77 billion rendered on 5 October 2012 and later reduced by a partial annulment to around US$1 billion issued on 2 November 2015. See Rachel L. Wellhausen, ‘Recent Trends in Investor–State Dispute Settlement’ (2016) Journal of International Dispute Settlement, 117, 133. Finally see Ascom Group S.A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan, SCC Case No. 116/2010, Award (19 December 2013) with an award of US$ 497 million. Cairn (n 1), para 797. 130 • Cairn Energy The Tribunal clarified that the present dispute is a tax-related investment dispute, not a tax dispute, since it ‘concerns alleged violations of an investment treaty resulting from certain sov - ereign measures taken by the Respondent in the field of taxation’. Such a dispute ‘must be distin- guished from tax disputes proper, which are disputes concerning the taxability (including the tax-amount) of a specific transaction’. The UK–India BIT excluded tax measures from the scope of the investor-state dispute set - tlement (ISDS) mechanism (Article 9) only in respect of the national treatment (NT) and most-favoured nation (MFN) treatment clause [Article 4(3)]. As a result despite other tax- related objections of the Respondent, the Cairn Tribunal held that it has jurisdiction to resolve the present dispute and that the Claimants’ claims were admissible in this arbitration. The statements of the Cairn Tribunal are far reaching. They explicitly confirm that the state’s power to tax is not immune to the scrutiny of arbitral tribunals under IIAs, even though this exercise takes place in areas sensitive to States such as in the energy sector and taxation. Indeed, the energy sector is particularly prone to create tensions between foreign investors and host states because states are called to take proactive roles at all levels in that area and they enjoy sovereignty both over natural resources and taxation of gains stemming from these resources. However, States equally exercise their sovereignty to oblige themselves to protect foreign inves- t ments in the energy sector under IIAs. a Th t is to say, the consent to ISDS under IIAs is derived from the same source as the power to tax and the power to regulate the energy sector: the sov - ereignty of the State. W henever such consent exists in an IIA, an arbitral tribunal may be called by a foreign investor to examine an alleged violation of standards of investment protection by a state’s fiscal conduct in the energy sector, or any other sector, entirely in line with that state’s sovereign rights. In the Cairn case, the Tribunal decided it had jurisdiction to examine whether the 2012 Amendment and its enforcement ensure a balance between, on the one hand, a state’s regulatory power to impose taxes, on the other hand, the investors’ expectations in having their investments protected as these relate to the energy sector. Cairn (n 1), para 793. By the same token, that is, that tax measures are arbitrable under IIAs and they may violate their standards of investment protections such as the FET or indirect expropriation see: EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN3481, Award (3 February 2006) para 177; Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability (14 December 2014) para 395; Occidental Exploration & Production Co. v Republic of Ecuador, LCIA Case No. UN3467, Final Award (1 July 2004) para 85. In similar vein, see: Thomas W. Wälde and Abba Kolo, ‘Investor- State Disputes: The Interface Between Treat-Based International Investment Protection and Fiscal Sovereignty’ (2007) 35 Intertax 427, 432, 434; Arno E. Gildemeister, L’arbitrage des différends fiscaux (2013) L.G.D.J. 170; Julien Chaisse, ‘Investor-State Arbitration in International Tax Dispute Resolution: A Cut above Dedicated Tax Dispute Resolution’ (2016) 41 Virginia Tax Review 158–165; Pasquale Pistone, ‘General Report’, in Michael Lang et al. (eds.), The Impact of Bilateral Investment Treaties on Taxation (IBFD 2017) sec. 1.2.2. Such a narrow tax carve out clause is typical for many IIAs. See UNCTAD, International Investment Agreements and Their Implications for Tax Measures: What Tax Policymakers Need to Know (2021) 23. In particular, India argued that tax mae tt rs are regulated by another international treaty, the Double Taxation Avoidance Agreement between the UK and India (signed 25 January 1993, entered into force 25 October 1993) (‘the UK-India DTAA’), and therefore the UK–India BIT should be read so as to exclude such mae tt rs from its scope according to Article 4(3) in con- junction with Article 30(2) of the Vienna Convention on the Law of Treaties (opened for signature 23 May 1969, entered into force 27 January 1980) 1155 UNTS 331 (VCLT). See Cairn (n 1), para 801 for India’s argument and paras 802–815 for the Cairn Tribunal’s analysis and counterarguments. In particular, the Tribunal clarified that Article 27(1) of the UK–India DTAA does not ‘provide a dispute resolution mechanism for situations in which an investor of one of the Contracting States considers that the host State has violated his rights as an investor, especially the BIT’. In turn, it only ‘provides for a dispute resolution mechanism for situations in which “a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention.”’ Cairn (n 1) para 806. For the entire discussion to that effect see Cairn (n 1), paras 798–874. Cf. United Nations, Preamble, in Paris Agreement (2015), hps://unfc tt cc.int/sites/default/files/english_paris_agreement.pdf . Cf. Marian (n 6), p. 52. Ibid, p. 9. Cairn Energy • 131 R E TR O A C TIVE TA X L AW A ND THE FE T S TA ND A R D : L E G A L EFFE C T S OF THE 2 0 1 2 A M ENDM EN T A ND THE R EL E VA N C E OF FE T Terminological order needed to examine the substantive and temporal effect of the 2012 Amendment appropriately Turning to the merits, the Cairn Tribunal focussed on the question whether India’s legislative (the 2012 Amendment) and executive tax measures concerning the 2006 Transactions by Cairn Energy and CUHL violated the FET standard under the UK–India BIT [Article 3(2)]. In particular, the Tribunal’s main task was to explore whether the assessment of capital gains tax on the CIHL Acquisition, more than seven years ae ft r it occurred, was unfair and inequitable. The Tribunal first observed that the tax was almost exclusively imposed on the CIHL acquisi - tion. The taxation was based on the final assessment order (FAO) issued on 25 January 2016. The legal basis for it was the 2012 Amendment, especially Explanation 5. The key aspect of the Tribunal’s analysis became the determination whether or not the 2012 Amendment was substantive and retroactive, or a mere clarification of already existing law. Before scrutinizing the substantive and temporal effects of the 2012 Amendment, the Tribunal contributed to methodological order in two ways. First, the Tribunal acknowledged the label of ‘clarification’ given by Indian Parliament to the 2012 Amendment constituted an important piece of evidence. However, such that label was not decisive for the Tribunal to assess the substantive and the temporal scopes of the 2012 Amendment. For the Tribunal, it was necessary to objectively ascertain the scope of applica - tion of that Amendment prior to and ae ft r 2012. The compatibility of the 2012 Amendment with Indian law, including its constitutional law, does not exclude the need for determination of the compatibility of that amendment with India’s international obligations under the UK–India BIT. Indeed, as observed by the Tribunal, ‘[it] is basic rule of international law that a State can- not invoke its own law as justification of a breach of its international obligations’. The Tribunal, therefore, was empowered to consider whether the 2012 Amendment was merely ‘clarificatory’, or whether it retroactively expanded the scope of taxable transfers. In the lae tt r case legitimate expectations of foreign investors in India could be frustrated, without effective legal protection, by labelling changes in tax law by the legislature as ‘clarification’. Methodologically, the Tribunal’s distinction between the influence of parliaments and con- stitutional courts and tribunals on an interpretation of domestic law and international law was of utmost importance for taxation mae tt rs. In such mae tt rs, the tax authorities use executive power to have real and direct influence on the formation of tax policy and the tax-law-making process. These powers are carried out by the highest level of tax institutions, such as the minis - tries of finances, through legislative initiatives and creation, implementation, enforcement, and the supervision of tax policy. In some jurisdictions, amendments of tax law as designed by min- istries of finance are nearly automatically accepted by parliaments without much reflection and Cairn (n 1) paras 878 ff. Ibid para 1038. Ibid para 1059. For the wording of Explanation 5 see above the Dispute between Cairn Energy and India section. The FAO relied on a ‘situs-shifting theory’ imposed by Explanation 5 of the 2012 Amendment according to which the direct transfer of shares in the non-Indian holding company constitutes the taxable event. Ibid paras 1051–1052. The Indian Parliament may have the ultimate authority to interpret the meaning of statutes in India, subject only to constitu- tional review by the courts, domestically, but not so under ‘India’s international obligations under the BIT’. Ibid 1064. Ibid paras 1063–1064 with the reference to International Law Commission, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts with Commentaries’, UN GAOR 56th Session Supp 10, ch 4, UN Doc A/56/10 (2001) (ARSIWA) 3. See also Article 27 VCLT. Cairn (n 1) para 1088, citing para 111 of Claimants’ Answers to the Tribunal’s Questions: ‘assertion by a State that its new legislation merely interprets or clarifies existing law cannot be purely self-judging, but must instead be subject to independent scrutiny by a tribunal with jurisdiction over the question. If it were otherwise, a State could legislatively expropriate or destroy any foreign investment with impunity through the mere artifice of labelling’. 132 • Cairn Energy duly considering a public discourse. Hence, if the same parliaments have the final authority in interpretation of tax laws relevant in examining the compatibility of such laws and their applica- tions with IIAs, foreign investors could enter into a vicious circle between local tax authorities and parliaments with a negative spill over effect on protection of their investments. This situa - tion would be directly and immediately negative for taxpayers (distortions in their investments) and in the long-term indirectly negative to States (reduction of foreign investment). Just as it is vital to distinguish between tax disputes under domestic tax law and tax-related investment disputes under IIAs, it is important to demarcate the role of parliaments and domestic courts and tribunals in the tax sphere on the one side, and arbitral tribunals in investment disputes on the other. Second, the Tribunal stressed the need for a terminological order for the key terms related to the 2012 Amendment: (i) ‘retroactive’; (ii) ‘retrospective’, and ‘clarificatory’. To explain their meaning, the Tribunal asked the Parties for relevant submissions which relied on scholarly materials. Ae ft r their analysis, the Tribunal, largely inspired by the definition of ‘retroactive’ by Juratowitch, considered ‘a law to be retroactive if it changes the content of the law in the past, so that the law is deemed to have always had such (new) content, and applies to transactions that took place in the past’. The Tribunal also used the terms ‘retroactive’ and ‘retrospective’ legisla - tion interchangeably, following the submissions of the Parties. A law that applies prospectively but immediately modifies the effects of transactions occurring in the past was not considered by the Tribunal as retrospective but prospective (or immediate). A tripartite conceptual division of the operation of law into retroactive, retrospective, and prospective was simplified (albeit not rigorously) to a bipartite division into retroactive (sometimes: retrospective) and prospec - tive (sometimes: immediate). This division allowed the consideration of a retroactive tax law as a law ‘which imposes a tax burden, or a higher tax burden, on income that has already been earned’ and thus concerns the scenario ‘where at the time that income was earned (etc.), there was no tax burden under the law at that time’. A Tax law imposing ‘a tax burden, or a higher tax burden, on future income (or gains or inheritance […]) from a transaction which has already been completed’, following the mentioned distinction of the Tribunal, would be considered as prospective (immediate). For example, Dimitry Kochenov and Petra Bárd, ‘Rule of Law Crisis in the New Member States of the EU: The Pitfalls of Overemphasising Enforcement’, Reconnect Working Paper No. 1 ( July 2018), https://reconnect-europe.eu/wp-content/ uploads/2018/07/RECONNECT-KochenovBard-WP_27072018b.pdf; Błażej Kuźniacki, Rzeczywisty beneficjent a podatek u źródła: Alokacja dochodu czy przeciwdziałanie nadużyciom międzynarodowego i unijnego prawa podatkowego?, Wolters Kluwer Poland (2022), sec. 2.3 (wprowadzenie). See above the Tax-related investment disputes are arbitrable unless IIA s state otherwise section. a Th t is, both Parties relied on: Ben Juratowitch, Retroactivity and the Common Law (Bloomsbury Publishing 2008); Hans Gribnau and Melvin Pauwels, Retroactivity of Tax Legislation (EATLP International Tax Series 2013). The Claimant also relied on: Philip Baker, ‘Retroactive Tax Legislation’ (2012) 48 International Taxation. A quotes was taken by the Tribunal from Philip Baker, ‘Retroactive Tax Legislation’ (2012) 48 International Taxation. Cairn (n 1) para 1080, citing Juratowitch (n 42) 5 according to whom a law is retroactive if it ‘deems the law at the time of a past event to have been as provided in the subsequent statute, where the law at the time of the event was actually something different’. Cairn (n 1) paras 1070, 1080. Ibid para 1080 c. For example, Paul Salembier, ‘Understanding Retroactivity: W hen the Past just Ain’t W hat it Used to Be’ (2003) 33 Hong Kong Law Journal 99, 102, 104. The Tribunal was not very rigorous in that division insofar it appears to follow from time to time a kind of tripartite division of temporal effects of laws into: (i) retroactive; (ii) immediate; and (iii) prospective. Cairn (n 1) para 1092. Such an approach was largely in line with doctrinal discourse, which acknowledged that demarcation lines between three temporal categories of laws are blurred and fluid, whereby retrospective laws have been every now and then described as hav - ing prospective effect, and prospective laws have been characterized as retrospective. Juratowitch (n 42) 6–12, as cited by the Tribunal in para 1077. Scholars also observed that the concepts of retroactivity and retrospectivity ‘are sometimes (implicitly or explicitly) considered synonyms or interchangeable’. Gribnau and Pauwels (n 42) 42–43, as cited by the Tribunal in para 1078. A quote used by the Tribunal in para 1075 from Baker (n 42) 780. Baker labelled it as retrospective, Ibid. Cairn Energy • 133 Likewise, a fortiori, tax law is (clearly) prospective (not immediate) whenever it imposes tax burden, or a higher tax burden, only on future income from a transaction which will be com- pleted ae ft r entry into force of that law. Finally, the Tribunal dealt with the term ‘clarificatory’ in respect of the nature of law. The Tribunal observed that ‘to determine whether a statute is clarificatory in nature, the first ques - tion is not whether it operates towards the past or towards the future; the question is whether it expands the scope or operation of the provision being clarified so that it effectively changes the content of that provision, whether prospectively or retroactively’. As a result, the Tribunal decided to further determine first whether the 2012 Amendment expanded the scope or opera - tion of Section 9(1)(i) of the ITA, or whether it was a true clarification, and then, separately and irrespective of the nature of that amendment, whether it operated retroactively, with immediate effect, or prospectively. Substantiative change in tax law via the 2012 Amendment A thorough review of a significant body of evidence arising out of nine self-standing sources, with special emphasis on the Supreme Court of India’s judgment in the Vodafone case, convinced the Tribunal that the 2012 Amendment expanded the scope of Section 9(1)(i) of the ITA rather than merely clarified it. It means that a legal basis for taxation of gains stemming from the CIHL’s acquisition in 2006 did not exist. Thus, an interpretation and application of Section 9(1)(i) of the ITA to the opposite result should be considered as clearly contra legem. At the time of Cairn’s corporate reorganization and until CIHL’s Acquisition in 2012, the Section 9(1)(i) of the ITA reads as follows: The following incomes shall be deemed to accrue or arise in India: (i) all income accruing or arising, whether directly or indirectly, [1] through or from any business connection in India, or [2] through or from any property in India, or [3] through or from any asset or source of income in India, or [4] through the transfer of a capital asset situate in India. (Emphasis and numbers in square brackets added) The fourth limb of Section 9(1)(i) of the ITA did not apply to indirect transfers by means of transfers of shares of companies situated outside of India even if such companies owned cap - ital assets situated in India. By comparison, the 2012 Amendment—Explanation 5—reads as follows: For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India’. (Explanation 5) Cf. Cairn (n 1) paras 1072 a., 1075, and 1080 a.-c. Ibid, para 1090. Ibid, paras 1091–1092. a Th t is, (1) the ITA 1961’s original intent; (2) the evolution of the legislative debates; (3) the opinions of special tax committees; (4) the subsequent clarifications and amendments to the 2012 Amendment; (5) the tax advice received by the Claimants; (6) the ITD’s practice prior to the 2012 Amendment; (7) the timing of the ITD’s assessment against CUHL; (8) the Order of 9 March 2017 of Income Tax Appellate Tribunal (ITAT); and (9) the Supreme Court’s judgment in Vodafone. Cairn (n 1) paras 1093–1251. Finance Act 2012 [Act No. 23 of 2012]. John Gardiner Q.C. in his expert report on the Cairn v. India stated that ‘[i]n the light of the previous decision of the Supreme Court the language of this provision’, such as references to ‘clarification’, ‘are simply self serving abuses of language; no doubt in a different context being capable of being referred to as “deceitful”’. (Gardiner’s Expert Report 5) (20 June 2016). We want to hereby acknowledge the access to two expert witness’ reports of John Gardiner (appointed by the Claimants) and two expert witness’ reports of David H. Rosenbloom (appointed by the Respondent). We received them exclusively for research purposes thanks to the kindness of counsel for the Claimants. 134 • Cairn Energy This legislative amendment to the Section 9(1)(i) of the ITA allowed it to apply to tax gains from OITs, that is, to the transfers by non-residents of a share in a company incorporated abroad, if the share derived, directly or indirectly, its value substantially from assets located in India. One significant indication against an application of Section 9(1)(i) of the ITA to tax gains from OITs before the 2012 Amendment entered into force is that the Respondent was unable to produce any documentary evidence that the ITD had taxed a single indirect transfer of capital assets under that Section prior to the 2012 Amendment,. To be more precise, in the four decades between the enactment of the ITA 1961 and the initiation of the investigation against Vodafone, the ITD not only had never taxed OITs but also never ae tt mpted to do so. Moreover, the ITD’s ae tt mpts to tax an OIT, Tata Cellular Industries (Tata), occurred roughly contemporaneously with the ITD’s ae tt mpts to tax Vodafone in respect of the Hutchison-Vodafone transaction, not earlier on. Most importantly, however, the approach taken by the ITD in the Tata case was tax- ation based on the substance over form doctrine by lifting the corporate veil, not as an indi- rect transfer taxable under Section 9(1)(i) of the ITA. As observed by the Supreme Court in the Vodafone case, Section 9(1)(i) of the ITA is not a ‘look through’ provision. Although the Respondent has advanced several arguments to explain the absence of tax assessments against indirect transfers prior to 2007, the evidence contradicted them. The ITD’s prime argument was that the practice of OITs was a new practice and, therefore, the first wave of tax cases concerning such transactions emerged in or around 2007. The argument goes as follows: prior to 2007 the ITD did not have the opportunity to apply its broad interpretation of the Section 9(1)(i) of the ITA to OITs. The facts, however, reveal that the indirect ownerships and transfers of assets sit - uated in India had been occurring at the very least since 1996. A clear example were investments in India by Cairn Energy and the following reorganization of its company structure in India. The Supreme Court of India in its judgment in the Vodafone case arrived at the unequivocal finding that ‘Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so would amount to changing the content and ambit of Section 9(1)(i). We cannot re-write Section 9(1)(i)’. The Cairn Tribunal considered this conclusion of the Supreme Court as the decisive evidence which confirmed the Tribunal’s conclusion that, prior to the 2012 Amendment, Section 9(1)(i) of the ITA did not cover indirect transfers. Cairn (n 1) paras 1169, 1171. a Th t is, the anti-tax avoidance ‘look through’ or ‘look at’ doctrine, as developed by the Indian courts within the framework of the broader substance over form doctrine. Cairn (n 1) paras 1261–1262. Internationally, a look through approach (doctrine) constitutes ‘[t]he most radical solution to the problem of conduit companies’ under tax treaties insofar as it allows tax authorities and courts to ignore the principle of the legal status of corporate bodies and tax income from a transaction as if the company involved in the transaction did not exist for tax purposes. OECD, Double Taxation Conventions and the Use of Conduit Companies, adopted by the OECD Council on 27 November 1986, Paris, paras 23–25. This was later confirmed by the Bombay High Court, which found that the Tata transaction could be taxable as a colourable transaction (the holding companies did not have substance), not as an indirect transfer. Aditya Birla Nuvo v. Deputy Director of Income Tax (International Taxation) and Union of India, through the Ministry of Finance, [2012] 342 ITR 308 (Bom), paras 91, 96–99. Vodafone (n 18) para. 71. Cairn (n 1) para 1178. Ibid paras 1179–1180. See also above The dispute between Cairn Energy and India section. Vodafone (n 21), para 71. Cairn (n 1) para 1204. The Tribunal convincingly explained why it gave so much interpretative weight to the Supreme Court’s judgment in the Vodafone case. Although this judgment was not legally binding on the Parties to the Cairn case, the Tribunal pointed out that ‘international law has long considered the highest courts of States to be the most authoritative expositors of municipal law and have therefore accorded weight to their pronouncements’. The judgment in the Vodafone case was rendered by India’s highest court, which is ‘the ultimate interpreter of Indian law’, subject only to the role played by the Constitutional Court in the Indian judicial firmament, ‘and it goes without saying that it is far more expert than this Tribunal in understanding and applying that law ’. Moreover, the Supreme Court in Vodafone provided a clear, convincing, and unequivocal meaning to Section 9(1)(i) of the ITA in respect of OITs, and this was exactly the core of the dispute in the Cairn case. The rea - soning of the Supreme Court also appears to be persuasive and relevant to the reasoning of the Tribunal insofar as the Supreme Cairn Energy • 135 The considerations of the Supreme Court are worth a brief presentation because of their precision and persuasiveness. First, the Hutchison-Vodafone transaction concerned an off - shore share sale, and not a sale of Indian assets, and the tax consequences of each were di -f ferent, that is, only the sale of Indian assets by a foreign company could lead to withholding taxation under the Section 9(1)(i) of the ITA , not a sale of shares in another foreign company that owns the Indian assets. Second, the fact that Vodafone was acquiring a controlling inter- est in the underlying companies did not mean that Vodafone had acquired a distinct capital asset independent of the shares and situated in India. Third, Art. 265 of the Constitution of India—‘No tax shall be levied or collected except by authority of law ’—requires a clear stat- utory basis for taxation. In that regard, the Separate Opinion of Justice K .S. Radhakrishnan quoted the passage from Rowlatt J. expressing the mentioned principle in the following words: In a taxing Act one has to look merely at what is clearly said. There is no room for any intend - ment. There is no equity about a tax. er Th e is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. (emphasis added by us) The fourth limb of Section 9(1)(i) of the ITA clearly and specifically stipulated that that the capital asset must be ‘situate in India’ to enter the ambit of that provision. Therefore, any income generated from the transfer of capital by a foreign company could be taxable in India only if that asset was situated in India at the time of the transfer. Accordingly, following the Supreme Court’s observations, the Cairn Tribunal concluded that prior the entry into force of the 2012 Amendment, Section 9(1)(i) of the ITA not only did not cover indirect transfers, but could not ‘by a process of interpretation be extended to cover’ such transfers. As the Supreme Court categorically found, this ‘would amount to changing the content and ambit of Section 9(1)(i)’. This, in the Tribunal’s view, is precisely what the 2012 Amendment did. It was, therefore, clear to the Tribunal that ‘the 2012 Amendment amended Section 9(1)(i) by imposing a new tax burden where none previously existed’ and thus it constituted a substantive change in Indian tax law. Court ‘was mindful of the need for certainty and the rule of law ’. These observations were relevant to ‘the Tribunal’s application of an international obligation which is concerned with the protection and promotion of the rule of law and its integral limbs such as reasonable predictability and certainty’. Ibid paras 1228, 1231–1232. Taken together, the highest rank of the Supreme Court in the Indian judicial system (the final court of appeal in majority of cases) and the persuasiveness of its reasoning in the Vodafone case, the Tribunal’s approach to give a lot of interpretative weight to the discussed judgment was commendable. Cf. Błażej Kuźniacki, ‘Tax Treaty Interpretation by Supreme Courts: Case Study of CFC rules’ in International Tax Principles in BRICS and OECD Countries: Divergences and Convergences (2016) Revista Direito Tributário Internacional Atual, The Brazilian Institute of Tax Law (IBDT) in São Paulo, https://www.ibdt.org.br/RDTIA/en/1/tax-treaty-interpretation-by-supreme-courts- case-study-of-cfc-rules/; Michael Lang, ‘The Term ‘Enterprise’ and Article 24 of the OECD Model Convention’ in Guglielmo Maisto, (ed.), The Meaning of ‘Enterprise’, ‘Business’ and ‘Business Profits’ under Tax Treaties and EU Tax Law (IBFD 2011) 120; David Ward, The Interpretation of Income Tax Treaties with Particular Reference to the Commentaries on the OECD Model (IBFD 2001) 161; Andreas Bullen, Arm’s Length Transaction Structures: Recognizing and Restructuring Controlled Transactions in Transfer Pricing, (IBFD 2010) 65. Vodafone (n 18) para 88. Ibid. Paras 169–170. Cape Brandy Syndicate v. IRC (1921) 1 KB 64, P. 71 (Rowlatt, J.). Also quoted by the Tribunal. Cairn (n 1) para 1225. Cairn (n 1) para 1249. The inner quotes come from Vodafone (n 18) para 71, Cairn (n 1) para 1250. The Tribunal also nicely explained the dynamics in interpretation between judicial, executive and legislative powers in light of the circumstances in the Cairn case: ‘The common law evolves in light of changing circumstances and it is not unusual for authorities such as the ITD to seek to give new interpretations to existing laws in response to such chan -g ing circumstances. Sometimes the courts will bless such interpretations, sometimes they do not; indeed, sometimes the courts themselves will revisit what was thought to be settled law. But the courts must also give effect to the laws as written by Parliament and there are many instances where the courts will hold that the law, as written, does not support the taking of administrative, investigative or enforcement action. In the Tribunal’s view, this is the case here: the Court disagreed with the interpretation of the Executive and gave effect to the law, i.e., Section 9(1)(i), as written by Parliament’. Ibid para 1251. 136 • Cairn Energy Far-reaching retroactive effect of the 2012 Amendment Aeft r concluding that the 2012 Amendment constituted a substantive change in Section 9(1)(i) of the ITA by its extension to OITs, it was very easy for the Tribunal to state that this Amendment was retroactive. The easiness of this task followed from the very wording of the Finance Act 2012, which expressly stated that Explanations 4 and 5 ‘shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962’. It means that the Indian legislature unequivocally indicated that the 2012 Amendment purports to apply as of the entry into force of the ITA 1961, that is, 1 April 1962. Thus, the intention of the Indian legislature in respect of the retroactive effect of the 2012 Amendment was clear and extreme, that is, the retroactive effect reached back 60 years, aiming to tax OITs retroactively between 1 April 1962 and 1 April 2012. The Tribunal concluded that the retroactive amendment in tax law applied to the Claimants with respect to the CIHL Acquisition (likewise, this amendment covered the transactions of the Claimants in Vodafone). It was, therefore, necessary to examine whether this retroactive taxation of the CIHL Acquisition was fair and equitable. Relevance of the FET standard and the principle of legal certainty in the context of retroactive taxation Once the Tribunal concluded that the 2012 Amendment led to retroactive taxation of the CIHL Acquisition, its task was to determine the compatibility of such taxation with the FET standard. To this end, the Tribunal carefully set the scene by explaining the relevance of the FET standard and the principle of legal certainty in the context of retroactive taxation. Before looking closer at that relevance, the Tribunal observed that Indian case law does not allow Parliament to go ‘too far’ in introducing retroactive legislation. For example, Indian courts have found grounds to strike down ‘a retroactive tax that imposes an unforeseen financial burden on a taxpayer or widens the meaning of a term so as to subject an assessee to taxation that it could not have contemplated at the time of the transaction’. This shows that Indian courts tolerate retroactive tax legislation ‘when the burden of the application of the tax law could have been foreseen or when, for one reason or another – often involving drafting problems, a legislative ‘fix’ is required to clarify Parliament’s Intention’. Finance Act 2012 [Act No. 23 of 2012], para 4. Cairn (n 1) para 1253. In fact, only the length of the retroactive effect was to some extent disputable insofar as the Respondent had tried to chal - lenge it in various ways, all rejected by the Tribunal. Ibid paras 1255–1259. Ibid para 1259. Ibid paras 1260, 1676. Actually, even before doing so, the Tribunal examined the Respondent’s tax avoidance defence (paras 1260–1591) and other defences (paras 1592–1673). We will address the former defence in the next section. Ibid para 1682 with a reference to: Jayam and Company v. Assistant Commissioner & Snr., (2016) 2 SCC 125, para. 19 and Shew Bagwan Goenka v. Commercial Tax Office and Others, (1973) 32 STR 368, para. 15. Cairn (n 1) para 1683. The Indian jurisprudence is largely in line with the approach to retroactive taxation in many countries. For instance, in the Netherlands, it is agreed that the retroactive taxation should in principle not reach further back in time than the moment at which the taxpayers have been informed about the intention to introduce such taxation (eg the moment at which a proposal of retroactive tax law is submitted to Parliament or the moment at which a press release is issued in which the intention to introduce such a law is announced), or it is otherwise foreseeable. Exceptionally, if there are very weighty arguments such as preventing a small group of taxpayers from obtaining an unintended and unjustified advantage via abusive tax avoidance or tax evasion, the retroactive taxation can reach further back in time than the moment on which the retroactive tax law was foreseeable for taxpayers. Hans Gribnau, ‘Equality, Legal Certainty and Tax Legislation in the Netherlands: Fundamental Legal Principles as Checks on Legislative Power: A Case Study’, (2013) 9 Utrecht Law Review 72–73. Similarly, in Australia, a retroactive tax law is acceptable if the Government has announced in a detailed way, by press release, its intention to introduce such legislation, and the Australian Taxation Office (ATO) issued guidance on treatment of taxpayers covered by such a law. In the view of the Australian Government, retroactive tax law may be appropriate, for example, when it addresses a tax avoidance or a tax evasion issue. Examples of such laws in Australia regarded the elimination of schemes linked with organized crime and the ‘deliberate flouting of company and tax laws’ leading to revenue losses of ‘hundreds of millions of dollars’. Australian Law Reform Commission, Laws with retrospective operation, (12 Jan. 2016), paras 13.93 and 13.95–13.98, <hps:// tt www.alrc.gov.au/publication/traditional-rights-and-freedoms-encroachments-by-commonwealth-laws-alrc-report-129/13-retrospec - tive-laws/laws-with-retrospective-operation-2/> accessed 13 Feb. 2023. Cairn Energy • 137 Consequently, the bottom line for legally acceptable retroactive taxation in domestic settings seems to be its foreseeability by taxpayers, unless some specific and very important justification exists for it. This minimum criterion is in principle not met by the legislature if taxpayers neither were informed nor could foresee that their transactions would be taxable at the time of their realization. With the length of the reach of retroactive taxation its foreseeability by taxpayers is decreased and thus its legality in a domestic legal system. In other words, the more retroactive taxation is, the stronger justification for it must exist. This is also very much true for compatibility with the FET standard in international invest - ment law, as followed from the further analysis of the Tribunal. That’s why the Respondent tried hard to convince the Tribunal that the 2012 Amendment, if at all, had retroactive effect only for two months. The game was played for a high stake: the shorter the retroactivity, the less tension it creates under the principle of the rule of law and the principles of legal certainty and predictability, both very relevant to the constitutionality of retroactive tax law and its com- patibility with the FET standard. Indeed, the Tribunal observed that ‘[w]hat appears to be permitted in India and at the same time compatible with FET is “some” retro - activity of a relatively minor character, but not “any” retroactivity: the investor and, any law-abiding person more generally, has a protection against retroactivity exceeding certain limits’. To determine whether the 2012 Amendment led to the retroactivity compatible with the FET standard under the UK–India BIT, the Tribunal decided to carry out a balancing exercise between India’s public policy objectives, on the one hand, and the Claimants’ interest in benefitting from the values of legal certainty and predictability, on the other. [(…)] The proper legal principle to apply in a jurisdiction governed by the rule of law, in the Tribunal’s view, is that of legal certainty: the general rule is that laws should apply prospectively; thus, except for specific cases where retroactivity is compatible with the rule of law, any individual is entitled to assume that the State will not legislate retroactively even absent a specific commitment. The Tribunal clearly considered the principle of legal certainty was the core principle relevant to assessing the compatibility of retroactive taxation with the FET standard. At the same time, however, the Tribunal acknowledged that the principle of legal certainty is not absolute. Thus, it must be examined whether the retroactive taxation could be justified by a specific purpose other than to increase the taxable base that India could not aain b tt y applying the 2012 Amendment 83 84 prospectively. Following tax scholars and practice of various states, the Tribunal considered Cairn (n 1) paras 1692 ff. Ibid paras 1255–1256. Ibid paras 1750 ff. Ibid para 1785 in fine . Cf. Rosenbloom (n 55) para 50: ‘Some degree of retroactivity is tolerable, and therefore foreseeable to investors. In the presence of a demonstrable tax avoidance scheme, it is not possible to say that legislation intended to address the avoidance, even if retroactive to some extent, is inconsistent with the “Rule of Law.”’ See also Nupur Jalan and Akshara Rao, ‘The Cairn Arbitration Award: Retrospective Taxation of Indirect Share Transfers in India Breaches Bilateral Investment Treaty’, (2021) 75 Bulletin for International Taxation sec. 2.2.2.3. Cairn (n 1) para 1789. a Th t is, ‘given the degree to which retroactivity upsets legal certainty, the State should have a specific and compelling public policy objective that warrants not only the regulatory change in general, but also the retroactive application of that change. In other words, to justif y legislating with retroactive effects, a State must be facing a situation where the new rule would not fulfil its purpose (ie not fully attain the public interest being pursued) if its effects were only prospective. [(…)] The goal of protecting and enhancing the public treasury is present in any ae tt mpt by a government to raise revenue. Instead, there must be an identi - fiable and specific public purpose justifying why it would not suffice to apply the measure prospectively, and why the State has deemed it necessary to apply it to past transactions’. Ibid paras 1790–1791. Baker (n 42) 780; Philip Baker, ‘Retrospective tax legislation and the European Convention on Human Rights’, British Tax Review (2005) 291; James Hollis, ‘The UK Retroactive Correction of Repo Tax Legislation’ (2011) Journal of Taxation of Financial Products 225. 138 • Cairn Energy combatting abusive tax practices as the relevant specific public purpose that could justify retro - active taxation in question. Furthermore, the determination of a tax avoidance theory under Indian tax law undertaken by the Tribunal earlier on, during the analysis of the Respondent’s tax avoidance defence, was very helpful in the examination of the mentioned justification against the factual background. Hence, these elements of the Cairn decision will be analysed in the next section. They were pivotal to decide on the compatibility of the 2012 Amendment and taxation of the CIHL Acquisition based on that amendment with the FET standard. DE C ODIN G TA X AV OID A N C E UNDER D OM E S TIC ( INDI A N ) TA X L AW TO DE TER M INE WHE THER R E TR O A C TIVE TA X ATION WA S FA IR A ND E Q UITA B L E Relevance of decoding abusive tax avoidance for examining the Respondent’s tax avoidance defence and the justification for retroactive taxation Although it was not articulated by the Tribunal explicitly, the proper decoding of the concept of tax avoidance under Indian tax law was pivotal not only to (i) assess the major defence of the Respondent but also (at least partly) to (ii) examine the main justification for the violation of the principles of legal certainty and predictability by the retroactive taxation. The Respondent’s tax avoidance defence was based on the following logic: if the 2006 Transactions, including the CIHL Acquisition, were tax avoidant and thus undertaken to avoid taxation in India under different grounds than the 2012 Amendment, the tax bur - den imposed cannot be characterized as being unfair and inequitable because the 2006 Transactions could be ignored or recharacterized for tax purposes. The Tribunal agreed with this logic with a crucial caveat; namely even if the tax avoidance was proven by the Respondent in accordance with the Indian judicial anti-avoidance rule, it may not be enough to preclude the Tribunal from an examination of whether the retroactive taxation complies with the UK–India BIT’s FET standard. To this end, the Respondent would have to prove that the taxation that would have been imposed under the Indian judicial anti-avoidance rule ‘would have been identical, or at least as much as that which was in fact imposed’. This was perfectly logical: the effect of the hypothetical use of the Indian anti-tax avoidance doc - trine would have to be entirely or almost entirely reflected in the effect of the tax measures actually used by India in respect of the 2006 Transactions in order to disregard the need for testing these measures under the UK–India BIT’s FET standard. Only then could the 2006 Transactions lead to taxation equivalent to that under the 2012 Amendment and its application by the Indian tax authorities, irrespective of their existence, in which case the questions as to the retroactive nature and its reconciliation with the FET standard would have become moot. The prevention of abusive tax avoidance was considered by the Tribunal as a major justifica - tion in respect of the retroactive taxation. The examination of that justification required from the Tribunal to strike a balance between India’s public purpose and the investor’s interests. The Tribunal considered that the principle of proportionality was relevant in this balancing exercise, Cairn (n 1) paras. 1796–1797, 1812. For example, ‘the Respondent rightly has not argued that it enacted the 2012 Amendment to combat tax avoidance by the Claimants specifically. Indeed, as the Tribunal has found in Section VII.A.3.a(ii) above, the FAO did not tax the Claimants on a theory of tax avoidance. It has not been suggested that the 2012 Amendment was enacted to sanction the Claimants for their specific abuse. In any event the Tribunal has found that the 2006 Transactions were not tax avoidant’. Ibid para 1812. Ibid para 1262. Ibid 1439. Cf. Van Weeghel (n 11) sec. 26.2.3. Cairn (n 1) para 1796. Cairn Energy • 139 which required it to verify whether the retroactive taxation was not more burdensome for the investor’s rights and interests than required by the pursued public purpose, ‘especially if a less burdensome measure would be available to satisfy the same public purpose’. This balancing exercise under the principle of proportionality is seen by investment scholars as appropriate to manage the tensions between the different principles at stake in investor-State disputes. However, the Cairn Tribunal appeared to focus mainly on the discovery of abusive tax avoid- ance of the 2006 Transactions and the anti-abuse scope and purpose of the 2012 Amendment rather than determining whether the interests of the Claimants (investors) were found to be weightier than those of the Respondent (host state). It means that the principle of proportion- ality was not applied by the Tribunal in a classical way to solve tensions between the principle of legal certainty, typically securing the interests of investors, and the principle of tax equity, favouring the budgetary interests of host states, but to delineate ‘the proper territorial limits of the State’s fiscal powers’ beyond which the FET standard may be violated. This is not dissimilar to the approach by the Court of Justice of the European Union (CJEU) in case law on the compatibility of domestic anti-tax avoidance provisions and the Treaty on the Functioning of the EU, in which the Court determines the proper extent of a state’s fiscal authority territorially, and the principle of legal certainty is assessed as a part of the proportion- ality test. To the extent of relevant similarities of facts and legal questions in tax avoidance cases, arbitral tribunals may take into account the CJEU’s interpretative approach to support Ibid para 1788 with references to: Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award (5 October 2012) paras 427, 452; Electrabel S. A . v. Republic of Hungary, ICSID Case No. ARB/07/19, Award (25 November 2015) para 179; LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (3 October 2006) para 195; Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award (5 September 2008) para 232; and Roland Kläger, ‘Fair and Equitable Treatment’ in International Investment Law (Cambridge 2011), 128, 236–245. Valentina Vadi, Proportionality, Reasonableness and Standards of Review in International Investment Law and Arbitration, Elgar International Investment Law series (2018); Julien Chaisse, ‘Investor-State Arbitration in International Tax Dispute Resolution: A Cut above Dedicated Tax Dispute Resolution’ (2016) Virginia Tax Review 149; Benedict Kingsbury and Stephan Schill, ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest – The Concept of Proportionality’ in Stephan Schill (ed.), International Investment Law and Comparative Public Law, (Oxford University Press 2010); Eric De Brabandere, Paulina Baldini and Miranda da Cruz, ‘The Role of Proportionality in International Investment Law and Arbitration: A System-Specific Perspective’ (2020) 89 Nordic Journal of International Law 471. Cairn (n 1) paras 1260–1591, 1813–1816. Ricardo García Antón and Toni Marzal, ‘Proportionality and the fight against international tax abuse: comparative analysis of judicial review in EU, international investment and W TO law ’, 30 Asia Pacific Law Review (Special Issue 2022) 9. Ibid 8. Cf. Wolfgang Schön, ‘Neutrality and Territoriality – Competing or Converging Concepts in European Tax Law?’ (2015) 69 Bulletin for International Taxation, issue 4/5; Dennis Weber, ‘The Reasonableness Test of the Principal Purpose Test Rule in OECD BEPS Action 6 (Tax Treaty Abuse) versus the EU Principle of Legal Certainty and the EU Abuse of Law Case Law ’ (2017) 1 Erasmus Law Review 38; Maria Hilling, ‘Justifications and Proportionality: An Analysis of the ECJ’s Assessment of National Rules for the Prevention of Tax Avoidance’ (2015) 41 Intertax 303. For the relevant case law on the compatibility of domestic anti-tax avoidance measures with the EU law see, for example, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04 (12 September 2006); Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08 (17 September 2009); Société d’investissement pour l’agriculture tropicale SA (SIAT) v. État belge, C-318/10 (5 July 2012); Itelcar – Automóveis de Aluguer Lda v. Fazenda Pública, C-282/12 (3 October 2013); Inspecteur van de Belastingdienst/ Noord/kantoor Groningen v. SCA Group Holding BV, X AG and Others v. Inspecteur van de Belastingdienst Amsterdam and Inspecteur van de Belastingdienst Holland-Noord/kantoor Zaandam v MSA International Holdings BV and MSA Nederland BV, C-39/13, C-40/13, and C-41/13 (12 June 2014); X BV, X NV v Staatssecretaris van Financiën, C-398/16, C-399/16 (22 February 2018); N Luxembourg 1, X Denmark A/S, C Danmark I, Z Denmark ApS v Skaem tt inisteriet (C-115/16, C-118/16, C-119/16, and C-299/16) (26 February 2019); Lexel AB v Skaev tt erket, C-484/19 (20 January 2021). See more on this case law in literature: Dennis Weber, ‘Tax Avoidance and the EC Treaty Freedoms A Study of the Limitations under European Law to the Prevention of Tax Avoidance’ (Kluwer Law 2005) 250–278; Luc De Broe, International Tax Planning and Prevention of Abuse: A Study under Domestic Tax Law, Tax Treaties and EC Law in Relation to Conduit and Base Companies (IBFD 2008) 880–902; Adam Zalasiński, ‘Proportionality of Anti-Avoidance and Anti-Abuse Measures in the CJEU’s Direct Tax Case Law ’ (2007) 35 Intertax 310–321. It should be remembered that there are also relevant differences in the reasoning of the Tribunal in the Carin case and the CJEU case law in tax avoidance cases. Notably, the CJEU is less protective of ‘form’ than the Cairn Tribunal since the Court ulti- mately looks for a ‘genuine’ connection of companies and their transaction with EU Member States, while the Tribunal did not do that. Adolfo Martín Jiménez, ‘International Investment Agreements and Anti-Tax Avoidance Measures: Incoherencies in the International Law System, ‘Systemic Interpretation’ And Taxpayers’ Rights’ in Pasquale Pistone (ed), Building Global International Tax Law, Essays in Honour of Guglielmo Maisto (IBFD 2022) sec. 4 and 5. 140 • Cairn Energy their reasoning. Recently, the CJEU’s case law in corporate direct taxation mae tt rs has had steadily more impact on the interpretation of global standards of abuse tax avoidance and vice versa. Arbitral tribunals could seek guidance from the CJEU’s jurisprudence in tax avoidance cases to determine the existence of abusive tax avoidance and to examine the suitability and the proportionality of anti-abuse measures. The CJEU case law appears to be particularly relevant to arbitral tribunals for the interpretation of the FET standard under IIAs. The Tribunal observed that legislation resulting in retroactive prevention of abusive tax avoidance could be compatible with domestic and international law because it specifically aims to discourage and prevent the future abusive practice of taxpayers. Such legislation warns tax - payers that actively seeking to abuse tax law does not pay off insofar as the abusive practices may be stricken down by the legislator with retroactive effect and thus ‘the taxpayers will not benefit, even temporarily, from their own wrongful conduct’. Moreover, ‘retroactive taxation of abusive transactions is also less intrusive on taxpayers’ interests of legal certainty and pre- dictability, since taxpayers that actively engage in abusive practices can hardly have a legitimate interest to benefit from their conduct’. This is a powerful argument. Indeed, the principle of legal certainty and predictability does not seem to equally protect the taxpayers actively seeking to abusively avoid taxation and the taxpayers who in the course of ordinary day-to-day business or investment practices benefit from tax advantages in a full compliance with the lee tt r and the purpose of tax law. Guaranteeing legal (tax) certainty requires examining a variety of legal and non-legal factors in a particular context together with other important tax policy goals such as fairness, economic Cf. Thomas W. Wälde and Abba Kolo, ‘Coverage of Taxation under Modern Investment Treaties’ in Peter T. Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford 2008) 314. Also, a comparative methodology could be used in respect of the case law of the European Court of Human Rights. The Tribunal relied on such case law implicitly and indirectly via the references to the scholarship, for example, Cairn (n 1) paras 1796–1800. The Tribunal acknowledged that interpretation of the FET standard could be guided, inter alia , by general principles of law. In that respect, the Tribunal stated that ‘there is no reason why the Tribunal should not seek guidance from the jurisprudence of international adjudicatory bodies, such as the ECtHR , to determine the existence of general principles of law ’. Ibid para 1738. For the relevance of jurisprudence of the World Trade Organisation (W TO) in tax-related investor-state dispute resolution cases see Reinhard Quick and Christian Lau, ‘Environmentally Motivated Tax Distinctions and W TO Law: The European Commission’s Green Paper on Integrated Product Policy in Light of the “Like Product-” and “PPM-” Debates’ (2003) 6 JIEL 419. Robert J. Danon and Sebastian Wuschka, ‘International Investment Agreements and the International Tax System: The Potential of Complementarity and Harmonious Interpretation’ (2021) 75 Bulletin for International Taxation 697. Cf. Wolfgang Schön, ‘Interpreting European Law in the Light of the OECD/G20 Base Erosion and Profit Shifting Action Plan’ (2020) 74 Bulletin for International Taxation sec. 7. Cf. Cairn (n 1) para 1738. In that regard, it is worth mentioning that chain of judgments of the CJEU have formed a general principle of EU law according to which the advantages under EU law are not to be granted to ‘a person [that] invokes certain rules of EU law providing for an advantage in a manner which is not consistent with the objectives of those rules’, that is, the general principle of the prohibition of abuse of rights under EU law. Quote from: CJEU, N Luxembourg 1, X Denmark A/S, C Danmark I, Z Denmark ApS v Skaem tt inisteriet (C-115/16, C-118/16, C-119/16, and C-299/16) (26 February 2019) para 102. Indeed, it has been recently suggested by scholars that the principle of proportionality, constituting a general principle and a cornerstone of EU law plays an important role for the purposes of the FET in a sense that the proportionality of legal meas - ures should be seen as a requirement for FET under IIAs. This suggestion is based on a reference to Cairn (n 1) para. 1787. See Pasquale Pistone and Ivan Lazarov, The Fundamental Right to Fair and Equitable Treatment in the Cross-Border Recovery of Taxes within the EU: A Need for a Common Minimum Standard, 15 World Tax Journal 1 (2023), sec. 4. However, it should be borne in mind that the Cairn Tribunal used domestic standards of abusive tax avoidance as a benchmark to examine the compatibility of Indian retroactive taxation with the FET standard, not the abusive tax avoidance standard arising from international treaties, for example, tax treaties or the EU Treaties. Cf. Martín Jiménez (n 96) sec. 4. Cairn (n 1) para 1796. Ibid with the reference to Baker (n 42) 781. Judith Freedman, ‘Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle’ (2004) British Tax Revies 356: ‘There will be no deficit in the rule of law if the area of uncertainty is one that does not affect day-to-day transac - tions and is governed not by arbitrariness but rather by procedures that attract the support of the compliant members of the tax community ’. However, it is worth bearing in mind that the borderline between abusive tax avoidance and acceptable tax planning is very thin and context-sensitive. Therefore ‘[t]hose who deliberately and with open eyes try to balance on the borderline of acceptable tax planning should not be surprised if they have to realize that they fall down on the wrong side’. Frederik Zimmer, ‘In Defence of General Anti-Avoidance Rules’ (2019) 72 Bulletin for International Taxation, sec. 5. Cairn Energy • 141 efficiency, and raising revenue. Especially ae tt mpts of taxpayers to avoid taxation by artificial structures may not deserve to be protected by the principle of legal certainty. One could argue that taxpayers are exclusively responsible for such practices leading to tax uncertainty. By con- trast, one could argue that new legislation or incompetent tax authorities can cause tax uncer - tainty which is beyond the control of taxpayers and thus taxpayers must be protected under the principle of legal certainty in such instances. Consequently, if the 2012 Amendment was specifically targeted to abusive tax avoidance and did not apply too retroactively, that is, its ret - roactive application was foreseeable to the Claimants in 2006, or its effect could be achieved by the Indian anti-tax avoidance doctrine applicable in 2006, the amendment might have been considered by the Tribunal as not violating the FET standard. Such a measure would be suitable and proportional to achieve its aim insofar as it would secure interests of investors and States in a balanced way, without tensions between the principle of legal certainty and the principle of tax equity. The retroactivity of the Indian legislation, however, was effectively reaching back more than 50 years. It is, therefore, doubtful whether such legislation, even if targeting only abusive tax avoidance, would survive the scrutiny under the FET standard. e T Th ribunal’s approach to decoding abusive tax avoidance for examining the Respondent’s tax avoidance defence and the justification for retroactive taxation Examining the Respondent’s tax avoidance defence required the Cairn Tribunal to undertake an arduous task; namely the reconstruction of Indian tax avoidance doctrine, and then a pplying it to determine whether the 2006 Transactions constituted abusive avoidance of taxation in India. In that regard, the Tribunal observed that its task was ‘not to determine whether the 2006 Transactions were tax avoidant/abusive as an Indian court would do’, but ‘to determine whether the challenged measures (the FAO and related measures) were fair and equitable’. To this end, the Tribunal went through an in-depth and comprehensive analysis of Indian case law. The Cairn case therefore to some extent resembles the Indofood case on beneficial ownership (BO) in which a dispute concerning the interpretation of a tax concept was decided in a non-tax dispute. The sole focus of the Tribunal on the Indian case law regarding abusive tax avoidance stemmed from the fact that the 2006 Transactions allegedly constituted tax avoidance under Indian tax law, not international law (eg Indian tax treaties). Also the notion of tax avoidance is relative and depends on the extent to which legislatures, courts, and tax authorities of various states tolerate the behaviour of a taxpayer leading to a reduction of tax liability. In the Cairn case, the only relevant source to determine abusive tax avoidance was indeed Indian case law, Brian Arnold, ‘Some Thoughts on Tax Certainty’, 2 Belt and Road Initiative Tax Journal 1(2021), 93, 98. Cf. above the Far-reaching retroactive effect of the 2012 Amendment section. Cairn (n 1) para 1283. Some references were made to English and other Commonwealth case law insofar as it was incorporated by the Indian courts. The Court of Appeal, 2 March 2006, Indofood International Finance Ltd. v. JP Morgan Chase Bank NA, London Branch, [2006] STC 1195, ITLR (2006) 653. The Indofood case is an unusual case concerning the concept of BO, because the dispute concerning the understanding of the tax concept of BO under the Agreement between the Government of the Kingdom of the Netherlands and the Government of the Republic of Indonesia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (signed in Jakarta on 29 January 2002, entered into force 30 December 2003), had a contract law dimension (the essence of the dispute was contractual liability and not tax liability). As a result, neither the judges nor the aor tt neys for the parties were tax experts, even though the most important issue to be decided was precisely one rooted in international tax law (the concept of BO). The tax authorities also did not ae tt nd the hearing and did not make any submissions. See Philip Baker ‘United Kingdom: Indofood International Finance Ltd v. JP Morgan Chase Bank NA’ in Michael Lang and oth- ers (eds), Beneficial Ownership: Recent Trends (IBFD 2013) sec. 2.1. Cf. Cairn (n 1) para 1265. Błażej Kuźniacki ‘Controlled Foreign Companies and Tax Avoidance. International and Comparative Perspectives with Specific Reference to Polish Tax and Constitutional Law, EU Law and Tax Treaties’ (2020 C.H. Beck) 31. 142 • Cairn Energy as a statutory definition of abusive tax avoidance in India at the time of the dispute between the Cairn Energy and the Indian tax authorities did not exist. Prior to the analysis of Indian case law, the Tribunal decided to use the terms tax abuse and tax avoidance interchangeably and appears to endorse the Respondent’s understanding of abusive tax avoidance, that is, ‘one where the form of the transactions, even if formally lawful, was chosen with the dominant purpose of reducing or avoiding liability to pay tax in ways that are inconsistent with the intent of the law’. Yet, in the entire analysis, the Tribunal did not explicitly discuss the second prong of this definition, which refers to the inconsistency of the transaction with the intent of the law. It was not an omission on the side of the Tribunal, but a result of a careful reflection on the Indian case law, which did not appear to focus on the contradiction test as a part of the abuse test. Accordingly, the Tribunal did not appear to analyse the second prong per se, but rather implicitly by references to a colourable/artificial device. Internationally, the second prong is linked with the normative element of abusive tax avoid- ance aimed at testing whether a transaction would be ‘contrary to the object and purpose of the relevant provisions’. The Tribunal seems to acknowledge that the second prong of abusive tax avoidance is about transactions undertaken ‘contrary to the object and purpose of the tax law’ while examining the prevention of abusive tax avoidance as a specific public policy justification for the retroactive taxation. However, the Tribunal did not explain how the second prong of abusive tax avoidance could be understood and what role it plays in the determination of abusive tax avoidance. As it illustrated by the discussion in the ‘Dominant purpose test and colourable/ artificial device test as building blocks of the Indian substance over form doctrine’, ‘The Tribunal’s approach regarding the mechanism and consequences of the substance over form doctrine’, and the ‘Inadequacy of the substance over form doctrine to permit taxation of the CIHL Acquisition under the 2012 Amendment and the need for the extension of source state taxation to that effect’ sections, the second prong under Indian tax avoidance doctrine does not seem to play a separate The GAAR was introduced in India by then Finance Minister, Pranab Mukherjee, on 16 March 2012, but it was not imple- mented until 1 April 2017. It has become effective for the assessment year 2018–19 onwards. ‘GAAR will be effective April 1, 2017, onwards: CBDT’ (27 January 2017) Business Standard, <https://www.business-standard.com/article/economy-policy/ gaar-will-be-effective-april-1-2017-onwards-cbdt-117012700715_1.html> accessed 25 March 2022. The Indian GAAR is con- tained in CHAPTER X-A (Section 95) of the ITA. Thus, we have decided to use the term ‘abusive tax avoidance’ as it most accurately reflects the object of examination of the Tribunal. However, whenever the term ‘tax avoidance’ is used, it shall be equated with ‘abusive tax avoidance’, unless otherwise stated. Cairn (n 1) 1270. See the discussion in the ‘Dominant purpose test and colourable/artificial device test as building blocks of the Indian substance over form doctrine’, ‘The Tribunal’s approach regarding the mechanism and consequences of the substance over form doctrine’, and the ‘Inadequacy of the substance over form doctrine to permit taxation of the CIHL Acquisition under the 2012 Amendment and the need for the extension of source state taxation to that effect’ sections. Likewise, the Indian legislature did not decide to include an explicit reference to the second prong of abusive tax avoidance under the Indian GAAR . Section 96(1) of the ITA defines an impermissible avoidance arrangement as ‘an arrangement, the main purpose of which is to obtain a tax benefit, and it (a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length; (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act; (c) lacks commercial substance or is deemed to lack commercial substance under Section 97, in whole or in part; or (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes’. The language under lee tt r (b) to some extent resembles the second prong as it refers to ‘the misuse, or abuse, of the provisions of this Act’, which may be identified with contradicting the relevant provisions of tax law. The quote is taken from a guiding principle as added in 2003 to para 9.5. of the Commentary on Article 1 of the OECD Model Taxation Convention (MTC). See also the second part of the principal purposes test (PPT) as added in 2017 to Article 29(9) of the Model Tax Convention and Article 7(1) of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shiift ng (OECD 24 November 2016). This Convention was signed by India on 7 June 2017 and entered into force on 1 October 2019, < https://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf> accessed 24 September 2022. Cf. Article 6 of the Council Directive (EU) 2016/1164 of 12 July 2016 Laying Down Rules against Tax Avoidance Practices that Directly Affect the Functioning of the Internal Market (ATAD), OJ L 193/1 (19 July 2016)—the European Union (EU) GAAR . ‘A major justification invoked in respect of retroactive taxation is the State’s power to combat tax abuse. In particular, where taxpayers exploit an inadvertent legislative loophole in a manner that is abusive and manifestly contrary to the object and purpose of the tax law, the State may be justified to close such a loophole with a retroactive effect and without breaching its own law or applicable international law ’. [italics added, footnotes omitted]. Cairn (n 1) para 1796. Cairn Energy • 143 role in defining abusive tax avoidance. It rather appears in the notion of a colourable/artificial device. Hence, the Tribunal just replicated the approach of Indian jurisprudence in tax avoid- ance cases in that regard. Nevertheless, it is noteworthy that the contradiction test is considered by tax scholars as by far the most important element of the identification of abusive tax avoidance. It is also revealed in tax literature that the absence of a contradiction test in anti-tax avoidance measures clearly works in favour of tax authorities. The tax authorities applying such rules may have the temptation to replace their own personal judgment about what is good and bad, per- mitted or prohibited, without really making a reasonable effort to interpret the legislation or tax treaty being applied. As commented, the objective element [i.e., the contradiction test] of (some) GAARs and the PPT works as a guarantee to the taxpayer. (text in the square brackets added) Even if the contradiction test could be ipso facto decoded from the economic substance test or the notion of a colourable/artificial device, its absence in anti-tax avoidance measures will clearly work in favour of tax authorities. Legally, they will not be required to establish that an obtainment of tax benefit was contrary to relevant tax provisions. As a result, the taxpayers will lose a guarantee that they can effectively obtain tax benefits as long as this is in line with the language, object, and purpose of relevant tax provisions. This seems to imply that the Indian tax avoidance’s doctrine worked more favourably for the Respondent than for the Claimants, by its very nature providing them less legal certainty than anti-tax avoidance measures with the contradiction test. Although the Tribunal did not appear to acknowledge that, its examination of the Respondent’s tax avoidance defence was anyway saturated with a cautiousness, including the following preliminary points: (i) ‘there can be no tax avoidance without a tax that is being avoided’; (ii) the Respondent’s tax avoidance This may be contrasted with the case law of the CJEU in which, from Emsland-Stärke GmbH v. Hauptzollamt Hamburg- Jonas, 2000 E.C.R . I-11569, a finding of abusive tax avoidance is based on a two-pronged test. The test ‘requires, first, a combi - nation of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved. It requires, second, a subjective element consisting of the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it’ (paras 52–53). This test turns out to be the role model for determining abuse in the EU. It became useful for that purpose across all areas of the CJEU’s juridical purview and was integrated into several anti-abuse rules in EU secondary law which partly harmonizes the area of tax - ation. Alfredo Garcia Prats and others, EU Report: Anti-avoidance measures of general nature and scope – G. A. A.R . and other rules (2018) 103A IFA Cashiers 8. With regard to the second prong of the PPT see Wolfgang Schön, ‘The Role of “Commercial Reasons” and “Economic Reality” in the Principal Purpose Test under Article 29(9) of the 2017 OECD Model’ in Pasquale Pistone (ed), Building Global International Tax Law: Essays in Honour of Guglielmo Maisto (IBFD 2022) sec. 12.1 and 12.2.1. With regard to the second prong of the Canadian general anti-avoidance rule (GAAR) and the PPT see Michael N. Kandev and John J. Lennard, ‘Treaty Shopping in Canada ae ft r Alta Energy Luxembourg (2021): A Closed Door without a Lock Bulletin for International Taxation’ (2022) 76 Bulletin for International Taxation sec. 5.3 in fine . Indeed, the tax scholarship analysing case law on domestic GAARs in an international tax context—judicial and admin- istrative decisions in 2021 in several countries on ‘treaty shopping cases’, that is, Canada: Alta ; Trinidad and Tobago: Methanex; Argentina: Molinos; and Spain: a decision of the GAAR committee in Spain—reveals a common risk for taxpayers in anti-tax avoidance measures based on ‘economic substance’ without the contradiction test (ie essentially focussing on ‘artificiality ’ exclu- sively). Adolfo Martín Jiménez, Is There an International Minimum Standard on Tax Treaty Shopping after BEPS Action 6? Some Recent Divergent Trends, World Tax Journal 3 (2022), sec. 3.4.3. Martín Jiménez (n 118) sec. 3.4.3. a Th t is, these tests are intertwined in a factual way so that the more artificial an arrangement or transaction is, the more likely that an obtainment of tax benefit from them is contrary to relevant tax provisions. Błażej Kuźniacki, ‘The GAAR (Article 6 ATAD)’, in Werner Haslehner and others (eds), A Guide to the Anti-Tax Avoidance Directive (Edward Elgar Publishing 2020) 171. The Tribunal seems to entirely separate the examination of the 2006 Transactions under the Indian substance over form doctrine from the question of whether they were taxable under Section 9(1)(i) prior to the 2012 Amendment because, following the Vodafone case, it was apparent to the Tribunal that OITs were not taxable in India at the time. Cairn (1) paras 1427–1428. This preliminary point seems to be heavily influenced by the 2nd Expert Witness Report of Richard Gardiner (23 June 2017) para 23: ‘To establish that something constitutes tax avoidance you have to identify the tax that has been supposedly avoided so that the Revenue authorities can counteract that avoidance and impose that tax. No such analysis is conducted in the Statement of Defence and Annex B. And if conducted it inexorably follows that there has been no tax here which had been avoided’. 