Dodging or Dealmaking? Decoding the Principal Purpose Test for Double Taxation Avoidance Agreements in India and Beyond.

The authors are Deepika Muskan and Sakshi Vardhan, Fourth Year Students from Gujarat National Law University.

“The avoidance of taxation is the only intellectual pursuit that carries any reward.”

-John Maynard Keynes

Abstract:

The study examines the implementation of the Principal Purpose Test (PPT) as a key anti-abuse measure in India’s tax treaty network, analysing its effectiveness in curbing treaty shopping for tax avoidance while maintaining legitimate cross-border investments. The study reveals that the test is a significant advancement in international tax policy as an anti-abuse measure. However, its implementation raises complex practical and interpretational challenges that require careful navigation by both tax authorities and taxpayers. The PPT in India requires a factual interpretation. The study analyses the recent Central Board of Direct Taxation (CBDT) guidelines, which provides crucial clarity on prospective application and grandfathering provisions. The study also discusses important judicial precedents regarding the interpretation of PPT in India. The study briefly discusses the Anti- Tax Avoidance mechanisms in foreign nations, giving recommendations and a way forward for India to emerge as a global leader in international tax policy coordination.

Keywords: Principal Purpose Test (PPT), Anti-Abuse Measures, Double Taxation, CBDT Guidelines.

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Introduction

The landscape of international taxation has undergone a profound transformation in the past decade, driven primarily by the Base Erosion and Profit Shifting (BEPS) initiatives of the Organisation for Economic Co-operation and Development’s (OECD).^[1] There were growing concerns regarding aggressive tax planning strategies that exploited gaps and mismatches in tax laws to artificially shift profits to low-tax jurisdictions, resulting in minimal overall corporate taxation. This led to a global effort against Treaty Shopping. Treaty shopping refers to the practice of exploiting double tax treaties between countries by using an intermediary jurisdiction to channel investments or transactions, often to secure favourable tax treatment. This practice has been a subject of debate, with some viewing it as a legitimate strategy to optimize tax liabilities, while others see it as a loophole that undermines the integrity of tax systems.^[2] This practice has led to significant revenue loss worldwide. India, as a developing nation and an emerging economy has an extensive network of 93 bilateral tax treaties. However, India found itself particularly vulnerable to such arrangements.^[3] The traditional approach to combating tax avoidance through treaty abuse were specific anti-avoidance rules (SAARs) and judicial interventions. But these measures have now proved to be insufficient to address the sophistication and scale of modern tax avoidance schemes.^[4] The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) introduced the Principal Purpose Test (PPT). Which led to a paradigm shift towards a coordinated global action against treaty abuse. Unlike previous approaches that relied primarily on bilateral negotiations or domestic anti-avoidance measures, the PPT establishes a unified framework for preventing treaty benefits in inappropriate circumstances across multiple jurisdictions simultaneously.^[5]

The Evolution of Anti-Abuse Provisions in International Taxation

Historical Development of Anti-Avoidance Frameworks

The anti-avoidance measures in international taxation have evolved in phases, each phase being a result of increasingly sophisticated tax planning strategies. In the beginning, countries relied primarily on Judicial Anti-Avoidance Rules (JAAR), which were a result of judicial precedents applying the doctrines of substance over form, business purpose, and step transaction. These judicial principles were effective in individual cases. However, they lacked the consistency and predictability required for prevention against comprehensive treaty abuse.^[6]

These flaws led to the development of Specific Anti-Avoidance Rules (SAARs). These rules target specific transactions known to result in tax avoidance, such as provisions addressing dividend stripping, bonus stripping, thin capitalization, and transfer pricing manipulation. While SAARs provide greater certainty and consistency than the judicial approach, they have a narrow scope, and hence, they can be circumvented through alternative structuring arrangements. ^[7]

The General Anti-Avoidance Rules (GAAR), which were introduced in India on 1 April 2017, were a more extensive approach to domestic anti-avoidance. GAAR applies where the main purpose of an arrangement is to gain tax advantage and the arrangement meets one of four "tainted elements", namely, absence of commercial substance, creation of rights and obligations that would not otherwise arise, abuse of legal form, or absence of bona fide intent. However, GAAR’s application is subject to significant safeguards, including a monetary threshold of INR 30 million, grandfathering provisions, and mandatory review by an Approving Panel.^[8] 

The BEPS Project and Multilateral Coordination

The Base Erosion and Profit Shifting (BEPS) project, was launched in 2013 with the support of G20 nations. marking the first comprehensive multilateral effort to address tax avoidance in the digital age. The project’s 15 Action Plans addressed various aspects of international tax planning, with Action 6 specifically focusing on “Preventing the Granting of Treaty Benefits in Inappropriate Circumstances”.^[9] Action 6 established minimum standards requiring countries to include anti-abuse provisions in their tax treaties, offering jurisdictions three alternatives: (1) the Principal Purpose Test alone, (2) the PPT combined with a simplified or detailed Limitation of Benefits (LOB) provision, or (3) a detailed LOB provision supplemented by mechanisms to address conduit arrangements. The PPT emerged as the default option due to its ability to satisfy the minimum standard independently and its applicability across diverse treaty structures.^[10] 

