International Tax Treaties Must Not Become Tools to Dilute India’s Tax Sovereignty

Taxation is one of the most fundamental attributes of State sovereignty. The power to levy and collect taxes is not merely a fiscal function but an expression of constitutional authority, democratic accountability, and economic self-determination. Article 265 of the Constitution of India embodies this principle by mandating that no tax shall be levied or collected except by authority of law. In an era of globalised commerce and cross-border capital flows, this sovereign power increasingly interacts with international legal commitments, most notably, Double Taxation Avoidance Agreements (DTAAs).

While tax treaties play a critical role in preventing double taxation, promoting foreign investment, and fostering international cooperation, they were never intended to serve as instruments for eroding a nation’s tax base. Over time, however, aggressive tax planning, treaty shopping, and complex multi-jurisdictional corporate structures have exposed the vulnerabilities of treaty frameworks.

The central concern today is whether international tax treaties, if interpreted mechanically or exploited strategically, risk diluting India’s fiscal sovereignty and undermining its legitimate right to tax income arising from its economic territory.

The recent decision of the Supreme Court in Authority for Advance Rulings v. Tiger Global International Holdings (2026) provides a timely occasion to revisit this concern. The judgment emphatically reiterates that tax treaties do not entail abdication of sovereignty and must be interpreted in a manner consistent with constitutional principles, legislative intent, and evolving anti-avoidance norms.

Facts in Brief: AAR v. Tiger Global International Holdings (2026)

• Parties: Tiger Global International II, III and IV Holdings, investment entities incorporated in Mauritius.
• Investment: Between 2011–2015, the assessees acquired shares of Flipkart’s Singapore holding company, whose value was substantially derived from Indian assets.
• Transaction: In 2018, as part of Walmart’s acquisition of Flipkart, the assessees sold their Singapore-company shares to a Luxembourg entity, earning capital gains exceeding USD 2 billion in aggregate.
• Tax Position: The assessees claimed capital gains exemption under the India–Mauritius DTAA, relying on Tax Residency Certificates and grandfathering of pre-1 April 2017 investments.
• Revenue’s Stand: The transaction was treated as an indirect transfer of Indian assets taxable in India, and withholding tax was prescribed under Section 197 of the Income Tax Act, 1961.
• AAR: The Authority for Advance Rulings rejected treaty relief, holding that the arrangement was prima facie designed for tax avoidance.
• High Court: The Delhi High Court set aside the AAR’s ruling and held the assessees entitled to treaty benefits.
• Supreme Court: The Supreme Court reaffirmed that tax treaties do not dilute India’s tax sovereignty and that treaty benefits may be denied in cases of abuse, emphasising substance over form.

Conceptual Foundations: Tax Sovereignty and International Obligations

Tax sovereignty refers to the inherent authority of a State to determine the incidence, scope, and manner of taxation within its jurisdiction. It is closely linked with economic policy, redistribution, and public welfare. International law recognises this sovereignty, subject only to consensual limitations undertaken by States through treaties.

DTAAs are such consensual instruments. Their primary purpose is twofold:

• Elimination of double taxation, and
• Prevention of fiscal evasion.

Importantly, tax treaties do not create taxing rights; they merely allocate or restrict existing domestic taxing powers between contracting States. This distinction is crucial. As observed by the Supreme Court, a DTAA “does not involve surrender of sovereign taxing power but regulates its exercise in agreed situations”.

Thus, treaty interpretation must preserve the balance between international comity and domestic fiscal autonomy.

Indian Experience: From Investment Promotion to Treaty Abuse

India’s treaty network expanded significantly after liberalisation in the early 1990s. The India–Mauritius DTAA, signed in 1982, became the most prominent example. Its residence-based taxation of capital gains led to the so-called “Mauritius route”, through which a substantial portion of foreign investment entered India.

While this route contributed to capital inflows, it also generated concerns of treaty shopping, where entities with no real economic nexus to Mauritius were interposed solely to claim treaty benefits. Judicial endorsement of this structure in Union of India v. Azadi Bachao Andolan (2004) provided certainty to investors but also constrained revenue authorities.

Over time, it became evident that treaties designed to prevent double taxation were being used to achieve double non-taxation. This compelled India to renegotiate treaties, introduce Limitation of Benefits (LOB) clauses, and adopt domestic anti-avoidance measures such as the General Anti-Avoidance Rule (GAAR).

Tiger Global Judgment: Reasserting Sovereign Tax Authority

The Tiger Global case arose from the sale of shares of a Singapore-based company (Flipkart Pvt. Ltd.) by Mauritian entities of the Tiger Global group as part of Walmart’s acquisition. Though the shares sold were not of an Indian company, their value was derived substantially from Indian assets.

