A tax case may seem unlikely to be a barometer of the state of rule of law in a country like India. There are far too many other cases concerning fundamental human rights to stake claim on that title.

Yet, the judgment in the case of Tiger Global is one of the most consequential ones in India’s jurisprudential history. And it might come with an economic cost in terms of foreign investment in India.

Justice R Mahadevan said something remarkable during the pronouncement of the judgment.

“We offer this as a tribute not only to India,” he beamed as he said, “but for all nations to develop”.

Congratulating Justice JB Pardiwala for his statements on sovereignty, he added,

“What my Lord has now observed is going to be forever for the nations to develop."

This was pronounced in connection with Justice Pardiwala’s characterisation of the role of international organisations in international taxation as “sovereign incursions, threats or attacks or even attempts to weaken” India’s tax sovereignty.

“Taxing an income arising out of its own country is an inherent sovereign right to that country. Any application of filters or diffusers to this is a direct attack or threat to its sovereignty which can affect a nation’s long-term interest,” he added.

In one of the most alarming statements in his opinion, Justice Pardiwala appears to call for India to unilaterally abdicate its obligations under international law:

“It is seen historically one more angle of exercise or assertion of tax sovereignty is the power to take or make unilateral moves instead of bilateral and frame tax policies on cross border transactions which enter a country. Powerful economies in the world exercise this unilateral power to make their trading partners fall in line to their priorities.”

With due respect to the institution of the Supreme Court – the protector of the rule of law – the individual judges appear to be calling for an abdication of India’s obligations under the international rule of law. The judgment ignores Article 51 of the Constitution of India, which urges the State to foster respect for international law and treaty obligations.

The rule of law issues raised by this judgment are not limited to international law alone. First, by adopting a foreign-policy driven interpretation of the law, the Bench could also be seen as exceeding its constitutional prerogative. Secondly, constitutional law requires that the law as interpreted by a bench of the Supreme Court binds a subsequent bench of equal strength. The later bench may express disagreement, but it must refer the matter for consideration by a larger bench of judges if it were to overrule the precedent.

Although the judgment attempts to navigate the binding precedent of the Supreme Court in Azadi Bachao Andolan (2003), as reaffirmed by the three-judge bench in Vodafone (2012), some aspects of the judgment are at diametric odds to those decisions.

For example, the India-Mauritius tax treaty requires that a person should be “liable to tax” in a contracting state to qualify for treaty protection. In line with international consensus, it was held in Azadi that one need not actually pay tax in Mauritius to be considered to be “liable to tax” therein. Furthermore, the liability referred to the taxpayer’s general tax liability and not to a particular stream of income per se. In Tiger Global, however, the Supreme Court holds that a taxpayer must prove that the transaction is taxable in Mauritius to gain access to treaty protection. Which interpretation is normatively preferable may be open to debate, but the issue is whether the Supreme Court followed the constitutional norms in India to overturn the precedent.

Let me be clear, foreign investors are not penny-wise, pound-foolish. They will not shun the Indian market merely to save on Indian tax costs when there are profits to be earned. However, they may become wary of the economy. Tax uncertainties can perhaps be factored in, but the repudiation of the commitment to the rule of law cannot. And that may make investors and trading partners wary as, perhaps, also the citizenry.

Dr. Dhruv Janssen-Sanghavi is the founder of Janssen-Sanghavi & Associates, an international tax counsel practice based in India and the Netherlands.