The development of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) as a multilateral instrument is a revolutionary approach to implementing treaty-related BEPS measures without requiring bilateral renegotiation with multiple existing tax treaties. India was among the first countries to sign the MLI on June 7, 2017. Subsequently deposited its instrument of ratification on June 25, 2019, and MLI entered into force for India on October 1, 2019.^[11]

The Principal Purpose Test in Indian DTAAs

The CBDT Circular provides that “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 if it 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).”^[12] This is the basis for the principle purpose test. It constitutes of a two-stage test: first, where tax authorities must demonstrate that “one of the principal purposes” of the arrangement was obtaining treaty benefits, and, secondly, even if this threshold test is crossed, the taxpayer can avail of the benefit by showing that award of the benefit is not contrary to the object and purpose of the treaty. The burden thus shifts between the parties during various stages, and this results in a balance being achieved.^[13]

The PPT applies to Indian tax treaties through two primary mechanisms. For treaties covered by the MLI, the PPT takes effect based on specific timeline provisions related to each contracting state’s ratification. For withholding taxes, the PPT applies to events occurring on or after the first day of the previous year beginning after the latest MLI entry into force date between the contracting jurisdictions. For other taxes, it applies to previous years beginning after six months from the latest MLI entry into force date.^[14]

Treaties incorporating the PPT through bilateral negotiations, such as those with Chile, China, Iran, and Hong Kong, follow their respective dates of entry into force. The India-Mauritius DTAA presents a unique case, as the protocol signed on March 7, 2024, introducing the PPT has not yet entered into force. That creates a temporary uncertainty that the CBDT’s guidance has sought to address. ^[15] Currently, the PPT applies to approximately 20 tax treaties entered into by India through the MLI, including those with Australia, France, Japan, the UK, Singapore, and Cyprus. Notable treaties with the United States, Germany, and China remain outside the MLI framework.

Nature and Scope of Operation

The test operates as a general anti-abuse rule that supplements other treaty provisions. Its non-obstante clause ensures overriding effect over specific treaties when the purpose test is satisfied. Unlike mechanical rules such as LOB provisions that rely on objective ownership and activity tests, the PPT requires a contextual analysis of all relevant facts and circumstances surrounding the transaction or arrangement.^[16] 

The ambit of "arrangements or transactions" under the PPT is construed widely so as to cover any agreement, understanding, scheme, transaction, or series of transactions, irrespective of legal enforceability. The words “transaction” or “arrangement” include “the creation, assignment, acquisition or transfer of the income itself, or of the property or right in respect of which the income accrues”.  This broad approach makes it possible for the PPT to cover sophisticated tax planning arrangements that could otherwise take advantage of technical deficiencies in more precise anti-avoidance provisions. The PPT could apply to abusive conduit arrangements as well as abusive restructurings, such as those in Prévost Car Inc. v. The Queen and Velcro Canada Inc. v. Canada, dividend transfer transactions like those in the Royal Dutch Oil Company case and the Bank of Scotland case, as well as steps that are taken in order to change a corporation’s residence for tax purposes as occurred in MIL Investments (SA).^[17]

To illustrate this, one can take an example from a Russian case law. Russia and Cyprus had a tax treaty. In the case of Severstal PAO (2016), a Russian company paid dividends to four Cypriot shareholders in 2011. The company applied for the 5% withholding tax rate provided for in the Russia-Cyprus Income and Capital Tax Treaty (1998). During a tax audit, the tax authorities discovered that the Cypriot companies had paid the dividends directly to companies registered in the British Virgin Islands (BVI). Applying PPT provisions, the tax authorities taxed these offshore companies on the actual recipients of the dividends and subjected them to withholding tax of 15% instead of 5%.^[18]

The PPT's interaction with pre-existing treaty provisions gives rise to nuanced interpretational issues. Although the PPT has the ability to withhold treaty benefits, it cannot achieve positive tax obligations or recharacterize arrangements for tax purposes. That limitation ensures that PPT denial could lead to imposition of domestic tax rates over treaty-reduced rates but cannot achieve taxing rights that do not otherwise exist under domestic law or the treaty.

The CBDT Guidelines and Judicial Clarifications in India

CBDT Circular 01/2025: Key Provisions and Analysis^[19]

The Central Board of Direct Taxes issued the Circular No. 01/2025 on January 21, 2025, providing comprehensive guidance on the application of the PPT under India’s DTAAs. This circular addressed several critical uncertainties regarding the implementation. Particularly regarding its temporal application and interaction with existing treaty provisions.^[20]

The circular establishes four principles governing the application of PPT. First, it confirms the prospective nature for implementation. This prospective application principle provides crucial certainty for existing investment structures and helps preserve legitimate expectations built around pre-existing treaty frameworks.

