By Mukesh Butani and Tarun Jain

The ministry of finance has sprung a pleasant surprise a week before the Budget. Obviating investors’ concerns about the entitlement of tax treaty benefits, the Central Board of Direct Taxes (CBDT) has issued a “guidance” to clarify the scope and application of the tax treaty anti-avoidance Principal Purpose Test (PPT). Borne out of the global disenchantment against misuse of treaties — as a part of the OECD-led base erosion and profit shifting initiative (BEPS) — PPT standard forms part of the multilateral instrument (MLI) framework, which was ratified in 2019 and has been engrafted in Indian Double Taxation Avoidance Agreements (DTAAs). Arun Jaitley signed the MLI at the June 2019 OECD Paris ceremony.

The PPT is essentially a “purpose”-driven inquiry seeking to ascertain the subjective reasons of an investor to locate in a favourable tax-treaty jurisdiction, and a handle to the revenue to deny the treaty benefit in the event such benefit constitutes “one of the principal purposes” of the multinational structure leading to such benefit. Put differently, the PPT compels multinationals to rely on business reasons or........

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