With the objective of providing clarity and certainty on the application of the Principal Purpose Test (“PPT”) under India’s Double Taxation Avoidance Agreements (“DTAAs”), the CBDT has issued a Press Release on March 15, 2025. The Press Release provides clarifications in respect of Circular No. 1/2025 dated January 21, 2025 (‘the Circular’), which provided guidance on applicability of PPT.

The clarifications provided by the Press Release in respect of the Circular are summarised hereunder:

1. The Circular seeks to provide guidance only to those DTAAs where the PPT provision exists i.e. it does not apply to DTAAs where the PPT is not in existence.
2. The Circular is not intended to interfere or interact with any other provision of the DTAAs, including provisions related to invoking of examination of treaty entitlement or denying treaty benefits, other than PPT.
3. The Circular is not intended to interfere or interact with the anti-abuse rules under domestic law, such as General Anti-Abuse Rule (‘GAAR’), Specific Anti-Abuse Rules (‘SAAR’) and Judicial Anti-Abuse Rules (‘JAAR’) reflected in or resulting from judicial interpretations. These rules will continue to operate independently.
4. This clarification reaffirms that the Circular applies exclusively to the PPT without affecting other provisions of the Income-tax Act. The Government remains committed to ensuring consistency in tax law interpretation while upholding the existing legal framework.

KNAV Comments:

This Press Release provides clarity on the scope of the Circular and shall bring certainty and clarity for both the taxpayers as also the tax authorities as to the manner in which cases are to be approached.

Satisfaction of the PPT may be the litmus test to access the benefits of the DTAAs. Hence, it will be interesting to see as to how the Revenue Authorities interpret PPT provision while granting DTAA benefits. This makes it imperative for foreign companies having presence in India to analyse the PPT provisions along with existing Limitation of Benefit Clauses, beneficial ownership conditions in the DTAAs to ensure that they are in compliance, should there be any scrutiny from Revenue Authorities.

Clarifications on Applicability of Principal Purpose Test in Double Taxation Avoidance Agreements – Read Here