India’s DTAA Framework: Evolution and MLI Alignment

The Rationale Behind Double Taxation Avoidance Agreements

The fundamental rationale behind Double Taxation Avoidance Agreements DTAA lies in addressing the problem of overlapping tax jurisdiction. When income arises in one country and is earned by a resident of another, both countries may assert the right to tax the same income one on the basis of source and the other on the basis of residence. Without coordination, this overlap results in double taxation, increasing the tax burden beyond what is economically reasonable.

Such double taxation acts as a barrier to cross-border economic activity. It discourages international trade, foreign investment, and the mobility of capital and labour by making cross-border transactions more costly and unpredictable. DTAAs are designed to remove this obstacle by clearly allocating taxing rights between contracting states through mutually agreed rules.

I. The Evolution of DTAA: Timeline

The idea of preventing the same income from being taxed twice across borders may sound modern, but its origins stretch back more than a century long before globalisation in its current sense. The story of Double Taxation Avoidance Agreements (DTAAs) unfolds at the intersection of economic cooperation, fiscal necessity, and the evolution of international law.

II. Legal Provisions Governing Double Taxation Avoidance Agreements in India

The legal framework governing Double Taxation Avoidance Agreements in India is firmly anchored in both constitutional authority and statutory enactment. This dual foundation ensures that tax treaties operate as binding instruments within India’s domestic legal system while maintaining consistency with international obligations.

A. The Constitutional Basis: The constitutional authority for implementing DTAAs flows from Article 253 of the Constitution of India, which empowers Parliament to make laws for giving effect to international treaties, agreements, and conventions. This provision enables India to honour its international tax commitments even when treaty obligations require deviation from ordinary legislative competence.

Through Article 253, tax treaties acquire a status that allows their provisions to be incorporated into domestic law and applied by Indian tax authorities and courts.

B. Statutory Framework Under the Income Tax Act, 1961: The operationalisation of DTAAs is governed primarily by Section 90 of the Income Tax Act, 1961. This provision authorises the Central Government to enter into agreements with foreign countries for:

• avoidance of double taxation, and
• prevention of fiscal evasion with respect to income taxes.

A key legal consequence of Section 90 is the principle of treaty override. Where a DTAA exists, the provisions of the treaty apply to the extent they are more beneficial to the taxpayer than domestic tax law. This ensures that taxpayers can rely on treaty protections even when domestic provisions prescribe a higher tax burden.

In addition, Section 90A extends similar treatment to agreements entered into with specified associations in foreign territories, reinforcing India’s broader commitment to international tax cooperation. India’s approach to preventing double taxation is not limited to treaty partners.

Section 91 of the Income Tax Act provides unilateral relief where no DTAA exists with the country in which foreign income is earned. Under this provision, a resident taxpayer is allowed credit for foreign taxes paid, subject to prescribed conditions. This ensures that relief from double taxation is available even in the absence of bilateral treaty arrangements.

C. Procedural Requirements for Treaty Benefits: To access DTAA benefits, Indian law mandates compliance with specific procedural requirements. A taxpayer claiming treaty relief must furnish a Tax Residency Certificate (TRC) issued by the tax authorities of the country of residence. The TRC serves as formal proof of residency and is a statutory precondition for availing treaty benefits. Failure to comply with these requirements may result in denial of treaty relief, even where substantive treaty conditions are otherwise satisfied.

Why DTAAs Matter?

At its core, a Double Taxation Avoidance Agreement (DTAA) prevents the same income from being taxed twice; once in the source country and once in the residence country. But in practice, treaties do far more. They:

• Allocate taxing rights
• Define Permanent Establishment thresholds
• Cap withholding tax rates
• Provide dispute resolution mechanisms

In cross-border structuring, the treaty often determines whether a transaction is viable.

For example, if domestic law prescribes 20% withholding tax on dividends, but the India–Singapore DTAA caps it at 10%, the treaty directly influences cost of capital. Treaties are therefore not academic constructs. They shape investment decisions.

III. From Bilateral Negotiation to Multilateral Reform: Introduction to the MLI

While DTAAs were designed to eliminate double taxation, over time certain treaty provisions began to be used for aggressive tax planning. Capital gains exemptions, low withholding tax caps, and broad Permanent Establishment (PE) thresholds made some jurisdictions attractive as conduit locations.

In India’s case, the India–Mauritius and later the India–Singapore treaties assumed strategic importance. Under their earlier versions, capital gains arising from the transfer of Indian shares were taxable only in the country of residence of the investor. Since jurisdictions like Mauritius did not levy capital gains tax in many cases, this effectively resulted in gains escaping taxation in both countries. This led to widespread treaty-based structuring, where intermediate holding entities were established primarily to access treaty benefits.