144 • Cairn Energy appears to be speculative to a considerable extent and suffered from the lack of any concrete and actual determination of tax avoidance, making the entire process of determination of abusive tax avoidance full of frailties ; (iii) the burden of proving abusive tax avoidance was clearly on the Indian tax authorities. Last but not least, it is revealing to read the conclusion of the Tribunal about the far-reaching retroactivity of the 2012 Amendment (in para 1253) together with the observation that the specific and compelling public policy justification for the retroactive change in tax law must reflect ‘the degree to which retroactivity upsets legal certainty’ (in para 1790). Such reading reveals that to persuade the Tribunal that the retroactive taxation of the CIHL Acquisition did not violate the FET standard, the Respondent would have to unequivocally prove two facts: (i) the 2006 Transaction constituted blatantly abusive tax avoidance clearly targeted by the Indian anti-tax avoidance doctrine and (ii) if such doctrine would be applied to that transaction, the tax burden would be equivalent to that under the 2012 Amendment. Alternatively, the Respondent would have to prove that the 2012 Amendment’s scope covered only blatantly abusive tax avoid- ance transactions with the aim to prevent their existence and its retroactive application could have been foreseeable by the Claimants. Otherwise, the far-reaching frustration of the principle of legal certainty by the taxation based on the 2012 Amendment and thus the violation of the FET standard could not be justified. Dominant purpose test and colourable/artificial device test as building blocks of the Indian substance over form doctrine The Tribunal thoroughly analysed the Indian case law from 1960 to 2016. During that period, the pendulum of judicial interpretation swung from strict literal interpretation of the tax laws following the Westminster doctrine to departure from that doctrine in 1980’s and later on in 126 127 favour of a step transaction approach as a subset of the substance over form doctrine to partly swing back in the late 1990’s and early 2000’s to the Westminster doctrine/literal interpre- tation. Finally, the Indian case law endorsed the substance over form approach with a focus on a ‘colourable or artificial device’ solely or dominantly used for tax avoidance purposes. From this voluminous package of Indian case law, the Tribunal eventually appears to be mostly Cairn (n 1) para 1436. Ibid 1437–1438. While the procedural issues regarding the burden of proof under anti-tax abusive measures are not necessarily identical internationally, the point made by the Tribunal was largely consistent with most of them. Indeed, the tax authorities are always obliged to first gather evidence, on the basis of relevant facts and circumstances, to determine whether the transaction in question constitute abusive tax avoidance under given anti-tax abusive measures. The taxpayers, then, may always submit the counterevidence. The courts will evaluate all the relevant evidence under the standard of proof, which is a balance of probabilities. Giuseppe Marino, ‘The Burden of Proof in Cross-Border Situations (International Tax Law)’ sec. 4.1 and Klaus- Dieter Drüen and Daniel Drissen, ‘Burden of Proof and Anti-Abuse Provisions’, sec. 2.1.2 in Gerard Meussen (ed), The Burden of Proof in Tax Law (IBFD 2013). Cairn (n 1) paras 1301–1423. a Th t is, ‘every man is entitled if he can to order his affairs so that the tax attracting under the appropriate Acts is less than it otherwise would be’ as propounded by Lord Tomlin in The Commissioners of Inland Revenue v. Duke of Westminster, [1935] A C, 1; All ER 259, (H.L.). This doctrine was followed by, for example, Commissioner of Income Tax, Gujarat v. A. Raman & Company, [1968] 67 ITR 11 (SC); Commissioner of Income Tax v. M/s B.M. Kharwar, AIR 1969 SC 812. The departure from the Westminster doctrine was completed by the Supreme Court in the case of McDowell & Co. Ltd v. CTO [1985] 154 ITR 148 (SC), in which the Court stated that ‘the time has come for us to depart from the Westminster princ- i ple as emphatically as the British courts have done’. The step-transactions doctrine permitted the tax authorities or the courts to disregard purely tax-motivated transactions inserted into a preordained series of transactions. For the relevant British case law to that effect see W. T. Ramsay Ltd. v. Internal Revenue Commissioners, [1981] 1 All E. R .865 (H.L.); Inland Revenue v. Burmah Oil, [1981] T.R . 535 (H.L.); Furniss (Inspector of Taxes) v. Dawson, [1984] All E.R . 530 (H.L.). a Th t is, ‘regard must be had to substance and not the form of a transaction’, see Calcua C tt hromotype v. Collector of Central Excise, AIR 1998 SC 1631, para 13. Mathuram Agrawal v. State of Madhya Pradesh, (1999) 8 Supreme Court Cases 667 para 12. Twinstar Holdings Ltd. v. Anand Kedia, 2003 (2) BomCR 56; Aditya Biria Nuvo Limited and others v. Deputy Director of Income Tax and others, MANU/MH/0884/2011, para 96; Vodafone (n 18) para 68; State of Rajahthan and others v Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Another, CIVIL APPEAL No. 434 OF 2016, para 30. Cairn Energy • 145 influenced by the Supreme Court of India’s judgment in the Vodafone case, thereby accepting (albeit not with full conviction) the dominant purpose test with importance of a colourable/ artificial device to determine abusive tax avoidance. The Tribunal also gave a considerable weight to the findings of the Supreme Court of India in the Vodafone case from which follows that: (i) tax planning, that is, reducing tax liability within the framework of law, is legitimate and permissible under Indian tax law, and (ii) the distinction between acceptable tax planning and abusive tax avoidance is to be based on the Indian version of the substance over form jud-i cial doctrine. This doctrine is prima facie based on two intertwined tests: (i) the dominant purpose test and (ii) the artificiality test. These tests influence each other in the way that the dominant non-tax business purpose of a transaction implies the lack of artificiality (existence of economic substance) of that transaction, or, at least, it means that the transaction is not abu- sive since the business purpose outweighs the artificiality. Accordingly, when it occurs that the transaction is artificial to some degree, then the mere existence of a business purpose may not be enough to dispel the abusive tax avoidance. To this end, such purpose must outweigh the artificiality, the determination of which requires a balancing act to be exercised by undertak - ing a holistic analysis of the entire investment rather than only a single transaction. In practice, this balancing act is extremely difficult, because the line between non-abusive and abusive tax avoidance is often blurred, fluid, and highly circumstantial. The fluctuating Indian case law in tax avoidance cases reflects this observation. Striking a proper balance requires the skill of a ‘judicial ballerina’ in tax cases. In light of the above observations, it is also noteworthy that the balancing act stemming from the interplay between the dominant purpose test and the artificiality test is methodologically similar to the way the EU General Anti-Avoidance Rule (GAAR) and the OECD’s Principal Purpose Test (PPT) operate. That is to say, a proper application of these rules under both prongs—the main purpose test/one of the principal purposes test and the contradiction test—requires taking into account the existence of non-tax business purposes and economic substance, although only the GAAR contains such requirements in its wording under the non-genuine arrangement criterion. By analogy, one may say that although the Indian sub- stance over form doctrine does not refer to the contradiction test (the second prong) explicitly, such a test is to a large extent implicit in that doctrine by means of the balancing act under the dominant purpose test and the artificiality test. In other words, once the transaction in question meets requirements for abusive tax avoidance pursuant to the Indian substance over form doc - trine, presumably this transaction contradicts the purpose of some provisions under the ITA. The stronger the evidence of the transaction’s artificiality and dominant tax avoidance purpose, the stronger the presumption of its contradiction with the relevant tax provisions. a Th t is, ‘although the Tribunal is not fully convinced that the “dominant purpose” test which the Respondent has sought to impress upon it is what has emerged from Vodafone (in that on one reading of the Chief Justice’s reasons it might be said that a colourable device is required to demonstrate tax avoidance), the Tribunal has opted to accept the dominant purpose test as being the applicable one’. Cairn (n 1) para 1424. Ibid paras 1422, 1476–1481. Vodafone (n 18) para. 68, as quoted or referred to by the Tribunal in Cairn paras 1404–1405, 1424. a Th t is, Article 6 of the Council Directive (EU) 2016/1164 of 12 July 2016 Laying Down Rules against Tax Avoidance Practices that Directly Affect the Functioning of the Internal Market (ATAD), OJ L 193/1 (19 July 2016) and Article 29(9) of the OECD Model Convention (2017), respectively. Article 6(1)-(2) of the ATAD. See also Schön (n 117) 2–4, 20; Kuźniacki (n 120)157. In the Cairn case, presumably, the contradiction would have to be proven in respect of Section 9(1)(i) of the ITA by means of evidence according to which the predominant purpose of the 2006 Transaction was to circumvent the scope of Section 9(1)(i) of the ITA in an artificial way. A transaction may contradict the object and purpose of relevant tax provisions (the second prong) either by (i) circumventing the scope of provisions that create a burden for the taxpayer (eg rules which subject the taxpayer’s income to taxation and anti-abuse rules, in particular SAARs) in an artificial way or by (ii) artificially exploiting the provisions that are favourable to the taxpayer (eg tax relief, tax exemptions). The former will normally have the object and purpose to increase or protect (maintain) revenue while the lae tt r is to make exceptions from it by various reasons, for example, to boost business in certain sectors or geographical regions. Cf. Zimmer (n 103) sec. 7. 146 • Cairn Energy e T Th ribunal’s approach regarding the mechanism and consequences of the substance over form doctrine The application of the substance over form doctrine and its derivatives under various GAARs can only lead to taxation based on recharacterized facts as derived from the economic substance of the transactions instead of their legal form. This taxation, however, does not follow from the application of the substance over form doctrine alone, but from the result of its successful application in conjunction with the relevant tax provisions that cover the recharacterized facts. Ultimately, taxation with reference to recharacterized facts depends on terms of the relevant tax provisions. This effect of the application of the substance over form doctrine, or any other general anti-tax abusive measure, is inherent in the logic of tax law and works irrespective of its explicit articulation in the wording of the anti-abuse rule or doctrine. Fundamentally, the above effect of application of the substance over form doctrine may be derived from the principle of ‘no taxation without representation’, as arising out of the rule of law in the area of taxation under constitutional laws of democratic countries, including Article 265 of the Constitution of India: ‘No tax shall be levied or collected except by authority of law ’. Consequently, apart from the fact that the substance over form doctrine was not part of Indian statutory tax law in 2006, this doctrine could not be an exclusive legal basis for taxation in India, since there is nothing in its wording (its case law ’s construction) that set parameters for taxation (no tax subject, no tax object, no tax rate). It merely permits looking at economic sub- stance instead of legal form for taxation purposes if the criteria for its application are met, which must be established by the tax authorities and/or accepted by the courts on a case-by-case basis. The relevant tax provisions are needed to tax transactions based on their economic substance rather than legal form. The lack of tax provisions that allow levying tax on the substance of a transaction instead of its form means that the transaction is not taxable. This can be also read from the Vodafone judgment. The Court said that Frederik Zimmer, General Report: Form and Substance in Tax Law (2002) 87a Cahiers de droit fiscal international 24-25; Zimmer (n 103) secs. 6, 7, 11; Carlos Palao Taboada, ‘OECD Base Erosion and Profit Shifting Action 6: The General Anti-Abuse Rule’ (2015) 69 Bulletin for International Taxation 605. Whereas Article 6(3) of the ATAD (EU GAAR) uses language to this end (‘Where arrangements or a series thereof are ignored in accordance with paragraph 1, the tax liability shall be calculated in accordance with national law), Article 29(9) of the 2017 OECD MTC (the PPT) is silent on it. However, in respect of these general antiavoidance rules the tax consequences should be drawn from relevant tax provisions based on the facts and circumstances that would appear in the absence of abusive tax avoidance, that is, on the basis of the existence of economic substance and/or valid commercial reasons sufficient to let the redefined arrangement or a series of abusive arrangements be considered compatible with the object and purpose of tax law. Zimmer (n 103) secs. 6, 7, 11; Taboada (n 136) 605.; Kuźniacki (n 120) 169. With respect to the PPT, see Błażej Kuźniacki, ‘The Principal Purpose Test (PPT) in BEPS Action 6/MLI: Exploring Challenges arising from its Legal Implementation and Practical Application’ (2018) 10 World Tax Journal 274–275; Andrés Báez Moreno and Juan José Zornoza Pérez, ‘The General Anti-abuse Rule Anti-tax Avoidance Directive’ in Almudí Cid and others (eds), Combating Tax Avoidance in the EU: Harmonization and Cooperation in Direct Taxation (Kluwer Law International 2019) 134; Philip Baker, ‘The BEPS Action Plan in the Light of EU Law: Treaty Abuse’ (2015) British Tax Review 408, 414; Robert Danon and others, ‘The Prohibition of Abuse of Rights Ae ft r the ECJ Danish Cases’ (2021) 49 Intertax 499. Cf. the CJEU, C-255/02 Halifax and Others (21 February 2006) Judgment, para 98. Johann Hattingh, ‘The Multilateral Instrument from a Legal Perspective: W hat May Be the Challenges?’ (2017) 71 Bulletin for International Taxation sec. 2 with reference to the late Lord Bingham’s articulation of the tenants of the rule of law as depicted in Tom H. Bingham, The Rule of Law (Allen Lane 2010). Cape Brandy Syndicate v. IRC (1921) 1 KB 64, P. 71 (Rowlatt, J.). See Vodafone (n 18) para 169. Also quoted by the Tribunal. Cairn (n 1) para 1225. Cf. CIT v. Ramal Ammal [1982] 135 ITR 292 (7 March 1981) Judgment: ‘The Tribunal cannot tax on the basis of sub - stance; neither can it let off an assessee from tax on the same basis’. See also S.R . Wadhwa and P.K. Sahu, ‘Branch Reporters’ in Form and Substance in Tax Law (2002) 87a Cahiers de droit fiscal international 353. Cairn Energy • 147 there should be a pre-ordained series of transactions and there should be steps inserted that have no commercial purpose and the inserted steps are to be disregarded for fiscal purpose and, in such situations, Court must then look at the end result, precisely how the end result will be taxed will depend on terms of the taxing statute sought to be applied. (emphasis added by us) Although this observation was explicitly made by the Court in respect of the principle of fiscal nullity, it remains relevant to the analysis of the substance over form doctrine insofar as the Respondent ae tt mpted to disregard the 2006 Transactions and the resulting holding structure. It shows that the substance over form doctrine could not constitute a self-standing legal basis for determining the taxation of the 2006 Transactions. Following that suit, the Tribunal stated that indirect transfers under Section 9(1)(i) of the ITA were not taxable in 2006. In that regard, the Tribunal also stated that the significant appreciation in value of oil and gas assets situated in India from 1996 to 2006 and indirectly owned by Cairn Energy ‘did not attract cap - ital gains tax in India’ because at the time the indirect ownership of such assets by non-resident companies was outside the Indian tax net. Thus, in a sense, the die was cast: the Tribunal pointed to the impossibility of taxation of the appreciation in value of the Indian oil and gas assets indirectly owned by Cairn Energy. Inadequacy of the substance over form doctrine to permit taxation of the CIHL Acquisition under the 2012 Amendment and the need for the extension of source state taxation to that effect The analysis of the Tribunal’s examination of the Indian substance over form doctrine shows that this doctrine was not suitable to permit taxation of the 2006 Transactions under the 2012 Amendment; in particular it could never lead to the same effective taxation as per the FAO. To this end, all of Cairn Energy’s 27 subsidiaries had to be disregarded and the transactions that actually took place had to be replaced with transactions that never took place, that is, the indirect offshore transfer of shares in the companies holding PSCs related to the Indian gas and oil assets by CUHL to CIL had to be replaced with the direct sale of the Indian gas and oil assets by CUHL to CIL. This would require proving that all the 2006 Transactions and all the Cairn Energy subsidiaries involved in these transactions were artificially designed to predomi - nantly avoid capital gains tax in India. As a result, Section 9(1)(i) of the ITA would be abused by Cairn Energy, that is, its scope would be artificially circumvented predominantly for purposes of avoidance of taxation under these provisions. Therefore, the tax could be imposed by the Indian tax authorities on the recharacterized facts, as if the Indian gas and oil assets had been directly sold by CUHL to CIL. Such far reaching recharacterization of facts was impossible under the Indian substance over form doctrine in the given circumstances. Also, in general, from a tax policy perspective it makes much more sense to tax OITs by extending the scope of domestic provisions regulating taxation at the source than trying to design and apply general or even specific anti-tax avoidance measures to this effect. Carefully designed provisions would provide that the gain in question will be taxed as a mae tt r of principle Vodafone (n 18) para 126 with reference to the words of Lord Brightman in the seminal English case Furniss (Inspector of st Taxes) v. Dawson, [1984] All E.R . 530 (H.L.). See also Gardiner’s 1 Expert Witness Report (n 55) in para 47: ‘I have underlined the critical passage quoted by K . S. Radhakrishnan, J. from Lord Brightman’s opinion above in Furniss v Dawson: if you consider there is a case for disregarding steps you then have to look at the end result to see what (if anything) is taxed. It is only where disregarding steps that you arrive at a taxable result that the concept applies. If you do not arrive at a taxable result then there is no room for the application of the principle’. Cf. Cairn (n 1) para 1291b. Cairn (n 1) para 1449. Ibid 1453. 148 • Cairn Energy on the basis of a substantive right to tax in the source state. This legislative approach would ensure certainty and predictability of tax consequences not only for investors but also for tax authorities. Anti-tax avoidance measures, in turn, are often inherently deprived of these virtues, as they are typically less rule-based and more discretionary in their application, which make them difficult to apply by the tax authorities in an even handed and predictable way. It is, therefore, of no surprise that international organizations in a high level tax policy document recommended addressing the issues with taxation of OITs by domestic provisions that precisely catch such transactions into the net of source taxation. As a mae tt r of fact, this solution was implemented in India by deeming OITs as disposals of the underlying assets under Section 9(1)(i) of the ITA five years before release of the mentioned high level tax policy document. However, it was implemented with a retroactive effect, which put that legislative amendment at odds with legislative standards recommended by international organisations and governed by legal principles. It also constituted a red flag arising from the fiscal conduct of India (host state) viewed against the most frequently invoked investment protection standard (FET). Triumph of form over substance and strict adherence to literal interpretation and legal principles In addition to the reason mentioned in the previous section, the Respondent’s tax avoidance defence largely based on the substance over form doctrine and tax policy considerations was simply doomed to failure because of the legal methodology applied by the Tribunal to assess that defence. This methodology consisted of two intertwined elements: (i) the legal form tri - umphed over economic substance and (ii) the analysis strictly adhered to literal interpretation and the principle of legal certainty. The Tribunal candidly underscored the triumph of legal form over substance and the rele- vance of legal principles instead of policy views in the following words: As for the ‘Cairn paid no capital gains tax anywhere in the world’ line of argument, this, in the Tribunal’s view, really goes to maer tt s of tax policy, not law, which are maer tt s for legislators, not the Tribunal. The Tribunal must decide on the basis of the law, irrespective of what its mem- bers’ views may be as to the overall fairness of the transaction from a policy perspective. In the end, Cairn and its advisors spent considerable effort and no doubt money devising a creative structure that met the company’s commercial objectives. If some aspects of the structure seem to be a triumph of form over substance, it is because corporations law aa tt ches much significance to maer tt s of form. (emphasis added by us) IMF, OECD, UN, and WBG (n 17) 37. Christophe Waerzeggers and Cory Hillier, ‘Introducing a General Anti-avoidance Rule (GAAR)—Ensuring that a GAAR Achieves its Purpose’ (2016) Tax Law IMF Technical Note 1. a Th t is, either by treating OITs as deemed disposals of the underlying assets (Model 1) or as treating the transfer as being made by the actual seller, offshore, but sourcing the gain on that transfer within the location country and so enabling that country to tax it. IMF, OECD, UN, and WBG (n 17) 7. For example, Model 1 mentioned in the note immediately above. a Th t is, ‘unless there are strong reasons to do otherwise, either model should only be implemented on a prospective (and not retroactive) basis (eg to transactions taking place ae ft r the change is announced, as opposed to applying to tax years before the announced change), and appropriate transitional arrangements could also be considered (such as deeming the market value cost base of relevant assets to be that at the time of commencement of the new taxing model)’. IMF, OECD, UN, and WBG (n 17) 38. See above The Tribunal’s approach regarding the mechanism and consequences of the substance over form doctrine and the Lesson to tax and investment policy makers: avoiding red flags in fiscal conduct sections. Cairn (n 1) para 1588. Cairn Energy • 149 This finding did not mean that the Tribunal was inclined to protect formally compliant but substan- tially abusive transactions. This meant, as read in the context of the Tribunal’s entire analysis, that blending important non-tax commercial/regulatory reasons with tax reasons amounted to legit-i mate tax planning rather than abusive tax avoidance, even if the outcome of such planning led to no taxation of given transactions at all anywhere in the world. This was relevant in the context of the 2006 Transactions, since (i) they involved 16 subsidiaries that were puppets of their parent company (Cairn Energy), (ii) the existence of intermediary holding companies newly incorporated to realize these transactions was commercially questionable (CUHL seemed redundant and CIHL appeared to serve tax avoidance purposes), and finally (iii) the pivotal element of these transactions relied on round tripping funds between the UK and India. Seeing these elements of the 2006 Transactions in isolation from the entire holding structure of Cairn Energy could cast doubts under the substance over form doctrine. However, such a dissecting approach to the determination of abusive tax avoid - ance would be incorrect. As emphasized by the Supreme Court of India in Vodafone, ‘every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner’. This is exactly how the Tribunal assessed the 2006 Transactions: within the fabric of Cairn Energy’s entire strategic investment in India. Moreover, even if the mentioned doubtful elements of the 2006 Transactions were disregarded for tax purposes (ie a look through approach in conjunction with recharacterization of facts), the Indian capital gains tax on them would not be triggered. This furthermore strengthened the thesis about the lack of abusive tax avoidance and the inadequacy of the substance over form doctrine as a legal means leading to tax these transactions. They could and should be taxed rather by means of the substantive rule on taxation of income from OITs at source, just as the Indian legislature decided to do so in 2012. However, it was done with far-reaching retro - active effect instead of prospective or at least immediate (doctrinally retrospective) effect. It seems that the Tribunal’s hesitation to accept the Respondent’s tax avoidance defence fo-l lowed from adherence to literal interpretation and the principle of legal certainty. Adherence to literal interpretation is common for arbitral tribunals and should probably be seen as embodying contextual and purposive interpretation in accordance with Article 31(1) of the VCLT. This approach de jure implies that the ordinary meaning of words is a functional vehicle of the common intention of the parties in good faith and in their context and in light of object and purpose of the international treaty. Arbitral tribunals have regularly based their Cf. Martín Jiménez (n 96) sec. 3.4: ‘in Cairn, the tribunal derived the specific anti-avoidance standard from domestic case law in India to recognize the right of the taxpayer to plan its affairs in order to pay the least taxes possible. This led the tribunal to protect step transactions even where there were signs of certain artificiality (round tripping transactions, holdings without substance, etc.) in a decision more inclined to respect the form of the transactions than to look at their economic and tax effects’. Vodafone (n 18) para 68: ‘It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach’. Ibid. If we compare transactions with and without allegedly artificial elements and the result would be the same, that is, no taxation in a given country from the perspective of which abusive tax avoidance is examined, the artificiality cannot be a factor deciding about the abusive tax avoidance. For that to happen, the comparative analysis must lead to a conclusion that the tax could not be avoided without the existence of the artificial elements of the transactions. Cf. Halifax (n 137) para 90; Danon and others (n 137) 499. See also the CJEU, C 115/16, C 118/16, C 119/16, and C 299/16 N Luxembourg 1 and Others (26 February 2019) Judgment, para. 137. See above the Dominant purpose test and colourable/artificial device test as building blocks of the Indian substance over form doctrine section. ILC, ‘Draft Articles on the Law of Treaties with Commentaries 1966’ (1966) II Yearbook of the International Law Commission 1966 §§ 6, 11 at 219, 221; Ian Sinclair, The Vienna Convention on the Law of Treaties (1984 Manchester University Press 1984) 118; Frank Engelen, Interpretation of Tax Treaties under International Law (IBFD 2005) 172–185. In a broader sense, that is, in relation to legal interpretation in general, Marcin Matczak aptly pointed out that ‘[l]inguistic terms have a function, which is to pick up relevant features from reality. We use linguistic terms for the purpose of signalling that those features occur. No approach to interpretation that aspires to be an effective tool of decoding ordinary meaning can neglect those functional and purposive aspects of language’. Marcin Matczak, ‘ W hy Judicial Formalism is Incompatible with the Rule of Law ’ (2018) 31 Canadian Journal of Law & Jurisprudence 74. See also Aaron Barak, Purposive Interpretation in Law (2005) Princeton University Press 26; Fish, Stanley, There Is No Textualist Position (2005) 42 San Diego Law Review 629. 