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Informist, Thursday, Jan. 15, 2026

 

NEW DELHI – The Supreme Court Thursday said India must take strong safeguards to protect its tax sovereignty, ensure fairness, and prevent abuse, when entering into international tax treaties. The top court made a case for India to avoid "most favoured nation" clauses, ensure the right to tax digital economy by including provisions in treaties that recognise "significant economic presence", not just physical presence of a company and impose digital services taxes on foreign digital platforms under international treaties.

 

The top court said no doubt entering into bilateral treaties has yielded its own good, consistency and stability, but with newer and newer trade complexities emerging in the global arena, nations should rethink very long-term treaties. There is no need to carry the burden or legacy of formative years of treaty making and even more when it comes to interpretation of such treaties, the court added.

 

A long-term compromise leads to erosion, porosity in the ingression, weakening or even destabilising a nation's long-term strategic and security interest, said Justice J.B. Pardiwala. 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 said.

 

The top court called for India to include a "limitation of benefits" clause in its international treaties. This will prevent treaty shopping by shell companies set up only to exploit treaty benefits, said the court, citing an example of the amended India-Mauritius treaty including the same clause to deny benefits to companies without genuine economic activity.

 

India should include a General Anti-Avoidance Rule override, said the apex court. This will ensure India overrides treaty benefits if the primary purpose of an arrangement is tax avoidance, said the court. The treaty should explicitly allow application of the General Anti-Avoidance Rule in cases of artificial transactions, the court added.

 

Moreover, 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. India should avoid residence-based taxation-only models, which favour tax havens and developed countries, said the court.

 

Justice Pardiwala said the treaties should follow the tax credit method and not tax exemption method, to prevent double non-taxation. India should include exit or renegotiation clauses and must retain the right to renegotiate or withdraw from a treaty if it is being misused or it no longer aligns with India's economic goals, he said. India should ensure a broad and updated permanent establishment definition to prevent avoidance through techniques like commissionaire arrangements and fragmentation of business activities, he added.

 

Retaining tax sovereignty becomes an impeccable strength for a nation to fight against cross border tax evasion, money laundering, drug and human trafficking, and round tripping of funds which would result in serious breach of the security and safety of the nation, said the court. A compromised international agreement, or a tax treaty or a protocol can pose serious challenges to the safety and security of a nation especially when the ability to dissect a good investment from a bad or an evil one is taken away or compromised, said the court. Tax evasion and tax abuse resulting in economic disorder is itself a huge sign of weakness for a nation, it added.

 

The Supreme Court held that Tiger Global International III Holdings and related entities were not entitled to an exemption from capital gains tax in the sale of their stake in Flipkart Singapore to Walmart Inc. for over INR 145 billion in 2018. Tiger Global and related entities had claimed that gains from the transfer of stake would be exempt from taxation as Article 13(3A) of the India-Mauritius Double Tax Avoidance Agreement "grandfathered" all acquisitions of shares before Apr. 1, 2017. The Supreme Court held that once it was found that Tiger Global's sale of its stake in Flipkart constituted an impermissible arrangement for realising capital gains under the India-Mauritius treaty, the benefits under the agreement would not be available.  End

 

Reported by Surya Tripathi

Edited by Ashish Shirke

 

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