India's network of Double Taxation Avoidance Agreements (DTAAs) — spanning over 90 countries — was built over five decades of bilateral negotiation. The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI), adopted by over 100 jurisdictions on 24 November 2016 as part of the OECD/G20 BEPS Project, allows participating countries to modify existing bilateral tax treaties simultaneously without renegotiating each one individually. India signed the MLI on 7 June 2017 and notified 93 of its DTAAs as Covered Tax Agreements (CTAs). The MLI entered into force for India on 1 October 2019.
Since then, many of India's commercially important tax treaties have been substantively modified — particularly through the Principal Purpose Test (PPT), the Simplified Limitation of Benefits (SLOB) provision where mutually adopted, modified Permanent Establishment rules, and revised tie-breaker residency tests for non-individuals. The result is a treaty landscape that may read like the original DTAA but functions differently in practice, with treaty benefit claims subject to anti-abuse filters that did not exist in the original treaty.
This article maps the MLI's architecture, India's elections, the PPT and SLOB, country illustrations (Mauritius, Singapore, Netherlands, USA), the Supreme Court's Nestlé SA (2024) ruling and 2025 ITAT decisions on country-specific notification, CBDT Circular No. 01/2025 on grandfathering, payer due diligence, documentation, scenarios, and how GAAR and PPT interact. References to the Income Tax Act are to the ITA 2025 (effective 1 April 2026) unless specified otherwise.
Scope of this article
II. The MLI — architecture, India's position, and the CTA mechanism
The Covered Tax Agreement (CTA) mechanism is the MLI's core innovation: the MLI supplements and modifies each CTA in specified ways without physically replacing the treaty text. The modified treaty must be read alongside the MLI, with the MLI prevailing over inconsistent CTA provisions. For a treaty to become a CTA, both partners must have signed the MLI and notified that treaty as a CTA. Where only one partner has notified, it is not a CTA. Where a partner has not signed the MLI — notably the United States — that country's treaties remain outside the MLI framework; the India–USA DTAA is therefore unaffected by the MLI.
The MLI's 39 articles mix mandatory minimum standards and optional provisions with reservations. The actual modifications to any bilateral CTA depend on the intersection of India's elections and the other country's elections — no two CTAs are necessarily identical.
| MLI article / provision | India's election and practical effect |
|---|---|
| Article 6 — Purpose statement of CTAs | India adopted Article 6, modifying preambles of CTAs to state that the treaty is not intended to create opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty shopping — interpretive context for the PPT. |
| Article 7 — Prevention of treaty abuse (PPT; SLOB) | PPT is the minimum standard for all India's CTAs. India opted for SLOB as a supplement, but SLOB applies only where the other partner has also adopted it or permitted asymmetric application. PPT applies to all CTAs regardless of the other partner's position on SLOB. |
| Article 8 — Dividend withholding — 365-day holding | Reduced dividend withholding requires continuous holding of the requisite stake (often 10% or 25%) for at least 365 days before the dividend date — targets dividend stripping. |
| Article 9 — Capital gains on shares of land-rich entities | India adopted Article 9(4): India may tax gains on shares deriving value principally from immovable property in India even if the transfer is abroad, unless shares are listed on a recognised stock exchange. |
| Article 13 — Artificial avoidance of PE (specific activity exemptions) | India adopted Option A: each PE exemption (warehouse, display, purchasing office, etc.) must be individually preparatory or auxiliary — multiple exempt activities cannot collectively shield a core business function. |
| Article 14 — Contract splitting | Connected contracts are aggregated for PE time thresholds — counters splitting contracts to stay below PE duration tests. |
| Article 4 — Dual residency of non-individuals | Competent authority mutual agreement procedure replaces POEM-based tie-breaker for companies resident in both India and a CTA partner. |
| Article 16 — MAP | India adopted Article 16, including a three-year window to initiate MAP and endeavour to resolve within two years. |
III. The Principal Purpose Test — the most consequential MLI change
Article 7(1) of the MLI introduces the PPT: a benefit under a CTA shall not be granted if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted in that benefit, unless granting the benefit would be in accordance with the object and purpose of the relevant treaty provisions. The threshold is 'one of the principal purposes' — not sole or dominant purpose. The escape requires the taxpayer to establish that granting the benefit accords with the treaty's object and purpose.
SLOB under Article 7(6), where mutually adopted, is an objective bright-line: qualified person categories (individual residence, active business, government, listed company, pension fund, qualifying ownership). A person failing SLOB cannot claim treaty benefits even if it might pass PPT. Many European partners did not adopt SLOB asymmetrically — for those CTAs, only PPT applies as the MLI anti-abuse overlay.
IV. Treaty-specific illustrations — Mauritius, Singapore, Europe, USA
India–Mauritius: Mauritius has not ratified the MLI, so the treaty is not a CTA under the MLI. A Protocol signed 7 March 2024 proposes preamble alignment and a bilateral PPT. Ratification and entry into force must be verified from current CBDT notifications. CBDT Circular No. 01/2025 clarifies that the Protocol PPT will not apply to grandfathered transactions — investments before 1 April 2017 — but existing LOB conditions in the treaty since 2016 must still be met.
