The income tax department has come out with a fresh guidance note on applicability of Principal Purpose Test (PPT) for claiming tax treaty benefits, which will apply prospectively.
The Central Board of Direct Taxes (CBDT) in its guidance note on PPT also clarified that the grandfathering provisions under the India-Cyprus DTAA, India-Mauritius DTAA and India-Singapore DTAA would remain outside the purview of the newly issued PPT provision.
India has made certain treaty-specific bilateral commitments in the form of grandfathering provisions in the DTAAs signed with Singapore, Mauritius and Cyprus.
"These commitments, as reflected in the bilaterally agreed object and purpose of such grandfathering provisions, are not intended to interact with the PPT provision as such," the CBDT said.
The grandfathering provision in these treaties would be governed by the specific provisions specified in the respective DTAAs.
Deloitte India, Partner, Rohinton Sidhwa said the circular clarifies various aspects for interpreting the PPT that has now been featured in most Indian tax DTAAs.
Most importantly, it establishes the primacy of the grandfathering article that features in some treaties, namely Cyprus, Mauritius and Singapore. 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 April 1, 2025," Sidhwa said.
Nangia Andersen LLP Partner Vishwas Panjiar said as per the guidance note, PPT provisions shall only apply prospectively and would also not be applicable in cases where India has entered into treaty-specific bilateral commitments in the form of grandfathering (like India's treaty with Cyprus, Mauritius, and Singapore).
"The guidelines also recognise and in fact nudges tax authorities to refer to BEPS Action Plan 6 as well as the UN Model Tax Convention (subject to India's reservation on specific matters) for supplementary source of guidance while deciding on the invocation and application of PPT provisions," Panjiar added.
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