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India Treaties and Taxes

MLI Principal Purpose Test in India: Is It Switched Off?

1 November 2026 · ATB Legal · 16 min read

Two benches of the Income Tax Appellate Tribunal have held that India cannot use the principal purpose test (PPT) in the Multilateral Instrument (MLI) to deny relief under a tax treaty until the Government notifies the MLI’s changes to that particular treaty. As of 29 October 2026 we found no such notification and no reported Revenue appeal. For treaty claims for tax year 2026-27 onwards, now made under section 159 of the Income-tax Act 2025, the choice is between relying on that argument and building a file that passes the PPT on its merits. Treaty limitation-of-benefits clauses, GAAR and judicial anti-avoidance apply either way.

What the Tribunal decided

The lead orders concern Irish aircraft lessors leasing to Indian airlines for assessment year 2022-23. In Sky High XLIII, Kosi and Sky High LXXIX the Assessing Officer denied treaty relief by invoking Articles 6 and 7 of the MLI, which carry the PPT. In both Sky High batches the Dispute Resolution Panel upheld that finding (Sky High XLIII para 11; Sky High LXXIX para 2). Celestial did not involve the MLI.

OrderBench and dateMLI pointPPT on the facts
Sky High Appeal XLIII Leasing and TFDAC Ireland II (ITA 1122/Mum/2025, 1198/Mum/2025 and others)Mumbai ‘I’ Bench, 13 Aug 2025Articles 6 and 7 cannot be invoked without a section 90(1) notification for the India–Ireland treaty (paras 47, 53)Also decided, in the alternative, for the taxpayers (paras 54–79)
Kosi Aviation Leasing and 74 other appeals (ITA 994/Del/2025 and others)Delhi ‘D’ Bench, 30 Sep 2025Followed Sky High and rejected the Revenue’s new arguments (paras 32–37)Left open as academic (para 52(i))
Sky High LXXIX Leasing and others (ITA 1546–1550/Mum/2025)Mumbai ‘I’ Bench, 6 Oct 2025Summarised Sky High XLIII, including its MLI holding (para 7); grounds 2–4 on “legal contentions” left open (para 10)Followed Sky High XLIII on identical facts (paras 8–9)
Celestial Aviation Trading 36 and othersDelhi ‘D’ Bench, 29 Oct 2025Not in issue; lease character followed Celestial Aviation Trading 15, Article 8 followed Kosi (paras 4–7)Not in issue

In Sky High XLIII a CBDT-instructed note argued that, with the treaty and the MLI both notified, “no further notification is required” (para 27). The Tribunal held that Articles 6 and 7 “cannot be invoked against the assessee in the present assessment year, inasmuch as there is no Section 90(1) notification” incorporating them into the treaty (para 47).

The Revenue’s case was not that India had failed to notify the MLI. It was that the 2019 notification of the MLI, together with the treaty’s own notification, is enough once the two States’ MLI positions match and the provisions have taken effect, because the MLI is not an amending protocol but applies alongside the covered treaty (Sky High XLIII para 28, points 3, 5 and 12; Kosi para 25(iii)). The dispute is whether a further treaty-specific notification is needed.

In Kosi the Revenue raised new arguments, including earlier omnibus notifications and the Finance Act 2020 memorandum (para 25). The Delhi bench rejected each and held: “A specific notification for each country is required u/s. 90(1) of the Act where the MLI has the effect of amending /altering bilateral treaties” (para 37).

Sunflower Aircraft Leasing (ITA 1107/Mum/2025, 13 Aug 2025) is sometimes grouped with these rulings. The Dispute Resolution Panel had rejected the PPT on the facts (para 7), and the Tribunal decided permanent establishment and Article 8 (paras 32–44, 48).

Why: Nestle and section 90(1)

The Tribunals built on Assessing Officer (IT) v Nestle SA (Supreme Court, 19 October 2023), a case on most-favoured-nation clauses. Sky High XLIII reproduces this conclusion from the judgment: “A notification under section 90(1) is necessary and a mandatory condition for a court, authority, or Tribunal to give effect to a Double Taxation Avoidance Agreement, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law” (para 37).