India–Singapore: CTA under MLI; PPT in force from 1 April 2020 alongside the treaty's LOB. Singapore structures need both LOB substance/expenditure safe harbours and a credible answer that treaty access was not a principal purpose of the arrangement.
Netherlands, Germany, France: PPT without SLOB — eligibility is purpose-based without SLOB's objective categories. Document business rationale, board governance, and local substance.
India–USA: Not modified by MLI. Treaty benefits follow the treaty's detailed LOB article (objective tests). GAAR may still apply domestically.
V. The notification controversy — can the PPT apply without a treaty-specific notification?
ITAT Mumbai (Sky High LXXIX / XLIII Leasing, 2025) and ITAT Delhi (Kosi Aviation, September 2025): where no specific Section 90(1) notification existed for MLI modifications to the India–Ireland CTA, Revenue could not invoke PPT in domestic proceedings; treaty benefit denial was set aside. The notification position evolves as CBDT issues further notifications — always verify the register for the relevant CTA.
VI. CBDT Circular No. 01/2025 — PPT timing and grandfathering
| Issue | CBDT clarification (Circular No. 01/2025, 21 Jan 2025) |
|---|---|
| When does PPT apply? | From entry into effect of the relevant MLI provision for each CTA (e.g. 1 April 2020 Singapore, 1 April 2021 Cyprus, etc.), or from entry into force of a bilateral protocol — not retroactively. |
| PPT on grandfathered Mauritius / Singapore / Cyprus positions? | PPT does not apply to transactions protected by those treaties' grandfathering (e.g. Mauritius pre–1 April 2017 investments; Singapore/Cyprus per their protocols). |
| PPT and LOB both in Singapore? | Both apply independently. Grandfathering requires LOB satisfaction; post-grandfathering gains face PPT and LOB as applicable. |
VII. Practical implications — withholding, structures, dividends, PE
Indian payers deducting at reduced treaty rates must satisfy expanded due diligence: valid TRC, Form 10F, PE status declaration, PPT compliance declaration, and for material payments documentation of payee substance in the treaty state. Short-deduction exposure (Section 201) and Section 40(a)(i) disallowance risk arise if Revenue later disallows treaty benefits.
- Verify TRC and Form 10F before payment.
- PE status declaration from payee.
- PPT compliance declaration — arrangement not principally motivated by treaty access.
- For significant transactions: substance file (employees, office, payroll, bank activity, local filings).
| Structure category | PPT risk notes |
|---|---|
| Bare SPV in treaty state, no local operations | High — needs genuine rationale and substance. |
| Intermediate holdco with real treasury / regional role | Medium to high depending on facts and documentation. |
| Re-domicile before Indian exit | Very high temporal proximity risk — contemporaneous memos essential. |
| Regional HQ with portfolio of subsidiaries | Lower if governance and economics sit in treaty state. |
| Royalty/interest routing through low-function conduit | Moderate to high unless real functions and risk in treaty state. |
Article 8: verify 365-day continuous holding of the required percentage before each dividend record date for reduced treaty dividend withholding.
Articles 13–14: foreign enterprises with several Indian touchpoints must reassess whether aggregated activities or connected contracts create PE exposure despite individual exemptions or sub-threshold contracts.
VIII. Documentation framework
| Category | Minimum content |
|---|---|
| TRC and Form 10F | Current; before payment — not retroactive catch-up only. |
| PE declaration | No PE, or disclosed PE with correct withholding basis. |
| PPT compliance declaration | Commercial rationale; not boilerplate alone. |
| Board minutes | Real decisions in treaty jurisdiction — not single annual rubber-stamp. |
| Operational substance | Employees, lease, payroll, active accounts, local activity. |
| Commercial rationale memorandum | Contemporaneous narrative for PPT escape clause. |
| 365-day holding evidence | Cap table and custody history for Article 8 dividends. |
| Financial statements | Audited accounts of treaty-resident claimant. |
IX. Four scenarios under the MLI
Scenario A — Singapore SPV (2022), no employees, nominee directors, fails LOB spend test: very high PPT risk if MLI modifications are notified; restructure or build substance before exit.
Scenario B — Dutch holdco with Amsterdam treasury, employees, multi-country portfolio: moderate–low PPT risk with solid documentation; still verify notification status and Article 8 at each dividend.
Scenario C — Mauritius pre-2017 listed equity: grandfathered CG protection; PPT (when Protocol in force) not on grandfathered deals per Circular 01/2025; LOB spend in Mauritius must still be met.
Scenario D — US listed licensor: no MLI PPT; India–USA LOB governs; GAAR remains a separate domestic screen.
