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F. No. 500/05/2020/FT&TR-I1
Government of India .
Ministry ofJlinance
Deportment of Revenuc
Cer\tml Dool'd of Dlrcct Taxes
Foreign Tox & Tox Ttcscurch Division-II
Circular No. 01/2025
Now Deihl, 21st January, 2025
Subject: Guidance for application of the Principal Purpose ·Tcst (PPT) under
India's Double Taxation Avoidance Agreements-rog.
The Multilateral Convention to Implement Tax Treaty Related Provisions to Prevent
Base Erosion and Profit Shifting ("MLI") entered Into force for India on 1S
t 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.
2. 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 of an item of income 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 of the relevant provisions of this Convention (or Agreement).
3. 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 DT AA. 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.
4. The determination of whether one of the principal purposes for entering into
transaction(s) or arrangement(s) is to obtain tax advantage(s) should be based on an
objective assessl1!ent 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 following
broad guidance is provided:
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' .
A. Period fOl' which the PPT provision is envisaged to be applied:
For ens~rlng parity and 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.
Accordingly, the PPT provision under India's DTAAs shall apply as follows:
a. ~or 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.
b. 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:
i. .
with respect to taxes withheld at source on amounts paid or credited to non-
residents, where the event giving rise to such taxes occurs on or after the first day of the
previous year that begins on or after the latest of the dates on which the MLl enters Into
force for the Contracting Jurisdictions to the DTAA:
Ii.
with respect to all other taxes levied by India for prev.!ous years beginning on or
after the expiration of a period of six calendar months from the latest of the dates on .
. which the MLI enters into force for the Contracting Jurisdictions to the DTAA.
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 using OEci)'s MLI database. For
the above purposes, previous year shall be as defined in section 3 of the Income-tax Act.
1961.
The aforesaid period for the application of PPT shall however, be subject to the
interaction of such provisions with Treaty Specific Bilateral commitments as provided
for below.
B. Interaction of the PPT provision with certain Treaty-Specific Bilateral
Commitments:
India has made certain treaty-specific bilateral commitments in the form of
grandfathering provisions under the following DTAAs, as on date:
i.
India-Cyprus DTAA;
ii.
India-Mauritius DTAAi and
iii.
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 as such.
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.
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.c. Arlditional/S
1
upp ementary Sources of Guidance:
The application of the PPT provision is expected to be a context-specific fact-based
:xerc~se,. to be carried out on a case-by-case basis, keeping in view the objective facts
I nd. ~mdmgs. In this regard, besides the BEPS Action Plan 6 Final Report, subject to
ndla s.reservations, wherever applicable, tax authorities may refer to the Commentary
to ~:tlc1es 1 and 29 of the UN Model Tax Convention (updated in 2021) as
addl~lOn.al/supplementary sources of gUidance while deciding on the invocation and
applicatIOn of the PPT provision, subject to India's reservations, wherever applicable.
Copy to:
i.
PS to FM/OSD to FM/PS to MoS(F)/OSD to MoS(F)
ii.
OSD to Revenue Secretary
iii.
Chairman, CBDT and all Members, CBDT
~0~,~\j
(ANCHAL KHANDELWAL)
Director, FT&TR-/1
Government of India
iv.
All Pr.CCsIT /CCsIT /Pr.DGsIT /DGsIT with a request to circulate among all officers
in their regions/charges.
v.
All Joint Secretaries/CsIT /Directors/ Deputy Secretaries/ Under Secretaries of
CBDT
vi.
Web Managaer, ADG(S)-4,O/0 Pr.DGIT(Systems), Delhi with a request to place
the circular on https:llwww.incometax.gov.in
vii.
CIT(M&TP), Official Spokesperson of CBDT
viii.
JelT, Data base Cell for placing it on www.irsofficersonline.gov.in
ix.
The Guard File
d(~~\,\~
(ANCHAL KHANDELWAL)
Director, FT&TR-II
Government of India
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