150 • Cairn Energy reasoning on the ‘ordinary meaning’ approach to distinguish legitimate treaty shopping from abusive ones under IIAs. Accordingly, their jurisprudence is on balance permissive towards strategic interposition of special purpose entities predominantly or solely to benefit from the most favourable IIA with the host state, unless such interposition took place ae ft r the dispute with respect to the investment had arisen or was already foreseeable (the abuse of rights/abuse of process doctrine). Such an interpretative approach forges strong armour that protects for- mally compliant structures and burdens states to manoeuvre around it by proving the investors’ abusive behaviour. Although the Cairn Tribunal dealt with the question of abusive tax avoidance under Indian law rather than with abuse of rights under the UK–India BIT, perhaps the common approach to interpretation by arbitral tribunals had an impact on the Tribunal’s reasoning and conclusions in the case. Such reasoning deviates to some extent from the reasoning of courts in tax cases in many jurisdictions in which economic substance and substance over form doctrines may prevail over a literal interpretation in order to prevent tax avoidance. However, the Tribunal’s inter- pretative methodology was in line with the approach to linguistic interpretation following from the canon of interpretation of tax law in accordance with the constitutional principles in many jurisdictions, including the Indian tax jurisprudence of the Supreme Court, Constitutional Court, and High Courts. As noted by the Indian Constitutional Court in Muthuram Agrawal: It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow o fr m the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. e s Th tatute should clearly and unambiguously convey the three components of the tax law, that is, the subject of the tax, the person who is liable to pay the tax and the rate at which the taxes to be paid. (emphasis added by us) Jorun Baumgartner, Treaty Shopping in International Investment Law (OUP 2016) 284. Ibid sec. 4.3; Anil Vastardis, The Nationality of Corporate Investors under International Investment Law (Oxford: Bloomsbury Publishing 2021) chapter 7. For example, Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility (17 December 2015) para 588. Arbitral tribunals have conferred the protection under IIAs on foreign investors even in respect of allegedly artificial round tripping structures designed predominantly or solely to benefit from IIAs. g. Tokios Tokelės v. Ukraine, ICSID Rules, ICSID Case No. ARB/02/18, Majority Decision on Jurisdiction (29 April 2004) para 36 (Dissenting: Prosper Weil, Presiding); Yukos (n 11) paras 1368–1370. It is noteworthy, however, that in Yukos case the treaty shopping was tantamount to a sham/abusive practice under the Russian DA w TT ith Cyprus, according to two expert-witnesses of the Respondent (Stef van Weeghel and David Rosenbloom). The Yukos Tribunal appeared to agree with them. This finding supported a significant (25 per cent) reduction in the damages awarded to the Claimant under the ‘contrib - utory fault doctrine’. Ibid paras 1594, 1615–1621, 1637. Only in a few cases, tribunals have denied access to IIAs to entirely or almost entirely sham/empty structures/companies while examining the application of denial of benefits (DoBs) clauses with a substantial business activity criterion. Alps Finance and Trade AG v. The Slovak Republic, UNCITRAL, Award (5 March 2011) para 217; Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Rules, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections (1 June 2012) paras 4.63–4.78; Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011-17, Award (31 January 2014) paras 370–384. In cases regarding DoBs under the Energy Charter Treaty (ECT) (opened for signature on 17 December 1994, entered into force on 16 April 1998), tribunals have appeared to require very little substance for the entity to pass muster under the substantial business activity criterion, accepting anything more than sham/zero substance at the level of tested company. Limited Liability Company Amto v. Ukraine, SCC Rules, SCC Case No. 080/2005, Award (26 March 2008) para 69; Masdar Solar & Wind Cooperatief U. A. v. Kingdom of Spain, ICSID Rules, ICSID Case No. ARB/14/1, Award (16 May 2018) paras 206. Cf. Martín Jiménez (n. 96) sec. 4 and 5; Zimmer (n 136) 19–67. a Th t is, the principles of legal certainty and predictability. Błażej Kuźniacki, Beneficial Ownership in International Taxation (Elgar Edward Publishing 2022) sec. 2.II. Mathuram Agrawal (n 128) para 12, cited in Union of India v Azadi Bachao Andolan [2003] 10 SCC 1 para 158. Also cited in Cairn (n 1) para 1382. Cairn Energy • 151 Since adherence to literal interpretation was supported by Indian constitutional law and its judi - cial application in tax cases, the Tribunal’s interpretative approach was commendable. In par - ticular, its application rightly led to the conclusion that the 2006 Transactions might not have been taxed under the Indian substance over form doctrine, which, incidentally, did not include the basic components of the tax law. Thus, as we discussed in the ‘Inadequacy of the substance over form doctrine to permit taxation of the CIHL Acquisition under the 2012 Amendment and the need for the extension of source state taxation to that effect’ section, this doctrine could not constitute a standalone and sufficient legal basis for taxation of the 2006 Transactions before entry into force of the 2012 Amendment. The Tribunal’s reasoning in the assessment of the Respondent’s tax avoidance defence appears to be also considerably guided by the principle of legal certainty even though it was explicitly applied at the later stage of the analysis; that concerning the FET standard and the justification for the retroactive taxation. Notably, the Tribunal observed that ‘the principle of legal certainty (and its corollaries, stability and predictability) provides significant guidance when determining whether retroactive taxation is compatible with the FET standard provided at Article 3(2) of the BIT’. The Tribunal’s protection of the form of legal transactions for legit - imate tax planning purposes seems to be facilitated by the principle of legal certainty. Indeed, a deviation from clearly defined legal form in favour of broad and blurred economic substance creates tension with taxpayers’ legitimate expectations in respect of tax consequences stem- ming from their investments. Retroactive taxation without a specific and adequate justification in public policy is an extreme example of frustration of the principle of legal certainty. In that regard, the Tribunal’s interpretative approach resembles that of the Supreme Court of Canada (SCC) in a recent judgment in Alta Energy. Its opening statement of the majority of judges is worth quoting: The principles of predictability, certainty, and fairness and respect for the right of taxpayers to legitimate tax minimization are the bedrock of tax law. In the context of international tax treaties, respect for negotiated bargains between contracting states is fundamental to ensure tax certainty and predictability and to uphold the principle of pacta sunt servanda, pursuant to which parties to a treaty must keep their sides of the bargain. The Tribunal’s approach, mutatis mutandis , could be equated with that of the SCC’s majority of judges. Cairn (n 1) para 1757. In our view, it was also an exemplification of a balanced interpretation, which takes ‘into account both the State’s sover - eignty and the State’s responsibility to create an adapted and evolutionary framework for the development of economic activ- ities and the necessity to protect foreign investment and its continuing flow’. El Paso Energy International Company v Argentine Republic, ICSID Case No ARB/03/15, Decision on Jurisdiction (27 April 2006) para 70; and BP America Production Company and others v Argentine Republic, ICSID Case No ARB/04/8, Decision on Preliminary Objections (27 July 2006) para 99. Brigitte Stern, ‘Investment Arbitration and State Sovereignty’ (2020) 35 ICSID Rev–FILJ 448. Cf. Cairn (n 1) para 1789: ‘the Tribunal will carry out a balancing exercise between India’s public policy objectives, on the one hand, and the Claimants’ interest in bene- fitting from the values of legal certainty and predictability, on the other’. Supreme Court of Canada, Canada v. Alta Energ y Luxembourg SARL (2021 SCC 49) para 1. See diverging opinions on that judgment in: Brian Arnold, ‘Supreme Court Decides Alta Energy Luxembourg for the Taxpayer’ The Arnold Report n. 219/2021 (2021) Canadian Tax Foundation; Scott Wilkie, ‘The Taxpayer is Successful Today at the Supreme Court in the Important Alta Energy “Treaty Shopping” Case – Updated’ (26 November 2021), <https://tax.osgoode.yorku.ca/2021/11/the-taxpayer-is- successful-tody-at-the-supreme-court-in-the-important-alta-energy-treaty-shopping-case/>, accessed 2 April 2022. Although the Alta Energy case referred to a different context than the Cairn case, the application of the DA be TT tween Luxembourg and Canada and the possibility to deny benefits under that DTAA via the Canadian GAAR , its outcome and the reasoning of the SCC are informative to the current analysis. Alta Energ y (n 165) para 1. Cf. Martín Jiménez (n 96) sec. 3.4. 152 • Cairn Energy Examining the prevention of abusive tax avoidance as a specific public policy justification for the retroactive taxation The major specific justification examined by the Tribunal was the prevention of tax abuse (abusive tax avoidance). The Tribunal did not have an uphill battle in concluding that the 2012 Amendment and its application failed to be justified by the prevention of abusive tax avoidance. No systemic abusive tax avoidance via OITs was identified before 2012. Even if that phenomenon had existed back then, the substance over form doctrine was considered as a general tool to prevent abusive tax avoidance in India. Also, the 2012 Transactions did not constitute abusive tax avoidance in the Tribunal’s view and yet the 2012 Amendment targeted them. All this demonstrated that the 2012 Amendment neither was suitable nor necessary to combat a systemic abusive tax avoidance. Its policy justification was the expansion of the source rule and increase of the revenue from taxation of OITs transferring assets with a significant con- nection with India. Such policy justification was valid for prospective but not for retroactive legislation. Most importantly, the methodology of the 2012 Amendment was not consistent with the prevention of abusive tax avoidance, since Explanations 4 and 5 targeted all OITs trans - ferring assets situated in India, irrespective of their abusive nature. The Tribunal’s observations were apt. The 2012 Amendment could not be justified by the need for the prevention of abusive tax avoidance because it failed to contain any premises of abuse of tax law and thus its application was by no means calibrated to target that phenomenon. Actually, it did target more precisely purely commercial and straightforward OITs than complex abusive tax avoidance OITs. As a result, the Tribunal rightly concluded that the 2012 Amendment and its application to tax CIHL’s acquisition by CIL failed to adequately balance ‘the Claimants’ pro - tected interest of legal certainty/ stability/ predictability on the one hand, and the Respondent’s power to regulate in the public interest on the other’. This retroactive taxation deprived the Claimants of their ability to plan their activities in consideration of the legal con- sequences of their conduct, in violation of the principle of legal certainty, which the Tribunal considers to be one of the core elements of the FET standard, and of the rule of law more generally. Such measure was ‘grossly unfair’ and violated the standard of Claimants’ investments FET under Article 3(2) of the UK–India BIT. L E S S ON TO TA X A ND INVE S TM EN T POL IC Y M A KER S : AV OIDIN G R ED FL A GS IN FIS C A L C OND UC T The Cairn decision is relevant to tax and investment policy makers. In particular, it permits iden- tif ying and systemizing two red flags in a state’s power to tax vis-à-vis mechanisms and standards of investment protection in IIAs. The first flag is unjustified far-reaching retroactive taxation. Its a Th t is, beyond providing revenues for India’s general budget, which was not enough to justify the departure from the principle of legal certainty by retroactive taxation. Ibid paras 1794, 1810. Ibid paras 1796–1797 with the Tribunal’s references to and quotations from Baker (n 42) 781 and The European Commission of Human Rights, A , B, C and D v. UK, Application No.8531/79, reported in (1981) 23 DR 203. For two other justifications, irrelevant for this case, see above n 11. In fact, OITs were rarely seen in India back then, as admitted by the Respondent. Cairn (n 1) para 1813. Ibid. Ibid. Ibid para 1814. Ibid para 1815. Ibid para 1816. Ibid. Ibid in fine . Cairn Energy • 153 identification teaches us that the retroactive taxation should be foreseeable to adversely affected taxpayers and only in extreme and well-justified cases may it reach beyond such a foreseeability. The second flag is an inadequate (too broad and not proportional) approach by states to the prevention of tax avoidance. The Tribunal in the Cairn case implies that legal measures aiming to prevent tax avoidance should only encompass tax avoidance practices and not undermine the taxpayer’s legitimate rights to plan and execute their investments in the most tax advantageous way in accordance with wording, context and purpose of tax law. Tax policy makers should be wary of their approach to taxation of foreign investments, rec - ognizing threats following from red flags. Tax legislation and practice of tax authorities should avoid surprises of foreign investors that ‘go too far’ and thus do not pass muster under the FET standard. The Cairn decision shows that taxation of cross-border transactions should be treated in a fair and equitable way; otherwise, it will not survive an arbitral tribunal’s scrutiny. This decision also shows that in each and every case it is necessary to objectively ascertain the substantive and temporal scopes of application of the amended law. Labelling amendments of law as ‘clarifications’ and establishing their compatibility with the constitution do not constitute an effective defense of the respondent state against the claims concerning the incompatibility of the amendments with an IIA. Although such an approach is relevant to all ISDS cases address - ing retroactive amendments of law, it is of particular importance to tax law because of the tax authorities’ influence on the formation of tax policy and the tax-law-making process. Parliaments should not have the final authority in interpretation of amendments of tax laws to examine their compatibility with IIAs. Only arbitral tribunals have that role. Local tax authorities and parlia- ments cannot change that reality by calling amendments of tax law as ‘clarificatory’. One of the most significant and credible signals that a state may give of its intentions toward foreign investments is the conclusion of IIAs with states in which potential investors are located. The credibility of such a signal is measured to a large extent by the fact that a prospective inves - tor will be a legal beneficiary of the treaties’ enforcement provisions, that is, the ISDS mech- anism. Carving out tax measures from the scope of the FET standard, the most frequently invoked protection standard contained in IIAs in general, including tax-related cases, means that unfair and arbitrary conduct of states in tax mae tt rs will potentially not be subject to inter - national review. This may undermine the credibility of states trying to host investments and in any event may lead to increased risk related to investments in their territories and thus pos - sibly the price of contemplated investments. Indeed, evidence shows a correlation between states often losing a higher share of ISDS cases with negative rule of law ratings and high-risk Wälde and Kolo (n 97) 357. Cf. Martín Jiménez (n 96) secs. 3.4, 4 and 5; Danon and Wuschka (n 98) 698–699. The ongoing energy crisis may encour - age some states to use tax measures retroactively, sometimes even for the purposes of indirect expropriation of investors’ property in the energy sector. The energy crisis has already prompted the EU to adopt legislation at the EU level (regulation) directly binding its Member States to impose the temporary solidarity contribution on certain (excess) profits of fossil fuel companies. This contribution constitutes a windfall tax and may be levied retroactively on profits generated from 1 January 2022. Article 15 of the Council Regulation (EU) 2022/1854 of 6 October 2022 on an emergency intervention to address high energy prices (7 Oct. 2022) Official Journal of the European Union LI 261/1. Also, in a slightly different context, it is wise to remember that to the extent the international tax regime seeks to promote foreign investment by means of elimination of double taxation, it should integrate rather than exclude the investment treaty regime and thus fully respect standards of investment protection. Cf. Juliane Kokott, Pasquale Pistone and Robin Miller, ‘Public International Law and Tax Law: Taxpayers’ Rights, The International Law Association’s Project on International Tax Law – Phase 1’ (2021) 52 Georgetown J. of Intl. Tax L. 389. Salacuse (n 25) 161. Cf. Danon and Wuschka (n 98) 687, 701. Salacuse (n 25) 161: ‘ by the time an investor is considering a particular investment, international capital markets, through numerous mechanisms, including the financial press, credit rating agencies, banking networks, and many others, have already absorbed whether a specific country has entered into investment treaties’. In that regard, it is worth indicating the observations of Nobel Laureate Eugene Fama and others according to which markets rapidly and efficiently absorb information about price assets and investment opportunities. Eugene Fama, ‘Efficient Capital Markets: A Review of Theory and Empirical Work’ (1970) 25 J Fin 383, 383–417; Eugene Fama, ‘Efficient Capital Markets: II’ (1991) 46 J Fin 1575–617. 154 • Cairn Energy grading by many private political risk-rating companies. Relevant data also shows that the types of state conduct causing investment withdrawals and cancellations coincide with the type of conduct that IIAs—and ISDS—purport to prevent, including unfair and inequitable treat- ment. States cannot therefore overlook the fact that ISDS contributes to the development of a rule-oriented regime for cross-border investments, which significantly decreases the risk of investments and thus their costs in their territories. Investment policy makers, in the ae ft rmath of the Cairn decision, should perhaps not rush to terminate IIAs and carve out tax measures from the FET standard in remaining and prospective IIAs as is the scenario in India. In addition, it is partly the mainstream flow of recommen- dations of UNCTAD to tax and investment policy makers, although UNCTAD appears to acknowledge that ‘the FET clause does not preclude States from adopting good faith regulatory or other measures that pursue legitimate policy objectives’. Why not avoid red a fl gs in fiscal conduct of States against investment protection mechanisms instead of reducing such protec - tion upfront? Roberto Echandi, ‘The Debate on Treaty-Based Investor–State Dispute Settlement: Empirical Evidence (1987–2017) and Policy Implications’ (2019) 34 ICSID Rev–FILJ 60. Ibid 37, 61. For the data sources see World Bank Group, ‘2017/2018 Global Investment Competitiveness (GIC) Report’ 35; MIGA, ‘ World Investment and Political Risk, Reports’ (2010, 2011, 2012, and 2013). Although ‘currently international adjudication faces a new and existential risk’, the empirical evidence shows that the crit - ical debate ‘about the right to private action granted to international investors through ISDS has frequently been based more on ideological views than on facts’. For the previous quote see Campbell McLachlan, ‘The assault on international adjudication and the limits of withdrawal’ (2019) 68(3) IQLQ 499, 500. For the lae tt r quote see Echandi (n 184) 58. Cf. Stern (n 164) 449. Recent empirical studies also show that ‘over a period when the ISDS protection was in place, though India may have had to confront some adverse rulings against its regulatory actions, the overall participation in a system governed by IIAs did influence the inflow of FDI positively’. Jaivir Singh, Vatsala Shreeti and Parnil Urdhwareshe, ‘The Impact of Bilateral Investment Treaties on FDI Inflows Into India: Some Empirical Results’ (2022) 57(3) Foreign Trade Review 320. a Th t is, the arbitration proceedings in Cairn (n 1) and Vodafone (n 24) cases prompted India to give a notice of termination of its existing BITs to at least 74 states since 2017 and release the India Model BIT (2016) to replace the existing model from 2003. The new model, among others, seems to entirely exclude tax measures from its scope under a very broad tax carve-out under its Article 2(4)(ii), completely omits the FET standard and insists that on the investor exhaust domestic remedies for at least five years before commencing an arbitration under the BIT. Such extremely restrictive wording is unheard of in any BIT in the world. Hence, according to some authors, India’s Model BIT (2016) ‘seems more like a restatement of international law on sovereignty rather than a treaty meant to protect cross-border commercial transactions’. See Abhishek Dwivedi, ‘India’s Flawed Approach to Bilateral Investment Treaties’ The Diplomat (4 December 2020). See also Douglas Thompson, ‘Vodafone Claim Still On ae ft r India Rules Out Tax Law Changes’ (2014) Global Arb Rev.; ‘Cairn’s Tax Liability Credit Negative for Vedanta: Moody ’s’ The Indian Express (17 March 2015); Grant Hanessian and Kabir Duggal ‘The 2015 Indian Model BIT: Is This Change the World Wishes to See?’ (2015) 30 ICSID Rev–FILJ 729, 735. UNCTAD (n 28) 26–28. Ibid, reform option 4.3.3, the third indent at p. 28. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Arbitration International Oxford University Press

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Arbitration International, 2023, 39, 125–154 https://doi.org/10.1093/arbint/aiad003 Advance access publication 1 March 2023 Recent Development Cairn Energy : when retroactive taxation not justified by prevention of tax avoidance is unfair and inequitable *, † Błażej Kuźniacki and Stef van Weeghel A BS TR AC T In late 2020, the Cairn Tribunal concluded one of the largest investor-state arbitration disputes to date. The core of the dispute was retroactive taxation of offshore indirect transfers of shares of companies with underlying assets situated in India (crude petroleum and natural gas fields). The Tribunal decided that India had violated the fair and equitable standard under the UK–India bilateral investment treaty by the retroactive taxation without a specific justification for doing so. Notably, India failed to persuade the Tribunal that the retroactive tax law aimed against abusive tax avoidance. In the article, the authors aim to partly respond to a call of Professor Thomas Wälde for a systematization of the red flags arising from the conduct of host states in taxation mae tt rs viewed against investment protection mechanisms. By analysing the Cairn Tribunal’s rea- soning, the authors identify and examine two red flags: (i) retroactive taxation and (ii) prevention of tax avoidance. Their conclusion is that states should exercise caution with such red flags rather than rush to ter - minate international investment agreements or carve out tax measures from the fair and equitable standard in remaining and prospective international investment agreements. IN TR OD UC TION The decision of the Tribunal in Cairn v India , declaring the failure of the Respondent (India) to accord the Claimant’s investment fair and equitable treatment (FET) under the UK–India bilateral investment treaty, concluded one of the largest tax-related investor-state Błażej Kuźniacki, Assistant Professor in Tax & Technology at the University of Amsterdam, Research Assistant Professor at the Lazarski University, Advisor at PwC Global Tax Policy, Senior Manager at International Tax Services at PwC Netherlands. Stef van Weeghel, Professor of International Tax Law at the University of Amsterdam, Global Tax Policy Leader at PwC, Chair of Board of Trustees at the International Bureau of Fiscal Documentation (IBFD), immediate past chair of the Permanent Scientific Committee of the International Fiscal Association (IFA). Cairn Energy Plc Cairn UK Holdings Limited v Republic of India, UNCITRAL, PCA Case No. 2016-7, Award (21 December 2020) (Laurent Lévy, President; Stanimir A. Alexandrov; J. Christopher Thomas). Cairn (n 1). Cairn Energy or Cairn (the first Claimant) and CUHL (the second Claimant), a wholly-owned subsidiary of Cairn. The Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the Republic of India for the Promotion and Protection of Investments (signed 14 March 1994, entered into force 6 January 1995 (UK–India BIT). India unilaterally terminated the UK–India BIT on 22 March 2017. According to its sunset clause in Article 15, the India–UK.BIT will continue to apply for another 15 years beyond its termination to investments made during its time in force. © The Author(s) 2023. Published by Oxford University Press on behalf of the London Court of International Arbitration. This is an Open Access article distributed under the terms of the Creative Commons Attribution License ( https:// creativecommons.org/licenses/by/4.0/), which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited. 126 • Cairn Energy arbitrations to date. Indeed, the magnitude of an award in excess of US$ 1.2 billion in favour of the investor, the strategic importance of the energy sector for the host state (extraction of crude petroleum and natural gas from the Indian territory) and developments in interna- tional arbitration make this case impossible to overlook, especially in light of the 2021–23 global energy crisis. With this article, the authors aim to partly respond to a call of the late Professor Thomas Wälde for a systematization of the red flags arising from the conduct of host states in taxation mae tt rs viewed against investment protection mechanisms. They will look closely at the red flags, that is, the two overarching and intertwined tax-related themes dealt with in the Cairn decision: (i) expanding the tax base with retroactive effect and (ii) the identifying and preventing of tax avoidance. The first theme (retroactive taxation) required a two-step analysis. In the first step, the Tribunal analysed whether or not the analysed amendment to Indian tax law was substantive and retroactive, or was it a mere clarification of already existing law. This question is important not only for taxation but for all investment treaty arbitration which deals with defenses based on ‘clarifications of law’. In the second step, the Tribunal focussed on the question of whether, by imposing retroactive taxation, India treated the Claimants unfairly and inequitably in breach of its obligation under Art. 3(2) of the UK–India BIT (FET standard). The second theme (tax avoidance) was relevant to the examination of the Respondent’s defence of retroactive taxation—had the transactions at issue (in 2006) been characterized as tax avoidance, they would have to be ignored and tax could have been imposed in the absence of retroactive taxation measures introduced (in 2012) by India. It was also relevant as a spe- cific public policy justification for the retroactive taxation (the need to prevent abusive tax avoidance). The Tribunal scrutinized both themes in order to conclude whether or not the retroactive taxation imposed by India violated the FET standard under the UK–India BIT. The depth of the Tribunal’s exploration of Indian tax law, retroactive taxation, and the concept of tax avoidance, was noteworthy. It probably constitutes the most comprehensive analysis of taxation measures in international arbitration case law so far. This includes the compensation to the investor in the amount of nearly US$ 990 million for the net proceeds that would have been earned from the planned 2014 sale of CIL shares and the restitution in the amount close to US$ 250 million in order to withdraw the wrongful tax demand by the Indian tax authorities. For more on the reparation (compensation and restitution) in that case see Prabhash Ranjan, ‘Cairn Energy v India: Continuity in the Use of ILC Articles on State Responsibility’ (2022) ICSID Rev—FILJ 4–9. For the crucial role played by energy disputes in shaping the constant development and evolution of international investment law, arbitration and their exposition on political risks see Elena Cima, ‘Investment Arbitration in the Energy Sector: Past, present, and future’ in Thomas Schultz, Federico Ortino (eds), The Oxford Handbook of International Arbitration (Oxford University Press 2020) 815–842. For an analysis of international arbitration in investment tax-related cases in energy sector see Cornel Marian, The State’s Power to Tax in the Investment Arbitration of Energy Disputes: Outer Limits and the Energy Charter Treaty (Kluwer Law International International 2020) 1–292. For the reasons why projects in the oil and gas sector are particularly prone to dis - putes and how to mitigate the risks associated with such disputes see Elina Aleynikova, Tuuli Timonen and E. G. Pereira (eds), Governing Law and Dispute Resolution in the Oil and Gas Industry (Edward Elgar Publishing 2022). Wikipedia, ‘2021–2022 global energy crisis’ <https://en.wikipedia.org/wiki/2021%E2%80%932022_global_energy_cri - sis#Responses> accessed 16 March 2022. Thomas Wälde, ‘National Tax Measures Affecting Foreign Investors Under the Discipline of International Investment Treaties’, Proceedings of the Annual Meeting, Am. Soc’y Int’l L. Proc., 102. (9–12 April 2008) 59. Cairn (n 1) paras 1260 et seq. The Cairn Tribunal also examined other potential justifications for the retroactive taxation, that is, correcting inadvertent technical errors of new legislation and avoiding the ‘announcement effect’ of new legislation. None of them, however, was relevant in Cairn case. Ibid paras 1798–1800. Stef van Weeghel, ‘Tax and Investment Treaties: Further Thoughts’ in Pasquale Pistone (ed.) Building Global International Tax Law, Essays in Honour of Guglielmo Maisto (IBFD 2022) sec. 26.2.3. For a thorough analysis of international arbitration case law in tax-related cases see: William W. Park, ‘Tax and Arbitration’ (2020) 36 Arbitration International 166–197. To some extent, the Ascom Tribunal dealt with retroactive tax measures. It was, however, a tangential issue and not related to retroactive tax law by design but to retroactive tax assessments of the Kazakh tax authorities. Ascom Group S. A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan, SCC Case No. 116/2010, Award (19 December 2013) para 1799. The Yukos Tribunal, in turn, dealt with the question of abusive tax avoid- ance under the Russian tax law and the Agreement between the Government of the Russian Federation and the Government of the Republic of Cyprus on Avoidance of Double Taxation of Income and Capital (signed 5 December 1998; entered into force 17 Cairn Energy • 127 ‘The dispute between Cairn Energy and India’, Tax-related investment disputes are arbitrable unless IIAs state otherwise, and ‘Retroactive tax law and the FET standard: legal effects of the 2012 amendment and Relevance of FET’ sections examine the Tribunal’s analysis of retroactive taxation and the notion of tax avoidance for the purposes of determining whether or not India violated the UK–India BIT. ‘The dispute between Cairn Energy and India’ section summarizes the dispute while the Tax-related investment disputes are arbitrable unless IIAs state othe-r wise section presents key aspects of the decision, with a focus on arbitrability of tax-related investment disputes. ‘The retroactive tax law and the FET standard: legal effects of the 2012 amendment and Relevance of FET’ section and its subsections look closely at the substantive and temporal scope of the examined taxation measures introduced in India in 2012. Ae ft r con- cluding that the Tribunal correctly determined the change in the Indian tax law in 2012 was substantive and retroactive, we present the Tribunal’s explanations of the relevance of the FET standard and the principle of legal certainty in the context of retroactive taxation. The Tribunal acknowledged that although the principle of legal certainty is the core principle relevant to assessing the compatibility of retroactive taxation with the FET standard, it is not absolute and thus retroactive taxation which upsets legal certainty may be justified, in particular by preven- tion of abusive tax avoidance. The decoding tax avoidance under domestic (Indian) tax law to determine whether retroactive taxation was fair and equitable section, therefore, turns to the notion of tax avoidance under Indian law. The examination of that notion was pivotal not only to (i) assess the major defence of the Respondent but also (at least partly) to (ii) examine the main justification for the violation of the principle of legal certainty by the retroactive taxation. Finally, the ‘Lesson to tax and investment policy makers: avoiding red flags in fiscal conduct’ section accentuates the high relevance of the Cairn decision for tax and investment policy mak- ers, underscoring the need to avoid red flags in a state’s power to tax. THE DIS P U TE B E T WEEN C A IR N ENER G Y A ND INDI A The mae tt r in Cairn v. India can be traced back to the early 1990s. The significant increase in the cost of oil due to the Persian Gulf crisis, in combination with the very limited development of India’s domestic petroleum industry and high levels of public spending and debt, created a major financial crisis in India in 1991. With financial support and assistance of the International Monetary Fund (IMF) and the World Bank Group (WBG), India implemented major infra- structural and legal changes to become a free-market economy open to foreign investment. Throughout the 1990s, India ae tt mpted to attract foreign investment in the oil and gas sec - tor. One of the investors was Cairn Energy. From 1996 to 2006, Cairn acquired a number of August 1999) (Russia-Cyprus DTAA). See a series of Yukos v Russia cases – Yukos Universal Ltd (Isle of Man) v Russian Federation, PCA AA 227 (Final Award) (18 July 2014); Veteran Petroleum Ltd (Cyprus) v Russian Federation, PCA AA 228 (Final Award) (18 July 2014); Hulley Enterprises Ltd (Cyprus) v Russian Federation, PCA AA 226 (Final Award) (18 July 2014). The analysis of abusive tax avoidance in Yukos, v. Russia constituted a basis for the Tribunal’s conclusion that of contributory fault on damages of the claimants, noting that they ‘have contributed to the extent of 25 percent to the prejudice which they suffered as a result of Respondent’s destruction of Yukos’; that is, the Tribunal’s identification of abusive tax avoidance on the side of the claimants led to the reduction of the award by 25 per cent. Presumably, the Tribunal reached that conclusion to a significant extent based on the experts, reports of David Rosenbloom and Stef van Weeghel, since they observed that the Yukos structure and transactions with the Cypriot entities were a sham and constituted the abuse of the Russia-Cyprus DTAA. Ibid paras 204–210, 244–246, 1549, 1615–1621. See also Stef van Weeghel, ‘Tax and Investment Treaties: A few Observations’ in Georg Kofler, Ruth Mason and Alexander Rust (eds.) ‘Thinker, Teacher, Traveler: Reimagining International Tax’ (IBFD 2021) sec. 49.3. Another interesting example of dealing with abusive tax avoidance by an arbitral tribunal is case LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No ARB/12/37 (Award on 30 August 2022), effectively decided in favour of the Respondent since the Tribunal awarded US Investor Lone Star just 4.6 per cent of its damages claim against South Korea. The Ascom and Yukos cases regarded investments in the oil and gas sector while LSF-KEB case was related to investments in the financial, real estate, engineering, and construction manufacturer sectors. Cairn’s first investment in the Indian oil and gas sector was the acquisition of Command Petroleum Limited in 1996, an Australian company that held interests in a 1994 production sharing contracts (PSC) for the Ravva oil and gas field in India. See Cairn (n 1) para 18. 