This circular provides clarity on the implementation of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements (DTAAs), as modified by the Multilateral Convention to Implement Tax Treaty Related Provisions to Prevent Base Erosion and Profit Shifting (MLI). The MLI came into effect for India on October 1, 2019, and includes the PPT to curb tax treaty abuse.

What is the PPT?
The Principal Purpose Test (PPT) is a rule in India’s tax treaties with other countries. It prohibits people or companies from using these treaties to avoid taxes if their main reason for doing a transaction was to get tax benefits (e.g., paying lower taxes than they should).

When does it apply?
The rule applies to India’s tax treaties that have been changed by a global agreement called the Multilateral Convention to Implement Tax Treaty Related Provisions (MLI), which started for India on October 1, 2019. The rule also applies to treaties that India changed through individual agreements with countries like Chile, Iran, Hong Kong, China, etc.

How does the PPT work?
If a person or company enters into a transaction mainly to avoid taxes using the tax treaty, the tax authorities can deny them the benefits of that treaty. However, if the person can prove that the transaction was in line with the overall purpose of the treaty (e.g., for genuine business reasons), they might still get the benefits.

When does it apply to specific transactions?

• For tax treaties amended under the MLI, the PPT applies based on when the MLI entered into force for that particular country.
• For some countries like Cyprus, Mauritius, and Singapore, special rules (grandfathering provisions) apply, meaning the PPT rule doesn’t apply to certain past agreements made with them.

Additional Guidance:
Tax authorities will look at all the facts and circumstances of each case to see if the PPT should apply. They can also refer to other international guidance to make decisions.

The circular is meant to help tax officials understand when and how to apply the PPT under India’s tax treaties, ensuring it is used fairly and consistently.