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

As India negotiates trade deals with various countries, including the US, the Supreme Court has asserted that treaties should be driven by national interest and India must safeguard its tax sovereignty while entering into international agreements.

In his separate but concurring judgment upholding domestic revenue authorities’ decision that capital gains arising from a US-based investor firm Tiger Global's exit from Flipkart in 2018 are taxable in India, Justice JB Pardiwala emphasised that “Treaties should be driven by national interest, not pressure from foreign governments or corporations.”

Explaining the broader principles of international tax treaties, Justice Pardiwala said, “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.”

Noting that treaties should reflect broader economic and public interest, not just bureaucratic or diplomatic goals, he 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.

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.

Reversing the 2024 Delhi High Court verdict, the Supreme Court upheld Indian tax authorities' demand for capital gains tax on Tiger Global's exit from Flipkart.

Allowing the tax department's appeal, the top court held that the mere possession of a Tax Residency Certificate (TRC) does not preclude a detailed enquiry where an interposed entity is alleged to be a conduit for tax avoidance.