128 • Cairn Energy interests in India’s oil sector, some of which appeared to be very successful. As a result of a series of intra-group transactions (mainly share transfers), these interests were eventually held by 27 subsidiaries incorporated outside of India. In 2006, Cairn consolidated all 27 subsidia-r ies under a single Indian company, Cairn India Limited (CIL), a wholly-owned subsidiary of Cairn UK Holdings Limited (CUHL). The purpose of this consolidation was to offer CIL shares to the public. Ae ft r this public offering, CUHL continued to own the majority of CIL shares while the minority was held by the public. It is important to note that the consolidation of the 27 subsidiaries involved the transfer of shares in non-Indian companies that owned assets in India. These shares were initially transferred to CUHL and then by CUHL to Cairn India Holdings Limited (CIHL), Cairn Energy ’s wholly-owned subsidiary incorporated in Jersey. The final step of the consolidation involved the acquisition of CIHL’s shares by CIL from CUHL (the CIHL Acquisition). These transactions are further also collectively referred to as ‘the 2006 Transactions’. Ae ft rwards, that is, between 2009 and 2014, CUHL sold most of the shares in CIL to other investors. The Indian tax authorities did not challenge the intra-group transactions and their tax con- sequences at the time they were undertaken and in the following years. The challenge occurred later following considerable changes in the Indian tax environment regarding taxation of off - shore indirect transfers (OITs). These changes were triggered by the Supreme Court of India’s judgment in favour of Vodafone in a tax dispute with the Indian tax authorities. Indeed, this judgment prompted the Indian legislature to amend Section 9(1)(i) of the Income Tax Act (ITA) in 2012 with retroactive effect from 1 April 1962 making it applicable to OITs (the 2012 Amendment). The 2012 Amendment introduced the possibility to retroactively tax in India a gain stemming from a transfer by a non-resident of a share in a company incorporated abroad, Cairn’s exploration activities led, among the others, to a discovery in 2004 the Mangala oil field in Rajasthan, the largest onshore discovery in India in over two decades at the time, accounting for nearly 25 per cent of India’s entire domestic oil pro - duction. See Cairn (n 1) para 23. In its turn a wholly-owned subsidiary of Cairn Energy Plc. Cairn Energy Plc and CUHL were the Claimants in the arbitration. For the detailed description of all steps see Cairn (n 1) paras 32–78. In October 2009, CUHL sold 2.3 per cent of CIL’s issued share capital to Petronas and in December 2011 CUHL sold 40 per cent of such shares to Vedanta. In June and September 2012 and in January 2014, CUHL sold additional shares in CIL in on-market transactions, amounting to 3.5 per cent, 8 per cent, and 2.5 per cent, respectively. On the date of the Notice of Arbitration (22 September 2015), CUHL held 9.82 per cent of the issued share capital of CIL. See Cairn (n 1) paras 84–93. In international tax jargon, OITs are transfers of shares in a non-resident company that owns assets in a country by another non-resident company. Non-resident company means a company not resident under the applicable tax rules of the country in which the assets are located. Oe ft n tax residence in a country is a consequence of incorporation or registration under the laws of that country. Accordingly, non-resident is often used interchangeably with incorporated in a foreign country. See also, for OITs, a joint initiative of the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), United Nations (UN) and World Bank Group (WBG), e T Th axation of Offshore Indirect Transfers—A Toolkit (2020) 5, 7. The Vodafone case regarded the acquisition of Indian assets of Hong Kong-based Hutchison Telecom Limited (HTL) by Vodafone International Holdings, a Dutch subsidiary of Vodafone Group Plc, in 2007 for US$ 11 billion. The Indian assets were hold by HTL indirectly via its wholly-owned subsidiary from the Cayman Islands. Following this transaction, the Indian tax authorities imposed a capital gains tax of US$ 2.2 billion on Vodafone. For the judgment see Vodafone International Holdings BV v Union of India (2012) 6 SCC 613, Judgment, Supreme Court of India (20 January 2012) (Kapadia, Radhakrishnan, Kumar). In particular, the Court confirmed that Section 9(1)(i) of ITA does not impose a charge to tax on the sale of shares in foreign incorporated companies since these shares are not ‘assets situate in India’ even though the assets owned by such companies may be so situate. To substantiate its finding, the Court applied the principle stemming from the UK House of Lords’ landmark judg - ment in Salomon v Salomon [1897] AC 22 (16 November 1896) according to which the corporation is ‘a person’ that is separate from its member. In the Court’s view, there was no basis for piercing the corporate veil. The Court pointed out that ‘shareholdings in companies incorporated outside India is property located outside India’ (para 89). Accordingly, it rejected ‘the arguments of the Indian Tax Authority that the situs of the Cayman shares was situated in the place (India) where the underlying assets stood situated’. (para 82). In practice, the tax liability could arise ‘retrospectively’, albeit only for six years, given that Section 161 of the ITA pro - vides that no tax can be levied beyond the six-year time limit. Thus the Indian Tax Department (ITD) could only pursue to tax retroactively transactions occurring ae ft r 1 April 2006. The 2006 Transactions of Cairn Energy and CUHL took place between October and December 2006, which means that they felt within the limitation period. Thus the mentioned retroactive amendment in tax law applied to the Claimants. Cairn (n 1) paras 1066, 1255–1259. Likewise, this amendment grasped the transactions of Vodafone. Cairn Energy • 129 if the share derived, directly or indirectly, its value substantially from assets located in India. The transactions in the Vodafone case and the 2006 Transactions regarding the consolidation in the Cairn case, in particular the CIHL Acquisition, felt squarely into scope of this retroactive legislation. Relying on the new legislation, in 2014, the Indian Tax Department (ITD) initiated an inves- tigation into Cairn’s restructuring from 2006 and prevented CUHL from selling its shares in CIL, eventually demanding approximately US$ 4.4 billion (including interest) from CUHL to be paid in tax on the income (gains) stemming from transactions conducted in 2006. Upon CUHL’s refusal to pay the tax India forced a sale of CUHL’s shares in CIL in order to collect the 22 23 tax. In December 2015, Cairn Energy and CUHL filed a notice of arbitration claiming that India significantly damaged their investment by the retroactive taxation. In December 2020, the Cairn Tribunal decided that India had violated the FET standard under the UK–India BIT by retroactively taxing the transactions at issue without a specific justification for doing so, thereby compromising the principle of legal certainty and the rule of law more generally. TA X- R EL ATED INVE S TM EN T DIS P U TE S A R E A R B ITR A B L E UNL E S S II A S S TATE O THER WIS E In line with previous arbitral decisions in which some of the largest arbitral awards to inves - tors have been based on tax-related (mis)conduct of host states towards investors, the Cairn Tribunal observed that tax-related investment disputes, by contrast to tax disputes, do not fall outside the scope of the Tribunal’s jurisdiction, unless this is explicitly stated in a given intern- a tional investment agreement (IIA). Finance Act 2012 [Act No. 23 of 2012]. For a detailed description of this investigation see Cairn (n 1) paras 146–186. The shares, as of November 2018, amounted to 98.72 per cent of CUHL’s shareholding in CIL. Ibid paras 197–205, 1837, Pursuant to Article 9(3)(c) of the UK–India BIT and Article 3(1) of the United Nations Commission on International Trade Law Arbitration Rules 1976 (the UNCITRAL Rules). Cairn (n 1) para. 208. Cairn (n 1) paras 1816–1822. A similar decision was rendered a few months earlier by the arbitral tribunal in Vodafone International Holdings BV v. India (I) (PCA Case No. 2016-35) (Award) (25 September 2020). The award is not publicly available. Interestingly, Vodafone filled two separate notices for arbitration: (i) on 17 April 2012 the Netherlands–India BIT (Vodafone Group plc, Annual Report (2015) 169) and (ii) on 15 June 2015 under the UK–India BIT (Vodafone Group plc, Annual Report (2016) 150). From August 2017, India pursued before the High Court of Delhi an antiarbitration injunction against Vodafone’s second notice of arbitration under the UK–India BIT, arguing that Vodafone’s strategy of filing separate claims based on identical facts by two companies in the same vertical corporate chain (controlled by the Vodafone Group) was an abuse of process. The Delhi High Court ultimately held that there was no abuse of process in the facts of the case because the multiple claims of Vodafone were not ‘per se vexatious’ and Vodafone did not seek double recovery of damages. The second arbitration was initiated by Vodafone only ae ft r India had raised an objection against the first tribunal under the Netherlands India BIT. See Union of India v Vodafone Group plc United Kingdom and ANR, Judgment, High Court of Delhi (7 May 2018) paras 120, 125–226, 150. See more on this case, Constantinos Salonidis and Sudhanshu Roy, ‘Union of India v Vodafone Group plc:1 One Step Closer to Reconciling the Jurisdictional Competence of Domestic Courts and Investment Treaty Tribunals?’ 34 ICSID Review–FILJ 585–594. For example, in a series of Yukos v Russia cases (n 11) arbitration led to the total award of around US$ 50. It was reputedly rd the largest award ever rendered. See Jeswald W. Salacuse, The Law of Investment Treaties (3 edn) (Oxford University Press 2021) 128. See more literature on Yukos v Russia in relation to analysis of international arbitration and taxation: Ali Lazem and Ilias Bantekas, ‘The treatment of tax as expropriation in international investor–state arbitration’ (2022) 38 Arbitration International 119–123; Sebastian G. Martinez, ‘Taxation Measures under the Energy Charter Treaty ae ft r the Yukos Awards Articles 21(1) and 21(5) Revisited’, (2019) 34(1) ICSID Review 85–106; Ruth Teitelbaum, ‘W hat’s Tax Got to Do with It? The Yukos Tribunal’s Approach to Motive and Treaty Interpretation’ (2015) 12(5) Transnational Dispute Management (TDM, OGEMID). See also Occidental Petroleum Corporation and Occidental Exploration and Production Company v Republic of Ecuador, ICSID Case No ARB/06/11, Award (5 October 2012) with an original award on damages of US$1.77 billion rendered on 5 October 2012 and later reduced by a partial annulment to around US$1 billion issued on 2 November 2015. See Rachel L. Wellhausen, ‘Recent Trends in Investor–State Dispute Settlement’ (2016) Journal of International Dispute Settlement, 117, 133. Finally see Ascom Group S.A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan, SCC Case No. 116/2010, Award (19 December 2013) with an award of US$ 497 million. Cairn (n 1), para 797. 130 • Cairn Energy The Tribunal clarified that the present dispute is a tax-related investment dispute, not a tax dispute, since it ‘concerns alleged violations of an investment treaty resulting from certain sov - ereign measures taken by the Respondent in the field of taxation’. Such a dispute ‘must be distin- guished from tax disputes proper, which are disputes concerning the taxability (including the tax-amount) of a specific transaction’. The UK–India BIT excluded tax measures from the scope of the investor-state dispute set - tlement (ISDS) mechanism (Article 9) only in respect of the national treatment (NT) and most-favoured nation (MFN) treatment clause [Article 4(3)]. As a result despite other tax- related objections of the Respondent, the Cairn Tribunal held that it has jurisdiction to resolve the present dispute and that the Claimants’ claims were admissible in this arbitration. The statements of the Cairn Tribunal are far reaching. They explicitly confirm that the state’s power to tax is not immune to the scrutiny of arbitral tribunals under IIAs, even though this exercise takes place in areas sensitive to States such as in the energy sector and taxation. Indeed, the energy sector is particularly prone to create tensions between foreign investors and host states because states are called to take proactive roles at all levels in that area and they enjoy sovereignty both over natural resources and taxation of gains stemming from these resources. However, States equally exercise their sovereignty to oblige themselves to protect foreign inves- t ments in the energy sector under IIAs. a Th t is to say, the consent to ISDS under IIAs is derived from the same source as the power to tax and the power to regulate the energy sector: the sov - ereignty of the State. W henever such consent exists in an IIA, an arbitral tribunal may be called by a foreign investor to examine an alleged violation of standards of investment protection by a state’s fiscal conduct in the energy sector, or any other sector, entirely in line with that state’s sovereign rights. In the Cairn case, the Tribunal decided it had jurisdiction to examine whether the 2012 Amendment and its enforcement ensure a balance between, on the one hand, a state’s regulatory power to impose taxes, on the other hand, the investors’ expectations in having their investments protected as these relate to the energy sector. Cairn (n 1), para 793. By the same token, that is, that tax measures are arbitrable under IIAs and they may violate their standards of investment protections such as the FET or indirect expropriation see: EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN3481, Award (3 February 2006) para 177; Burlington Resources, Inc. v. Republic of Ecuador, ICSID Case No. ARB/08/5, Decision on Liability (14 December 2014) para 395; Occidental Exploration & Production Co. v Republic of Ecuador, LCIA Case No. UN3467, Final Award (1 July 2004) para 85. In similar vein, see: Thomas W. Wälde and Abba Kolo, ‘Investor- State Disputes: The Interface Between Treat-Based International Investment Protection and Fiscal Sovereignty’ (2007) 35 Intertax 427, 432, 434; Arno E. Gildemeister, L’arbitrage des différends fiscaux (2013) L.G.D.J. 170; Julien Chaisse, ‘Investor-State Arbitration in International Tax Dispute Resolution: A Cut above Dedicated Tax Dispute Resolution’ (2016) 41 Virginia Tax Review 158–165; Pasquale Pistone, ‘General Report’, in Michael Lang et al. (eds.), The Impact of Bilateral Investment Treaties on Taxation (IBFD 2017) sec. 1.2.2. Such a narrow tax carve out clause is typical for many IIAs. See UNCTAD, International Investment Agreements and Their Implications for Tax Measures: What Tax Policymakers Need to Know (2021) 23. In particular, India argued that tax mae tt rs are regulated by another international treaty, the Double Taxation Avoidance Agreement between the UK and India (signed 25 January 1993, entered into force 25 October 1993) (‘the UK-India DTAA’), and therefore the UK–India BIT should be read so as to exclude such mae tt rs from its scope according to Article 4(3) in con- junction with Article 30(2) of the Vienna Convention on the Law of Treaties (opened for signature 23 May 1969, entered into force 27 January 1980) 1155 UNTS 331 (VCLT). See Cairn (n 1), para 801 for India’s argument and paras 802–815 for the Cairn Tribunal’s analysis and counterarguments. In particular, the Tribunal clarified that Article 27(1) of the UK–India DTAA does not ‘provide a dispute resolution mechanism for situations in which an investor of one of the Contracting States considers that the host State has violated his rights as an investor, especially the BIT’. In turn, it only ‘provides for a dispute resolution mechanism for situations in which “a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention.”’ Cairn (n 1) para 806. For the entire discussion to that effect see Cairn (n 1), paras 798–874. Cf. United Nations, Preamble, in Paris Agreement (2015), hps://unfc tt cc.int/sites/default/files/english_paris_agreement.pdf . Cf. Marian (n 6), p. 52. Ibid, p. 9. Cairn Energy • 131 R E TR O A C TIVE TA X L AW A ND THE FE T S TA ND A R D : L E G A L EFFE C T S OF THE 2 0 1 2 A M ENDM EN T A ND THE R EL E VA N C E OF FE T Terminological order needed to examine the substantive and temporal effect of the 2012 Amendment appropriately Turning to the merits, the Cairn Tribunal focussed on the question whether India’s legislative (the 2012 Amendment) and executive tax measures concerning the 2006 Transactions by Cairn Energy and CUHL violated the FET standard under the UK–India BIT [Article 3(2)]. In particular, the Tribunal’s main task was to explore whether the assessment of capital gains tax on the CIHL Acquisition, more than seven years ae ft r it occurred, was unfair and inequitable. The Tribunal first observed that the tax was almost exclusively imposed on the CIHL acquisi - tion. The taxation was based on the final assessment order (FAO) issued on 25 January 2016. The legal basis for it was the 2012 Amendment, especially Explanation 5. The key aspect of the Tribunal’s analysis became the determination whether or not the 2012 Amendment was substantive and retroactive, or a mere clarification of already existing law. Before scrutinizing the substantive and temporal effects of the 2012 Amendment, the Tribunal contributed to methodological order in two ways. First, the Tribunal acknowledged the label of ‘clarification’ given by Indian Parliament to the 2012 Amendment constituted an important piece of evidence. However, such that label was not decisive for the Tribunal to assess the substantive and the temporal scopes of the 2012 Amendment. For the Tribunal, it was necessary to objectively ascertain the scope of applica - tion of that Amendment prior to and ae ft r 2012. The compatibility of the 2012 Amendment with Indian law, including its constitutional law, does not exclude the need for determination of the compatibility of that amendment with India’s international obligations under the UK–India BIT. Indeed, as observed by the Tribunal, ‘[it] is basic rule of international law that a State can- not invoke its own law as justification of a breach of its international obligations’. The Tribunal, therefore, was empowered to consider whether the 2012 Amendment was merely ‘clarificatory’, or whether it retroactively expanded the scope of taxable transfers. In the lae tt r case legitimate expectations of foreign investors in India could be frustrated, without effective legal protection, by labelling changes in tax law by the legislature as ‘clarification’. Methodologically, the Tribunal’s distinction between the influence of parliaments and con- stitutional courts and tribunals on an interpretation of domestic law and international law was of utmost importance for taxation mae tt rs. In such mae tt rs, the tax authorities use executive power to have real and direct influence on the formation of tax policy and the tax-law-making process. These powers are carried out by the highest level of tax institutions, such as the minis - tries of finances, through legislative initiatives and creation, implementation, enforcement, and the supervision of tax policy. In some jurisdictions, amendments of tax law as designed by min- istries of finance are nearly automatically accepted by parliaments without much reflection and Cairn (n 1) paras 878 ff. Ibid para 1038. Ibid para 1059. For the wording of Explanation 5 see above the Dispute between Cairn Energy and India section. The FAO relied on a ‘situs-shifting theory’ imposed by Explanation 5 of the 2012 Amendment according to which the direct transfer of shares in the non-Indian holding company constitutes the taxable event. Ibid paras 1051–1052. The Indian Parliament may have the ultimate authority to interpret the meaning of statutes in India, subject only to constitu- tional review by the courts, domestically, but not so under ‘India’s international obligations under the BIT’. Ibid 1064. Ibid paras 1063–1064 with the reference to International Law Commission, ‘Draft Articles on Responsibility of States for Internationally Wrongful Acts with Commentaries’, UN GAOR 56th Session Supp 10, ch 4, UN Doc A/56/10 (2001) (ARSIWA) 3. See also Article 27 VCLT. Cairn (n 1) para 1088, citing para 111 of Claimants’ Answers to the Tribunal’s Questions: ‘assertion by a State that its new legislation merely interprets or clarifies existing law cannot be purely self-judging, but must instead be subject to independent scrutiny by a tribunal with jurisdiction over the question. If it were otherwise, a State could legislatively expropriate or destroy any foreign investment with impunity through the mere artifice of labelling’. 132 • Cairn Energy duly considering a public discourse. Hence, if the same parliaments have the final authority in interpretation of tax laws relevant in examining the compatibility of such laws and their applica- tions with IIAs, foreign investors could enter into a vicious circle between local tax authorities and parliaments with a negative spill over effect on protection of their investments. This situa - tion would be directly and immediately negative for taxpayers (distortions in their investments) and in the long-term indirectly negative to States (reduction of foreign investment). Just as it is vital to distinguish between tax disputes under domestic tax law and tax-related investment disputes under IIAs, it is important to demarcate the role of parliaments and domestic courts and tribunals in the tax sphere on the one side, and arbitral tribunals in investment disputes on the other. Second, the Tribunal stressed the need for a terminological order for the key terms related to the 2012 Amendment: (i) ‘retroactive’; (ii) ‘retrospective’, and ‘clarificatory’. To explain their meaning, the Tribunal asked the Parties for relevant submissions which relied on scholarly materials. Ae ft r their analysis, the Tribunal, largely inspired by the definition of ‘retroactive’ by Juratowitch, considered ‘a law to be retroactive if it changes the content of the law in the past, so that the law is deemed to have always had such (new) content, and applies to transactions that took place in the past’. The Tribunal also used the terms ‘retroactive’ and ‘retrospective’ legisla - tion interchangeably, following the submissions of the Parties. A law that applies prospectively but immediately modifies the effects of transactions occurring in the past was not considered by the Tribunal as retrospective but prospective (or immediate). A tripartite conceptual division of the operation of law into retroactive, retrospective, and prospective was simplified (albeit not rigorously) to a bipartite division into retroactive (sometimes: retrospective) and prospec - tive (sometimes: immediate). This division allowed the consideration of a retroactive tax law as a law ‘which imposes a tax burden, or a higher tax burden, on income that has already been earned’ and thus concerns the scenario ‘where at the time that income was earned (etc.), there was no tax burden under the law at that time’. A Tax law imposing ‘a tax burden, or a higher tax burden, on future income (or gains or inheritance […]) from a transaction which has already been completed’, following the mentioned distinction of the Tribunal, would be considered as prospective (immediate). For example, Dimitry Kochenov and Petra Bárd, ‘Rule of Law Crisis in the New Member States of the EU: The Pitfalls of Overemphasising Enforcement’, Reconnect Working Paper No. 1 ( July 2018), https://reconnect-europe.eu/wp-content/ uploads/2018/07/RECONNECT-KochenovBard-WP_27072018b.pdf; Błażej Kuźniacki, Rzeczywisty beneficjent a podatek u źródła: Alokacja dochodu czy przeciwdziałanie nadużyciom międzynarodowego i unijnego prawa podatkowego?, Wolters Kluwer Poland (2022), sec. 2.3 (wprowadzenie). See above the Tax-related investment disputes are arbitrable unless IIA s state otherwise section. a Th t is, both Parties relied on: Ben Juratowitch, Retroactivity and the Common Law (Bloomsbury Publishing 2008); Hans Gribnau and Melvin Pauwels, Retroactivity of Tax Legislation (EATLP International Tax Series 2013). The Claimant also relied on: Philip Baker, ‘Retroactive Tax Legislation’ (2012) 48 International Taxation. A quotes was taken by the Tribunal from Philip Baker, ‘Retroactive Tax Legislation’ (2012) 48 International Taxation. Cairn (n 1) para 1080, citing Juratowitch (n 42) 5 according to whom a law is retroactive if it ‘deems the law at the time of a past event to have been as provided in the subsequent statute, where the law at the time of the event was actually something different’. Cairn (n 1) paras 1070, 1080. Ibid para 1080 c. For example, Paul Salembier, ‘Understanding Retroactivity: W hen the Past just Ain’t W hat it Used to Be’ (2003) 33 Hong Kong Law Journal 99, 102, 104. The Tribunal was not very rigorous in that division insofar it appears to follow from time to time a kind of tripartite division of temporal effects of laws into: (i) retroactive; (ii) immediate; and (iii) prospective. Cairn (n 1) para 1092. Such an approach was largely in line with doctrinal discourse, which acknowledged that demarcation lines between three temporal categories of laws are blurred and fluid, whereby retrospective laws have been every now and then described as hav - ing prospective effect, and prospective laws have been characterized as retrospective. Juratowitch (n 42) 6–12, as cited by the Tribunal in para 1077. Scholars also observed that the concepts of retroactivity and retrospectivity ‘are sometimes (implicitly or explicitly) considered synonyms or interchangeable’. Gribnau and Pauwels (n 42) 42–43, as cited by the Tribunal in para 1078. A quote used by the Tribunal in para 1075 from Baker (n 42) 780. Baker labelled it as retrospective, Ibid. Cairn Energy • 133 Likewise, a fortiori, tax law is (clearly) prospective (not immediate) whenever it imposes tax burden, or a higher tax burden, only on future income from a transaction which will be com- pleted ae ft r entry into force of that law. Finally, the Tribunal dealt with the term ‘clarificatory’ in respect of the nature of law. The Tribunal observed that ‘to determine whether a statute is clarificatory in nature, the first ques - tion is not whether it operates towards the past or towards the future; the question is whether it expands the scope or operation of the provision being clarified so that it effectively changes the content of that provision, whether prospectively or retroactively’. As a result, the Tribunal decided to further determine first whether the 2012 Amendment expanded the scope or opera - tion of Section 9(1)(i) of the ITA, or whether it was a true clarification, and then, separately and irrespective of the nature of that amendment, whether it operated retroactively, with immediate effect, or prospectively. Substantiative change in tax law via the 2012 Amendment A thorough review of a significant body of evidence arising out of nine self-standing sources, with special emphasis on the Supreme Court of India’s judgment in the Vodafone case, convinced the Tribunal that the 2012 Amendment expanded the scope of Section 9(1)(i) of the ITA rather than merely clarified it. It means that a legal basis for taxation of gains stemming from the CIHL’s acquisition in 2006 did not exist. Thus, an interpretation and application of Section 9(1)(i) of the ITA to the opposite result should be considered as clearly contra legem. At the time of Cairn’s corporate reorganization and until CIHL’s Acquisition in 2012, the Section 9(1)(i) of the ITA reads as follows: The following incomes shall be deemed to accrue or arise in India: (i) all income accruing or arising, whether directly or indirectly, [1] through or from any business connection in India, or [2] through or from any property in India, or [3] through or from any asset or source of income in India, or [4] through the transfer of a capital asset situate in India. (Emphasis and numbers in square brackets added) The fourth limb of Section 9(1)(i) of the ITA did not apply to indirect transfers by means of transfers of shares of companies situated outside of India even if such companies owned cap - ital assets situated in India. By comparison, the 2012 Amendment—Explanation 5—reads as follows: For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India’. (Explanation 5) Cf. Cairn (n 1) paras 1072 a., 1075, and 1080 a.-c. Ibid, para 1090. Ibid, paras 1091–1092. a Th t is, (1) the ITA 1961’s original intent; (2) the evolution of the legislative debates; (3) the opinions of special tax committees; (4) the subsequent clarifications and amendments to the 2012 Amendment; (5) the tax advice received by the Claimants; (6) the ITD’s practice prior to the 2012 Amendment; (7) the timing of the ITD’s assessment against CUHL; (8) the Order of 9 March 2017 of Income Tax Appellate Tribunal (ITAT); and (9) the Supreme Court’s judgment in Vodafone. Cairn (n 1) paras 1093–1251. Finance Act 2012 [Act No. 23 of 2012]. John Gardiner Q.C. in his expert report on the Cairn v. India stated that ‘[i]n the light of the previous decision of the Supreme Court the language of this provision’, such as references to ‘clarification’, ‘are simply self serving abuses of language; no doubt in a different context being capable of being referred to as “deceitful”’. (Gardiner’s Expert Report 5) (20 June 2016). We want to hereby acknowledge the access to two expert witness’ reports of John Gardiner (appointed by the Claimants) and two expert witness’ reports of David H. Rosenbloom (appointed by the Respondent). We received them exclusively for research purposes thanks to the kindness of counsel for the Claimants. 