BACKGROUND
- Upon the Multilateral Instrument (MLI) entering into force, PPT has been introduced as a minimum standard in India's tax treaties covered by the MLI.
- PPT seeks to deny treaty benefit in cases where one of the
principal purposes of the arrangement/ transaction is to obtain a
tax benefit
- However, PPT would not apply where it is established that granting the benefit would be in accordance with the object and purpose of the treaty.
- The Central Board of Direct Taxes (CBDT) has now issued a circular1 providing guidance for the application of the PPT under India's tax treaties.
GUIDANCE IN THE CBDT CIRCULAR
- Period for application of PPT – PPT
provision shall be applied prospectively as
follows:
- Tax treaties where PPT has been incorporated through bilateral process: From the date of entry into force of the tax treaty or the protocol through which PPT is incorporated in the tax treaty (Chile, Iran, Hong Kong, China etc.)
- Tax treaties where PPT has been incorporated through MLI: From the date of entry into effect of MLI in relation to the relevant
| Type of Taxes | Entry into Effect |
|---|---|
| Withholding taxes on payments to non-residents | Event giving rise to withholding tax occurs on or after the 1st day of the next calendar year / taxable period that begins on the latter of the dates on which the MLI enters into force1 for each treaty partner |
| Other taxes | Taxable periods beginning on or after expiry of 6 calendar months from the latter of the dates on which the MLI enters into force for each treaty partner |
- Grandfathering Provisions
The grandfathering provisions under India – Cyprus, India - Mauritius and India - Singapore Tax Treaty with respect to capital gains arising from transfer of shares of an Indian company acquired prior to 1 April 2017 shall remain outside the scope of the PPT. - Additional Sources of Guidance
- Determination of whether one of the principal purposes is to obtain tax advantage should be based on objective assessment of the relevant facts and circumstances.
- Application of the PPT provision is a context specific factual analysis to be carried out on case-to-case basis keeping in mind the objective facts and findings. Tax Authorities may refer to BEPS Action Plan 6 and the Commentary to Articles 1 and 29 of the UN Model Tax Convention (updated in 2021) as additional sources of guidance for application of PPT, subject to India's reservations.
AURTUS COMMENTS
- The clarification regarding prospective application of PPT and protection of capital gains grandfathering provisions under India's tax treaties with Cyprus, Mauritius and Singapore is a welcome move and shall provide more certainty to foreign investors.
- In a recent decision2 , the Delhi Tribunal, also had the opportunity of dealing with the applicability of PPT in the context of India – Luxembourg Treaty while granting benefit to Luxembourg based Foreign Portfolio Investor (FPI). In the said decision, the Tribunal relied upon the Delhi High Court ruling in the case of Tiger Global International III Holdings3 and upheld the sanctity of Tax Residency Certificate for granting treaty benefit. The Tribunal also had regard to other factors such registration of the FPI with SEBI, majority investment concentration being outside India, incurring of substantial operational expenditure in Luxembourg, filing of tax return in Luxembourg etc.
- However, the revenue has filed a Special Leave Petition against the said Delhi High Court ruling and the Hon'ble Supreme Court has stayed the said Delhi High Court ruling. Accordingly, one will have to wait for the Supreme Court's verdict for a final decision.
Footnotes
1. Date of entry into force of MLI for India is 1 October 2019
2. SC Lowy P.I. (Lux) S.A.R.L [ITA No. 3568/Del/2013]
3. W.P. (C) 6764/2020
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