Second, the circular explicitly excludes grandfathering provisions in India’s treaties with Mauritius, Singapore, and Cyprus from PPT scrutiny. This exclusion is particularly significant for capital gains arising from shares acquired before April 1, 2017, which remain exempt from Indian capital gains taxation despite subsequent treaty amendments. The CBDT’s position recognizes that grandfathering provisions represent specific bilateral commitments that should be honoured independently of general anti-abuse measures.^[21]

Thirdly, the circular emphasizes that PPT application requires a “context-specific fact-based exercise” conducted on a case-by-case basis, with particular attention to “objective facts and findings”. This guidance suggests that tax authorities must ground their PPT determinations in concrete evidence rather than subjective assessments or presumptions about taxpayer motivations. 

Fourthly, the circular places the burden on taxpayers to establish that granting treaty benefits would align with the “object and purpose” of the relevant treaty provisions. This allocation of burden works as a safeguard against abuse while preserving access to benefits for legitimate commercial activities. 

March 2025 CBDT Clarification^[22]

Responding to concerns regarding the scope and interpretation of the Circular dated 01/2025, the CBDT issued a clarifying press release on March 15, 2025. This clarification addressed four key areas of uncertainty that had emerged following the initial circular.

The clarification confirms that the circular applies exclusively to DTAAs containing PPT provisions, meaning treaties without such provisions remain unaffected by the guidance.^[23] 

The press release emphasizes that the circular does not interfere with other treaty provisions beyond the PPT, including separate anti-abuse measures such as LOB clauses or beneficial ownership requirements. This clarification ensures that the comprehensive anti-abuse framework created by various treaty provisions continues to operate coherently.

Most importantly, the clarification states that the circular does not affect the operation of domestic anti-abuse rules such as GAAR, SAAR, and JAAR, which “shall continue to operate independently”.^[24] Addressing the concerns regarding the PPT guidance inadvertently limiting the application of domestic anti-avoidance measures in cross-border transactions. 

The March clarification represents the CBDT’s commitment to providing clear guidance while preserving the integrity of India’s comprehensive anti-avoidance framework, which includes both treaty-based and domestic measures.^[25] 

Judicial Interpretation

The SC Lowy Case: Delhi ITAT’s Pioneering Decision

The Delhi Income Tax Appellate Tribunal’s decision in SC Lowy P.I. (LUX) S.A.R.L. v. ACIT^[26] represents the first comprehensive judicial interpretation of the PPT under Indian tax law. The landmark case involved a Luxembourg-based entity claiming benefits under the India-Luxembourg DTAA for income derived from Indian securities transactions. 

The ITAT’s analysis focused on several key factors in determining whether the PPT was satisfied. The tribunal examined the entities' business operations, including the diversity of its investment portfolio, the presence of qualified personnel, the incurrence of substantial business expenses, and the timing of its incorporation relative to specific investment opportunities. These factors collectively demonstrated that the entity had genuine commercial substance beyond mere tax planning.^[27] 

The tribunal adopted a holistic approach, considering the taxpayer’s overall business model rather than focusing narrowly on individual transactions. This methodology suggests that courts will evaluate the commercial rationality of business structures in their entirety, rather than dissecting specific aspects that might appear tax-motivated when taken in isolation. That the mere existence of tax benefits does not automatically trigger denial of the PPT, if the arrangement has substantial commercial purpose. This interpretation maintains space for legitimate tax planning while targeting arrangements that lack genuine business rationale.^[28] 

Mumbai ITAT Decision on MLI Implementation

The Mumbai ITAT’s decision in Sky High Appeal XLIII Leasing Company Limited^[29] addressed fundamental questions regarding the implementation of MLI provisions in India. The tribunal ruled that MLI provisions, including the PPT, cannot be enforced without a separate notification under Section 90(1) of the Income Tax Act, which provides that, “90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India, and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.”^[30]

In its judgement, the Mumbai ITAT heavily relied on the Supreme Court’s precedent in Nestlé SA^[31], holding that mere ratification of international instruments does not automatically modify India’s bilateral tax treaties for domestic law purposes. This decision requires the government to issue specific notifications incorporating MLI changes into each affected treaty relationship. The tribunals approach creates potential complications for PPT implementation across India’s treaty network, as it suggests that tax authorities cannot apply PPT provisions without explicit domestic incorporation through proper notification procedures. ^[32]

Application, Practical Issues, and Compliance Strategies

Analysis of Cross-Border Investment Structures

The implementation of PPT provisions significantly affects how multinational enterprises structure their cross-border investments through India. Traditional investment routes through jurisdictions like Mauritius, Singapore, and Cyprus now require enhanced documentation and substantive business presence to ensure treaty benefits remain available. Companies must demonstrate genuine commercial activities, including meaningful decision-making, risk management, and operational functions in the treaty jurisdiction.^[33]

The PPT’s fact-based approach means that investment structures must be evaluated holistically, considering factors such as the sequence of transactions, the presence of intermediary entities, the flow of funds, and the allocation of risks and rewards. Structures that appear artificial or contrived, particularly those involving circular cash flows or entities lacking economic substance, face increased scrutiny under the PPT framework.^[34] 

