Tax Arbitration


Combining the intricate conceptual nuances of tax laws and law of contracts to apply them in an arbitration paradigm, tax arbitration, as a niche species of arbitration, has gradually come to fore as a distinct and specialised segment of dispute resolution mechanism in the Indian legal system. There are enough peculiarities and features of tax arbitration which justify a delineation of its features and analysis of its trends. This is particularly true in the domestic law scenario which traverses much beyond its limited (though well instituted) tenets in an international law context. Seeking to sketch its contours, this post attempts to identify the facets of tax arbitration in India.

Contract as basis for tax arbitration: setting the context

Terms of a contract define the respective rights and obligations of the parties. These are various species of contractual clauses which are intended to envisage and arrest the consequences of future events. For illustrative purposes, price escalation clauses tend to provide the circumstances, manner, and limits in which contractual price would stand varied. As another illustration, modern contracts, particularly long-term contracts, are typically endowed with “change of law” clauses to address the consequences befalling from legislative or other changes in the legal environment. Contractual covenants dealing with taxes are yet another illustration of such futuristic delineation by the contracting parties. In such circumstances, irrespective of external legal system, implications arising from the application or interpretation of such clauses are essentially contractual disputes. For example, whether and how government orders fixing the price would influence the price escalation clause is an issue entirely distinct from the application and interpretation of the government order itself; the former being a contractual dispute whereas the latter being a dispute to be addressed under the dispute settlement mechanism enacted by the legal system concerned. Similarly, as another example, whether a particular tax is to be levied and on whom, may be a question to be tried according to the national legal system under the tax law concerned which, however, does not detract the contractual dimension which may permit shifting of such tax incidence and its concomitant issues would constitute contractual disputes.

It is principally for this reason of contractual determination of inter-party tax disputes that tax arbitration finds an interesting play in the arbitration framework. There is now enough judicial authority both in India and abroad that arbitrators are competent to determine the party response for bearing the tax incidence, irrespective of the nature of charge created by the tax law in question. With substantial autonomy being available to the parties to delineate their inter se tax obligations, tax arbitration under commercial contracts is becoming increasingly frequent with arbitrators starting to appreciate the finer nuances and intricacies of fiscal laws in order to exemplify the contractual stipulations agreed to by the parties in respect of their tax obligations.

Tax treaty arbitration

Besides in the space of commercial arbitration, tax arbitration also exists as a means to resolve stalemate amongst tax treaty partner countries vis-à-vis double taxation of their residents.1 In the context of “Double Taxation Conventions” (colloquially referred to as “Double Taxation Avoidance Agreements” in India), it is increasingly being felt that the non-binding concession based “mutual agreement procedure” is not the optimal approach to further the objective of obviating double taxation.2 Thus, increasingly third-party arbitration is canvassed as a formal and binding means to resolve outstanding issues amongst the tax treaty partners. The Organisation for Economic Cooperation and Development (OECD) in its Model Double Tax Convention particularly favours the adoption of arbitration to resolve double taxation disputes.3 In fact, many countries have already adopted arbitration as the dispute resolution mechanism in their respective tax treaties, e.g. USA-Canada Treaty4, besides there being significant thrust to evolve nuanced arbitration models qua tax treaty disputes, such as the case of basketball arbitration.5 Even though the incumbent policy of the Government of India (GOI) is currently not in favour of tax treaty arbitration,6 yet its very presence is a useful reminder of increasing popularity of arbitration in tax space.

Tax arbitration in bilateral investment treaties (BIT) context

Arbitration yet again finds itself at the centre stage of tax, albeit indirectly, in the wake of increasing scrutiny of tax laws in sphere of bilateral investment treaties. Arbitration is generally the default dispute resolution mechanism in these treaties and thus a claim that tax law (or its implementation) violates the sovereign assurances recorded in the BIT results in scrutiny of the impugned tax law through the process of arbitration under the BIT, as the recent instances in Vodafone7 and Cairn8 reveal.9 Indeed, GOI has revised its BIT policy to carve out tax from the scope of BIT and, specifically, excluded tax measures from the scrutiny of arbitrators,10 yet this formal acknowledgement also reveals steering presence of arbitration in tax space, which at least continues in other jurisdictions.

Legislative sanction enabling contractual affixation of tax liabilities

Section 64-A of the Sale of Goods Act, 1930 makes certain stipulations in respect of changes in customs, excise duty and sales tax. It provides that ordinarily the seller is permitted to recover an increase in their tax incidence from the buyer and, vice versa, the seller is obliged to pass on the benefit of a reduced tax incidence in their respect. However, this provision, as an instance of party autonomy, permits the parties to specifically stipulate otherwise, in which case the ordinary rule shall not apply. This provision has been judicially construed to constitute the basis to permit the parties to a contract to vary their respective tax obligations.11 Furthermore, even though the provision is limited to certain species of taxes, again by judicial interpretation, its underlying principle has been extended to other species of taxes not enumerated in the provision itself.12 Thus, there is sufficient legislative sanction approving party autonomy to contractual define their respective tax liabilities.

