PPT circular doesn’t intend to interfere with any other provision of the Indian DTAAs, says CBDT

Apex policy making body for direct taxes, Central Board of Direct Taxes (CBDT) has said that the circular on the application of the Principal Purpose Test (PPT) provision under India’s Double Taxation Avoidance Agreements (DTAAs) is not intended to interfere or interact with anti-abuse rules. It also said that the government remains committed to ensuring consistency in tax law interpretation while upholding the existing legal framework.

PPT is part of the international tax rules aimed at preventing the misuse of tax treaties. Under the Base Erosion and Profit Shifting (BEPS) framework, the PPT checks whether a business arrangement is genuinely commercial or created mainly to avoid taxes. If the primary purpose is tax-saving, treaty benefits can be denied.  The board came out with detailed circular in January.

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Now in a statement, the board said the January 21 circular seeks to provide guidance on the application of the PPT provision under India’s DTAAs, wherein such a provision exists. Therefore, “this circular shall apply to the PPT provision in only those Indian DTAAs (Double Taxation Avoidance Agreement) wherein such a provision exists,” it said. Further, it is not intended to interfere or interact with any other provision of the Indian DTAAs, including such provisions that may be invoked for examination of treaty entitlement or denial of treaty benefits, other than the PPT.

“The circular is not intended to interfere or interact with anti-abuse rules under the domestic law, such as General Anti-Abuse Rule (GAAR) and Specific Anti-Abuse Rules (SAAR), and Judicial Anti-Abuse Rules (JAAR) reflected in or resulting from judicial interpretations,” it said. Also, it added that such rules shall continue to operate independently.

According to the board, the latest clarification does not introduce any new legal interpretation but “reaffirms that the circular applies only to the PPT without affecting other provisions of the Income-tax Act.” The board assured about the government’s commitment in ensuring consistency in tax law interpretation while upholding the existing legal framework.

Earlier, in January, CBDT had said that past investments made under certain tax treaties with countries like Mauritius, Cyprus and Singapore will not be affected by PPT. In a circular, setting the context with regard to the objective of PPT, CBDT said that that such a determination should be based on an objective assessment of relevant facts and circumstances. It clarified that with a view to ensure parity and uniformity in application of PPT under DTAA, PPT provision is intended to be applied prospectively.

The board further clarified that with respect to India-Mauritius, India-Cyprus & India-Singapore DTAAs where India has made treaty-specific bilateral commitments in the form of grandfathering provisions, the same is not intended to interact with PPT provisions. Accordingly, grandfathering provisions under such DTAAs will remain outside the purview of the PPT provision.