Practical compliance requires multinational groups to conduct comprehensive substance reviews of their existing structures, documenting the commercial rationale for each entity and transaction within the investment chain. This documentation must go beyond formal compliance with treaty requirements to demonstrate genuine business purposes that would justify the structure even if the structure adduced no tax benefits.^[35]

Documentation and Evidence Requirements

The PPT’s emphasis on “all relevant facts and circumstances” creating extensive documentation requirements for taxpayers seeking to establish their entitlement to treaty benefits. Companies must maintain contemporaneous records demonstrating the commercial substance of their operations, including board resolutions, business plans, risk management policies, and operational procedures.^[36] 

The burden of proof allocation under the PPT means that taxpayers must proactively establish their case rather than simply responding to tax authority challenges.^[37] 

Compliance Strategies and Risk Management

Effective PPT compliance requires a multi-faceted approach that addresses both structural and procedural considerations. Companies should conduct regular substance audits to ensure their treaty jurisdiction operations meet both formal requirements and practical expectations for genuine business activity. These audits should evaluate personnel qualifications, decision-making processes, risk management functions, and local market engagement. 

Risk management strategies should include scenario planning for potential PPT challenges, including preparation of detailed position papers explaining the commercial rationale for investment structures. Companies should also establish clear protocols for responding to tax authority inquiries, including document production procedures and communication strategies.^[38]

Proactive engagement with tax authorities through advance rulings or bilateral advance pricing agreements can provide valuable certainty regarding PPT application to specific structures. These mechanisms allow companies to clarify their compliance position before implementing significant transactions or structures.^[39] 

Impact on Foreign Direct Investment Flows

The implementation of PPT provisions has created both challenges and opportunities for foreign direct investment (FDI) flows into India. While the enhanced anti-abuse framework may initially create uncertainty for some investors, the CBDT’s guidance regarding prospective application and grandfathering provisions has helped stabilize expectations. India’s FDI inflows have shown resilience, with equity inflows reaching USD 50.01 billion in FY25, representing a 13% increase despite enhanced scrutiny measures.^[40]

The PPT’s impact varies significantly across investment categories and structures. Passive portfolio investments through traditional fund structures may face less scrutiny than complex holding company arrangements designed primarily for tax efficiency. Operating investments with substantial Indian business activities typically satisfy PPT requirements more readily than purely financial arrangements. 

Long-term FDI^[41] trends suggest that while the PPT may deter purely tax-motivated structures, it has not significantly impacted genuine commercial investments. India’s continued attraction as an investment destination, supported by initiatives such as the Make in India program and Production-Linked Incentive schemes, appears to outweigh concerns about enhanced tax compliance requirements. 

Critical Analysis: Effectiveness and Implementation Challenges

Assessment of PPT Effectiveness in Curbing Treaty Abuse

The Principal Purpose Test reflects significant advances in global action against treaty abuse, yet its performance needs to be evaluated on both the basis of what it was designed to achieve and against the realities of operational challenges.^[42] Early evidence indicates that the PPT has largely prevented the most deplorable forms of treaty shopping, especially transactional schemes involving shell companies with little economic substance. The fact that the PPT exists seems to have urged most multinational corporations to enhance the content of their treaty jurisdiction activities.

However, the PPT’s effectiveness is constrained by multiple built-in constraints. The reliance on subjective assessments of principal purposes creates interpretational uncertainties that sophisticated tax planners may exploit. Unlike mechanical rules such as LOB provisions that provide clear safe harbours, the PPT requires case-by-case analysis that may yield variable outcomes across similar fact patterns.^[43]

The PPT’s outline as a general anti-abuse rule means it cannot address all forms of treaty abuse conclusively. Structures that retain commercial substance but obtain tax advantage may still comply with the PPT although they would not meet more specific anti-avoidance measures. The OECD suggestion of blending PPT with LOB provisions demonstrates an appreciation of the PPT's nature-limited problem.^[44] 

Implementation Challenges and Interpretational Issues

The implementation of PPT provisions has raised serious legal interpretation and administration issues. The Mumbai ITAT decision requiring standalone domestic notification of MLI provisions poses significant questions about the interface between international treaty obligations and application of domestic law. This process complexity presents opportunities for coverage gaps and legal challenge. 

The coalescence of PPT provisions with other anti-avoidance measures brings added complexity. Even though the CBDT has clarified that domestic anti-avoidance measures continue to operate independently of the PPT, the ground-level alignment of the overlapping frameworks remains challenging. Tax authorities must contend with competing policy priorities between PPT objectives and other policy priorities such as the encouragement of genuine investment and treaty certainty.^[45]

The fact-intensive nature of the PPT brings severe burdens on both tax administrations and taxpayers. Tax administrations require specialized expertise to undertake the extensive analysis needed for effective application of the PPT, while taxpayers incur greater documentation and compliance expenses. The intensity of resources may make the PPT administratively infeasible in developing economies with weak administrative capacities.