Contractually agreed prices: Insulation from tax fluctuations

One aspect wherein tax arbitration is overwhelming prevalent is vis-à-vis that class of agreements which are colloquially referred to as “firm price” contracts wherein essentially the price is fixed irrespective of future events. Conceptually the reverse of price escalation clauses, such contractual stipulations may, and generally so do, include within its scope the tax incidence as well. Simply put, such contracts inter alia stipulate that the change in tax incidence shall not affect the agreed contract price. Such species of contracts are a regular feature in government contracts and even long-term contracts, such as those in case of construction, etc. where the parties intend to insulate themselves from tax changes.

The leading judicial authority on the impact of firm price contracts and the ability of the arbitrators to delineate its tax consequences qua the parties is the decision of the Supreme Court in Numaligarh Refinery13 which is relevant for multiple reasons. Firstly, this decision awarded the court’s imprimatur to tax arbitration insofar as it declared that it was within the arbitrator’s jurisdiction to interpret and give effect to the tax liability clause under the agreement. Secondly, the Court also approved the tenor and effect of the contractual terms which identified and stipulated the tax liabilities of the parties inter se each other. Thirdly, in this decision the Court took cognizance of and approved firm price contracts.14 On this aspect, the decision of the Supreme Court observes as under:

22. … In these parameters of the terms and conditions, that the price quoted for the entire work shall remain firm and fixed till the complete execution of the work, the heading pricing and currency changes leaves no manner of doubt that there is no scope for giving any benefit of fluctuation on the exchange rates. Once the price is fixed there is no provision for giving any benefit for fluctuation in terms of the contract then in that case, the claimant Daelim Industrial Company (DIC) cannot raise this claim of excess payment made towards customs duty on account of fluctuation on exchange rate. The minority view expressed by Justice M.M. Dutt appears to be correct. Had there been downward trend in the exchange rate, then the DIC would not have slashed the exchange rate. If the downward trend cannot benefit either party then equally the upward trend cannot benefit the DIC for claiming the payment of the higher customs duty on account of fluctuation in exchange rate. Therefore, the expression, “firm and fixed” is clear answer to the question if during the course of contract certain fluctuation has taken place in the market then on that count the claimant cannot raise extra demand on account of upward trend in the exchange rate.

23. … In the present case, in view of the fact that the price is firmly fixed and DIC has clearly understood and agreed the terms of the contract, and it was clearly stipulated in Clause 12.2 that no financial adjustment arising there from shall be permitted by the owner.15

This decision has since then become the pivot for tax arbitration. For illustration, soon thereafter, the Delhi High Court in Union of India v. Bhardwaj Enterprises16 upheld the outcome of tax arbitration proceedings which had precluded the seller from passing on the statutory increase in sales tax to the buyer in view of firm price contract.17 Since then the outcome of tax arbitration giving full effect to firm price contracts has been regularly upheld by the courts.18

It is important to clarify that the scope of tax arbitration is neither limited to firm price contracts or issues relating to liability of indirect taxes alone. There is sufficient jurisprudence available in India which permits the parties to even inter se assign direct tax liability. In a large number of cases, including those of the Supreme Court, both i.e. the primacy given under the contract to the arbitrator to decide upon the contractually assigned tax liability as also the arbitrator’s award to such effect, have been approved by the courts, thereby vindicating the basis for tax arbitration.19

“Change of law” and “price escalation” clauses: Further impetus to tax arbitration

Tax laws further claim substantive space in arbitration claims wherein tax measures are pressed upon to trigger either “change of law” or “price escalation” clauses. While the invocation of these clauses is technically different from a claim relating to firm price contracts, pragmatically these clauses have the same effect insofar as the consequent arbitration will delineate as to which of the parties would bear the incidence of tax, and hence these are another species of tax arbitration. There are examples galore of such tax arbitrations.20 For illustration, whether an executive circular clarifying upwards the rate of tax on fuel used for the contractual operations would constitute a “change of law” was considered in the space of arbitration.21 In fact, the introduction of goods and services tax (GST) law, comprehensively replacing the erstwhile indirect tax law, has been a single dominating cause triggering a host of tax arbitrations insofar as GST has been characterised as a new law, thereby triggering the change in law clause, or alternatively, the claim that GST influences the price, and thus, invocation of the price escalation clause, as the case may be. Scores of tax arbitration disputes have been recently occasioned on such account of GST alone.


The consistent expansion of tax arbitration in India is in line with the concurrent affirmation of the Supreme Court’s continuing wide affirmation of party autonomy22 which principle extends to parties choosing and varying their inter se legal obligations qua taxes. While doing so, it is well understood by the parties that the wide autonomy available to the parties to define their respective tax obligations is restricted to their inter se tax obligations alone and does not detract the consequences under the tax law concerned. As a consequence, for example, even if the liability under the contract is shifted, it can still be recovered by the Tax Department from the person liable to pay as per the tax law,23 and the statutory tax consequences of the contract would equally follow.24 In order to ensure that such tax law consequences do not dilute the operation of the contract or otherwise to insulate against the action of the tax authorities, the parties increasingly stipulate various additional clauses, such as those dealing with tax indemnity, legal assistance, etc. in the contract in order to address such eventualities. Such clauses in turn expand the scope of the arbitration and thus are concomitant features in tax arbitration. Thus, tax arbitration in India continues to expand as a subset of alternative dispute resolution in line with the evolving global trends.

