The Central Board of Direct Taxes (CBDT) has issued guidance for application of Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements.
The Multilateral Convention to Implement Tax Treaty Related Provisions to Prevent Base Erosion and Profit Shifting (“MLI”) entered Into force for India on 1S October 2019. The MLI modifies some of India’s Double Taxation Avoidance Agreements (DTAAs). A key provision of the MLI is the Principal Purpose Test (PPT), which seeks to curb revenue leakage by preventing treaty abuse. While the PPT is Included in most of India’s DTAAs through the MLI, it is part of some other DTAAs through bilateral processes.
The PPT reads as follows:
Notwithstanding the other provisions of this Convention (or Agreement), a benefit under this Convention (or Agreement) shall not be granted in respect ofan item ofincome ifit Is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the prinCipal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose ofthe relevant provisions ofthis Convention (or Agreement).
The PPT envisages denial of benefits under a DTAA where it is reasonable to conclude, having considered all the relevant facts and circumstances that one of the prinCipal purposes of an arrangement or transaction was to obtain a benefit, directly or indirectly, under a DTAA. Where this is the case, however, the last part of the PPT provision allows the·person to whom the benefit would otherwise be denied the possibility of establishing that obtaining the benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the convention. The PPT is intended to ensure that DTAAs apply in accordance with the objects and purpose for which they were entered into, i.e. to provide benefits in respect of bona fide exchange of goods and services, and movement of capital and persons.
The determination of whether one of the principal purposes for entering into a transaction(s) or arrangement(s) is to obtain tax advantage(s) should be based on an objective assessment of the relevant facts and circumstances.
In order to provide clarity and certainty on the application of the PPT provision under India’s DTAAs, the broad guidance is provided.
For uniformity in the application of the PPT provision under India’s DTAAs, it Is clarified that the PPT provision Is Intended to be applied prospectively.
DTAAs where the PPT has been Incorporated through bilateral processes (such as Chile, Iran, Hong Kong, China, etc.) from the date of entry Into force of the DTAA or the Amending Protocol incorporating the PPT, as the case may be.
For DTAAs where the PPT has been incorporated through the MLI·from the date of entry into effect of the provisions of the MLI with respect to the DTAA specified in Article 3S of the MLl, as under:
For India, the date of entry into force of the MLI is 1st October 2019. The date of entry into force for the DTAA partner needs to be ascertained. The previous year shall be as defined in section 3 of the Income-tax Act. 1961.
India has made certain treaty-specific bilateral commitments in the form of grandfathering provisions under the following DTAAs, as on date:
- India-Cyprus DTAA;
- India-Mauritius DTAAi and
- India-Singapore DTAA.
These commitments, as reflected in the bilaterally agreed object and purpose of such grandfathering prOVisions, are not intended to interact with the PPT provision. Therefore, it is clarified that the grandfathering provisions under such DTAAs shall remain outside the purview of the PPT provision, being governed, instead, by the specific provisions in this regard of the respective DTAA itself.
Read More: CBIC Accepts PCC Satendra Vikram Singh’s VRS To Enable Him To Join As CESTAT Technical Member
Circular Details
Circular No. 01/2025
Date: 21st January, 2025