Overlap and Coordination with Domestic Anti-Avoidance Rules

The interaction between the PPT and the domestic anti-avoidance regime in India offers both opportunities and challenges for full tax compliance. The "one of the principal purposes" test of the PPT is wider than GAAR's "main purpose" requirement, giving rise to potential cases where arrangements meet GAAR conditions but not PPT.^[46] This variation in scope may give rise to differential treatment of comparable arrangements depending on whether treaty benefits are being pursued. 

These coordination problems are worst where the case deals with multiple anti-avoidance rules. One structuring may trigger GAAR, some SAARs, judicial anti-avoidance principles, and the PPT simultaneously. While the CBDT has contended that these rules operate in isolation from one another, interaction between simultaneous frameworks is not apparent.

The timing differences between various anti-avoidance regimes add further complexity. Grandfathering is inherent in GAAR concerning arrangements entered into before April 2017, while PPT grandfathering applies to a treaty and may possibly clash with GAAR cut-off dates. Such timing mismatch adds possible gaps or overlaps in coverage to be carefully addressed.^[47]

Burden of Proof and Procedural Safeguards

The burden of proof lies first with the tax administration, once that prima facie case is made, the burden then shifts to the taxpayer. Tax administrations would need to initially establish that gaining treaty benefits was "one of the principal purposes" of the arrangement, and that would require extensive examination of all facts and circumstances that are pertinent.

After tax authorities establish their initial burden, the onus is then on taxpayers to prove that extending treaty benefits would not be contrary to the "object and purpose" of concerned treaty provisions.^[48] The tax authority must furnish proof that one of the main objectives of the taxpayer was to obtain the benefit, it is already fighting a losing battle. Alternatively, the taxpayer has no chance of fending off the accusation of abuse if it is up to him to furnish evidence that benefiting from one or several treaty provisions was not one of his primary motives. PPT attempts to establish a balance between the interests of the authority and those of the taxpayer. However, the bias in favor of the tax authority is fairly obvious.^[49] 

Absence of procedural safeguards as per GAAR exacerbates concerns over the operation of PPT. Unlike on the other side GAAR, there are Approving Panel scrutiny and monetary thresholds, the PPT does not have these equivalent protections. This lack of equal procedural protection has prompted some to recommend that application of PPT be subject to senior administrative review equivalent to being utilized with domestic general anti-avoidance rules.^[50]

Comparative Practices and International Perspectives

International adoption of PPT provisions under the MLI has established an interconnected series of anti-abuse measures that span hundreds of bilateral tax treaties globally. More than 100 jurisdictions signed the MLI as of 2024, with more than 60 expressing adoption of the PPT as their main anti-abuse tool. This widespread adoption creates opportunities for coordinated enforcement and consistent interpretation across jurisdictions.^[51]

Different countries have followed different paths. Australia's Taxation Office has provided voluminous practical guidance in the form of statements of the factors on which tax administrations will rely in implementing the PPT, with examples and safe harbours. This guidance is placed on the first priority of conjoint application of the PPT with treaty preambles that identify the intent to prevent avoidance. ^[52]

The United Kingdom approach is based on integration with current domestic anti-avoidance measures, namely the General Anti-Abuse Rule and some focused anti-avoidance rules. European Union member states must also consider how PPT provisions interact with EU state aid rules and underlying freedoms in EU law.^[53] 

Anti-Abuse Rule provides some insight into how to handle overlapping anti-avoidance regimes. Singapore has asserted that the PPT and domestic anti-avoidance rules apply severally, yet in parallel, to the same transaction.^[54] This approach of parallel application allows tax administrations to choose the most appropriate framework for handling fact patterns.^[55]

The United States of America, not a signatory to the MLI, has had vast treaty practice with LOB provisions and hence has complementary experience in implementing PPT. US treaty practice establishes the necessity of bright qualification tests and the limitations of addressing intricate corporate structures with rigid rules. The US experience points out that the union of objective tests (like LOB) with subjective testing (like PPT) provides the best anti-abuse regime.^[56]

European practice in the application of PPT has emphasized regional legal framework coordination and treaty-based action. Judgments of the European Court of Justice in cases such as the Danish Beneficial Ownership cases have established principles of prevention of treaty abuse affecting PPT interpretation even in non-EU settings.^[57]

Policy Recommendations and Future Outlook

Enhancing the PPT Implementation Framework

The establishment of expert review panels, such as GAAR's Approving Panel mechanism, would deliver valuable procedural protections while ensuring consistent application across cases. These panels would consist of both officials of the tax administration and outside experts in order to render balanced views on complex commercial arrangements.^[58]

Development of comprehensive PPT guidance that includes sample examples and safe harbours would significantly influence taxpayers' certainty of compliance while providing accurate standards for application by tax authority. The guidance must address common fact scenarios, outline the interaction of PPT with other anti-avoidance provisions, and provide practical tests for assessing commercial substance.^[59]

Higher quality training for tax officials is necessary for efficient PPT application, considering the complexity of the test as well as the expertise needed to apply treaty correctly. The training should be on international tax planning strategies, commercial substance evaluation, and coordination with tax authorities of treaty partners.

