CBDT issues clarification on exemptions from Principal Purpose Test in Double Taxation Avoidance Agreements

New Delhi [India], March 16 : The Central Board of Direct Taxes (CBDT) has issued a circular aimed at to offer guidance on the application of the Principal Purpose Test (PPT) provision under India's Double Taxation Avoidance Agreements (DTAAs).
In the clarification, the CBDT emphasised that the circular specifically addresses the PPT provision in Indian DTAAs where such a provision exists.
PPT is a provision used in international tax law, particularly in the context of Double Taxation Avoidance Agreements (DTAAs), to prevent tax treaty abuse. The PPT is designed to ensure that tax treaties are not used for artificial or contrived arrangements aimed at securing tax benefits without genuine economic substance.
It further clarified that the circular does not affect or interact with other provisions of the DTAAs, such as those invoked to examine treaty entitlement or deny treaty benefits.
Additionally, the CBDT confirmed that the guidance provided in Circular No. 01/2025 does not interfere with anti-abuse rules under Indian domestic law, including the General Anti-Abuse Rule (GAAR), Specific Anti-Abuse Rules (SAAR), or Judicial Anti-Abuse Rules (JAAR).
These anti-abuse provisions will continue to function independently of the circular.
The clarification also stressed that the circular does not introduce any new legal interpretations. Instead, it reaffirms that its applicability is limited to the PPT provision, ensuring consistency in the interpretation of tax laws without altering other sections of the Income-tax Act.
This move is expected to bring greater certainty to taxpayers and tax authorities alike, particularly those dealing with international taxation matters under India's tax treaties.