†Advocate, Supreme Court of India. LLM, London School of Economics; BBA, LLB (Hons.) National Law University, Jodhpur. The author can be reached at

1. Incidentally, arbitration is also an accepted dispute settlement mechanism within the WTO Dispute Settlement Understanding. See, WTO, Understanding on Rules and Procedures Governing the Settlement of Disputes, Art. 25.

2. See generally, Part VI, Multilateral Instrument (available at and its corresponding Explanatory Statement available at <>.

3. See generally, Article 25(5) (and its corresponding Commentary), OECD Model Double Taxation Convention. available at <>.

4. Refer Protocol to the USA Canada Double Tax Treaty, Art. 14(2) available at <>.

5. See generally, Patrick Temple-West, “International Arbitration for Tax Disputes, ‘Baseball’ Style”, Reuters (26-11-2012).

6. See generally, Remya Nair, “India Opposes Global Plan to Make Tax Arbitration Binding”, Livemint (23-9-2014)..

7. Vodafone International Holdings BV v. Union of India, PCA Case No. 2016-35, Award dated 25-9-2020, available at <>.

8. Cairn Energy PLC and Cairn UK Holdings Ltd. v. The Republic of India, PCA Case No. 2016-7, Award dated 21-12-2020, available at <>.

9. See generally, Tarun Jain & Shankey Agarwal, “Investment Treaties Interjecting Taxation’s Realm: The Latest in Vodafone’s India Saga”, available at <>

10. Revised Model Text for the Indian Bilateral Investment Treaty (2015), available at

11. Numaligarh Refinery Ltd. v. Daelim Industrial Co. Ltd., (2007) 8 SCC 466.

12. For illustration, see Speedcrafts Ltd. v. Union of India, 2018 SCC OnLine Del 10639.

13. (2007) 8 SCC 466.

14. In this case the relevant clause stipulated thus: “[t]he prices quoted for the entire scope of work shall remain firm and fixed till complete execution of the work.”

15. (2007) 8 SCC 466, 481-482.

16. 2009 SCC OnLine Del 133.

17. In this case, the relevant clause stipulated thus: “[t]he rate quoted by the contractor/contractors should be an all inclusive through rate i.e. the rate for the material delivered at site. No lead lift, sales tax, royalty or any other taxes that may be levied by the Government or the local bodies will be paid. They will also themselves arrange and for such working facilities as they may need (e.g. land for labour camps, contractor’s office, access to the site of work, etc.). The contractor will be deemed to have included this element of royalty of compensation in their through tender rate and will not be entitled to any extra payment. They are advised to see that site at work before tendering.”

18. For illustration, see Rashtriya Ispat Nigam Ltd. v. Dewan Chand Ram Saran, (2012) 5 SCC 306; NHAI v. JSC Centrodorstroy, (2016) 12 SCC 592; Union of India v. Bengal Shrachi Housing Development Ltd., (2018) 1 SCC 311; Konkan Railway Corpn. Ltd. v. Chenab Bridge Project Undertaking, (2023) 9 SCC 85.

19. For illustration, see Sumitomo Heavy Industries Ltd v. Oil & Natural Gas Co. Ltd., (2010) 11 SCC 296 sustaining the clause delineating parties’ liability of income tax and the arbitrators’ interpretation thereto. See also, Raghubir Saran Charitable Trust v. Puma Sports India (P) Ltd., 2013 SCC OnLine Del 1972; State ( NCT of Delhi) v. MBL Infrastructure Ltd., 2012 SCC OnLine Del 1465; Satya Developers (P) Ltd. v. Pearey Lal Bhawan Assn., 2015 SCC OnLine Del 12756, etc.

20. For illustration, see PSA SICAL Terminals (P) Ltd. v. V.O. Chidambranar Port Trust, 2021 SCC OnLine SC 508; Hyundai Corpn. v. ONGC Ltd. (2018) 12 SCC 386; ONGC Ltd. v. Atwood Oceanic International, SA, (2008) 11 SCC 267.

21. South East Asia Marine Engg. & Constructions Ltd. v. Oil India Ltd., (2020) 5 SCC 164.

22. See generally, PASL Wind Solutions (P) Ltd. v. GE Power Conversion India (P) Ltd., (2021) 7 SCC 1.

23. For illustration, see DTC v. Commr., Service Tax, 2015 SCC OnLine Del 8786. Appeal against this decision was dismissed by the Supreme Court vide order dated 15-1-2016 in DTC v. Commr., Service Tax, SLP(CC) No. 284/2016.

24. For illustration, see Central Goods and Services Tax Act, 2017, Ss. 85 and 87, dealing with “liability in case of transfer of business” and “liability in case of amalgamation or merger of companies” respectively.

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