Strengthening International Cooperation

The success of PPT rules is significantly based on cooperation between the partner tax treaty jurisdictions, and so it is implied that there should be intensified mechanisms of cooperation. Bilateral consultation procedures for PPT matters would encourage consistent comprehension and minimize chances of double taxation arising from incongruent stances. Such procedures can involve information exchange protocols and co-audit practices where necessary.

Expansion of jurisdictional standardized PPT documentation requirements would reduce compliance for multinationals while enhancing the quality of information at hand to tax administrations. The standardization needs to be aligned through OECD channels and woven into Mutual Agreement Procedure guidelines.

Strengthening dispute resolution procedures, such as fast-track MAP procedures for PPT cases and increasing the scope of binding arbitration, would be valuable protections against protracted uncertainty and double taxation. Dispute resolution mechanisms should be designed to take into account the complex issues of fact in PPT cases and allow for proper expert input.^[60]

Future Outlook

The development of international tax policy indicates that the anti-abuse provisions have to be continued to extend and streamlined, and the PPT is likely to be used as a basis of foundation for future developments. The OECD’s ongoing work dedicated work on Pillar One and Pillar Two of the digital tax initiative demonstrates commitment to coordinated approaches to international tax challenges. Lessons from the early implantation experience may help in building future anti-abuse framework on PPT principals.   

The success of the MLI as a multilateral instrument in modifying tax treaties opens the door to using similar approaches in other cross-border tax matters. Some industries or types of transactions incompatible with the PPT regimes that prevail at present could be tackled by future multilateral agreements. The precedent set by the MLI also demonstrates that it is not beyond the capacity of many countries to act in concert.^[61]

The growth in sophistication of tax planning methods it is necessary to repeatedly reform anti-abuse regimes to deal with new threats. The PPT's generally combat anti-abuse through a power of flexibility to respond to new planning methods as they arise, but this flexibility has to be weighed against considerations of legal certainty and equitable administration.

The integration of environmental, social, and governance (ESG) factors into tax policy can also have an impact on future anti-abuse development. When tax authorities apply tests such as the PPT, they might be considering the broader social consequences of tax planning arrangements increasingly.

Conclusion

The Principal Purpose Test represents a watershed moment in the international taxation policy, marking the transition from fragmented bilateral approaches to a coordinated multilateral action against treaty abuse. The Principal Purpose has been highly successful in discouraging flagrant treaty shopping structures. However, it has brought into sharp focus the challenges in reconciling anti-avoidance instruments with the legal need for certainty and commercial flexibility. The CBDT's 01/2025 circular and subsequent clarifications have offered important guidance on the application and implementation of the test in India. The judicial rulings by Indian tribunals, have started to set important precedents for the interpretation of the test that favour substance over form while leaving room for acceptable tax planning. In the case of India, the PPT scheme is both an opportunity and a challenge to become a global leader in international tax policy coordination. The proactive strategy by the country to implement MLI and the detailed guidance on the application of PPT reflect commitment to international best practices and protection of domestic interests. The long-term success of the test will ultimately be driven by international cooperation, and flexibility in response to changing business models and tax strategies. The interaction between PPT internationally and local anti-avoidance measures is complex, but it can be controlled effectively through explicit guidance.

The use of artificial intelligence in tax administrations will continue to grow, with the resultant prospect of decreasing the administrative burden. Mechanisms for international cooperation, such as more effective MAP procedures and harmonized documentation requirements, will be key to achieving maximum PPT effectiveness and minimizing compliance burdens. The success of the cooperation mechanisms will rely on continued commitment from all participating jurisdictions to the principles underpinning the BEPS project. The Principal Purpose Test is not merely an add-on to tax treaty provisions, but an irreversible tilt towards coordinated international governance of international taxation. It will influence the future evolution of international tax law and yield lessons for the treatment of other transnational policy issues in an ever more integrated world.

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[13] Samaahith Addoor, ‘India Applies Principal Purpose Test: Impact on Tax Structures & Deal Making’ (Taxsutra, 5 February 2025) <https://database.taxsutra.com/articles/5205e6711093e14f71af3ebf5b7b40/expert_article> accessed 30 September 2025

[14] Circular No. 1/2025 [F. No. 500/05/2020/Ft&Tr-Ii], Dated 21-01-2025

[15] Ernst & Young LLP, ‘Tax Alert: Protocol to India-Mauritius DTAA signed to include Principal Purpose Test’ (7 March 2024)< https://www.ey.com/content/dam/ey-unified-site/ey-com/en-in/technical/alerts-hub/documents/protocol-to-the-india-mauritius-dtaa-signed-to-include-principal-purpose.pdf> accessed 30 September 2025

[16] Kuldeep Sharma, ‘Combatting Tax Treaty Abuse: Tools available under the BEPS Multilateral Instrument’ (South Centre, Tax Cooperation Policy Brief No. 18, September 2021) <https://www.southcentre.int/wp-content/uploads/2021/09/TCPB18_Combatting-Tax-Treaty-Abuse_EN.pdf> accessed 30 September 2025

[17] David G Duff, ‘Tax Treaty Abuse and the Principal Purpose Test: Part II’ (2018) ARC 30