134 • Cairn Energy This legislative amendment to the Section 9(1)(i) of the ITA allowed it to apply to tax gains from OITs, that is, to the transfers by non-residents of a share in a company incorporated abroad, if the share derived, directly or indirectly, its value substantially from assets located in India. One significant indication against an application of Section 9(1)(i) of the ITA to tax gains from OITs before the 2012 Amendment entered into force is that the Respondent was unable to produce any documentary evidence that the ITD had taxed a single indirect transfer of capital assets under that Section prior to the 2012 Amendment,. To be more precise, in the four decades between the enactment of the ITA 1961 and the initiation of the investigation against Vodafone, the ITD not only had never taxed OITs but also never ae tt mpted to do so. Moreover, the ITD’s ae tt mpts to tax an OIT, Tata Cellular Industries (Tata), occurred roughly contemporaneously with the ITD’s ae tt mpts to tax Vodafone in respect of the Hutchison-Vodafone transaction, not earlier on. Most importantly, however, the approach taken by the ITD in the Tata case was tax- ation based on the substance over form doctrine by lifting the corporate veil, not as an indi- rect transfer taxable under Section 9(1)(i) of the ITA. As observed by the Supreme Court in the Vodafone case, Section 9(1)(i) of the ITA is not a ‘look through’ provision. Although the Respondent has advanced several arguments to explain the absence of tax assessments against indirect transfers prior to 2007, the evidence contradicted them. The ITD’s prime argument was that the practice of OITs was a new practice and, therefore, the first wave of tax cases concerning such transactions emerged in or around 2007. The argument goes as follows: prior to 2007 the ITD did not have the opportunity to apply its broad interpretation of the Section 9(1)(i) of the ITA to OITs. The facts, however, reveal that the indirect ownerships and transfers of assets sit - uated in India had been occurring at the very least since 1996. A clear example were investments in India by Cairn Energy and the following reorganization of its company structure in India. The Supreme Court of India in its judgment in the Vodafone case arrived at the unequivocal finding that ‘Section 9(1)(i) cannot by a process of interpretation be extended to cover indirect transfers of capital assets/property situate in India. To do so would amount to changing the content and ambit of Section 9(1)(i). We cannot re-write Section 9(1)(i)’. The Cairn Tribunal considered this conclusion of the Supreme Court as the decisive evidence which confirmed the Tribunal’s conclusion that, prior to the 2012 Amendment, Section 9(1)(i) of the ITA did not cover indirect transfers. Cairn (n 1) paras 1169, 1171. a Th t is, the anti-tax avoidance ‘look through’ or ‘look at’ doctrine, as developed by the Indian courts within the framework of the broader substance over form doctrine. Cairn (n 1) paras 1261–1262. Internationally, a look through approach (doctrine) constitutes ‘[t]he most radical solution to the problem of conduit companies’ under tax treaties insofar as it allows tax authorities and courts to ignore the principle of the legal status of corporate bodies and tax income from a transaction as if the company involved in the transaction did not exist for tax purposes. OECD, Double Taxation Conventions and the Use of Conduit Companies, adopted by the OECD Council on 27 November 1986, Paris, paras 23–25. This was later confirmed by the Bombay High Court, which found that the Tata transaction could be taxable as a colourable transaction (the holding companies did not have substance), not as an indirect transfer. Aditya Birla Nuvo v. Deputy Director of Income Tax (International Taxation) and Union of India, through the Ministry of Finance, [2012] 342 ITR 308 (Bom), paras 91, 96–99. Vodafone (n 18) para. 71. Cairn (n 1) para 1178. Ibid paras 1179–1180. See also above The dispute between Cairn Energy and India section. Vodafone (n 21), para 71. Cairn (n 1) para 1204. The Tribunal convincingly explained why it gave so much interpretative weight to the Supreme Court’s judgment in the Vodafone case. Although this judgment was not legally binding on the Parties to the Cairn case, the Tribunal pointed out that ‘international law has long considered the highest courts of States to be the most authoritative expositors of municipal law and have therefore accorded weight to their pronouncements’. The judgment in the Vodafone case was rendered by India’s highest court, which is ‘the ultimate interpreter of Indian law’, subject only to the role played by the Constitutional Court in the Indian judicial firmament, ‘and it goes without saying that it is far more expert than this Tribunal in understanding and applying that law ’. Moreover, the Supreme Court in Vodafone provided a clear, convincing, and unequivocal meaning to Section 9(1)(i) of the ITA in respect of OITs, and this was exactly the core of the dispute in the Cairn case. The rea - soning of the Supreme Court also appears to be persuasive and relevant to the reasoning of the Tribunal insofar as the Supreme Cairn Energy • 135 The considerations of the Supreme Court are worth a brief presentation because of their precision and persuasiveness. First, the Hutchison-Vodafone transaction concerned an off - shore share sale, and not a sale of Indian assets, and the tax consequences of each were di -f ferent, that is, only the sale of Indian assets by a foreign company could lead to withholding taxation under the Section 9(1)(i) of the ITA , not a sale of shares in another foreign company that owns the Indian assets. Second, the fact that Vodafone was acquiring a controlling inter- est in the underlying companies did not mean that Vodafone had acquired a distinct capital asset independent of the shares and situated in India. Third, Art. 265 of the Constitution of India—‘No tax shall be levied or collected except by authority of law ’—requires a clear stat- utory basis for taxation. In that regard, the Separate Opinion of Justice K .S. Radhakrishnan quoted the passage from Rowlatt J. expressing the mentioned principle in the following words: In a taxing Act one has to look merely at what is clearly said. There is no room for any intend - ment. There is no equity about a tax. er Th e is no presumption as to tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used. (emphasis added by us) The fourth limb of Section 9(1)(i) of the ITA clearly and specifically stipulated that that the capital asset must be ‘situate in India’ to enter the ambit of that provision. Therefore, any income generated from the transfer of capital by a foreign company could be taxable in India only if that asset was situated in India at the time of the transfer. Accordingly, following the Supreme Court’s observations, the Cairn Tribunal concluded that prior the entry into force of the 2012 Amendment, Section 9(1)(i) of the ITA not only did not cover indirect transfers, but could not ‘by a process of interpretation be extended to cover’ such transfers. As the Supreme Court categorically found, this ‘would amount to changing the content and ambit of Section 9(1)(i)’. This, in the Tribunal’s view, is precisely what the 2012 Amendment did. It was, therefore, clear to the Tribunal that ‘the 2012 Amendment amended Section 9(1)(i) by imposing a new tax burden where none previously existed’ and thus it constituted a substantive change in Indian tax law. Court ‘was mindful of the need for certainty and the rule of law ’. These observations were relevant to ‘the Tribunal’s application of an international obligation which is concerned with the protection and promotion of the rule of law and its integral limbs such as reasonable predictability and certainty’. Ibid paras 1228, 1231–1232. Taken together, the highest rank of the Supreme Court in the Indian judicial system (the final court of appeal in majority of cases) and the persuasiveness of its reasoning in the Vodafone case, the Tribunal’s approach to give a lot of interpretative weight to the discussed judgment was commendable. Cf. Błażej Kuźniacki, ‘Tax Treaty Interpretation by Supreme Courts: Case Study of CFC rules’ in International Tax Principles in BRICS and OECD Countries: Divergences and Convergences (2016) Revista Direito Tributário Internacional Atual, The Brazilian Institute of Tax Law (IBDT) in São Paulo, https://www.ibdt.org.br/RDTIA/en/1/tax-treaty-interpretation-by-supreme-courts- case-study-of-cfc-rules/; Michael Lang, ‘The Term ‘Enterprise’ and Article 24 of the OECD Model Convention’ in Guglielmo Maisto, (ed.), The Meaning of ‘Enterprise’, ‘Business’ and ‘Business Profits’ under Tax Treaties and EU Tax Law (IBFD 2011) 120; David Ward, The Interpretation of Income Tax Treaties with Particular Reference to the Commentaries on the OECD Model (IBFD 2001) 161; Andreas Bullen, Arm’s Length Transaction Structures: Recognizing and Restructuring Controlled Transactions in Transfer Pricing, (IBFD 2010) 65. Vodafone (n 18) para 88. Ibid. Paras 169–170. Cape Brandy Syndicate v. IRC (1921) 1 KB 64, P. 71 (Rowlatt, J.). Also quoted by the Tribunal. Cairn (n 1) para 1225. Cairn (n 1) para 1249. The inner quotes come from Vodafone (n 18) para 71, Cairn (n 1) para 1250. The Tribunal also nicely explained the dynamics in interpretation between judicial, executive and legislative powers in light of the circumstances in the Cairn case: ‘The common law evolves in light of changing circumstances and it is not unusual for authorities such as the ITD to seek to give new interpretations to existing laws in response to such chan -g ing circumstances. Sometimes the courts will bless such interpretations, sometimes they do not; indeed, sometimes the courts themselves will revisit what was thought to be settled law. But the courts must also give effect to the laws as written by Parliament and there are many instances where the courts will hold that the law, as written, does not support the taking of administrative, investigative or enforcement action. In the Tribunal’s view, this is the case here: the Court disagreed with the interpretation of the Executive and gave effect to the law, i.e., Section 9(1)(i), as written by Parliament’. Ibid para 1251. 136 • Cairn Energy Far-reaching retroactive effect of the 2012 Amendment Aeft r concluding that the 2012 Amendment constituted a substantive change in Section 9(1)(i) of the ITA by its extension to OITs, it was very easy for the Tribunal to state that this Amendment was retroactive. The easiness of this task followed from the very wording of the Finance Act 2012, which expressly stated that Explanations 4 and 5 ‘shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962’. It means that the Indian legislature unequivocally indicated that the 2012 Amendment purports to apply as of the entry into force of the ITA 1961, that is, 1 April 1962. Thus, the intention of the Indian legislature in respect of the retroactive effect of the 2012 Amendment was clear and extreme, that is, the retroactive effect reached back 60 years, aiming to tax OITs retroactively between 1 April 1962 and 1 April 2012. The Tribunal concluded that the retroactive amendment in tax law applied to the Claimants with respect to the CIHL Acquisition (likewise, this amendment covered the transactions of the Claimants in Vodafone). It was, therefore, necessary to examine whether this retroactive taxation of the CIHL Acquisition was fair and equitable. Relevance of the FET standard and the principle of legal certainty in the context of retroactive taxation Once the Tribunal concluded that the 2012 Amendment led to retroactive taxation of the CIHL Acquisition, its task was to determine the compatibility of such taxation with the FET standard. To this end, the Tribunal carefully set the scene by explaining the relevance of the FET standard and the principle of legal certainty in the context of retroactive taxation. Before looking closer at that relevance, the Tribunal observed that Indian case law does not allow Parliament to go ‘too far’ in introducing retroactive legislation. For example, Indian courts have found grounds to strike down ‘a retroactive tax that imposes an unforeseen financial burden on a taxpayer or widens the meaning of a term so as to subject an assessee to taxation that it could not have contemplated at the time of the transaction’. This shows that Indian courts tolerate retroactive tax legislation ‘when the burden of the application of the tax law could have been foreseen or when, for one reason or another – often involving drafting problems, a legislative ‘fix’ is required to clarify Parliament’s Intention’. Finance Act 2012 [Act No. 23 of 2012], para 4. Cairn (n 1) para 1253. In fact, only the length of the retroactive effect was to some extent disputable insofar as the Respondent had tried to chal - lenge it in various ways, all rejected by the Tribunal. Ibid paras 1255–1259. Ibid para 1259. Ibid paras 1260, 1676. Actually, even before doing so, the Tribunal examined the Respondent’s tax avoidance defence (paras 1260–1591) and other defences (paras 1592–1673). We will address the former defence in the next section. Ibid para 1682 with a reference to: Jayam and Company v. Assistant Commissioner & Snr., (2016) 2 SCC 125, para. 19 and Shew Bagwan Goenka v. Commercial Tax Office and Others, (1973) 32 STR 368, para. 15. Cairn (n 1) para 1683. The Indian jurisprudence is largely in line with the approach to retroactive taxation in many countries. For instance, in the Netherlands, it is agreed that the retroactive taxation should in principle not reach further back in time than the moment at which the taxpayers have been informed about the intention to introduce such taxation (eg the moment at which a proposal of retroactive tax law is submitted to Parliament or the moment at which a press release is issued in which the intention to introduce such a law is announced), or it is otherwise foreseeable. Exceptionally, if there are very weighty arguments such as preventing a small group of taxpayers from obtaining an unintended and unjustified advantage via abusive tax avoidance or tax evasion, the retroactive taxation can reach further back in time than the moment on which the retroactive tax law was foreseeable for taxpayers. Hans Gribnau, ‘Equality, Legal Certainty and Tax Legislation in the Netherlands: Fundamental Legal Principles as Checks on Legislative Power: A Case Study’, (2013) 9 Utrecht Law Review 72–73. Similarly, in Australia, a retroactive tax law is acceptable if the Government has announced in a detailed way, by press release, its intention to introduce such legislation, and the Australian Taxation Office (ATO) issued guidance on treatment of taxpayers covered by such a law. In the view of the Australian Government, retroactive tax law may be appropriate, for example, when it addresses a tax avoidance or a tax evasion issue. Examples of such laws in Australia regarded the elimination of schemes linked with organized crime and the ‘deliberate flouting of company and tax laws’ leading to revenue losses of ‘hundreds of millions of dollars’. Australian Law Reform Commission, Laws with retrospective operation, (12 Jan. 2016), paras 13.93 and 13.95–13.98, <hps:// tt www.alrc.gov.au/publication/traditional-rights-and-freedoms-encroachments-by-commonwealth-laws-alrc-report-129/13-retrospec - tive-laws/laws-with-retrospective-operation-2/> accessed 13 Feb. 2023. Cairn Energy • 137 Consequently, the bottom line for legally acceptable retroactive taxation in domestic settings seems to be its foreseeability by taxpayers, unless some specific and very important justification exists for it. This minimum criterion is in principle not met by the legislature if taxpayers neither were informed nor could foresee that their transactions would be taxable at the time of their realization. With the length of the reach of retroactive taxation its foreseeability by taxpayers is decreased and thus its legality in a domestic legal system. In other words, the more retroactive taxation is, the stronger justification for it must exist. This is also very much true for compatibility with the FET standard in international invest - ment law, as followed from the further analysis of the Tribunal. That’s why the Respondent tried hard to convince the Tribunal that the 2012 Amendment, if at all, had retroactive effect only for two months. The game was played for a high stake: the shorter the retroactivity, the less tension it creates under the principle of the rule of law and the principles of legal certainty and predictability, both very relevant to the constitutionality of retroactive tax law and its com- patibility with the FET standard. Indeed, the Tribunal observed that ‘[w]hat appears to be permitted in India and at the same time compatible with FET is “some” retro - activity of a relatively minor character, but not “any” retroactivity: the investor and, any law-abiding person more generally, has a protection against retroactivity exceeding certain limits’. To determine whether the 2012 Amendment led to the retroactivity compatible with the FET standard under the UK–India BIT, the Tribunal decided to carry out a balancing exercise between India’s public policy objectives, on the one hand, and the Claimants’ interest in benefitting from the values of legal certainty and predictability, on the other. [(…)] The proper legal principle to apply in a jurisdiction governed by the rule of law, in the Tribunal’s view, is that of legal certainty: the general rule is that laws should apply prospectively; thus, except for specific cases where retroactivity is compatible with the rule of law, any individual is entitled to assume that the State will not legislate retroactively even absent a specific commitment. The Tribunal clearly considered the principle of legal certainty was the core principle relevant to assessing the compatibility of retroactive taxation with the FET standard. At the same time, however, the Tribunal acknowledged that the principle of legal certainty is not absolute. Thus, it must be examined whether the retroactive taxation could be justified by a specific purpose other than to increase the taxable base that India could not aain b tt y applying the 2012 Amendment 83 84 prospectively. Following tax scholars and practice of various states, the Tribunal considered Cairn (n 1) paras 1692 ff. Ibid paras 1255–1256. Ibid paras 1750 ff. Ibid para 1785 in fine . Cf. Rosenbloom (n 55) para 50: ‘Some degree of retroactivity is tolerable, and therefore foreseeable to investors. In the presence of a demonstrable tax avoidance scheme, it is not possible to say that legislation intended to address the avoidance, even if retroactive to some extent, is inconsistent with the “Rule of Law.”’ See also Nupur Jalan and Akshara Rao, ‘The Cairn Arbitration Award: Retrospective Taxation of Indirect Share Transfers in India Breaches Bilateral Investment Treaty’, (2021) 75 Bulletin for International Taxation sec. 2.2.2.3. Cairn (n 1) para 1789. a Th t is, ‘given the degree to which retroactivity upsets legal certainty, the State should have a specific and compelling public policy objective that warrants not only the regulatory change in general, but also the retroactive application of that change. In other words, to justif y legislating with retroactive effects, a State must be facing a situation where the new rule would not fulfil its purpose (ie not fully attain the public interest being pursued) if its effects were only prospective. [(…)] The goal of protecting and enhancing the public treasury is present in any ae tt mpt by a government to raise revenue. Instead, there must be an identi - fiable and specific public purpose justifying why it would not suffice to apply the measure prospectively, and why the State has deemed it necessary to apply it to past transactions’. Ibid paras 1790–1791. Baker (n 42) 780; Philip Baker, ‘Retrospective tax legislation and the European Convention on Human Rights’, British Tax Review (2005) 291; James Hollis, ‘The UK Retroactive Correction of Repo Tax Legislation’ (2011) Journal of Taxation of Financial Products 225. 138 • Cairn Energy combatting abusive tax practices as the relevant specific public purpose that could justify retro - active taxation in question. Furthermore, the determination of a tax avoidance theory under Indian tax law undertaken by the Tribunal earlier on, during the analysis of the Respondent’s tax avoidance defence, was very helpful in the examination of the mentioned justification against the factual background. Hence, these elements of the Cairn decision will be analysed in the next section. They were pivotal to decide on the compatibility of the 2012 Amendment and taxation of the CIHL Acquisition based on that amendment with the FET standard. DE C ODIN G TA X AV OID A N C E UNDER D OM E S TIC ( INDI A N ) TA X L AW TO DE TER M INE WHE THER R E TR O A C TIVE TA X ATION WA S FA IR A ND E Q UITA B L E Relevance of decoding abusive tax avoidance for examining the Respondent’s tax avoidance defence and the justification for retroactive taxation Although it was not articulated by the Tribunal explicitly, the proper decoding of the concept of tax avoidance under Indian tax law was pivotal not only to (i) assess the major defence of the Respondent but also (at least partly) to (ii) examine the main justification for the violation of the principles of legal certainty and predictability by the retroactive taxation. The Respondent’s tax avoidance defence was based on the following logic: if the 2006 Transactions, including the CIHL Acquisition, were tax avoidant and thus undertaken to avoid taxation in India under different grounds than the 2012 Amendment, the tax bur - den imposed cannot be characterized as being unfair and inequitable because the 2006 Transactions could be ignored or recharacterized for tax purposes. The Tribunal agreed with this logic with a crucial caveat; namely even if the tax avoidance was proven by the Respondent in accordance with the Indian judicial anti-avoidance rule, it may not be enough to preclude the Tribunal from an examination of whether the retroactive taxation complies with the UK–India BIT’s FET standard. To this end, the Respondent would have to prove that the taxation that would have been imposed under the Indian judicial anti-avoidance rule ‘would have been identical, or at least as much as that which was in fact imposed’. This was perfectly logical: the effect of the hypothetical use of the Indian anti-tax avoidance doc - trine would have to be entirely or almost entirely reflected in the effect of the tax measures actually used by India in respect of the 2006 Transactions in order to disregard the need for testing these measures under the UK–India BIT’s FET standard. Only then could the 2006 Transactions lead to taxation equivalent to that under the 2012 Amendment and its application by the Indian tax authorities, irrespective of their existence, in which case the questions as to the retroactive nature and its reconciliation with the FET standard would have become moot. The prevention of abusive tax avoidance was considered by the Tribunal as a major justifica - tion in respect of the retroactive taxation. The examination of that justification required from the Tribunal to strike a balance between India’s public purpose and the investor’s interests. The Tribunal considered that the principle of proportionality was relevant in this balancing exercise, Cairn (n 1) paras. 1796–1797, 1812. For example, ‘the Respondent rightly has not argued that it enacted the 2012 Amendment to combat tax avoidance by the Claimants specifically. Indeed, as the Tribunal has found in Section VII.A.3.a(ii) above, the FAO did not tax the Claimants on a theory of tax avoidance. It has not been suggested that the 2012 Amendment was enacted to sanction the Claimants for their specific abuse. In any event the Tribunal has found that the 2006 Transactions were not tax avoidant’. Ibid para 1812. Ibid para 1262. Ibid 1439. Cf. Van Weeghel (n 11) sec. 26.2.3. Cairn (n 1) para 1796. Cairn Energy • 139 which required it to verify whether the retroactive taxation was not more burdensome for the investor’s rights and interests than required by the pursued public purpose, ‘especially if a less burdensome measure would be available to satisfy the same public purpose’. This balancing exercise under the principle of proportionality is seen by investment scholars as appropriate to manage the tensions between the different principles at stake in investor-State disputes. However, the Cairn Tribunal appeared to focus mainly on the discovery of abusive tax avoid- ance of the 2006 Transactions and the anti-abuse scope and purpose of the 2012 Amendment rather than determining whether the interests of the Claimants (investors) were found to be weightier than those of the Respondent (host state). It means that the principle of proportion- ality was not applied by the Tribunal in a classical way to solve tensions between the principle of legal certainty, typically securing the interests of investors, and the principle of tax equity, favouring the budgetary interests of host states, but to delineate ‘the proper territorial limits of the State’s fiscal powers’ beyond which the FET standard may be violated. This is not dissimilar to the approach by the Court of Justice of the European Union (CJEU) in case law on the compatibility of domestic anti-tax avoidance provisions and the Treaty on the Functioning of the EU, in which the Court determines the proper extent of a state’s fiscal authority territorially, and the principle of legal certainty is assessed as a part of the proportion- ality test. To the extent of relevant similarities of facts and legal questions in tax avoidance cases, arbitral tribunals may take into account the CJEU’s interpretative approach to support Ibid para 1788 with references to: Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award (5 October 2012) paras 427, 452; Electrabel S. A . v. Republic of Hungary, ICSID Case No. ARB/07/19, Award (25 November 2015) para 179; LG&E Energy Corp., LG&E Capital Corp. and LG&E International Inc. v. Argentine Republic, ICSID Case No. ARB/02/1, Decision on Liability (3 October 2006) para 195; Continental Casualty Company v. Argentine Republic, ICSID Case No. ARB/03/9, Award (5 September 2008) para 232; and Roland Kläger, ‘Fair and Equitable Treatment’ in International Investment Law (Cambridge 2011), 128, 236–245. Valentina Vadi, Proportionality, Reasonableness and Standards of Review in International Investment Law and Arbitration, Elgar International Investment Law series (2018); Julien Chaisse, ‘Investor-State Arbitration in International Tax Dispute Resolution: A Cut above Dedicated Tax Dispute Resolution’ (2016) Virginia Tax Review 149; Benedict Kingsbury and Stephan Schill, ‘Public Law Concepts to Balance Investors’ Rights with State Regulatory Actions in the Public Interest – The Concept of Proportionality’ in Stephan Schill (ed.), International Investment Law and Comparative Public Law, (Oxford University Press 2010); Eric De Brabandere, Paulina Baldini and Miranda da Cruz, ‘The Role of Proportionality in International Investment Law and Arbitration: A System-Specific Perspective’ (2020) 89 Nordic Journal of International Law 471. Cairn (n 1) paras 1260–1591, 1813–1816. Ricardo García Antón and Toni Marzal, ‘Proportionality and the fight against international tax abuse: comparative analysis of judicial review in EU, international investment and W TO law ’, 30 Asia Pacific Law Review (Special Issue 2022) 9. Ibid 8. Cf. Wolfgang Schön, ‘Neutrality and Territoriality – Competing or Converging Concepts in European Tax Law?’ (2015) 69 Bulletin for International Taxation, issue 4/5; Dennis Weber, ‘The Reasonableness Test of the Principal Purpose Test Rule in OECD BEPS Action 6 (Tax Treaty Abuse) versus the EU Principle of Legal Certainty and the EU Abuse of Law Case Law ’ (2017) 1 Erasmus Law Review 38; Maria Hilling, ‘Justifications and Proportionality: An Analysis of the ECJ’s Assessment of National Rules for the Prevention of Tax Avoidance’ (2015) 41 Intertax 303. For the relevant case law on the compatibility of domestic anti-tax avoidance measures with the EU law see, for example, Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue, C-196/04 (12 September 2006); Glaxo Wellcome GmbH & Co. KG v Finanzamt München II, C-182/08 (17 September 2009); Société d’investissement pour l’agriculture tropicale SA (SIAT) v. État belge, C-318/10 (5 July 2012); Itelcar – Automóveis de Aluguer Lda v. Fazenda Pública, C-282/12 (3 October 2013); Inspecteur van de Belastingdienst/ Noord/kantoor Groningen v. SCA Group Holding BV, X AG and Others v. Inspecteur van de Belastingdienst Amsterdam and Inspecteur van de Belastingdienst Holland-Noord/kantoor Zaandam v MSA International Holdings BV and MSA Nederland BV, C-39/13, C-40/13, and C-41/13 (12 June 2014); X BV, X NV v Staatssecretaris van Financiën, C-398/16, C-399/16 (22 February 2018); N Luxembourg 1, X Denmark A/S, C Danmark I, Z Denmark ApS v Skaem tt inisteriet (C-115/16, C-118/16, C-119/16, and C-299/16) (26 February 2019); Lexel AB v Skaev tt erket, C-484/19 (20 January 2021). See more on this case law in literature: Dennis Weber, ‘Tax Avoidance and the EC Treaty Freedoms A Study of the Limitations under European Law to the Prevention of Tax Avoidance’ (Kluwer Law 2005) 250–278; Luc De Broe, International Tax Planning and Prevention of Abuse: A Study under Domestic Tax Law, Tax Treaties and EC Law in Relation to Conduit and Base Companies (IBFD 2008) 880–902; Adam Zalasiński, ‘Proportionality of Anti-Avoidance and Anti-Abuse Measures in the CJEU’s Direct Tax Case Law ’ (2007) 35 Intertax 310–321. It should be remembered that there are also relevant differences in the reasoning of the Tribunal in the Carin case and the CJEU case law in tax avoidance cases. Notably, the CJEU is less protective of ‘form’ than the Cairn Tribunal since the Court ulti- mately looks for a ‘genuine’ connection of companies and their transaction with EU Member States, while the Tribunal did not do that. Adolfo Martín Jiménez, ‘International Investment Agreements and Anti-Tax Avoidance Measures: Incoherencies in the International Law System, ‘Systemic Interpretation’ And Taxpayers’ Rights’ in Pasquale Pistone (ed), Building Global International Tax Law, Essays in Honour of Guglielmo Maisto (IBFD 2022) sec. 4 and 5. 140 • Cairn Energy their reasoning. Recently, the CJEU’s case law in corporate direct taxation mae tt rs has had steadily more impact on the interpretation of global standards of abuse tax avoidance and vice versa. Arbitral tribunals could seek guidance from the CJEU’s jurisprudence in tax avoidance cases to determine the existence of abusive tax avoidance and to examine the suitability and the proportionality of anti-abuse measures. The CJEU case law appears to be particularly relevant to arbitral tribunals for the interpretation of the FET standard under IIAs. The Tribunal observed that legislation resulting in retroactive prevention of abusive tax avoidance could be compatible with domestic and international law because it specifically aims to discourage and prevent the future abusive practice of taxpayers. Such legislation warns tax - payers that actively seeking to abuse tax law does not pay off insofar as the abusive practices may be stricken down by the legislator with retroactive effect and thus ‘the taxpayers will not benefit, even temporarily, from their own wrongful conduct’. Moreover, ‘retroactive taxation of abusive transactions is also less intrusive on taxpayers’ interests of legal certainty and pre- dictability, since taxpayers that actively engage in abusive practices can hardly have a legitimate interest to benefit from their conduct’. This is a powerful argument. Indeed, the principle of legal certainty and predictability does not seem to equally protect the taxpayers actively seeking to abusively avoid taxation and the taxpayers who in the course of ordinary day-to-day business or investment practices benefit from tax advantages in a full compliance with the lee tt r and the purpose of tax law. Guaranteeing legal (tax) certainty requires examining a variety of legal and non-legal factors in a particular context together with other important tax policy goals such as fairness, economic Cf. Thomas W. Wälde and Abba Kolo, ‘Coverage of Taxation under Modern Investment Treaties’ in Peter T. Muchlinski, Federico Ortino and Christoph Schreuer (eds), The Oxford Handbook of International Investment Law (Oxford 2008) 314. Also, a comparative methodology could be used in respect of the case law of the European Court of Human Rights. The Tribunal relied on such case law implicitly and indirectly via the references to the scholarship, for example, Cairn (n 1) paras 1796–1800. The Tribunal acknowledged that interpretation of the FET standard could be guided, inter alia , by general principles of law. In that respect, the Tribunal stated that ‘there is no reason why the Tribunal should not seek guidance from the jurisprudence of international adjudicatory bodies, such as the ECtHR , to determine the existence of general principles of law ’. Ibid para 1738. For the relevance of jurisprudence of the World Trade Organisation (W TO) in tax-related investor-state dispute resolution cases see Reinhard Quick and Christian Lau, ‘Environmentally Motivated Tax Distinctions and W TO Law: The European Commission’s Green Paper on Integrated Product Policy in Light of the “Like Product-” and “PPM-” Debates’ (2003) 6 JIEL 419. Robert J. Danon and Sebastian Wuschka, ‘International Investment Agreements and the International Tax System: The Potential of Complementarity and Harmonious Interpretation’ (2021) 75 Bulletin for International Taxation 697. Cf. Wolfgang Schön, ‘Interpreting European Law in the Light of the OECD/G20 Base Erosion and Profit Shifting Action Plan’ (2020) 74 Bulletin for International Taxation sec. 7. Cf. Cairn (n 1) para 1738. In that regard, it is worth mentioning that chain of judgments of the CJEU have formed a general principle of EU law according to which the advantages under EU law are not to be granted to ‘a person [that] invokes certain rules of EU law providing for an advantage in a manner which is not consistent with the objectives of those rules’, that is, the general principle of the prohibition of abuse of rights under EU law. Quote from: CJEU, N Luxembourg 1, X Denmark A/S, C Danmark I, Z Denmark ApS v Skaem tt inisteriet (C-115/16, C-118/16, C-119/16, and C-299/16) (26 February 2019) para 102. Indeed, it has been recently suggested by scholars that the principle of proportionality, constituting a general principle and a cornerstone of EU law plays an important role for the purposes of the FET in a sense that the proportionality of legal meas - ures should be seen as a requirement for FET under IIAs. This suggestion is based on a reference to Cairn (n 1) para. 1787. See Pasquale Pistone and Ivan Lazarov, The Fundamental Right to Fair and Equitable Treatment in the Cross-Border Recovery of Taxes within the EU: A Need for a Common Minimum Standard, 15 World Tax Journal 1 (2023), sec. 4. However, it should be borne in mind that the Cairn Tribunal used domestic standards of abusive tax avoidance as a benchmark to examine the compatibility of Indian retroactive taxation with the FET standard, not the abusive tax avoidance standard arising from international treaties, for example, tax treaties or the EU Treaties. Cf. Martín Jiménez (n 96) sec. 4. Cairn (n 1) para 1796. Ibid with the reference to Baker (n 42) 781. Judith Freedman, ‘Defining Taxpayer Responsibility: In Support of a General Anti-Avoidance Principle’ (2004) British Tax Revies 356: ‘There will be no deficit in the rule of law if the area of uncertainty is one that does not affect day-to-day transac - tions and is governed not by arbitrariness but rather by procedures that attract the support of the compliant members of the tax community ’. However, it is worth bearing in mind that the borderline between abusive tax avoidance and acceptable tax planning is very thin and context-sensitive. Therefore ‘[t]hose who deliberately and with open eyes try to balance on the borderline of acceptable tax planning should not be surprised if they have to realize that they fall down on the wrong side’. Frederik Zimmer, ‘In Defence of General Anti-Avoidance Rules’ (2019) 72 Bulletin for International Taxation, sec. 5. Cairn Energy • 141 efficiency, and raising revenue. Especially ae tt mpts of taxpayers to avoid taxation by artificial structures may not deserve to be protected by the principle of legal certainty. One could argue that taxpayers are exclusively responsible for such practices leading to tax uncertainty. By con- trast, one could argue that new legislation or incompetent tax authorities can cause tax uncer - tainty which is beyond the control of taxpayers and thus taxpayers must be protected under the principle of legal certainty in such instances. Consequently, if the 2012 Amendment was specifically targeted to abusive tax avoidance and did not apply too retroactively, that is, its ret - roactive application was foreseeable to the Claimants in 2006, or its effect could be achieved by the Indian anti-tax avoidance doctrine applicable in 2006, the amendment might have been considered by the Tribunal as not violating the FET standard. Such a measure would be suitable and proportional to achieve its aim insofar as it would secure interests of investors and States in a balanced way, without tensions between the principle of legal certainty and the principle of tax equity. The retroactivity of the Indian legislation, however, was effectively reaching back more than 50 years. It is, therefore, doubtful whether such legislation, even if targeting only abusive tax avoidance, would survive the scrutiny under the FET standard. e T Th ribunal’s approach to decoding abusive tax avoidance for examining the Respondent’s tax avoidance defence and the justification for retroactive taxation Examining the Respondent’s tax avoidance defence required the Cairn Tribunal to undertake an arduous task; namely the reconstruction of Indian tax avoidance doctrine, and then a pplying it to determine whether the 2006 Transactions constituted abusive avoidance of taxation in India. In that regard, the Tribunal observed that its task was ‘not to determine whether the 2006 Transactions were tax avoidant/abusive as an Indian court would do’, but ‘to determine whether the challenged measures (the FAO and related measures) were fair and equitable’. To this end, the Tribunal went through an in-depth and comprehensive analysis of Indian case law. The Cairn case therefore to some extent resembles the Indofood case on beneficial ownership (BO) in which a dispute concerning the interpretation of a tax concept was decided in a non-tax dispute. The sole focus of the Tribunal on the Indian case law regarding abusive tax avoidance stemmed from the fact that the 2006 Transactions allegedly constituted tax avoidance under Indian tax law, not international law (eg Indian tax treaties). Also the notion of tax avoidance is relative and depends on the extent to which legislatures, courts, and tax authorities of various states tolerate the behaviour of a taxpayer leading to a reduction of tax liability. In the Cairn case, the only relevant source to determine abusive tax avoidance was indeed Indian case law, Brian Arnold, ‘Some Thoughts on Tax Certainty’, 2 Belt and Road Initiative Tax Journal 1(2021), 93, 98. Cf. above the Far-reaching retroactive effect of the 2012 Amendment section. Cairn (n 1) para 1283. Some references were made to English and other Commonwealth case law insofar as it was incorporated by the Indian courts. The Court of Appeal, 2 March 2006, Indofood International Finance Ltd. v. JP Morgan Chase Bank NA, London Branch, [2006] STC 1195, ITLR (2006) 653. The Indofood case is an unusual case concerning the concept of BO, because the dispute concerning the understanding of the tax concept of BO under the Agreement between the Government of the Kingdom of the Netherlands and the Government of the Republic of Indonesia for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income (signed in Jakarta on 29 January 2002, entered into force 30 December 2003), had a contract law dimension (the essence of the dispute was contractual liability and not tax liability). As a result, neither the judges nor the aor tt neys for the parties were tax experts, even though the most important issue to be decided was precisely one rooted in international tax law (the concept of BO). The tax authorities also did not ae tt nd the hearing and did not make any submissions. See Philip Baker ‘United Kingdom: Indofood International Finance Ltd v. JP Morgan Chase Bank NA’ in Michael Lang and oth- ers (eds), Beneficial Ownership: Recent Trends (IBFD 2013) sec. 2.1. Cf. Cairn (n 1) para 1265. Błażej Kuźniacki ‘Controlled Foreign Companies and Tax Avoidance. International and Comparative Perspectives with Specific Reference to Polish Tax and Constitutional Law, EU Law and Tax Treaties’ (2020 C.H. Beck) 31. 