The MLI was notified on 9 August 2019 (Notification No. 57/2019, recorded at para 28 of Sky High XLIII). It changes a treaty only where both partners’ choices match (Sky High XLIII para 31; Kosi para 31), so the change to each treaty must itself be notified (paras 40, 44). The synthesised text was “nothing more than an expository compilation” (para 43). The synthesised texts published by the Income Tax Department agree: the Singapore and UAE texts state that the document “does not constitute a source of law”. Three questions should be kept apart: whether the MLI change has entered into effect for a treaty under international law; what the synthesised text records, which is not itself a source of law; and whether the change is enforceable in Indian law without a treaty-specific notification. The Tribunals decided the third. The synthesised text’s disclaimer does not by itself show that the change is ineffective between the two States.

The alternative finding on the facts

Sky High XLIII went on to hold that, even if the PPT applied, the Revenue had not discharged its burden (paras 54–79). The evidence that carried weight:

  • Irish tax residency certificates. Relying on Azadi Bachao and Vodafone, the Tribunal presumed that, “in the absence of very compelling reasons”, these supported treaty relief (para 57). In Tiger Global (January 2026) the Supreme Court later held that a certificate is an “eligibility condition”, not “sufficient” evidence of residency, and does not bind an authority that has not enquired into it (para 37). Those observations were made in deciding whether advance-ruling applications were maintainable under section 245R(2) of the 1961 Act, and that setting limits what the Court finally decided. No ruling has yet considered the two together in a PPT case.
  • Irish directors, bankers and company secretary, and a licensed Irish administrator (para 67).
  • Leasing to China and Korea as well as India (paras 58(d), 71).
  • No payments to the parent beyond arm’s-length debt service (para 73).
  • A parent outside Ireland “does not, by itself, furnish a basis to invoke the PPT” (para 64); the tax saving is “not by itself determinative” (para 69).

On object and purpose, Articles 8 and 12 of the India–Ireland treaty were designed to remove aircraft-leasing income from source taxation (paras 77–79). Kosi reproduced this passage (para 23) but left the point open (para 52(i)).

What the rulings mean for the principal purpose test in India

What they decide. For assessment year 2022-23, under section 90(1) of the 1961 Act, the MLI PPT could not be applied to the India–Ireland treaty without a treaty-specific notification. On its terms, the reasoning would extend to any treaty the MLI modifies.

What they do not decide. They do not say that the PPT is invalid or that treaty abuse is allowed. They do not affect a PPT inserted by a notified bilateral protocol. They are Tribunal orders; we found no High Court or Supreme Court ruling on the point.

The 2025 Act. Proceedings for tax years beginning before 1 April 2026 stay under the 1961 Act (section 536(2)(c)). For later years the question arises under section 159(1), which keeps the structure of section 90(1): the Central Government “may, by notification, make such provisions as necessary for implementing the agreement”. It does not mention the MLI or amending protocols. Section 536(2)(j) deems a notification issued under the 1961 Act, “so far as it is not inconsistent with the corresponding provisions of this Act”, to have been issued under the 2025 Act and continues it in force. So the 2019 MLI notification and each treaty’s own notification carry forward under section 159. The open question is the one the Tribunals decided under the 1961 Act: whether that general MLI notification is enough to change a particular treaty. We found no ruling on it under the 2025 Act.

What could change. A treaty-specific notification could issue at any time. Whether it could reach back is unsettled; CBDT Circular 01/2025 dates the MLI PPT from the MLI’s entry-into-effect dates (para 4.A(b)).

Older anti-abuse clauses. The synthesised texts say that MLI Article 7(1) “replaces” Article 29 of the India–UAE treaty and Article 28C of the India–UK treaty. Both are main-purpose limitation-of-benefits clauses in the treaty texts as notified (S.O. 2001(E) of 2007 and S.O. 372(E) of 2014). Sky High XLIII held that the notified treaty “continues to remain the operative and governing instrument” until a modification is notified (para 53). On that reasoning, which is ours and untested, Articles 29 and 28C would still apply in Indian law.

