Retain, Don’t Relinquish: Supreme Court Flags Risks To India’s Tax Sovereignty In Global Treaty Frameworks

Retain, Don’t Relinquish: Supreme Court Flags Risks To India’s Tax Sovereignty In Global Treaty Frameworks

Introduction

In a concurring opinion delivered in the Tiger Global–Flipkart tax dispute, Justice J.B. Pardiwala emphasised that tax sovereignty is an essential facet of India’s economic independence and cautioned against compromising sovereign taxing rights through international treaties or external pressures. While fully concurring with the reasoning and conclusions of the main judgment authored by Justice R. Mahadevan, Justice Pardiwala supplemented the decision with significant observations on the constitutional and strategic dimensions of tax sovereignty.

Factual Background

The appeals arose from a dispute concerning India’s right to tax capital gains arising from transactions involving shares of an Indian company, in the context of applicable international tax treaty provisions. The controversy required examination of treaty interpretation, allocation of taxing rights between source and residence jurisdictions, and the extent to which treaty protections could shield gains from Indian taxation.

The main judgment addressed the specific legal issues raised in the appeals. In his concurring opinion, Justice Pardiwala expanded the discourse to underline the broader implications of international tax arrangements on India’s sovereign taxing powers.

Procedural Background

The batch of civil appeals was heard by a Bench comprising Justice R. Mahadevan and Justice J.B. Pardiwala. Justice Mahadevan authored the principal judgment deciding the issues in the appeals. Justice Pardiwala concurred with the outcome but delivered a separate opinion focusing on the importance of preserving tax sovereignty in an evolving global economic landscape marked by trade wars, tariff conflicts and geo-economic uncertainty.

Issues

1. Whether India’s sovereign power to tax income arising within its territory can be diluted through international tax treaty arrangements.

2. What safeguards should guide India while entering into or renegotiating international tax treaties.

3. How constitutional principles of sovereignty and economic independence intersect with treaty-based allocation of taxing rights.

Contentions of the Parties

The core dispute concerned the interpretation of tax treaty provisions governing taxation of capital gains. While the detailed arguments pertained to treaty interpretation and statutory provisions, Justice Pardiwala’s concurring opinion addressed a broader constitutional theme: the preservation of India’s tax sovereignty.

The observations were not confined to the facts of the case but extended to the manner in which nations, particularly developing economies, negotiate and implement international tax treaties. Justice Pardiwala highlighted the need to ensure that such arrangements do not undermine India’s sovereign right to tax income generated within its territory.

Reasoning and Analysis

Justice Pardiwala observed that sovereignty in the modern era extends beyond territorial and political control to include economic sovereignty, of which the power to tax is a central component. He cautioned that nations have historically ceded aspects of their sovereign rights to integrate into global economic systems, sometimes at long-term cost.

He underscored that taxing income arising within a country is an inherent sovereign right. Any mechanism that diverts or diffuses such taxing rights away from the source country, particularly through treaty arrangements, must be approached with caution. According to him, retention of sovereign powers should be the “golden rule,” and yielding should be an exception, justified only when meaningful and proportionate, and never at the expense of national welfare.

The opinion recognised that in the international domain, tax sovereignty operates within a complex matrix of diplomacy, investment considerations and global norms. However, compromises that are disproportionate or inadequately safeguarded may erode economic independence and strategic stability. Justice Pardiwala warned that poorly structured treaties could enable treaty shopping, round-tripping, tax abuse and even risks to economic order and national security.

Referring to privacy and economic jurisprudence, the Judge stressed that constitutional values must inform treaty-making. He noted that while domestic taxation is subject to constitutional checks and judicial review, international tax arrangements must equally align with constitutional principles and legislative authority.

Justice Pardiwala proposed a comprehensive framework of legal, structural and strategic safeguards to protect India’s tax sovereignty while entering into international tax treaties. These included incorporating Limitation of Benefits (LOB) clauses to prevent treaty shopping; preserving source-based taxation rights over capital gains, royalties, interest and business profits; ensuring the right to tax digital economy transactions through recognition of significant economic presence; including General Anti-Avoidance Rule (GAAR) overrides; preferring tax credit methods over exemption methods to prevent double non-taxation; avoiding Most Favoured Nation (MFN) clauses that restrict flexibility; defining Permanent Establishment broadly to prevent avoidance techniques; and retaining the ability to renegotiate or exit treaties when required

He further emphasised the importance of periodic treaty review mechanisms, cost-benefit analyses before signing agreements, and stakeholder consultations to ensure that treaty commitments reflect national interest rather than external pressure.

The concurring opinion stressed that economic independence is indispensable for long-term national growth and security, and that tax sovereignty is a critical indicator of a nation’s stability and autonomy in the global order.

Decision

The Bench decided the civil appeals in terms of the principal judgment authored by Justice R. Mahadevan and Justice J.B. Pardiwala concurred with the outcome and supplemented the judgment with observations underscoring the constitutional importance of preserving India’s tax sovereignty while engaging in international treaty frameworks.