Treaties should be driven by national interest, not pressure from foreign govts or corporations: Supreme Court

Treaties should be driven by national interest, not pressure from foreign governments or corporations, the Supreme Court has said while asserting that India must safeguard its tax sovereignty, ensure fairness, and prevent abuse while entering into international tax pacts.

The observations by Justice J.B. Pardiwala came while a judgment in which the Supreme Court upheld the decision of the domestic revenue authorities that capital gains arising from a U.S.-based investor firm Tiger Global’s exit from Flipkart in 2018 are taxable in India.

Justice Pardiwala wrote a separate but concurring opinion, spelling out broader principles on how India should approach international tax treaties.

“Tax treaties, international agreements, protocols and safeguards should be very engaging, transparent and capable of periodical reviews with the power to renegotiate with strong exit clauses to avoid unfair outcomes, safeguarding the nation’s strategic and security, preventing erosion of tax base and loss or weakening of democratic control and introducing explicit carve outs safeguarding the sovereign’s right of taxation.

“Treaties should be driven by national interest, not pressure from foreign governments or corporations,” Justice Pardiwala said.

The Supreme Court laid down detailed safeguards to ensure that tax treaties protect the country’s economic sovereignty, revenue base and public interest.

Justice Pardiwala suggested a comprehensive set of safeguards that India should adopt while negotiating or renewing international tax treaties, including incorporating limitation of benefits clauses to prevent treaty shopping by shell companies, allowing domestic anti-avoidance laws such as the General Anti-Avoidance Rule.

He said treaties should reflect broader economic and public interest, not just bureaucratic or diplomatic goals.

Tiger Global exited from Flipkart in 2018, when Walmart Inc. acquired a controlling stake in the Indian e-commerce company. Tiger Global approached the Income Tax Department in February 2019 for an Advance Authority Ruling to adjudicate on the matter.