Bilateral PPTs: Mauritius, Oman and Sri Lanka

Three treaties now carry a PPT inserted by a bilateral protocol that India has notified, so the MLI notification question does not arise in the same way.

TreatyProtocolIn forceIndian notificationEffect in India
MauritiusPort Louis, 7 Mar 2024; inserts Art 27B and a new preamble10 Aug 2026No. 135/2026, S.O. 5611(E), 13 Oct 2026, under section 159(1)From entry into force (Art 3(2))
OmanMuscat, 27 Jan 2025; inserts Art 27B28 May 2025No. 69/2025, S.O. 2858(E), 25 Jun 2025, under section 90(1) of the 1961 ActIncome of fiscal years beginning on or after 1 Apr 2026 (Art 15(3))
Sri LankaNew Delhi, 16 Dec 2024; replaces Art 28(6) and the preamble19 Jun 2026, as recited in the notificationNo. 88/2026, S.O. 3926(E), 16 Jul 2026, under section 159(1)Income of fiscal years beginning on or after 1 Apr 2027 (Art 3(3)(a))

Each clause denies a benefit where “obtaining that benefit was one of the principal purposes of any arrangement or transaction”, unless granting it accords with the treaty’s object and purpose. The Oman notification continues under section 536(2)(j). The new India–Qatar treaty, which applies from 1 April 2026, has its own principal purpose test (Art 28); India’s Gulf tax treaties covers Qatar and Oman together. Notification 88/2026 gives effect to the Sri Lanka Protocol only and does not mention the MLI. Sri Lanka Article 3(3)(a) refers to the year in which “the Agreement” enters into force; the 1 April 2027 date reads this as the Protocol.

Mauritius has a timing point. The Protocol took effect on 10 August 2026, but India notified it on 13 October 2026, “in accordance with Article 3”. We found no official guidance on withholding or treaty claims made in between. Circular 01/2025 applies a bilateral PPT from the protocol’s entry into force (para 4.A(a)) and keeps the Cyprus, Mauritius and Singapore grandfathering “outside the purview of the PPT provision” (para 4.B). For funds, see our note on the Mauritius treaty and GIFT relocation. For holding companies, see keep, fix, move or collapse.

How the PPT reaches common holding treaties

The India DTAA rates comparison lists the anti-abuse clause and MLI status for 26 treaty partners. The table below covers six of them.

TreatyHow the PPT reaches itEffect in IndiaOther anti-abuse text in the notified treatyNotification point
UAEMLI Art 7(1), which “replaces Article 29” (synthesised text)From 1 Apr 2020Art 29 main-purpose LOB (S.O. 2001(E), 28 Nov 2007)Open to the Sky High argument
SingaporeMLI Art 7(1) “applies” (synthesised text)From 1 Apr 2020Art 24A LOB (current text: S.O. 935(E), 23 Mar 2017) for Art 13(4A) and 13(4C) share gains; Art 28A keeps domestic anti-avoidance rulesOpen to the argument
NetherlandsMLI Art 7(1) “applies and supersedes” (synthesised text)From 1 Apr 2020None found; beneficial-ownership tests in Arts 10–12Open to the argument
IrelandMLI Arts 6 and 7 (joint synthesised text, Sky High para 28)From 1 Apr 2020 (per Circular 01/2025 para 4.A(b))None foundDecided for taxpayers, AY 2022-23
CyprusMLI Art 7(1) “applies and supersedes” (synthesised text)From 1 Apr 2021Protocol para 2 grandfathers shares acquired before 1 Apr 2017Open to the argument
UKMLI Art 7(1) “replaces Article 28C” (UK synthesised text)From 1 Apr 2020Art 28C main-purpose LOB (S.O. 372(E), 10 Feb 2014); main-purpose clauses in Arts 11(6), 12(11), 13(9), which India treats as not replaced (UK text, fn 7)Open to the argument