The issue was not illegality but misalignment. Treaties intended to prevent double taxation were increasingly used to achieve double non-taxation. Addressing such outcomes through bilateral renegotiation proved slow and fragmented. Each treaty required separate negotiation, ratification, and notification. Meanwhile, tax planning strategies evolved rapidly.

This structural gap between treaty design and economic reality ultimately led to coordinated global reform under the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project culminating in the Multilateral Instrument (MLI).

One of the most innovative outcomes of BEPS was the creation of the Multilateral Instrument (MLI) formally known as the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS. The MLI represents a structural innovation in international tax law. Instead of renegotiating hundreds of bilateral treaties individually, participating countries agreed to a single multilateral convention that overlays and modifies existing treaties simultaneously. The MLI:

• Introduces anti-abuse provisions such as the Principal Purpose Test (PPT)
• Strengthens rules against artificial avoidance of Permanent Establishment
• Improves dispute resolution mechanisms
• Embeds minimum anti-treaty shopping standards

Importantly, the MLI does not replace existing treaties. It modifies their application. Each country chooses which treaties it wishes to cover and which provisions it accepts, preserving sovereignty while enabling coordinated reform.

4. DTAA Alignment with the Multilateral Instrument (MLI): Mechanics of DTAA Modification Under the MLI

India ratified the MLI on 25 June 2019, marking a significant shift in its treaty policy from selective bilateral reform to coordinated multilateral alignment. The MLI became operative for India from 1 October 2019. MLI modifies how treaties operate by inserting internationally agreed anti-abuse standards without requiring renegotiation of each bilateral agreement. Its operation depends on:

• Ratification by both contracting states
• Listing the treaty as a Covered Tax Agreement
• Acceptance of compatible provisions

But in India, there is an additional layer Section 90(1) of the Income-tax Act, which requires formal notification before any treaty modification acquires domestic effect. This dual structure international alignment plus domestic incorporation defines India’s DTAA–MLI alignment model. The most significant of these standards is Article 7, i.e.  the Principal Purpose Test (PPT).

Under the PPT, treaty benefits may be denied where it is reasonable to conclude that obtaining such benefit was one of the principal purposes of an arrangement or transaction, unless granting the benefit is consistent with the object and purpose of the relevant treaty provision.

This represents a structural shift in treaty application. Earlier, treaty entitlement was largely determined by formal criteria residency status, legal ownership, and compliance with documentation requirements. Post-MLI, entitlement requires substantive justification. Tax authorities are now empowered to look beyond form and examine commercial rationale and economic substance. In effect, treaty access is no longer purely technical it is evaluative.

Illustration: India–Singapore Structure After MLI Alignment

Singapore is not merely a technical treaty partner it has consistently been one of India’s largest sources of foreign direct investment. According to official data released by the Department for Promotion of Industry and Internal Trade (DPIIT), Singapore accounted for approximately 27% of India’s total FDI inflows in FY 2021–22, retaining its position as the leading FDI source jurisdiction even after the 2016–17 amendments to the capital gains article. Across the period FY 2018–19 to FY 2022–23, Singapore has consistently ranked at or near the top among FDI contributors to India.

This data is significant for two reasons.

• First, it demonstrates that India’s shift to source-based capital gains taxation for shares acquired on or after 1 April 2017 did not collapse treaty-driven investment corridors.
• Second, it indicates that investment routed through Singapore is not driven solely by capital gains exemptions, but also by commercial infrastructure, regulatory predictability, financial ecosystem depth, and regional headquarters functionality.
• Against this backdrop, the India–Singapore DTAA provides a meaningful and economically relevant illustration of how the Principal Purpose Test (PPT) operates post-MLI.

The India–Singapore DTAA is a Covered Tax Agreement under the Multilateral Instrument. It is therefore subject to:

• Capital gains amendments (post-2017 acquisitions taxable in India),
• A Limitation of Benefits (LOB) clause (to prevent treaty shopping), and
• The Principal Purpose Test (PPT) introduced through the MLI.

Let us examine two contrasting scenarios.

Scenario 1: Conduit Investment Vehicle

A Singapore company is incorporated in 2023 to invest in Indian listed shares. The entity:

• Has no employees in Singapore,
• Incurs minimal operating expenditure,
• Does not conduct treasury, regional management, or strategic functions,
• Holds only Indian investments,
• Exists primarily to access treaty benefits.

Even if this entity qualifies as a Singapore tax resident and produces a valid Tax Residency Certificate (TRC), Indian tax authorities may examine the structure under:

• The Principal Purpose Test (Article 7 of the MLI), and
• The Limitation of Benefits clause under the India–Singapore DTAA.

If it is reasonable to conclude that obtaining treaty benefits was one of the principal purposes of the arrangement, and no independent commercial rationale exists, treaty benefits may be denied. The structure satisfies formal requirements but fails the substance test.