142 • Cairn Energy as a statutory definition of abusive tax avoidance in India at the time of the dispute between the Cairn Energy and the Indian tax authorities did not exist. Prior to the analysis of Indian case law, the Tribunal decided to use the terms tax abuse and tax avoidance interchangeably and appears to endorse the Respondent’s understanding of abusive tax avoidance, that is, ‘one where the form of the transactions, even if formally lawful, was chosen with the dominant purpose of reducing or avoiding liability to pay tax in ways that are inconsistent with the intent of the law’. Yet, in the entire analysis, the Tribunal did not explicitly discuss the second prong of this definition, which refers to the inconsistency of the transaction with the intent of the law. It was not an omission on the side of the Tribunal, but a result of a careful reflection on the Indian case law, which did not appear to focus on the contradiction test as a part of the abuse test. Accordingly, the Tribunal did not appear to analyse the second prong per se, but rather implicitly by references to a colourable/artificial device. Internationally, the second prong is linked with the normative element of abusive tax avoid- ance aimed at testing whether a transaction would be ‘contrary to the object and purpose of the relevant provisions’. The Tribunal seems to acknowledge that the second prong of abusive tax avoidance is about transactions undertaken ‘contrary to the object and purpose of the tax law’ while examining the prevention of abusive tax avoidance as a specific public policy justification for the retroactive taxation. However, the Tribunal did not explain how the second prong of abusive tax avoidance could be understood and what role it plays in the determination of abusive tax avoidance. As it illustrated by the discussion in the ‘Dominant purpose test and colourable/ artificial device test as building blocks of the Indian substance over form doctrine’, ‘The Tribunal’s approach regarding the mechanism and consequences of the substance over form doctrine’, and the ‘Inadequacy of the substance over form doctrine to permit taxation of the CIHL Acquisition under the 2012 Amendment and the need for the extension of source state taxation to that effect’ sections, the second prong under Indian tax avoidance doctrine does not seem to play a separate The GAAR was introduced in India by then Finance Minister, Pranab Mukherjee, on 16 March 2012, but it was not imple- mented until 1 April 2017. It has become effective for the assessment year 2018–19 onwards. ‘GAAR will be effective April 1, 2017, onwards: CBDT’ (27 January 2017) Business Standard, <https://www.business-standard.com/article/economy-policy/ gaar-will-be-effective-april-1-2017-onwards-cbdt-117012700715_1.html> accessed 25 March 2022. The Indian GAAR is con- tained in CHAPTER X-A (Section 95) of the ITA. Thus, we have decided to use the term ‘abusive tax avoidance’ as it most accurately reflects the object of examination of the Tribunal. However, whenever the term ‘tax avoidance’ is used, it shall be equated with ‘abusive tax avoidance’, unless otherwise stated. Cairn (n 1) 1270. See the discussion in the ‘Dominant purpose test and colourable/artificial device test as building blocks of the Indian substance over form doctrine’, ‘The Tribunal’s approach regarding the mechanism and consequences of the substance over form doctrine’, and the ‘Inadequacy of the substance over form doctrine to permit taxation of the CIHL Acquisition under the 2012 Amendment and the need for the extension of source state taxation to that effect’ sections. Likewise, the Indian legislature did not decide to include an explicit reference to the second prong of abusive tax avoidance under the Indian GAAR . Section 96(1) of the ITA defines an impermissible avoidance arrangement as ‘an arrangement, the main purpose of which is to obtain a tax benefit, and it (a) creates rights, or obligations, which are not ordinarily created between persons dealing at arm’s length; (b) results, directly or indirectly, in the misuse, or abuse, of the provisions of this Act; (c) lacks commercial substance or is deemed to lack commercial substance under Section 97, in whole or in part; or (d) is entered into, or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes’. The language under lee tt r (b) to some extent resembles the second prong as it refers to ‘the misuse, or abuse, of the provisions of this Act’, which may be identified with contradicting the relevant provisions of tax law. The quote is taken from a guiding principle as added in 2003 to para 9.5. of the Commentary on Article 1 of the OECD Model Taxation Convention (MTC). See also the second part of the principal purposes test (PPT) as added in 2017 to Article 29(9) of the Model Tax Convention and Article 7(1) of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shiift ng (OECD 24 November 2016). This Convention was signed by India on 7 June 2017 and entered into force on 1 October 2019, < https://www.oecd.org/tax/treaties/beps-mli-signatories-and-parties.pdf> accessed 24 September 2022. Cf. Article 6 of the Council Directive (EU) 2016/1164 of 12 July 2016 Laying Down Rules against Tax Avoidance Practices that Directly Affect the Functioning of the Internal Market (ATAD), OJ L 193/1 (19 July 2016)—the European Union (EU) GAAR . ‘A major justification invoked in respect of retroactive taxation is the State’s power to combat tax abuse. In particular, where taxpayers exploit an inadvertent legislative loophole in a manner that is abusive and manifestly contrary to the object and purpose of the tax law, the State may be justified to close such a loophole with a retroactive effect and without breaching its own law or applicable international law ’. [italics added, footnotes omitted]. Cairn (n 1) para 1796. Cairn Energy • 143 role in defining abusive tax avoidance. It rather appears in the notion of a colourable/artificial device. Hence, the Tribunal just replicated the approach of Indian jurisprudence in tax avoid- ance cases in that regard. Nevertheless, it is noteworthy that the contradiction test is considered by tax scholars as by far the most important element of the identification of abusive tax avoidance. It is also revealed in tax literature that the absence of a contradiction test in anti-tax avoidance measures clearly works in favour of tax authorities. The tax authorities applying such rules may have the temptation to replace their own personal judgment about what is good and bad, per- mitted or prohibited, without really making a reasonable effort to interpret the legislation or tax treaty being applied. As commented, the objective element [i.e., the contradiction test] of (some) GAARs and the PPT works as a guarantee to the taxpayer. (text in the square brackets added) Even if the contradiction test could be ipso facto decoded from the economic substance test or the notion of a colourable/artificial device, its absence in anti-tax avoidance measures will clearly work in favour of tax authorities. Legally, they will not be required to establish that an obtainment of tax benefit was contrary to relevant tax provisions. As a result, the taxpayers will lose a guarantee that they can effectively obtain tax benefits as long as this is in line with the language, object, and purpose of relevant tax provisions. This seems to imply that the Indian tax avoidance’s doctrine worked more favourably for the Respondent than for the Claimants, by its very nature providing them less legal certainty than anti-tax avoidance measures with the contradiction test. Although the Tribunal did not appear to acknowledge that, its examination of the Respondent’s tax avoidance defence was anyway saturated with a cautiousness, including the following preliminary points: (i) ‘there can be no tax avoidance without a tax that is being avoided’; (ii) the Respondent’s tax avoidance This may be contrasted with the case law of the CJEU in which, from Emsland-Stärke GmbH v. Hauptzollamt Hamburg- Jonas, 2000 E.C.R . I-11569, a finding of abusive tax avoidance is based on a two-pronged test. The test ‘requires, first, a combi - nation of objective circumstances in which, despite formal observance of the conditions laid down by the Community rules, the purpose of those rules has not been achieved. It requires, second, a subjective element consisting of the intention to obtain an advantage from the Community rules by creating artificially the conditions laid down for obtaining it’ (paras 52–53). This test turns out to be the role model for determining abuse in the EU. It became useful for that purpose across all areas of the CJEU’s juridical purview and was integrated into several anti-abuse rules in EU secondary law which partly harmonizes the area of tax - ation. Alfredo Garcia Prats and others, EU Report: Anti-avoidance measures of general nature and scope – G. A. A.R . and other rules (2018) 103A IFA Cashiers 8. With regard to the second prong of the PPT see Wolfgang Schön, ‘The Role of “Commercial Reasons” and “Economic Reality” in the Principal Purpose Test under Article 29(9) of the 2017 OECD Model’ in Pasquale Pistone (ed), Building Global International Tax Law: Essays in Honour of Guglielmo Maisto (IBFD 2022) sec. 12.1 and 12.2.1. With regard to the second prong of the Canadian general anti-avoidance rule (GAAR) and the PPT see Michael N. Kandev and John J. Lennard, ‘Treaty Shopping in Canada ae ft r Alta Energy Luxembourg (2021): A Closed Door without a Lock Bulletin for International Taxation’ (2022) 76 Bulletin for International Taxation sec. 5.3 in fine . Indeed, the tax scholarship analysing case law on domestic GAARs in an international tax context—judicial and admin- istrative decisions in 2021 in several countries on ‘treaty shopping cases’, that is, Canada: Alta ; Trinidad and Tobago: Methanex; Argentina: Molinos; and Spain: a decision of the GAAR committee in Spain—reveals a common risk for taxpayers in anti-tax avoidance measures based on ‘economic substance’ without the contradiction test (ie essentially focussing on ‘artificiality ’ exclu- sively). Adolfo Martín Jiménez, Is There an International Minimum Standard on Tax Treaty Shopping after BEPS Action 6? Some Recent Divergent Trends, World Tax Journal 3 (2022), sec. 3.4.3. Martín Jiménez (n 118) sec. 3.4.3. a Th t is, these tests are intertwined in a factual way so that the more artificial an arrangement or transaction is, the more likely that an obtainment of tax benefit from them is contrary to relevant tax provisions. Błażej Kuźniacki, ‘The GAAR (Article 6 ATAD)’, in Werner Haslehner and others (eds), A Guide to the Anti-Tax Avoidance Directive (Edward Elgar Publishing 2020) 171. The Tribunal seems to entirely separate the examination of the 2006 Transactions under the Indian substance over form doctrine from the question of whether they were taxable under Section 9(1)(i) prior to the 2012 Amendment because, following the Vodafone case, it was apparent to the Tribunal that OITs were not taxable in India at the time. Cairn (1) paras 1427–1428. This preliminary point seems to be heavily influenced by the 2nd Expert Witness Report of Richard Gardiner (23 June 2017) para 23: ‘To establish that something constitutes tax avoidance you have to identify the tax that has been supposedly avoided so that the Revenue authorities can counteract that avoidance and impose that tax. No such analysis is conducted in the Statement of Defence and Annex B. And if conducted it inexorably follows that there has been no tax here which had been avoided’. 144 • Cairn Energy appears to be speculative to a considerable extent and suffered from the lack of any concrete and actual determination of tax avoidance, making the entire process of determination of abusive tax avoidance full of frailties ; (iii) the burden of proving abusive tax avoidance was clearly on the Indian tax authorities. Last but not least, it is revealing to read the conclusion of the Tribunal about the far-reaching retroactivity of the 2012 Amendment (in para 1253) together with the observation that the specific and compelling public policy justification for the retroactive change in tax law must reflect ‘the degree to which retroactivity upsets legal certainty’ (in para 1790). Such reading reveals that to persuade the Tribunal that the retroactive taxation of the CIHL Acquisition did not violate the FET standard, the Respondent would have to unequivocally prove two facts: (i) the 2006 Transaction constituted blatantly abusive tax avoidance clearly targeted by the Indian anti-tax avoidance doctrine and (ii) if such doctrine would be applied to that transaction, the tax burden would be equivalent to that under the 2012 Amendment. Alternatively, the Respondent would have to prove that the 2012 Amendment’s scope covered only blatantly abusive tax avoid- ance transactions with the aim to prevent their existence and its retroactive application could have been foreseeable by the Claimants. Otherwise, the far-reaching frustration of the principle of legal certainty by the taxation based on the 2012 Amendment and thus the violation of the FET standard could not be justified. Dominant purpose test and colourable/artificial device test as building blocks of the Indian substance over form doctrine The Tribunal thoroughly analysed the Indian case law from 1960 to 2016. During that period, the pendulum of judicial interpretation swung from strict literal interpretation of the tax laws following the Westminster doctrine to departure from that doctrine in 1980’s and later on in 126 127 favour of a step transaction approach as a subset of the substance over form doctrine to partly swing back in the late 1990’s and early 2000’s to the Westminster doctrine/literal interpre- tation. Finally, the Indian case law endorsed the substance over form approach with a focus on a ‘colourable or artificial device’ solely or dominantly used for tax avoidance purposes. From this voluminous package of Indian case law, the Tribunal eventually appears to be mostly Cairn (n 1) para 1436. Ibid 1437–1438. While the procedural issues regarding the burden of proof under anti-tax abusive measures are not necessarily identical internationally, the point made by the Tribunal was largely consistent with most of them. Indeed, the tax authorities are always obliged to first gather evidence, on the basis of relevant facts and circumstances, to determine whether the transaction in question constitute abusive tax avoidance under given anti-tax abusive measures. The taxpayers, then, may always submit the counterevidence. The courts will evaluate all the relevant evidence under the standard of proof, which is a balance of probabilities. Giuseppe Marino, ‘The Burden of Proof in Cross-Border Situations (International Tax Law)’ sec. 4.1 and Klaus- Dieter Drüen and Daniel Drissen, ‘Burden of Proof and Anti-Abuse Provisions’, sec. 2.1.2 in Gerard Meussen (ed), The Burden of Proof in Tax Law (IBFD 2013). Cairn (n 1) paras 1301–1423. a Th t is, ‘every man is entitled if he can to order his affairs so that the tax attracting under the appropriate Acts is less than it otherwise would be’ as propounded by Lord Tomlin in The Commissioners of Inland Revenue v. Duke of Westminster, [1935] A C, 1; All ER 259, (H.L.). This doctrine was followed by, for example, Commissioner of Income Tax, Gujarat v. A. Raman & Company, [1968] 67 ITR 11 (SC); Commissioner of Income Tax v. M/s B.M. Kharwar, AIR 1969 SC 812. The departure from the Westminster doctrine was completed by the Supreme Court in the case of McDowell & Co. Ltd v. CTO [1985] 154 ITR 148 (SC), in which the Court stated that ‘the time has come for us to depart from the Westminster princ- i ple as emphatically as the British courts have done’. The step-transactions doctrine permitted the tax authorities or the courts to disregard purely tax-motivated transactions inserted into a preordained series of transactions. For the relevant British case law to that effect see W. T. Ramsay Ltd. v. Internal Revenue Commissioners, [1981] 1 All E. R .865 (H.L.); Inland Revenue v. Burmah Oil, [1981] T.R . 535 (H.L.); Furniss (Inspector of Taxes) v. Dawson, [1984] All E.R . 530 (H.L.). a Th t is, ‘regard must be had to substance and not the form of a transaction’, see Calcua C tt hromotype v. Collector of Central Excise, AIR 1998 SC 1631, para 13. Mathuram Agrawal v. State of Madhya Pradesh, (1999) 8 Supreme Court Cases 667 para 12. Twinstar Holdings Ltd. v. Anand Kedia, 2003 (2) BomCR 56; Aditya Biria Nuvo Limited and others v. Deputy Director of Income Tax and others, MANU/MH/0884/2011, para 96; Vodafone (n 18) para 68; State of Rajahthan and others v Gotan Lime Stone Khanji Udyog Pvt. Ltd. and Another, CIVIL APPEAL No. 434 OF 2016, para 30. Cairn Energy • 145 influenced by the Supreme Court of India’s judgment in the Vodafone case, thereby accepting (albeit not with full conviction) the dominant purpose test with importance of a colourable/ artificial device to determine abusive tax avoidance. The Tribunal also gave a considerable weight to the findings of the Supreme Court of India in the Vodafone case from which follows that: (i) tax planning, that is, reducing tax liability within the framework of law, is legitimate and permissible under Indian tax law, and (ii) the distinction between acceptable tax planning and abusive tax avoidance is to be based on the Indian version of the substance over form jud-i cial doctrine. This doctrine is prima facie based on two intertwined tests: (i) the dominant purpose test and (ii) the artificiality test. These tests influence each other in the way that the dominant non-tax business purpose of a transaction implies the lack of artificiality (existence of economic substance) of that transaction, or, at least, it means that the transaction is not abu- sive since the business purpose outweighs the artificiality. Accordingly, when it occurs that the transaction is artificial to some degree, then the mere existence of a business purpose may not be enough to dispel the abusive tax avoidance. To this end, such purpose must outweigh the artificiality, the determination of which requires a balancing act to be exercised by undertak - ing a holistic analysis of the entire investment rather than only a single transaction. In practice, this balancing act is extremely difficult, because the line between non-abusive and abusive tax avoidance is often blurred, fluid, and highly circumstantial. The fluctuating Indian case law in tax avoidance cases reflects this observation. Striking a proper balance requires the skill of a ‘judicial ballerina’ in tax cases. In light of the above observations, it is also noteworthy that the balancing act stemming from the interplay between the dominant purpose test and the artificiality test is methodologically similar to the way the EU General Anti-Avoidance Rule (GAAR) and the OECD’s Principal Purpose Test (PPT) operate. That is to say, a proper application of these rules under both prongs—the main purpose test/one of the principal purposes test and the contradiction test—requires taking into account the existence of non-tax business purposes and economic substance, although only the GAAR contains such requirements in its wording under the non-genuine arrangement criterion. By analogy, one may say that although the Indian sub- stance over form doctrine does not refer to the contradiction test (the second prong) explicitly, such a test is to a large extent implicit in that doctrine by means of the balancing act under the dominant purpose test and the artificiality test. In other words, once the transaction in question meets requirements for abusive tax avoidance pursuant to the Indian substance over form doc - trine, presumably this transaction contradicts the purpose of some provisions under the ITA. The stronger the evidence of the transaction’s artificiality and dominant tax avoidance purpose, the stronger the presumption of its contradiction with the relevant tax provisions. a Th t is, ‘although the Tribunal is not fully convinced that the “dominant purpose” test which the Respondent has sought to impress upon it is what has emerged from Vodafone (in that on one reading of the Chief Justice’s reasons it might be said that a colourable device is required to demonstrate tax avoidance), the Tribunal has opted to accept the dominant purpose test as being the applicable one’. Cairn (n 1) para 1424. Ibid paras 1422, 1476–1481. Vodafone (n 18) para. 68, as quoted or referred to by the Tribunal in Cairn paras 1404–1405, 1424. a Th t is, Article 6 of the Council Directive (EU) 2016/1164 of 12 July 2016 Laying Down Rules against Tax Avoidance Practices that Directly Affect the Functioning of the Internal Market (ATAD), OJ L 193/1 (19 July 2016) and Article 29(9) of the OECD Model Convention (2017), respectively. Article 6(1)-(2) of the ATAD. See also Schön (n 117) 2–4, 20; Kuźniacki (n 120)157. In the Cairn case, presumably, the contradiction would have to be proven in respect of Section 9(1)(i) of the ITA by means of evidence according to which the predominant purpose of the 2006 Transaction was to circumvent the scope of Section 9(1)(i) of the ITA in an artificial way. A transaction may contradict the object and purpose of relevant tax provisions (the second prong) either by (i) circumventing the scope of provisions that create a burden for the taxpayer (eg rules which subject the taxpayer’s income to taxation and anti-abuse rules, in particular SAARs) in an artificial way or by (ii) artificially exploiting the provisions that are favourable to the taxpayer (eg tax relief, tax exemptions). The former will normally have the object and purpose to increase or protect (maintain) revenue while the lae tt r is to make exceptions from it by various reasons, for example, to boost business in certain sectors or geographical regions. Cf. Zimmer (n 103) sec. 7. 146 • Cairn Energy e T Th ribunal’s approach regarding the mechanism and consequences of the substance over form doctrine The application of the substance over form doctrine and its derivatives under various GAARs can only lead to taxation based on recharacterized facts as derived from the economic substance of the transactions instead of their legal form. This taxation, however, does not follow from the application of the substance over form doctrine alone, but from the result of its successful application in conjunction with the relevant tax provisions that cover the recharacterized facts. Ultimately, taxation with reference to recharacterized facts depends on terms of the relevant tax provisions. This effect of the application of the substance over form doctrine, or any other general anti-tax abusive measure, is inherent in the logic of tax law and works irrespective of its explicit articulation in the wording of the anti-abuse rule or doctrine. Fundamentally, the above effect of application of the substance over form doctrine may be derived from the principle of ‘no taxation without representation’, as arising out of the rule of law in the area of taxation under constitutional laws of democratic countries, including Article 265 of the Constitution of India: ‘No tax shall be levied or collected except by authority of law ’. Consequently, apart from the fact that the substance over form doctrine was not part of Indian statutory tax law in 2006, this doctrine could not be an exclusive legal basis for taxation in India, since there is nothing in its wording (its case law ’s construction) that set parameters for taxation (no tax subject, no tax object, no tax rate). It merely permits looking at economic sub- stance instead of legal form for taxation purposes if the criteria for its application are met, which must be established by the tax authorities and/or accepted by the courts on a case-by-case basis. The relevant tax provisions are needed to tax transactions based on their economic substance rather than legal form. The lack of tax provisions that allow levying tax on the substance of a transaction instead of its form means that the transaction is not taxable. This can be also read from the Vodafone judgment. The Court said that Frederik Zimmer, General Report: Form and Substance in Tax Law (2002) 87a Cahiers de droit fiscal international 24-25; Zimmer (n 103) secs. 6, 7, 11; Carlos Palao Taboada, ‘OECD Base Erosion and Profit Shifting Action 6: The General Anti-Abuse Rule’ (2015) 69 Bulletin for International Taxation 605. Whereas Article 6(3) of the ATAD (EU GAAR) uses language to this end (‘Where arrangements or a series thereof are ignored in accordance with paragraph 1, the tax liability shall be calculated in accordance with national law), Article 29(9) of the 2017 OECD MTC (the PPT) is silent on it. However, in respect of these general antiavoidance rules the tax consequences should be drawn from relevant tax provisions based on the facts and circumstances that would appear in the absence of abusive tax avoidance, that is, on the basis of the existence of economic substance and/or valid commercial reasons sufficient to let the redefined arrangement or a series of abusive arrangements be considered compatible with the object and purpose of tax law. Zimmer (n 103) secs. 6, 7, 11; Taboada (n 136) 605.; Kuźniacki (n 120) 169. With respect to the PPT, see Błażej Kuźniacki, ‘The Principal Purpose Test (PPT) in BEPS Action 6/MLI: Exploring Challenges arising from its Legal Implementation and Practical Application’ (2018) 10 World Tax Journal 274–275; Andrés Báez Moreno and Juan José Zornoza Pérez, ‘The General Anti-abuse Rule Anti-tax Avoidance Directive’ in Almudí Cid and others (eds), Combating Tax Avoidance in the EU: Harmonization and Cooperation in Direct Taxation (Kluwer Law International 2019) 134; Philip Baker, ‘The BEPS Action Plan in the Light of EU Law: Treaty Abuse’ (2015) British Tax Review 408, 414; Robert Danon and others, ‘The Prohibition of Abuse of Rights Ae ft r the ECJ Danish Cases’ (2021) 49 Intertax 499. Cf. the CJEU, C-255/02 Halifax and Others (21 February 2006) Judgment, para 98. Johann Hattingh, ‘The Multilateral Instrument from a Legal Perspective: W hat May Be the Challenges?’ (2017) 71 Bulletin for International Taxation sec. 2 with reference to the late Lord Bingham’s articulation of the tenants of the rule of law as depicted in Tom H. Bingham, The Rule of Law (Allen Lane 2010). Cape Brandy Syndicate v. IRC (1921) 1 KB 64, P. 71 (Rowlatt, J.). See Vodafone (n 18) para 169. Also quoted by the Tribunal. Cairn (n 1) para 1225. Cf. CIT v. Ramal Ammal [1982] 135 ITR 292 (7 March 1981) Judgment: ‘The Tribunal cannot tax on the basis of sub - stance; neither can it let off an assessee from tax on the same basis’. See also S.R . Wadhwa and P.K. Sahu, ‘Branch Reporters’ in Form and Substance in Tax Law (2002) 87a Cahiers de droit fiscal international 353. Cairn Energy • 147 there should be a pre-ordained series of transactions and there should be steps inserted that have no commercial purpose and the inserted steps are to be disregarded for fiscal purpose and, in such situations, Court must then look at the end result, precisely how the end result will be taxed will depend on terms of the taxing statute sought to be applied. (emphasis added by us) Although this observation was explicitly made by the Court in respect of the principle of fiscal nullity, it remains relevant to the analysis of the substance over form doctrine insofar as the Respondent ae tt mpted to disregard the 2006 Transactions and the resulting holding structure. It shows that the substance over form doctrine could not constitute a self-standing legal basis for determining the taxation of the 2006 Transactions. Following that suit, the Tribunal stated that indirect transfers under Section 9(1)(i) of the ITA were not taxable in 2006. In that regard, the Tribunal also stated that the significant appreciation in value of oil and gas assets situated in India from 1996 to 2006 and indirectly owned by Cairn Energy ‘did not attract cap - ital gains tax in India’ because at the time the indirect ownership of such assets by non-resident companies was outside the Indian tax net. Thus, in a sense, the die was cast: the Tribunal pointed to the impossibility of taxation of the appreciation in value of the Indian oil and gas assets indirectly owned by Cairn Energy. Inadequacy of the substance over form doctrine to permit taxation of the CIHL Acquisition under the 2012 Amendment and the need for the extension of source state taxation to that effect The analysis of the Tribunal’s examination of the Indian substance over form doctrine shows that this doctrine was not suitable to permit taxation of the 2006 Transactions under the 2012 Amendment; in particular it could never lead to the same effective taxation as per the FAO. To this end, all of Cairn Energy’s 27 subsidiaries had to be disregarded and the transactions that actually took place had to be replaced with transactions that never took place, that is, the indirect offshore transfer of shares in the companies holding PSCs related to the Indian gas and oil assets by CUHL to CIL had to be replaced with the direct sale of the Indian gas and oil assets by CUHL to CIL. This would require proving that all the 2006 Transactions and all the Cairn Energy subsidiaries involved in these transactions were artificially designed to predomi - nantly avoid capital gains tax in India. As a result, Section 9(1)(i) of the ITA would be abused by Cairn Energy, that is, its scope would be artificially circumvented predominantly for purposes of avoidance of taxation under these provisions. Therefore, the tax could be imposed by the Indian tax authorities on the recharacterized facts, as if the Indian gas and oil assets had been directly sold by CUHL to CIL. Such far reaching recharacterization of facts was impossible under the Indian substance over form doctrine in the given circumstances. Also, in general, from a tax policy perspective it makes much more sense to tax OITs by extending the scope of domestic provisions regulating taxation at the source than trying to design and apply general or even specific anti-tax avoidance measures to this effect. Carefully designed provisions would provide that the gain in question will be taxed as a mae tt r of principle Vodafone (n 18) para 126 with reference to the words of Lord Brightman in the seminal English case Furniss (Inspector of st Taxes) v. Dawson, [1984] All E.R . 