'Tax Sovereignty Must Not Be Compromised' : Supreme Court Suggests Safeguards While Entering Into International Tax Treaties

In his concurring opinion in the Tiger Global–Flipkart tax dispute, Justice JB Pardiwala stressed that tax sovereignty is an essential facet of India's economic independence and warned against ceding taxing rights through international treaties or external pressures.

Justice Pardiwala fully agreed with the reasoning and conclusions reached by Justice R Mahadevan, who authored the main judgment deciding the issues raised in the appeals, while adding a few observations focusing on the concept of tax sovereignty.

Justice Pardiwala said tax sovereignty has assumed particular importance in the present global economic climate fraught with trade wars, tariff conflicts, and international economic uncertainty. He outlined a detailed set of safeguards that India should adopt while entering into international tax treaties to protect its tax sovereignty, including anti-abuse provisions, preservation of source-based taxation rights, flexibility to renegotiate or exit treaties, and alignment with domestic law and constitutional principles.

He observed that sovereignty in the modern world is no longer confined to territorial or political control, and now extends equally to economic sovereignty, with the power to tax forming one of its most critical components.

Justice Pardiwala observed that nations, particularly developing and import-dependent countries, have historically compromised or ceded aspects of their sovereign rights in order to integrate with international trade systems and global economic structures.

He noted that India's position has changed over the decades, with the country gaining greater economic strength, a large working-age population, and increasing global relevance in trade and commerce. In this background, he stressed that tax sovereignty has become a key indicator of a nation's stability and independence.

Justice Pardiwala explained that while domestic taxation operates within constitutional limits and is subject to judicial review, the exercise of tax sovereignty in the international domain requires balancing competing considerations such as diplomacy, investment attractiveness and protection of national interest.

He cautioned that compromises in this sphere can weaken a country's long-term economic and strategic position.

“the endeavour of a Nation is to preserve, nurture and promote its Sovereign powers in the global order to the best extent possible and this is possible only if such a power is retained by a Nation and not compromised. Retention should be the golden rule, and yielding should be an exception which is meaningful and not disproportionate and in aby view, not at the cost of a Nation's welfare and interest. A long-term compromise leads to erosion, porosity in the ingression, weakening or even destabilising a Nation's long term strategic and security interest. It should be a Nation's aspiration and desire to avoid even a medium-term compromise and should endeavour even short-term possibilities as minimal if not, at all”, he observed.

Justice Pardiwala said tax sovereignty can be compromised through external pressures, international bodies, or multinational corporations seeking changes in domestic tax policies to suit their interests. He underscored that the natural attribute of sovereignty is independence, and that economic independence is essential for long-term national growth and security.

He emphasised the principle that income should ordinarily be taxed in the jurisdiction where it is generated or where the source of value exists. Any arrangement that shifts taxing rights away from the source country, he said, amounts to a compromise of sovereignty.

“Taxing an income arising out of its own country is an inherent Sovereign right to that country. Any application of filters or diffusers to this is a direct attack or threat to its sovereignty which can affect a Nation's long-term interest. Besides economic independence, a neat power is better expressed if a Nation is more and more autonomous and can determine, manage, calibrate, align and work cross-border trade and business embedding its own dimensions and aspirations and therefore in the neo era of geo-economic uncertainties, it is better prudence to retain tax Sovereignty to oneself than to yield”, he observed.

Referring to global economic arrangements, Justice Pardiwala noted that past practices and legacy treaty structures should not be carried forward mechanically when changing geo-economic conditions warrant a more assertive approach. He cited India's 2016 decision to revoke several bilateral investment treaties as an example of a conscious sovereign choice taken to safeguard national interest.

Justice Pardiwala warned that poorly drafted or compromised international tax arrangements can facilitate tax abuse, money laundering and round-tripping of funds, which in turn pose risks not only to revenue but also to economic order and national security.

He stressed that anti-abuse laws must be effectively implemented. “Every anti abuse law must not only appear to be a deterrent but should be implemented to achieve the underlying goal of preventing an abuse by anyone against one's Nation and its people. Any lenience is yet another form of compromising tax sovereignty. When agreements need to be entered into between Nations either through its legislative or executive arm, dispute resolution should also be part of the same arm or process and should not be divorced or outsourced or pushed to mandatory arbitrations”, he said.

He suggested the following safeguards India must take to protect its tax sovereignty, ensure fairness, and prevent abuse while entering into an international treaty –

“These safeguards should be legal, structural, and strategic in nature.

1. Include a Limitation of Benefits (LOB) Clause
   • Purpose: Prevent treaty shopping by shell companies set up only to exploit treaty benefits.
   • Example: The amended India-Mauritius treaty includes an LOB clause to deny benefits to companies without genuine economic activity.
2. Include a General Anti-Avoidance Rule (GAAR) Override
   • Purpose: Ensure India can override treaty benefits if the primary purpose of an arrangement is tax avoidance.
   • The treaty should explicitly allow application of GAAR in cases of artificial transactions.
3. Ensure Right to Tax Digital Economy
   • Treaties must include provisions that:
     • Recognize "significant economic presence" (SEP), not just physical presence.
     • Allow India to impose equalisation levies or digital services taxes on foreign digital platforms.
4. Preserve Source-Based Taxation Rights
   • India must retain the right to tax income arising in its territory, especially:
     • Capital gains on shares of Indian companies
     • Interest, royalties, technical fees
     • Business profits from Indian operations
   • Avoid residence-based taxation-only models, which favour tax havens and developed countries.
5. Include Tax Credit, Not Exemption
   • Treaties should follow the tax credit method (foreign tax credit), not tax exemption method, to prevent double non-taxation.
6. Include Exit or Renegotiation Clauses
   • India must retain the right to renegotiate or withdraw from a treaty if:

• It is being misused
• It no longer aligns with India's economic goals
  • Example: India renegotiated its tax treaties with Mauritius, Cyprus, and Singapore when they became problematic.

1. Avoid "Most Favoured Nation" (MFN) Clauses
   • MFN clauses can bind India to give better terms to one country if they are given to another in the future.
   • This can undermine India's flexibility in future negotiations.
2. Clearly Define “Permanent Establishment” (PE)
   • Ensure a broad and updated PE definition to prevent avoidance through techniques like:
     • Commissionaire arrangements
     • Fragmentation of business activities
3. Align with India's Domestic Laws and Constitution
   • Treaty provisions should not conflict with domestic tax laws and must be in line with:
     • Constitutional powers
     • Parliament's authority to legislate taxation
   • If there's conflict, Indian courts usually uphold whichever provision is more beneficial to the taxpayer, so drafting must be precise.
4. Conduct Cost-Benefit Analysis Before Signing
   • Evaluate:
     • Will India lose revenue?
     • How will it affect domestic industry?
     • What is the long-term strategic impact?
   • Treaties should be driven by national interest, not pressure from foreign governments or corporations.
5. Build Treaty Monitoring and Review Mechanism
   • Set up a mechanism to periodically review tax treaties for:
     • Abuse
     • Relevance
     • Changing business and legal trends
6. Consult Stakeholders Before Signing
   • Involve:
     • Tax experts
     • Legal professionals
     • Industry bodies
     • Parliament committees

This ensures treaties reflect broader economic and public interest, not just bureaucratic or diplomatic goals.”

Case no. – Civil Appeal No. 262 of 2026

Case Title – The Authority For Advance Rulings (Income Tax) And Others v. Tiger Global International II Holdings and connected cases

Citation : 2026 LiveLaw (SC) 50

Click Here To Read/Download Judgment