In a relief to investors, Central Board of Direct Taxes (CBDT) on Wednesday clarified that past investments made under certain tax treaties with countries like Mauritius, Cyprus and Singapore will not be affected by Principal Purpose Test (PPT). 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.
In a circular, setting the context with regard to the objective of PPT, CBDT said 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 Double Taxation Avoidance Agreements (DTAAs), 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.
According to Rohinton Sidhwa, Partner, Deloitte India, essentially the circular protects such treaty specific bilateral commitments and carves them out of the purview of the PPT provisions. “This was a grey area when the new protocol was made public for the India Mauritius treaty. With this clarification there is a likelihood that the protocol would be notified and go into effect in the coming financial year beginning 1 April 2025,” he said.
Amit Maheshwari, Tax Partner at AKM Global felt that the circular was expected as a recent ruling involving a Luxembourg-based LLC (SC Lowy P.I. (LUX) S.A.R.L.), where the tax authorities sought to deny treaty benefits by alleging a lack of economic substance and beneficial ownership. However, the tribunal ruled in favour of the taxpayer, emphasising that treaty benefits cannot be denied based on mere assumptions and without any evidence. This was the first case dealing with PPT.
The circular provides much-needed guidance as to the time of applicability in the context of different treaties and provides much-needed confidence to investors. “By explicitly stating that the PPT will not be applied retroactively and that grandfathering provisions in tax treaties with Singapore, Cyprus, and Mauritius remain in effect, the uncertainty is removed regarding the treatment of existing investments,” Maheswari said.
Vishwas Panjiar, Partner at Nangia Andersen LLP said that the guidelines should serve as a baseline interpretation for the taxpayers as well. However, “application of PPT would more likely than not be a context-specific and fact-based exercise,” he said.