What applies regardless

  • Limitation-of-benefits clauses in the notified treaty text, as in the table. For UAE groups, see the India–UAE tax treaty guide. For Singapore, where Article 24A tests purpose, business activity and spending before relief on pre-2017 shares, see the India–Singapore tax treaty guide.
  • Beneficial ownership. Reduced rates for dividends, interest and royalties require the recipient to be the beneficial owner; UAE Article 10(2) caps dividend tax at 10 per cent only “if the recipient is the beneficial owner”.
  • Residency evidence. For non-residents, section 159(8) requires the certificate and the prescribed documents, which rule 75(1) of the Income-tax Rules 2026 sets as Form 41.
  • GAAR. Chapter XI of the 2025 Act (sections 178–184) applies “even if such provisions are not beneficial to him” (section 159(6)). Rule 128 of the Income-tax Rules 2026 excludes, among other things, arrangements with an aggregate tax benefit of INR 3 crore or less in the year (rule 128(1)(a)) and, as substituted by Notification 55/2026, income from transfer of investments made before 1 April 2017.
  • Judicial anti-avoidance. In Tiger Global the Court agreed that GAAR and, in the alternative, JAAR can deny treaty benefits “where the transaction lacks genuine commercial substance” (para 48), as a prima facie finding on maintainability (para 50).
  • The CBDT’s position. Its press release of 15 March 2025 said that Circular 01/2025 covers only the PPT; GAAR, specific anti-avoidance rules and judicial anti-avoidance apply independently.

Worked example

A UAE company holds shares in an Indian subsidiary. It receives a dividend in tax year 2026-27 and claims the 10 per cent treaty cap. The Revenue can test the claim in this order:

  1. Section 159(8) documents: a UAE tax residency certificate and Form 41.
  2. Beneficial ownership under Article 10(2).
  3. The PPT. The company can argue the Sky High point against MLI Article 7(1); if it wins, notified Article 29 (“the main purpose or one of the main purposes of the creation of such entity”) may still apply on the reading above.
  4. GAAR under Chapter XI, which section 159(6) applies regardless of the treaty.
  5. Judicial anti-avoidance on substance.

The notification point affects step 3 at most. Commercial reasons, real management in the UAE and genuine activity go to steps 3 to 5 alike. For a comparison of holding jurisdictions, see Singapore vs UAE for Indian investments and holding jurisdiction and substance.

What a prudent group does meanwhile

  1. Assume the PPT will apply. Build the file the Sky High bench found persuasive: minuted commercial reasons, local directors and decisions, staff or licensed administrators, activity beyond India, and payment flows (paras 58, 67–73).
  2. Plead the notification point alongside the facts. The lessors argued it as a threshold point and, without prejudice, met the PPT on the facts (Sky High XLIII paras 18, 21). The mutual agreement procedure is a separate route; the UAE side is covered in cross-border tax disputes.
  3. Read the notified treaty text, not only the synthesised text: its limitation-of-benefits, grandfathering and beneficial-ownership conditions.
  4. Test GAAR separately. Chapter XI asks about the main purpose of obtaining a tax benefit.
  5. Keep records for each year and each payment. If a notification issues, the PPT may be examined for years already filed.
  6. Watch for changes. Check section 159(1) notifications on incometaxindia.gov.in, search egazette.gov.in for “Multilateral Convention”, and search High Court case status by party name.

Common questions

Is the MLI principal purpose test in force in India? India notified the MLI on 9 August 2019. Two Tribunal benches have held that its PPT cannot apply to a treaty until the changes to that treaty are notified. As of 29 October 2026 we found no such notification.

Do the Sky High Leasing and Kosi Aviation rulings protect UAE or Singapore holding companies? The rulings concern India–Ireland. On their terms, the reasoning would extend to any treaty the MLI modifies without a separate notification, but no tribunal has yet applied it to another treaty. Notified limitation-of-benefits clauses, GAAR and judicial anti-avoidance are unaffected.

Does the India–Mauritius PPT need an MLI notification? No. Article 27B came in through a bilateral Protocol notified on 13 October 2026 under section 159(1), with effect from 10 August 2026. We found no official guidance on claims made between those two dates.

Has the Revenue appealed the Sky High Leasing ITAT order? As of 29 October 2026 we found no reported appeal to a High Court. That is not proof that none was filed.