[18] Hans van den Hurk, ‘ Tax Treaties and Abuse: The Effectiveness of the Principal Purpose Test and Some of Its Shortcomings’ (IBFD, 2022) <https://www.ibfd.org/sites/default/files/2022-10/oecd_international-tax-treaties-and-abuse-the-effectiveness-of-the-principal-purpose-test-and-some-of-its-shortcomings-ibfd-1.pdf > accessed 15 January 2026

[19] Circular No 1/2025 [F No 500/05/2020/Ft&Tr-Ii], Dated 21-01-2025

[20] PwC Mauritius, ‘India issues guidance on the application of the Principal Purpose Test’ (21 January 2025) <https://www.pwc.com/mu/en/services/tax/Taxtimes/india-treaty-ppt.html> accessed 30 September 2025

[21] Archana Rao, ‘India Clarifies Tax Treaties with Mauritius, Cyprus, and Singapore’ (India Briefing, 22 January 2024) <https://www.india-briefing.com/news/india-clarifies-tax-treaties-with-mauritius-cyprus-and-singapore-35933.html/> accessed 30 September 2025

[22] Central Board of Direct Taxes, ‘Circular No. 01/2025: Guidance for application of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements’

[23] Mihir Desai, ‘CBDT Clarifies Principal Purpose Test (PPT) Application Under India’s DTAAs’ (KNAV Insights, 22 January 2025)< https://in.knavcpa.com/insights/flash-alert-cbdt-issues-clarifications-on-circular-no-01-2025-guidance-for-application-of-the-principal-purpose-test-ppt-under-indias-dtaas/> accessed 1 October 2025

[24] Central Board of Direct Taxes, ‘Circular No. 01/2025: Guidance for application of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements’

[25] Taxmann, ‘CBDT Issues Clarification on PPT’s Circular; GAAR/SAAR Continue to Operate Independently’ (Taxmann, 18 March 2025) <https://www.taxmann.com/post/blog/cbdt-issues-clarification-on-ppts-circular-gaar-saar-continue-to-operate-independently >accessed 1 October 2025

[26] SC Lowy P.I. (Lux) S.A.R.L. v. Assistant Commissioner of Income Tax (ACIT) ITA No 3568/DEL/2023

[27] Ernst & Young LLP, ‘Delhi ITAT rules on principal purpose test’ (27 Mar 2025) <https://www.ey.com/en_in/technical/alerts-hub/2025/03/delhi-itat-rules-on-principal-purpose-test> accessed 1 October 2025

[28] ibid

[29] Sky High Appeal XLIII Leasing Company Limited [TS-1085-ITAT-2025(Mum)]

[30] Income Tax Act 1961, s 90(1)

[31] Assessing Officer (I.T.) v. Nestlé SA (2023) 458 ITR 756

[32] Amod Khare, Vishal Hakani, Gagan Malik, ‘MLI Provisions Unenforceable Without Separate Notification: Mumbai ITAT Rejects Tax Authority’s Attempt to Deny DTAA Benefit Using Principal Purpose Test’ (Alvarez & Marsal, 1 October 2025) <https://www.alvarezandmarsal.com/insights/mli-provisions-unenforceable-without-separate-notification-mumbai-itat-rejects-tax-authority-s-attempt-to-deny-dtaa-benefit-using-principal-purpose-test#_ftn2 >accessed 1 October 2025

[33] Aibidia, ‘Principal Purpose Test (PPT)’ (Aibidia Transfer Pricing Glossary, 2025) <https://www.aibidia.com/transfer-pricing-glossary/principal-purpose-test-ppt>accessed 1 October 2025

[34] Jinisha Jain and Ritu Shaktawat, ‘Interpretational issues in Anti-Abuse Provisions’ (The Chamber’s Journal, March 2024)< https://www.khaitanco.com/sites/default/files/202403/The%20Chamber%20Journal%20%20March%2024%20-%20Interpretational%20issues%20in%20anti%20abuse%20provisions.pdf> accessed 1 October 2025

[35] Aibidia (n 30)

[36] ibid

[37] ibid

[38] ibid

[39] OECD, Making Dispute Resolution More Effective – MAP Peer Review Report, India (Stage 1): Inclusive Framework on BEPS: Action 14, OECD/G20 Base Erosion and Profit Shifting Project (OECD Publishing, Paris, 2019) < https://doi.org/10.1787/c66636e8-en >accessed 1 October 2025

[40] ET Bureau ‘FDI inflows hit 3-yr high, grow 14% to $81 b in FY25’ The Economic Times (1 October 2025)

[41] India Brand Equity Foundation (IBEF), ‘Foreign Direct Investment in India | FDI Trends & Insights’ (2025)< https://ibef.org/economy/foreign-direct-investment >accessed 1 October 2025

[42]Lubna Kably, ‘Multilateral instrument to curb tax treaty abuse’ (The Times of India, 12 June 2019) <https://timesofindia.indiatimes.com/business/india-business/multilateral-instrument-to-curb-tax-treaty-abuse/articleshow/69779930.cms> accessed 1 October 2025

