[Opinion] Analysing PPT in DTAAs with Focus on the SC Lowy Case

Advocate Ayushman Tripathi, Summer Veer Shukla & Harsh – [2025] 180 taxmann.com 244 (Article)

1. Introduction

Double Taxation Avoidance Agreements (DTAAs) outline the allocation of taxing authority among participating nations, aiming to prevent double taxation and promote investment. Nevertheless, multinational corporations frequently use intermediary entities in specific jurisdictions to obtain treaty advantages, including diminished taxes or exemption from capital gains, a practice commonly referred to as treaty shopping. Acknowledging that treaties are designed to prevent double taxation rather than the absence of taxation, the OECD/G20 BEPS Project implemented Action 6 to combat treaty abuse. The final report’s Paragraph 22 emphasises that treaties ought to eradicate double taxation “without generating chances for non-taxation or diminished taxation via avoidance or evasion.”

Among the three suggested mechanisms aimed at preventing abuse, the Principal Purpose Test (PPT) emerged as the international benchmark. Article 29(9) of the 2017 OECD Model stipulates that treaty benefits shall be refused if, upon considering all relevant circumstances, it is reasonable to infer that the attainment of such benefit constituted one of the principal purposes of an arrangement, unless the granting of such benefit aligns with the objectives and purposes of the treaty. The Multilateral Instrument (MLI), finalised in 2017 and ratified by India in 2019, established the PPT through Article 7, in conjunction with a revised preamble that emphasises the importance of preventing treaty abuse. Given that the PPT is an integral component of the BEPS minimum standard, all signatories are required to implement it, either independently or in conjunction with a Limitation of Benefits (LOB) clause.

In India, the PPT amends several DTAAs. Previous decisions, such as the Azadi Bachao Andolan and Vodafone International, had sanctioned treaty shopping without express anti-abuse provisions. The PPT upsets this status quo by vesting tax administrations with a general rule of anti-abuse in treaties. Its initial application happened in the SC Lowy case, which is discussed extensively in further sections.

2. The Structure and the Interpretative Difficulties of the PPT Components of the PPT

Article 29(9) in the OECD Model and Article 7(1) in the MLI state that a benefit must be withheld if its obtaining can be plainly deduced as one of the principal reasons behind any arrangement, other than if the granting of such a benefit is in accord with the purpose and object of the treaty.

Broadly, PPT includes the following three points:

1. An arrangement or transaction is broadly defined to encompass any action or sequence of actions that yield a benefit.
2. Principal purpose element (subjective test) – Authorities should determine that the derivation of the treaty benefit was among the arrangement’s main aims. Differing from India’s GAAR requirement, which requires a primary or dominant purpose, the threshold in the PPT is less stringent. Commentators point out that in such wide drafting, though indicative of compromise, too much reliance can be left with the revenue authorities.
3. Element of object and purpose (objective assessment) – Even in instances where a principal objective is established, benefits may still be conferred if such action is consistent with the treaty’s object and purpose. Assessing this alignment presents complexities; the Vienna Convention on the Law of Treaties (VCLT) requires interpretation to be conducted in good faith, yet the OECD commentary provides minimal assistance. The bifurcated character of the PPT—initially rejecting, followed by the possible restoration of benefits—introduces ambiguity and effectively reallocates the evidentiary responsibility to taxpayers.

3. Comparison With Domestic Anti-Avoidance Rules

India’s GAAR (Chapter X-A in the Income-tax Act, 1961, operative in 2017) deems an arrangement impermissible if it lacks commercial substance or a bona fide purpose, and its essential purpose is the acquisition of tax benefits. The GAAR, therefore, requires a prevalent tax-avoidance motivation and other indicators, such as round-trip financings or misuse of provisions.

The PPT is simpler to activate—only requiring that gaining a benefit of the treaty be one among multiple key objects, without the requirement for proof of lack of substance or misuse. Additionally, the GAAR applies from the date after April 2017. In contrast, the PPT can operate against all income years after the date the MLI entered into force, except where it is expressly grandfathered.

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