530 (H.L.). See also Gardiner’s 1 Expert Witness Report (n 55) in para 47: ‘I have underlined the critical passage quoted by K . S. Radhakrishnan, J. from Lord Brightman’s opinion above in Furniss v Dawson: if you consider there is a case for disregarding steps you then have to look at the end result to see what (if anything) is taxed. It is only where disregarding steps that you arrive at a taxable result that the concept applies. If you do not arrive at a taxable result then there is no room for the application of the principle’. Cf. Cairn (n 1) para 1291b. Cairn (n 1) para 1449. Ibid 1453. 148 • Cairn Energy on the basis of a substantive right to tax in the source state. This legislative approach would ensure certainty and predictability of tax consequences not only for investors but also for tax authorities. Anti-tax avoidance measures, in turn, are often inherently deprived of these virtues, as they are typically less rule-based and more discretionary in their application, which make them difficult to apply by the tax authorities in an even handed and predictable way. It is, therefore, of no surprise that international organizations in a high level tax policy document recommended addressing the issues with taxation of OITs by domestic provisions that precisely catch such transactions into the net of source taxation. As a mae tt r of fact, this solution was implemented in India by deeming OITs as disposals of the underlying assets under Section 9(1)(i) of the ITA five years before release of the mentioned high level tax policy document. However, it was implemented with a retroactive effect, which put that legislative amendment at odds with legislative standards recommended by international organisations and governed by legal principles. It also constituted a red flag arising from the fiscal conduct of India (host state) viewed against the most frequently invoked investment protection standard (FET). Triumph of form over substance and strict adherence to literal interpretation and legal principles In addition to the reason mentioned in the previous section, the Respondent’s tax avoidance defence largely based on the substance over form doctrine and tax policy considerations was simply doomed to failure because of the legal methodology applied by the Tribunal to assess that defence. This methodology consisted of two intertwined elements: (i) the legal form tri - umphed over economic substance and (ii) the analysis strictly adhered to literal interpretation and the principle of legal certainty. The Tribunal candidly underscored the triumph of legal form over substance and the rele- vance of legal principles instead of policy views in the following words: As for the ‘Cairn paid no capital gains tax anywhere in the world’ line of argument, this, in the Tribunal’s view, really goes to maer tt s of tax policy, not law, which are maer tt s for legislators, not the Tribunal. The Tribunal must decide on the basis of the law, irrespective of what its mem- bers’ views may be as to the overall fairness of the transaction from a policy perspective. In the end, Cairn and its advisors spent considerable effort and no doubt money devising a creative structure that met the company’s commercial objectives. If some aspects of the structure seem to be a triumph of form over substance, it is because corporations law aa tt ches much significance to maer tt s of form. (emphasis added by us) IMF, OECD, UN, and WBG (n 17) 37. Christophe Waerzeggers and Cory Hillier, ‘Introducing a General Anti-avoidance Rule (GAAR)—Ensuring that a GAAR Achieves its Purpose’ (2016) Tax Law IMF Technical Note 1. a Th t is, either by treating OITs as deemed disposals of the underlying assets (Model 1) or as treating the transfer as being made by the actual seller, offshore, but sourcing the gain on that transfer within the location country and so enabling that country to tax it. IMF, OECD, UN, and WBG (n 17) 7. For example, Model 1 mentioned in the note immediately above. a Th t is, ‘unless there are strong reasons to do otherwise, either model should only be implemented on a prospective (and not retroactive) basis (eg to transactions taking place ae ft r the change is announced, as opposed to applying to tax years before the announced change), and appropriate transitional arrangements could also be considered (such as deeming the market value cost base of relevant assets to be that at the time of commencement of the new taxing model)’. IMF, OECD, UN, and WBG (n 17) 38. See above The Tribunal’s approach regarding the mechanism and consequences of the substance over form doctrine and the Lesson to tax and investment policy makers: avoiding red flags in fiscal conduct sections. Cairn (n 1) para 1588. Cairn Energy • 149 This finding did not mean that the Tribunal was inclined to protect formally compliant but substan- tially abusive transactions. This meant, as read in the context of the Tribunal’s entire analysis, that blending important non-tax commercial/regulatory reasons with tax reasons amounted to legit-i mate tax planning rather than abusive tax avoidance, even if the outcome of such planning led to no taxation of given transactions at all anywhere in the world. This was relevant in the context of the 2006 Transactions, since (i) they involved 16 subsidiaries that were puppets of their parent company (Cairn Energy), (ii) the existence of intermediary holding companies newly incorporated to realize these transactions was commercially questionable (CUHL seemed redundant and CIHL appeared to serve tax avoidance purposes), and finally (iii) the pivotal element of these transactions relied on round tripping funds between the UK and India. Seeing these elements of the 2006 Transactions in isolation from the entire holding structure of Cairn Energy could cast doubts under the substance over form doctrine. However, such a dissecting approach to the determination of abusive tax avoid - ance would be incorrect. As emphasized by the Supreme Court of India in Vodafone, ‘every strategic foreign direct investment coming to India, as an investment destination, should be seen in a holistic manner’. This is exactly how the Tribunal assessed the 2006 Transactions: within the fabric of Cairn Energy’s entire strategic investment in India. Moreover, even if the mentioned doubtful elements of the 2006 Transactions were disregarded for tax purposes (ie a look through approach in conjunction with recharacterization of facts), the Indian capital gains tax on them would not be triggered. This furthermore strengthened the thesis about the lack of abusive tax avoidance and the inadequacy of the substance over form doctrine as a legal means leading to tax these transactions. They could and should be taxed rather by means of the substantive rule on taxation of income from OITs at source, just as the Indian legislature decided to do so in 2012. However, it was done with far-reaching retro - active effect instead of prospective or at least immediate (doctrinally retrospective) effect. It seems that the Tribunal’s hesitation to accept the Respondent’s tax avoidance defence fo-l lowed from adherence to literal interpretation and the principle of legal certainty. Adherence to literal interpretation is common for arbitral tribunals and should probably be seen as embodying contextual and purposive interpretation in accordance with Article 31(1) of the VCLT. This approach de jure implies that the ordinary meaning of words is a functional vehicle of the common intention of the parties in good faith and in their context and in light of object and purpose of the international treaty. Arbitral tribunals have regularly based their Cf. Martín Jiménez (n 96) sec. 3.4: ‘in Cairn, the tribunal derived the specific anti-avoidance standard from domestic case law in India to recognize the right of the taxpayer to plan its affairs in order to pay the least taxes possible. This led the tribunal to protect step transactions even where there were signs of certain artificiality (round tripping transactions, holdings without substance, etc.) in a decision more inclined to respect the form of the transactions than to look at their economic and tax effects’. Vodafone (n 18) para 68: ‘It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach’. Ibid. If we compare transactions with and without allegedly artificial elements and the result would be the same, that is, no taxation in a given country from the perspective of which abusive tax avoidance is examined, the artificiality cannot be a factor deciding about the abusive tax avoidance. For that to happen, the comparative analysis must lead to a conclusion that the tax could not be avoided without the existence of the artificial elements of the transactions. Cf. Halifax (n 137) para 90; Danon and others (n 137) 499. See also the CJEU, C 115/16, C 118/16, C 119/16, and C 299/16 N Luxembourg 1 and Others (26 February 2019) Judgment, para. 137. See above the Dominant purpose test and colourable/artificial device test as building blocks of the Indian substance over form doctrine section. ILC, ‘Draft Articles on the Law of Treaties with Commentaries 1966’ (1966) II Yearbook of the International Law Commission 1966 §§ 6, 11 at 219, 221; Ian Sinclair, The Vienna Convention on the Law of Treaties (1984 Manchester University Press 1984) 118; Frank Engelen, Interpretation of Tax Treaties under International Law (IBFD 2005) 172–185. In a broader sense, that is, in relation to legal interpretation in general, Marcin Matczak aptly pointed out that ‘[l]inguistic terms have a function, which is to pick up relevant features from reality. We use linguistic terms for the purpose of signalling that those features occur. No approach to interpretation that aspires to be an effective tool of decoding ordinary meaning can neglect those functional and purposive aspects of language’. Marcin Matczak, ‘ W hy Judicial Formalism is Incompatible with the Rule of Law ’ (2018) 31 Canadian Journal of Law & Jurisprudence 74. See also Aaron Barak, Purposive Interpretation in Law (2005) Princeton University Press 26; Fish, Stanley, There Is No Textualist Position (2005) 42 San Diego Law Review 629. 150 • Cairn Energy reasoning on the ‘ordinary meaning’ approach to distinguish legitimate treaty shopping from abusive ones under IIAs. Accordingly, their jurisprudence is on balance permissive towards strategic interposition of special purpose entities predominantly or solely to benefit from the most favourable IIA with the host state, unless such interposition took place ae ft r the dispute with respect to the investment had arisen or was already foreseeable (the abuse of rights/abuse of process doctrine). Such an interpretative approach forges strong armour that protects for- mally compliant structures and burdens states to manoeuvre around it by proving the investors’ abusive behaviour. Although the Cairn Tribunal dealt with the question of abusive tax avoidance under Indian law rather than with abuse of rights under the UK–India BIT, perhaps the common approach to interpretation by arbitral tribunals had an impact on the Tribunal’s reasoning and conclusions in the case. Such reasoning deviates to some extent from the reasoning of courts in tax cases in many jurisdictions in which economic substance and substance over form doctrines may prevail over a literal interpretation in order to prevent tax avoidance. However, the Tribunal’s inter- pretative methodology was in line with the approach to linguistic interpretation following from the canon of interpretation of tax law in accordance with the constitutional principles in many jurisdictions, including the Indian tax jurisprudence of the Supreme Court, Constitutional Court, and High Courts. As noted by the Indian Constitutional Court in Muthuram Agrawal: It is not the economic results sought to be obtained by making the provision which is relevant in interpreting a fiscal statute. Equally impermissible is an interpretation which does not follow o fr m the plain, unambiguous language of the statute. Words cannot be added to or substituted so as to give a meaning to the statute which will serve the spirit and intention of the legislature. e s Th tatute should clearly and unambiguously convey the three components of the tax law, that is, the subject of the tax, the person who is liable to pay the tax and the rate at which the taxes to be paid. (emphasis added by us) Jorun Baumgartner, Treaty Shopping in International Investment Law (OUP 2016) 284. Ibid sec. 4.3; Anil Vastardis, The Nationality of Corporate Investors under International Investment Law (Oxford: Bloomsbury Publishing 2021) chapter 7. For example, Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12, Award on Jurisdiction and Admissibility (17 December 2015) para 588. Arbitral tribunals have conferred the protection under IIAs on foreign investors even in respect of allegedly artificial round tripping structures designed predominantly or solely to benefit from IIAs. g. Tokios Tokelės v. Ukraine, ICSID Rules, ICSID Case No. ARB/02/18, Majority Decision on Jurisdiction (29 April 2004) para 36 (Dissenting: Prosper Weil, Presiding); Yukos (n 11) paras 1368–1370. It is noteworthy, however, that in Yukos case the treaty shopping was tantamount to a sham/abusive practice under the Russian DA w TT ith Cyprus, according to two expert-witnesses of the Respondent (Stef van Weeghel and David Rosenbloom). The Yukos Tribunal appeared to agree with them. This finding supported a significant (25 per cent) reduction in the damages awarded to the Claimant under the ‘contrib - utory fault doctrine’. Ibid paras 1594, 1615–1621, 1637. Only in a few cases, tribunals have denied access to IIAs to entirely or almost entirely sham/empty structures/companies while examining the application of denial of benefits (DoBs) clauses with a substantial business activity criterion. Alps Finance and Trade AG v. The Slovak Republic, UNCITRAL, Award (5 March 2011) para 217; Pac Rim Cayman LLC v. Republic of El Salvador, ICSID Rules, ICSID Case No. ARB/09/12, Decision on the Respondent’s Jurisdictional Objections (1 June 2012) paras 4.63–4.78; Guaracachi America, Inc. and Rurelec PLC v. The Plurinational State of Bolivia, UNCITRAL, PCA Case No. 2011-17, Award (31 January 2014) paras 370–384. In cases regarding DoBs under the Energy Charter Treaty (ECT) (opened for signature on 17 December 1994, entered into force on 16 April 1998), tribunals have appeared to require very little substance for the entity to pass muster under the substantial business activity criterion, accepting anything more than sham/zero substance at the level of tested company. Limited Liability Company Amto v. Ukraine, SCC Rules, SCC Case No. 080/2005, Award (26 March 2008) para 69; Masdar Solar & Wind Cooperatief U. A. v. Kingdom of Spain, ICSID Rules, ICSID Case No. ARB/14/1, Award (16 May 2018) paras 206. Cf. Martín Jiménez (n. 96) sec. 4 and 5; Zimmer (n 136) 19–67. a Th t is, the principles of legal certainty and predictability. Błażej Kuźniacki, Beneficial Ownership in International Taxation (Elgar Edward Publishing 2022) sec. 2.II. Mathuram Agrawal (n 128) para 12, cited in Union of India v Azadi Bachao Andolan [2003] 10 SCC 1 para 158. Also cited in Cairn (n 1) para 1382. Cairn Energy • 151 Since adherence to literal interpretation was supported by Indian constitutional law and its judi - cial application in tax cases, the Tribunal’s interpretative approach was commendable. In par - ticular, its application rightly led to the conclusion that the 2006 Transactions might not have been taxed under the Indian substance over form doctrine, which, incidentally, did not include the basic components of the tax law. Thus, as we discussed in the ‘Inadequacy of the substance over form doctrine to permit taxation of the CIHL Acquisition under the 2012 Amendment and the need for the extension of source state taxation to that effect’ section, this doctrine could not constitute a standalone and sufficient legal basis for taxation of the 2006 Transactions before entry into force of the 2012 Amendment. The Tribunal’s reasoning in the assessment of the Respondent’s tax avoidance defence appears to be also considerably guided by the principle of legal certainty even though it was explicitly applied at the later stage of the analysis; that concerning the FET standard and the justification for the retroactive taxation. Notably, the Tribunal observed that ‘the principle of legal certainty (and its corollaries, stability and predictability) provides significant guidance when determining whether retroactive taxation is compatible with the FET standard provided at Article 3(2) of the BIT’. The Tribunal’s protection of the form of legal transactions for legit - imate tax planning purposes seems to be facilitated by the principle of legal certainty. Indeed, a deviation from clearly defined legal form in favour of broad and blurred economic substance creates tension with taxpayers’ legitimate expectations in respect of tax consequences stem- ming from their investments. Retroactive taxation without a specific and adequate justification in public policy is an extreme example of frustration of the principle of legal certainty. In that regard, the Tribunal’s interpretative approach resembles that of the Supreme Court of Canada (SCC) in a recent judgment in Alta Energy. Its opening statement of the majority of judges is worth quoting: The principles of predictability, certainty, and fairness and respect for the right of taxpayers to legitimate tax minimization are the bedrock of tax law. In the context of international tax treaties, respect for negotiated bargains between contracting states is fundamental to ensure tax certainty and predictability and to uphold the principle of pacta sunt servanda, pursuant to which parties to a treaty must keep their sides of the bargain. The Tribunal’s approach, mutatis mutandis , could be equated with that of the SCC’s majority of judges. Cairn (n 1) para 1757. In our view, it was also an exemplification of a balanced interpretation, which takes ‘into account both the State’s sover - eignty and the State’s responsibility to create an adapted and evolutionary framework for the development of economic activ- ities and the necessity to protect foreign investment and its continuing flow’. El Paso Energy International Company v Argentine Republic, ICSID Case No ARB/03/15, Decision on Jurisdiction (27 April 2006) para 70; and BP America Production Company and others v Argentine Republic, ICSID Case No ARB/04/8, Decision on Preliminary Objections (27 July 2006) para 99. Brigitte Stern, ‘Investment Arbitration and State Sovereignty’ (2020) 35 ICSID Rev–FILJ 448. Cf. Cairn (n 1) para 1789: ‘the Tribunal will carry out a balancing exercise between India’s public policy objectives, on the one hand, and the Claimants’ interest in bene- fitting from the values of legal certainty and predictability, on the other’. Supreme Court of Canada, Canada v. Alta Energ y Luxembourg SARL (2021 SCC 49) para 1. See diverging opinions on that judgment in: Brian Arnold, ‘Supreme Court Decides Alta Energy Luxembourg for the Taxpayer’ The Arnold Report n. 219/2021 (2021) Canadian Tax Foundation; Scott Wilkie, ‘The Taxpayer is Successful Today at the Supreme Court in the Important Alta Energy “Treaty Shopping” Case – Updated’ (26 November 2021), <https://tax.osgoode.yorku.ca/2021/11/the-taxpayer-is- successful-tody-at-the-supreme-court-in-the-important-alta-energy-treaty-shopping-case/>, accessed 2 April 2022. Although the Alta Energy case referred to a different context than the Cairn case, the application of the DA be TT tween Luxembourg and Canada and the possibility to deny benefits under that DTAA via the Canadian GAAR , its outcome and the reasoning of the SCC are informative to the current analysis. Alta Energ y (n 165) para 1. Cf. Martín Jiménez (n 96) sec. 3.4. 152 • Cairn Energy Examining the prevention of abusive tax avoidance as a specific public policy justification for the retroactive taxation The major specific justification examined by the Tribunal was the prevention of tax abuse (abusive tax avoidance). The Tribunal did not have an uphill battle in concluding that the 2012 Amendment and its application failed to be justified by the prevention of abusive tax avoidance. No systemic abusive tax avoidance via OITs was identified before 2012. Even if that phenomenon had existed back then, the substance over form doctrine was considered as a general tool to prevent abusive tax avoidance in India. Also, the 2012 Transactions did not constitute abusive tax avoidance in the Tribunal’s view and yet the 2012 Amendment targeted them. All this demonstrated that the 2012 Amendment neither was suitable nor necessary to combat a systemic abusive tax avoidance. Its policy justification was the expansion of the source rule and increase of the revenue from taxation of OITs transferring assets with a significant con- nection with India. Such policy justification was valid for prospective but not for retroactive legislation. Most importantly, the methodology of the 2012 Amendment was not consistent with the prevention of abusive tax avoidance, since Explanations 4 and 5 targeted all OITs trans - ferring assets situated in India, irrespective of their abusive nature. The Tribunal’s observations were apt. The 2012 Amendment could not be justified by the need for the prevention of abusive tax avoidance because it failed to contain any premises of abuse of tax law and thus its application was by no means calibrated to target that phenomenon. Actually, it did target more precisely purely commercial and straightforward OITs than complex abusive tax avoidance OITs. As a result, the Tribunal rightly concluded that the 2012 Amendment and its application to tax CIHL’s acquisition by CIL failed to adequately balance ‘the Claimants’ pro - tected interest of legal certainty/ stability/ predictability on the one hand, and the Respondent’s power to regulate in the public interest on the other’. This retroactive taxation deprived the Claimants of their ability to plan their activities in consideration of the legal con- sequences of their conduct, in violation of the principle of legal certainty, which the Tribunal considers to be one of the core elements of the FET standard, and of the rule of law more generally. Such measure was ‘grossly unfair’ and violated the standard of Claimants’ investments FET under Article 3(2) of the UK–India BIT. L E S S ON TO TA X A ND INVE S TM EN T POL IC Y M A KER S : AV OIDIN G R ED FL A GS IN FIS C A L C OND UC T The Cairn decision is relevant to tax and investment policy makers. In particular, it permits iden- tif ying and systemizing two red flags in a state’s power to tax vis-à-vis mechanisms and standards of investment protection in IIAs. The first flag is unjustified far-reaching retroactive taxation. Its a Th t is, beyond providing revenues for India’s general budget, which was not enough to justify the departure from the principle of legal certainty by retroactive taxation. Ibid paras 1794, 1810. Ibid paras 1796–1797 with the Tribunal’s references to and quotations from Baker (n 42) 781 and The European Commission of Human Rights, A , B, C and D v. UK, Application No.8531/79, reported in (1981) 23 DR 203. For two other justifications, irrelevant for this case, see above n 11. In fact, OITs were rarely seen in India back then, as admitted by the Respondent. Cairn (n 1) para 1813. Ibid. Ibid. Ibid para 1814. Ibid para 1815. Ibid para 1816. Ibid. Ibid in fine . Cairn Energy • 153 identification teaches us that the retroactive taxation should be foreseeable to adversely affected taxpayers and only in extreme and well-justified cases may it reach beyond such a foreseeability. The second flag is an inadequate (too broad and not proportional) approach by states to the prevention of tax avoidance. The Tribunal in the Cairn case implies that legal measures aiming to prevent tax avoidance should only encompass tax avoidance practices and not undermine the taxpayer’s legitimate rights to plan and execute their investments in the most tax advantageous way in accordance with wording, context and purpose of tax law. Tax policy makers should be wary of their approach to taxation of foreign investments, rec - ognizing threats following from red flags. Tax legislation and practice of tax authorities should avoid surprises of foreign investors that ‘go too far’ and thus do not pass muster under the FET standard. The Cairn decision shows that taxation of cross-border transactions should be treated in a fair and equitable way; otherwise, it will not survive an arbitral tribunal’s scrutiny. This decision also shows that in each and every case it is necessary to objectively ascertain the substantive and temporal scopes of application of the amended law. Labelling amendments of law as ‘clarifications’ and establishing their compatibility with the constitution do not constitute an effective defense of the respondent state against the claims concerning the incompatibility of the amendments with an IIA. Although such an approach is relevant to all ISDS cases address - ing retroactive amendments of law, it is of particular importance to tax law because of the tax authorities’ influence on the formation of tax policy and the tax-law-making process. Parliaments should not have the final authority in interpretation of amendments of tax laws to examine their compatibility with IIAs. Only arbitral tribunals have that role. Local tax authorities and parlia- ments cannot change that reality by calling amendments of tax law as ‘clarificatory’. One of the most significant and credible signals that a state may give of its intentions toward foreign investments is the conclusion of IIAs with states in which potential investors are located. The credibility of such a signal is measured to a large extent by the fact that a prospective inves - tor will be a legal beneficiary of the treaties’ enforcement provisions, that is, the ISDS mech- anism. Carving out tax measures from the scope of the FET standard, the most frequently invoked protection standard contained in IIAs in general, including tax-related cases, means that unfair and arbitrary conduct of states in tax mae tt rs will potentially not be subject to inter - national review. This may undermine the credibility of states trying to host investments and in any event may lead to increased risk related to investments in their territories and thus pos - sibly the price of contemplated investments. Indeed, evidence shows a correlation between states often losing a higher share of ISDS cases with negative rule of law ratings and high-risk Wälde and Kolo (n 97) 357. Cf. Martín Jiménez (n 96) secs. 3.4, 4 and 5; Danon and Wuschka (n 98) 698–699. The ongoing energy crisis may encour - age some states to use tax measures retroactively, sometimes even for the purposes of indirect expropriation of investors’ property in the energy sector. The energy crisis has already prompted the EU to adopt legislation at the EU level (regulation) directly binding its Member States to impose the temporary solidarity contribution on certain (excess) profits of fossil fuel companies. This contribution constitutes a windfall tax and may be levied retroactively on profits generated from 1 January 2022. Article 15 of the Council Regulation (EU) 2022/1854 of 6 October 2022 on an emergency intervention to address high energy prices (7 Oct. 2022) Official Journal of the European Union LI 261/1. Also, in a slightly different context, it is wise to remember that to the extent the international tax regime seeks to promote foreign investment by means of elimination of double taxation, it should integrate rather than exclude the investment treaty regime and thus fully respect standards of investment protection. Cf. Juliane Kokott, Pasquale Pistone and Robin Miller, ‘Public International Law and Tax Law: Taxpayers’ Rights, The International Law Association’s Project on International Tax Law – Phase 1’ (2021) 52 Georgetown J. of Intl. Tax L. 389. Salacuse (n 25) 161. Cf. Danon and Wuschka (n 98) 687, 701. Salacuse (n 25) 161: ‘ by the time an investor is considering a particular investment, international capital markets, through numerous mechanisms, including the financial press, credit rating agencies, banking networks, and many others, have already absorbed whether a specific country has entered into investment treaties’. In that regard, it is worth indicating the observations of Nobel Laureate Eugene Fama and others according to which markets rapidly and efficiently absorb information about price assets and investment opportunities. Eugene Fama, ‘Efficient Capital Markets: A Review of Theory and Empirical Work’ (1970) 25 J Fin 383, 383–417; Eugene Fama, ‘Efficient Capital Markets: II’ (1991) 46 J Fin 1575–617. 154 • Cairn Energy grading by many private political risk-rating companies. Relevant data also shows that the types of state conduct causing investment withdrawals and cancellations coincide with the type of conduct that IIAs—and ISDS—purport to prevent, including unfair and inequitable treat- ment. States cannot therefore overlook the fact that ISDS contributes to the development of a rule-oriented regime for cross-border investments, which significantly decreases the risk of investments and thus their costs in their territories. Investment policy makers, in the ae ft rmath of the Cairn decision, should perhaps not rush to terminate IIAs and carve out tax measures from the FET standard in remaining and prospective IIAs as is the scenario in India. In addition, it is partly the mainstream flow of recommen- dations of UNCTAD to tax and investment policy makers, although UNCTAD appears to acknowledge that ‘the FET clause does not preclude States from adopting good faith regulatory or other measures that pursue legitimate policy objectives’. Why not avoid red a fl gs in fiscal conduct of States against investment protection mechanisms instead of reducing such protec - tion upfront? Roberto Echandi, ‘The Debate on Treaty-Based Investor–State Dispute Settlement: Empirical Evidence (1987–2017) and Policy Implications’ (2019) 34 ICSID Rev–FILJ 60. Ibid 37, 61. For the data sources see World Bank Group, ‘2017/2018 Global Investment Competitiveness (GIC) Report’ 35; MIGA, ‘ World Investment and Political Risk, Reports’ (2010, 2011, 2012, and 2013). Although ‘currently international adjudication faces a new and existential risk’, the empirical evidence shows that the crit - ical debate ‘about the right to private action granted to international investors through ISDS has frequently been based more on ideological views than on facts’. For the previous quote see Campbell McLachlan, ‘The assault on international adjudication and the limits of withdrawal’ (2019) 68(3) IQLQ 499, 500. For the lae tt r quote see Echandi (n 184) 58. Cf. Stern (n 164) 449. Recent empirical studies also show that ‘over a period when the ISDS protection was in place, though India may have had to confront some adverse rulings against its regulatory actions, the overall participation in a system governed by IIAs did influence the inflow of FDI positively’. Jaivir Singh, Vatsala Shreeti and Parnil Urdhwareshe, ‘The Impact of Bilateral Investment Treaties on FDI Inflows Into India: Some Empirical Results’ (2022) 57(3) Foreign Trade Review 320. a Th t is, the arbitration proceedings in Cairn (n 1) and Vodafone (n 24) cases prompted India to give a notice of termination of its existing BITs to at least 74 states since 2017 and release the India Model BIT (2016) to replace the existing model from 2003. The new model, among others, seems to entirely exclude tax measures from its scope under a very broad tax carve-out under its Article 2(4)(ii), completely omits the FET standard and insists that on the investor exhaust domestic remedies for at least five years before commencing an arbitration under the BIT. Such extremely restrictive wording is unheard of in any BIT in the world. Hence, according to some authors, India’s Model BIT (2016) ‘seems more like a restatement of international law on sovereignty rather than a treaty meant to protect cross-border commercial transactions’. See Abhishek Dwivedi, ‘India’s Flawed Approach to Bilateral Investment Treaties’ The Diplomat (4 December 2020). See also Douglas Thompson, ‘Vodafone Claim Still On ae ft r India Rules Out Tax Law Changes’ (2014) Global Arb Rev.; ‘Cairn’s Tax Liability Credit Negative for Vedanta: Moody ’s’ The Indian Express (17 March 2015); Grant Hanessian and Kabir Duggal ‘The 2015 Indian Model BIT: Is This Change the World Wishes to See?’ (2015) 30 ICSID Rev–FILJ 729, 735. UNCTAD (n 28) 26–28. Ibid, reform option 4.3.3, the third indent at p. 28.

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