[43] Hans van den Hurk, ‘ Tax Treaties and Abuse: The Effectiveness of the Principal Purpose Test and Some of Its Shortcomings’ (IBFD, 2022) <https://www.ibfd.org/sites/default/files/2022-10/oecd_international-tax-treaties-and-abuse-the-effectiveness-of-the-principal-purpose-test-and-some-of-its-shortcomings-ibfd-1.pdf >accessed 1 October 2025

[44] Vrinda Bagaria, ‘Interplay of Domestic GAAR and PPT – An Overview’ (Taxsutra, 24 August 2020) <https://database.taxsutra.com/articles/f19a4cf1a50253576614fc9bde8384/expert_article> accessed 1 October 2025

[45] P V Iyer, ‘Anti-Abuse Provisions under Income Tax Law: An Indian Perspective (with reference to GAAR and PPT)’ (Taxmann, 2020) < https://www.taxmann.com/research/international-tax/top-story/105010000000017471/anti-abuse-provisions-under-income-tax-law-an-indian-perspective-with-reference-to-gaar-and-ppt-experts-opinion> accessed 1 October 2025

[46] KPMG, ‘Action 6 – Preventing the granting of treaty benefits in inappropriate circumstances’ (KPMG Flash News, 30 October 2015)< https://assets.kpmg.com/content/dam/kpmg/pdf/2015/10/KPMG-Flash-News-Action-Plan-6-Treaty-Abuse-1.pdf >accessed 1 October 2025

[47] ibid

[48] Rajesh Simhan, Afaan Arshad and Anand Unnikrishnan, ‘Tax treaties and the principal purpose test – government clarifies its application’ (Anagram Partners, 28 January 2025) <https://anagrampartners.in/wp-content/uploads/2025/01/20250127-Principal-Purpose-Test-Tax-Circular-UpdateR1.pdf> accessed 1 October 2025

[49] Błażej Kuźniacki, ‘Untangling the PPT’s burden of proof’ (Kluwer International Tax Blog, 22 January 2018) <https://legalblogs.wolterskluwer.com/international-tax-law-blog/untangling-the-ppts-burden-of-proof/> accessed 15 January 2026

[50] ibid

[51] Blazej Kuzniacki, ‘The Limitation on Benefits (LOB) Provision in BEPS Action 6/MLI: Ineffective Overreaction of Mind-Numbing Complexity – Part 1’ (2018) 46(1) Intertax <https://kluwerlawonline.com/journalarticle/Intertax/46.1/TAXI2018007> accessed 1 October 2025

[52] Sharma (n 16)

[53] Irma Mosquera, ‘Interaction between PPT, tax treaty and domestic GAARs’ (Inter-American Center of Tax Administrations, 24 June 2019) <https://www.ciat.org/interaction-between-ppt-tax-treaty-and-domestic-gaars/?lang=en> accessed 1 October 2025

[54] Tay Ang Sim, ‘Countering Treaty Abuse Using Singapore’s General Anti-Abuse Rule and the Principal Purpose Test’ (Tax Academy of Singapore, 1 February 2020) <https://www.taxacademy.sg/files/research-papers/countering%20treaty%20abuse%20using%20singapores%20general%20aar%20and%20ppt.pdf> accessed 1 October 2025

[55]Vrinda Bagaria, ‘Interplay of Domestic GAAR and PPT – An Overview’ (Taxsutra, 24 August 2020)< https://database.taxsutra.com/articles/f19a4cf1a50253576614fc9bde8384/expert_article >accessed 1 October 2025

[56] José Domingo Palomino Pérez, ‘Are the LOB provisions efficient measures to prevent tax treaty hopping by taxpayers?’ (Tilburg University, 19 June 2017) <https://arno.uvt.nl/show.cgi?fid=143947> accessed 1 October 2025

[57] Mosquera (n 15)

[58] Sanjay Sanghvi, Raghav Kumar Bajaj and Ujjval Gangwal, ‘Government constitutes GAAR Panel under the Income-tax Law’ (Khaitan & Co, 11 February 2022)< https://www.khaitanco.com/thought-leaderships/Government-constitutes-GAAR-Panel-under-the-Income-tax-Law> accessed 1 October 2025

[59] Vinod Arora, ‘CBDT Guidelines on PPT under DTAAs with Mauritius, Singapore, Cyprus’ (FinTax Blog, 2025)< https://fintaxblog.com/cbdt-guidelines-on-ppt-under-dtaas-with-mauritius-singapore-cyprus/>accessed 1 October 2025

[60] Jyotsana Thareja, ‘Mutual Agreement Procedures (MAP)’ (TaxGuru, 2024)< https://taxguru.in/income-tax/mutual-agreement-procedures-map.html >accessed 1 October 2025

[61] Damini Agarwal, ‘Impact of MLI on Indian Tax Treaties under International Taxation’ (TaxGuru, 2024) <https://taxguru.in/income-tax/impact-mli-indian-tax-treaties-international-taxation.html> accessed 1 October 2025