Scenario 2: Substantive Regional Holding Company

Now consider a different Singapore entity incorporated in 2023. This company:

• Functions as an Asia-Pacific regional headquarters,
• Employs finance, treasury, and compliance personnel,
• Manages investments across multiple jurisdictions,
• Bears commercial risk,
• Maintains operational expenditure consistent with business activity.

In this case, even if tax efficiency forms part of the investment decision, the entity demonstrates independent commercial purpose and economic substance.

Here, treaty entitlement becomes far more defensible because:

• Commercial rationale exists beyond tax savings,
• Substance aligns with treaty object and purpose,
• The arrangement cannot be characterised as artificial.

The PPT does not prohibit tax planning. It prohibits artificial tax-driven arrangements divorced from commercial reality.

But the critical question that emerged in India was not whether the PPT exist under the MLI but it was whether it can the be invoked automatically in domestic proceedings merely because India ratified the MLI?

This issue came into sharp focus in Kosi Aviation Leasing Ltd. v. ACIT (Delhi ITAT, 2025), following earlier Mumbai ITAT rulings in Sky High LXXIX Leasing Co. Ltd. and Sky-High Appeal XLIII Leasing Co. Ltd.

Case: Kosi Aviation Leasing Ltd. v. ACIT (Delhi ITAT, 2025): The case arose in the backdrop of India’s adoption of the Multilateral Instrument (MLI) and the introduction of the Principal Purpose Test (PPT) into several Covered Tax Agreements. The core question before the Tribunal was procedural but fundamental: Can the Revenue invoke the PPT under the MLI in domestic proceedings without a country-specific notification under Section 90(1) of the Income-tax Act, 1961?

Facts:  

• The cases involved Irish aircraft lessors who had leased aircraft to Indian airlines under operating lease arrangements and claimed treaty protection under the India–Ireland DTAA.
• The Revenue sought to deny treaty benefits by invoking the Principal Purpose Test under the MLI, alleging that the structures were designed primarily to obtain tax advantages.
• The Tribunal rejected the Revenue’s position on a fundamental legal ground.

The Tribunal’s Reasoning: The Delhi ITAT rejected the Revenue’s position. The Tribunal held that:

1. The MLI is not self-executing in Indian domestic law.

2. A general notification announcing India’s ratification of the MLI is not sufficient.

3. Any modification to a DTAA must be incorporated through a country-specific notification under Section 90(1).

4. Until such notification is issued, the original, unmodified DTAA continues to govern.

The Tribunal relied heavily on the Supreme Court’s decision in Nestlé SA v. AO (International Taxation), where the Court emphasised that treaty provisions acquire domestic enforceability only through statutory incorporation. The logic was clear: International agreement alone does not override domestic statutory procedure.

Significance: These rulings do not question the validity of the MLI as an international instrument. Instead, they clarify the mechanics of its domestic application. From a structural standpoint, three distinct steps are required before an MLI-based provision becomes enforceable in India:

1. Ratification of the MLI at the international level;

2. Bilateral designation of the DTAA as a Covered Tax Agreement; and

3. Formal notification under Section 90(1) incorporating the modification into domestic law.

Absent the third step, treaty-altering provisions such as the PPT cannot be automatically applied by tax authorities. This judicial position introduces a constitutional checkpoint into treaty reform. It reinforces the principle that international commitments must pass through domestic statutory processes before affecting taxpayer rights.

Implications for Taxpayers: For professionals advising on cross-border transactions, the implications are significant:

• MLI ratification alone does not automatically amend a DTAA in India.
• Revenue authorities must demonstrate that the relevant treaty modification has been specifically notified under Section 90(1).
• In the absence of such notification, taxpayers may rely on the unmodified DTAA provisions.

This significantly enhances legal certainty and prevents unilateral expansion of anti-abuse standards without procedural compliance. reveals something deeper about India’s treaty architecture. India is fully aligned with global anti-abuse standards under the MLI. But it insists that treaty modification follow constitutional and statutory procedure.

Conclusion

India’s DTAA framework, viewed through the lens of its alignment with the Multilateral Instrument (MLI), reflects recalibration rather than disruption. The core objective of eliminating double taxation remains intact, but the architecture through which treaty benefits are accessed has materially evolved.

Through the incorporation of BEPS-aligned standards most notably the Principal Purpose Test treaty entitlement is now conditioned on demonstrable commercial substance rather than mere formal qualification. At the same time, India’s statutory insistence that treaty modifications acquire domestic force only through formal incorporation preserves constitutional discipline within multilateral alignment.

The DTAA–MLI alignment therefore produces a dual outcome: stronger substantive scrutiny and clearer procedural structure. India has aligned with global anti-abuse norms without surrendering domestic legislative control. The trajectory is evident treaty benefits remain available, but only where structure aligns with substance and international reform operates within statutory boundaries.