The assessees claimed exemption from capital gains tax under the India, Mauritius DTAA, relying on Tax Residency Certificates (TRCs) and the grandfathering provisions introduced in 2016. The Authority for Advance Rulings (AAR) rejected the claim, holding that the arrangement was prima facie designed for tax avoidance. The Delhi High Court reversed this finding. On appeal, the Supreme Court restored the primacy of substance over form.

A. Treaty Benefits Are Not Absolute

The Court clarified that treaty benefits are conditional and not automatic. A DTAA cannot be interpreted to shield transactions that are abusive, artificial, or lacking commercial substance. It emphasised that treaties must be applied in good faith and in accordance with their object and purpose, consistent with international law principles reflected in the Vienna Convention.

B. Tax Residency Certificates Are Evidentiary, Not Conclusive

While recognising the importance of TRCs, the Court rejected the argument that they are conclusive proof of treaty entitlement. A TRC establishes prima facie residence but does not preclude inquiry into real control, management, and economic substance, particularly where tax avoidance is alleged.

C. Source-Based Taxation and Indirect Transfers

The Court reaffirmed India’s right to tax indirect transfers under Section 9 of the Income Tax Act, 1961, as clarified by the Finance Act, 2012. It held that capital gains arising from alienation of shares deriving substantial value from Indian assets fall within India’s source-based taxing jurisdiction, unless explicitly exempted by treaty.

GAAR and the Evolution of Anti-Avoidance Jurisprudence

The introduction of GAAR under Chapter X-A of the Income Tax Act marked a paradigm shift in Indian tax law. GAAR empowers tax authorities to deny tax benefits arising from “impermissible avoidance arrangements” lacking commercial substance or created primarily to obtain tax advantages.

The Tiger Global judgment harmonises GAAR with treaty obligations by clarifying that Section 90(2A) expressly allows GAAR to override treaty benefits in cases of abuse. This statutory design ensures that treaties do not become sanctuaries for aggressive tax planning.

Importantly, the Court rejected the argument that pre-2017 investments enjoy blanket immunity. While genuine investments are grandfathered, abusive arrangements culminating in post-2017 taxable events remain subject to GAAR scrutiny.

Treaty Interpretation: From Formalism to Functionalism

One of the most significant contributions of the judgment lies in its interpretive approach. The Court moved away from rigid formalism towards a functional, purposive interpretation of treaties. It emphasised:

• The need to read treaty provisions in light of economic realities,
• The relevance of OECD commentary and international anti-abuse norms, and
• The legitimacy of domestic anti-avoidance doctrines in preventing treaty misuse.

This approach aligns Indian jurisprudence with global developments such as the OECD’s Base Erosion and Profit Shifting (BEPS) project, which advocates denial of treaty benefits where arrangements lack a principal commercial purpose.

National Security, Revenue Integrity, and Democratic Accountability

Tax sovereignty is not merely a fiscal concern; it has broader implications for national security and democratic governance. Large-scale revenue loss through treaty abuse undermines the State’s capacity to fund public goods, infrastructure, and social welfare.

Moreover, opaque ownership structures and round-tripping of funds can raise concerns of money laundering, regulatory arbitrage, and economic manipulation. The Court’s insistence on examining beneficial ownership and real control reflects an understanding that tax law cannot operate in isolation from these broader concerns.

Allowing treaties to be used as shields against legitimate taxation would erode public confidence in the fairness of the tax system and distort the social contract between the State and its citizens.

Balancing Investor Certainty and Sovereign Interests

A recurring argument against strict anti-avoidance enforcement is the fear of investor uncertainty. The Tiger Global judgment addresses this concern by drawing a clear distinction between legitimate tax planning and abusive avoidance.

The Court does not discourage foreign investment or undermine treaty commitments. Instead, it reassures genuine investors that structures with real commercial substance, long-term economic engagement, and transparent governance will continue to receive treaty protection. What is disallowed is the exploitation of legal form divorced from economic reality.

Conclusion

International tax treaties are instruments of cooperation, not capitulation. They are designed to facilitate cross-border economic activity while respecting the sovereign right of States to tax income arising within their jurisdiction. When treaties are interpreted or applied in a manner that enables artificial avoidance of tax, they cease to serve their intended purpose.

The Supreme Court’s decision in Tiger Global marks a decisive reaffirmation of India’s tax sovereignty. It clarifies that treaties do not override constitutional principles, statutory anti-avoidance frameworks, or the economic substance of transactions. By insisting that treaty benefits flow only to genuine, bona fide arrangements, the Court has strengthened the integrity of India’s international tax regime.

In a global economy where capital is mobile but public responsibilities remain local, safeguarding tax sovereignty is essential. International tax treaties must remain instruments of fairness and balance, not tools to dilute the fiscal authority of the Indian State.

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