CBDT Issues Guidance on Principal Purpose Test (PPT) Under India’s DTAAs
The Central Board of Direct Taxes (CBDT) has released Circular No. 01/2025 dated January 21, 2025, providing guidance on the application of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements (DTAAs).
Key Highlights of the Guidance
Introduction to PPT and MLI
The Multilateral Instrument (MLI), effective for India from October 1, 2019, has introduced significant changes to India’s DTAAs to combat tax treaty abuse. A cornerstone of the MLI is the Principal Purpose Test (PPT), which aims to prevent the misuse of DTAAs.
The PPT denies treaty benefits if:
The principal purpose of an arrangement or transaction is to obtain a treaty benefit.
Such a benefit contradicts the object and purpose of the treaty unless the taxpayer can establish that the benefit aligns with the treaty’s intent.
Purpose of the PPT
The PPT ensures DTAAs are used for their intended purposes, such as facilitating legitimate cross-border trade, services, and investment, rather than for tax avoidance. The determination of treaty abuse relies on an objective assessment of facts and circumstances.
Detailed Guidance on PPT Application
A. Applicability of PPT
The PPT provision will be applied prospectively and is categorized as follows:
- For DTAAs Amended Through Bilateral Processes
The PPT applies from the date of entry into force of the DTAA or amending protocol (e.g., Chile, Iran, Hong Kong, China). - For DTAAs Amended via MLI
Taxes Withheld at Source: Applicable where taxable events occur on or after the first day of the previous year following the MLI’s entry into force for both jurisdictions.
Other Taxes: Applicable for previous years starting six months after the MLI’s entry into force for both jurisdictions.
Note: For India, the MLI entered into force on October 1, 2019. The entry-into-force date for India’s treaty partners must be verified using the OECD’s MLI database.
B. Treaty-Specific Bilateral Commitments
Certain DTAAs include grandfathering provisions that are unaffected by the PPT. These include:
- India-Cyprus DTAA
- India-Mauritius DTAA
- India-Singapore DTAA
These provisions operate independently of the PPT and are governed by their respective DTAAs.
C. Supplementary Guidance Sources
The application of the PPT is context-specific and fact-based. For additional clarity, the following may be referred to:
- BEPS Action Plan 6 Final Report, subject to India’s reservations.
- Commentary on Articles 1 and 29 of the UN Model Tax Convention (2021), subject to India’s reservations.
These resources serve as supplementary references for assessing PPT applicability.
Conclusion
The guidance aims to ensure clarity and uniformity in the application of the PPT under India’s DTAAs. It emphasizes that treaty benefits should align with the object and purpose of the agreements, facilitating genuine cross-border activities while curbing treaty abuse.
For further details, refer to Circular No. 01/2025 dated January 21, 2025.
Stay informed about the latest tax updates and notifications with us!