X. Departmental scrutiny triggers
| Trigger | Response direction |
|---|---|
| Structure or restructure close to Indian exit or dividend | Contemporaneous commercial memos; timeline narrative. |
| TRC only, no substance in treaty state | Build and file substance evidence, not only certificates. |
| Nominee directors; boards outside treaty state | Fix governance; resident competent directors. |
| Single-asset SPV, no office or staff | Treat as high PPT exposure absent restructuring. |
| Conduit royalty/interest with no functions | Demonstrate DEMPE/treasury functions and risk. |
| Land-rich company share sale | Article 9(4) and valuation chain analysis. |
| Dividend relief within 12 months of acquiring stake | Check Article 8 365-day test. |
| Multiple 'exempt' activities forming core India business | Article 13 aggregation / fragmentation analysis. |
Key takeaways
- The MLI entered into force for India on 1 October 2019. India listed 93 DTAAs as CTAs. Both partners must sign and notify the treaty as a CTA for MLI overlay; non-MLI signatories (e.g. USA) are unaffected.
- PPT is a minimum standard for India's CTAs: denial where it is reasonable to conclude that obtaining the treaty benefit was one of the principal purposes, unless the benefit aligns with the treaty's object and purpose.
- Nestlé (2024): MLI changes to a specific CTA need a separate Section 90(1) notification for domestic effect; Sky High and Kosi Aviation (2025) applied this to PPT invocations — verify notification status for the relevant CTA.
- CBDT Circular No. 01/2025: PPT applies from each treaty's MLI effective dates (not retroactively); grandfathering for Mauritius, Singapore, and Cyprus as stated; PPT and LOB can both apply where the treaty has both.
- India–Mauritius is not an MLI CTA; the 2024 Protocol proposes a bilateral PPT — track ratification. Grandfathered pre-2017 investments retain CG protection subject to existing LOB.
- Article 8 imposes a 365-day continuous holding condition for reduced treaty dividend rates where adopted — verify at each record date.
- Articles 13–14 tighten PE analysis — anti-fragmentation and contract aggregation.
- Indian payers need expanded treaty due diligence (TRC, Form 10F, PE and PPT declarations, substance file) to mitigate Section 201 and Section 40(a)(i) exposure.
- Bare holding SPVs and conduits face the highest PPT risk; regional substance and governance materially improve defensibility.
- GAAR and PPT are independent — evaluate both for any structure relying on Indian treaty benefits.
Frequently asked questions
Why is there 2025 litigation if India signed the MLI in 2017?
International entry into force differs from domestic legal effect. Nestlé confirmed that country-specific Section 90(1) notifications are required for MLI-modified CTAs. Until those issue, Revenue's PPT invocation may fail where notification is missing — as in Sky High and Kosi Aviation.
Does PPT apply to my India–Netherlands royalty at 10%?
The India–Netherlands treaty is a CTA with PPT incorporated. Whether PPT can be applied in assessment depends on whether CBDT has notified that CTA's MLI modifications. If notified, AO may examine principal purpose; a Netherlands entity with real IP/R&D substance and documentation can argue the object-and-purpose escape.
Is a pre-2017 Mauritius holding fully protected?
Grandfathered CG protection applies per the 2016 protocol, and Circular 01/2025 confirms the Protocol PPT will not disturb grandfathered transactions — but the treaty's LOB (e.g. minimum expenditure in Mauritius) must still be satisfied. Verify Protocol status and GAAR separately.
Does MLI change interest withholding?
Treaty rate access remains subject to PPT analysis where MLI applies and is domestically notified. Article 8 targets dividends, not interest directly, but overall financing structure may still be examined under PPT for treaty-motivated routing.
Does migrating a holdco to a friendlier treaty state trigger PPT?
Yes — high risk when relocation is near an Indian exit or dividend and the new state offers better treaty terms. Contemporaneous non-tax commercial reasons and documentation are critical.
Must our Indian subsidiary change TDS practice for the foreign parent?
Yes — before reduced treaty TDS on dividends, interest, royalties, or FTS, obtain TRC, Form 10F, PE declaration, and PPT compliance declaration, and retain substance evidence. Inadequate diligence exposes the payer to short-deduction and disallowance risk if treaty benefits are later denied.
Conclusion
The MLI has overlaid common anti-abuse standards on India's covered treaties. Residency and a TRC alone are no longer a complete answer — purpose, substance, documentation, and notification status matter.
The 2024–2025 litigation and Circular 01/2025 clarify notification and grandfathering, but the subjective PPT standard will keep evolving as notifications complete and assessments multiply.
Enterprises with India cross-border payments or holding structures should verify CTA-specific notification, refresh substance files, obtain PPT declarations each cycle, and stress-test positions under both PPT and GAAR with professional support.
Important disclaimer
This article has been prepared by Sandeep Singla & Associates, Chartered Accountants, solely for educational and informational purposes. It does not constitute legal, tax, or professional advice. The Income Tax Act, 2025, the MLI, India's DTAAs, and CBDT circulars and notifications cited reflect publicly available information as of the date of preparation and are subject to change, judicial interpretation, and further guidance. Treaty analysis is fact-specific and partner-specific. Obtain independent advice from a qualified Chartered Accountant, Advocate, or international tax specialist before any structuring or withholding decision. Sandeep Singla & Associates, its partners, and staff disclaim liability for loss or expense from reliance on this article. Prepared in compliance with the ICAI Code of Ethics and applicable ICAI advertising guidelines. © 2026 Sandeep Singla & Associates. All rights reserved. Reproduction requires prior written permission.