India Must Preserve Tax Sovereignty While Entering International Treaties: Supreme Court Proposes Safeguards
The Apex Court held that while international tax treaties play a vital role in facilitating cross-border investment and avoiding double taxation, India must incorporate and apply adequate safeguards to ensure that such treaties do not erode domestic tax sovereignty or legitimise impermissible arrangements.
Justice J.B. Pardiwala, Justice R. Mahadevan, Supreme Court
The Supreme Court has observed that India must preserve its tax sovereignty while entering into and applying international tax treaties, and that treaty benefits cannot be extended to transactions found to be impermissible under domestic law.
While declining to grant relief to Tiger Global International II Holdings in relation to capital gains arising from the Walmart–Flipkart transaction, the Apex Court laid down safeguards to prevent misuse of treaty provisions.
The Court was hearing appeals challenging a judgment of the Delhi High Court, which had overturned the ruling of the Authority for Advance Rulings and extended an exemption under Article 13(4) of the applicable Double Taxation Avoidance Agreement to Tiger Global.
A Bench comprising Justice J.B. Pardiwala and Justice R. Mahadevan allowed the appeals filed by the Revenue.
The Supreme Court undertook a detailed examination of the nature and purpose of international tax treaties. It is observed that such treaties are instruments of mutual agreement between sovereign States, intended to avoid double taxation and encourage legitimate economic activity, but they do not operate in isolation from domestic law.
The Court held that treaty provisions do not create an independent or overriding right to exemption. Rather, they presuppose that the transaction in question is lawful and permissible under the domestic legal framework of the contracting States.
The Court noted that, in the present case, the factual findings clearly established that the transfer of unlisted equity shares by Tiger Global was carried out pursuant to an arrangement impermissible under Indian law. Once such a factual finding is recorded, the Court held, the assessees cannot claim the benefit of treaty protection.
Addressing the broader issue of safeguards, the Court emphasised that India must ensure that international treaties are not drafted or interpreted in a manner that facilitates treaty shopping, artificial structuring, or tax avoidance schemes lacking commercial substance. It was observed that extending treaty benefits to such arrangements would undermine domestic tax legislation and erode India’s tax base.
The Court further held that the presence of formal compliance, such as possession of a tax residency certificate, cannot override substantive scrutiny of the transaction. Treaty benefits, the Court observed, must be denied where the arrangement is found to be colourable or impermissible.
The Supreme Court underscored that domestic anti-avoidance provisions and statutory safeguards cannot be rendered nugatory by the mechanical application of treaty clauses. Treaties, it held, must be interpreted purposively, in harmony with domestic law, and consistent with constitutional principles.
Highlighting the importance of tax sovereignty, the Court cautioned that international treaties must not be allowed to defeat legislative intent or dilute Parliament’s power to tax income arising from transactions closely connected with India.
“When the canvas or bandwidth of tax Sovereignty or spectrum is so wide in its sweep, having no inherent limitations, 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”, the Court further remarked.
The Court further underlined that safeguards such as substantive anti-avoidance scrutiny, alignment of treaty interpretation with domestic legislative intent, and denial of benefits in cases of treaty shopping are essential to protect tax sovereignty. It cautioned that treaties are not meant to become instruments for legitimising unlawful or abusive structures, and that extending treaty benefits in such cases would undermine public revenue and constitutional principles.
The Court reiterated that international obligations must operate in harmony with domestic law, and not at the cost of disabling the State from taxing income arising from transactions closely connected with India
Cause Title: The Authority for Advance Rulings (Income Tax) & Others v. Tiger Global International II Holdings (Neutral Citation: 2026 INSC 60)
Appearances
Appellant: N Venkatraman, A.S.G, Senior Advocate Nisha Bagchi, with Advocates Raj Bahadur Yadav, AOR, Shashank Bajpai, Padmesh Mishra and Others
Respondent: Senior Advocates Harish Salve and Porus Kaka, with Advocates Dr Shashwat Bajpai, Parul Jain, Arijit Ghosh, Manish Kanth and Others