Can GAAR deny treaty benefits even if the MLI PPT is unavailable? Yes. Section 159(6) applies Chapter XI “even if such provisions are not beneficial”, subject to the exclusions in rule 128 of the Income-tax Rules 2026, including the INR 3 crore threshold and the carve-out for investments made before 1 April 2017.

Sources

  1. Sky High Appeal XLIII Leasing Co Ltd and TFDAC Ireland II Ltd v ACIT/DCIT, ITA 1122/Mum/2025, 1198/Mum/2025 and others, ITAT Mumbai ‘I’ Bench, 13 August 2025, itat.gov.in
  2. Kosi Aviation Leasing Ltd and others v ACIT, ITA 994/Del/2025 and others, ITAT Delhi ‘D’ Bench, 30 September 2025, itat.gov.in
  3. Sky High LXXIX Leasing Co Ltd and others v ACIT, ITA 1546–1550/Mum/2025, ITAT Mumbai ‘I’ Bench, 6 October 2025, itat.gov.in
  4. Celestial Aviation Trading 36 Ltd and others v ACIT, ITA 1384/Del/2025 and others, ITAT Delhi ‘D’ Bench, 29 October 2025, itat.gov.in
  5. Sunflower Aircraft Leasing Ltd v ACIT, ITA 1107/Mum/2025, ITAT Mumbai ‘I’ Bench, 13 August 2025, itat.gov.in
  6. Authority for Advance Rulings v Tiger Global International II Holdings, 2026 INSC 60, Supreme Court, 15 January 2026, sci.gov.in
  7. Assessing Officer (IT) v Nestle SA, Supreme Court, 19 October 2023, (2023) 458 ITR 756, as reproduced in sources 1 and 2, sci.gov.in
  8. CBDT Circular No. 01/2025, Guidance for application of the PPT, 21 January 2025, incometaxindia.gov.in
  9. CBDT press release, 15 March 2025, clarification on Circular 01/2025 (no longer on the ITD site)
  10. Notification No. 135/2026, S.O. 5611(E), 13 October 2026: India–Mauritius Protocol, Ministry of Finance (Department of Revenue), incometaxindia.gov.in
  11. Notification No. 69/2025, S.O. 2858(E), 25 June 2025: India–Oman Protocol (Art 15), Ministry of Finance (Department of Revenue), incometaxindia.gov.in
  12. Notification No. 88/2026, S.O. 3926(E), 16 July 2026: India–Sri Lanka Protocol, Ministry of Finance (Department of Revenue), incometaxindia.gov.in
  13. Notification No. 55/2026, G.S.R. 241(E), 31 March 2026: rule 128, Income-tax Rules 2026, incometaxindia.gov.in
  14. Income-tax Rules 2026, rules 75 and 128 (G.S.R. 198(E), 20 March 2026), CBDT, incometaxindia.gov.in
  15. Income-tax Act 2025, section 159, Income Tax Department, incometaxindia.gov.in
  16. Income-tax Act 2025, section 536 (Repeal and savings), Income Tax Department, incometaxindia.gov.in
  17. India–UAE DTAA (ITD consolidated text, Arts 10 and 29), incometaxindia.gov.in
  18. India–Singapore DTAA (ITD consolidated text, Arts 13, 24A and 28A), incometaxindia.gov.in
  19. India–UK DTAA (ITD consolidated text, Arts 11, 12, 13 and 28C), incometaxindia.gov.in
  20. India–Cyprus DTAA 2016 and Protocol (ITD consolidated text), incometaxindia.gov.in
  21. India–Netherlands DTAA (ITD consolidated text), incometaxindia.gov.in
  22. India–Mauritius DTAA (ITD consolidated text, Art 27B), incometaxindia.gov.in
  23. MLI synthesised texts, Income Tax Department: UAE incometaxindia.gov.in ; Singapore incometaxindia.gov.in ; Netherlands incometaxindia.gov.in ; Cyprus incometaxindia.gov.in
  24. UK–India synthesised text of the MLI and the 1993 Convention, HM Revenue & Customs, 2020, gov.uk

Related reading

This article is general information and not legal advice. The legal framework and its application change over time; please take advice on your specific circumstances.