MLI and PPT in Indian Tax Treaties: Where Litigation Stands

Key Takeaways

• The Multilateral Instrument (MLI) adds anti-abuse rules, chiefly the principal purpose test (PPT), to many of India’s tax treaties.
• Two benches of the Income Tax Appellate Tribunal, Mumbai in Sky High XXXIV Leasing and Delhi in Kosi Aviation, held that the MLI changes do not apply to a treaty until India issues a separate notification for that treaty under its treaty-making power.
• India notified the MLI itself in 2019, but not treaty-by-treaty changes. The Revenue is expected to take the issue higher; no High Court ruling has been reported.
• The CBDT’s January 2025 circular says the PPT applies prospectively and does not override grandfathering clauses, such as those in the Mauritius, Singapore and Cyprus treaties.
• None of this limits India’s domestic general anti-avoidance rules (GAAR), which the Supreme Court applied in the Tiger Global case in January 2026.

What the MLI does

The MLI is an OECD convention that lets countries amend many tax treaties at once. Where both countries have chosen the same option, the MLI modifies their treaty. For India, the main change is the principal purpose test: a treaty benefit can be denied if obtaining it was one of the principal purposes of an arrangement, unless granting it would be in line with the treaty’s object and purpose.

India signed the MLI in 2017, ratified it in 2019 and issued a notification bringing it into Indian law. It did not issue separate notifications amending each treaty.

The rulings: a separate notification is needed

Indian law gives effect to a treaty only through a notification under the treaty provision of the Income-tax Act (section 90 of the 1961 Act). The Supreme Court in the Nestle SA case (October 2023) held that a treaty change, in that case a most-favoured-nation clause, does not apply until it is notified.

Applying that reasoning:

• ITAT Mumbai, Sky High XXXIV Leasing (India-Ireland treaty). The Tribunal held that MLI changes to a specific treaty need their own notification, and that the general 2019 notification of the MLI is not enough. Without it, the PPT the tax officer applied was not enforceable. It also found that the PPT was not met on the facts.
• ITAT Delhi, Kosi Aviation. A second bench reached the same result, after the Revenue argued that the Mumbai ruling had missed key points. The Revenue’s own arguments, that the MLI “only” modifies or limits existing treaties, were read as accepting that it does change them, and so needs notification.

The reasoning is sound, but the result is a technical win. It opens room in cross-border structuring for now, but it does not stop the tax department from using GAAR, and the Revenue can be expected to come back with stronger arguments.

The CBDT circular on PPT

In January 2025 the CBDT issued a circular on the PPT, after India and Mauritius signed a protocol in March 2024 adding the PPT to their treaty. It clarified two points:

1. The PPT is prospective. It applies from the date it takes effect for a treaty, not to earlier transactions.
2. Grandfathering prevails. Where a treaty grandfathers certain investments, for example gains on shares acquired before 1 April 2017 under the Mauritius, Singapore and Cyprus treaties, the PPT does not override that grandfathering, given its object and purpose.

Where things stand

What it means for structures

• A treaty claim that would fail the PPT may, for now, be defended on the notification point, but that defence can disappear with one notification, and the tribunals’ view may not survive appeal.
• GAAR remains. After Tiger Global, a tax residency certificate is necessary but not enough, and substance and commercial purpose have to be shown.
• Grandfathered investments under the Mauritius, Singapore and Cyprus treaties keep their protection from the PPT under the CBDT circular.
• Document the commercial reasons for any treaty-based structure now, rather than relying on the notification gap.

See also DIFC Variable Capital Company for Investing Into India and GIFT City AIF vs Offshore Funds.

FAQ

Does the MLI apply to India’s tax treaties?
India has ratified it, but two tax tribunals have held that its changes do not apply to a particular treaty until India notifies them for that treaty. No higher court has ruled.

What is the principal purpose test?
A rule that denies a treaty benefit if obtaining it was one of the principal purposes of an arrangement, unless the benefit is in line with the treaty’s object and purpose.

Is the PPT retrospective?
No. The CBDT’s January 2025 circular says it applies prospectively, and it does not override grandfathering clauses.

Do these rulings stop GAAR?
No. GAAR is part of India’s domestic law and applies independently of the treaties.

Talk to KCM about treaty-based structures: contact us.

This article draws on notes by Dhaval Trivedi, Partner, K C Mehta & Co LLP.

Sources and last checked: 10 November 2026

• ITAT Mumbai, Sky High XXXIV Leasing Company Ltd v ACIT (2025).
• ITAT Delhi, Kosi Aviation Leasing (2025).
• Supreme Court of India, AO v Nestle SA (19 October 2023).
• CBDT Circular No. 01/2025 (21 January 2025) on the principal purpose test.
• Supreme Court of India, Tiger Global case, 2026 SCC OnLine SC 86 (15 January 2026).
• Bloomberg Tax, “India Court Decisions on MLI Require Separate Notifications” (March 2026).
• Originally shared on LinkedIn by Suril Mehta: https://www.linkedin.com/posts/surilm_interesting-development-big-blow-to-application-share-7386025933897469952-0qMx/
• Originally shared on LinkedIn by Suril Mehta: https://www.linkedin.com/posts/surilm_massive-clarification-1-ppt-is-prospective-share-7288209231369891841-Rojw/

This is not to be construed as legal advice. The actual advice will depend upon the facts and will have to take into consideration the case-specific facts and the anti-abuse regulations.