I. Introduction
A structurally consequential dispute has been unfolding in Indian tax tribunals, one that concerns not the merits of any single taxpayer’s arrangement but the domestic legal validity of the instrument India uses to police treaty abuse across several double taxation avoidance agreements (DTAAs), the OECD/G20 Multilateral Instrument (MLI). A line of Mumbai ITAT rulings, beginning with Sky High Leasing in August 2025, has held that the MLI’s centerpiece anti-abuse tool, the Principal Purpose Test (PPT), cannot be invoked against Indian taxpayers at all, because India never issued the treaty-specific notification the law requires to give it domestic effect. If this reasoning survives appellate scrutiny, a substantial share of post-2020 treaty-shopping enforcement may unravel.
The Tribunal also held, separately, that the taxpayer’s structure would have satisfied the PPT anyway. This article sets that finding aside and focuses on the more basic question it answered first: was the PPT ever validly part of Indian law at all?
II. What Nestlé SA Decided
The starting point is not the MLI itself, but the Supreme Court’s judgment delivered in Assessing Officer v. Nestlé SA on the MFN clauses in the protocols between India and the Netherlands, France and Switzerland with respect to direct taxation. These clauses state that if India adopts a more favourable tax regime for a subsequent OECD state, then the same should be automatically extended to the residents of the MFN country. Taxpayers contended that the benefit was triggered at the time the triggering event took place. The Supreme Court ruled against on two points. First, the third state had to be an OECD member at the time it signed its own treaty with India, not merely by the time the taxpayer invoked the clause. Second, and more consequentially, a validly triggered MFN benefit does not become part of Indian law merely because it exists at the level of international commitment. Section 90(1) of the Income-tax Act, 1961 requires the Central Government to give effect to a DTAA, or any protocol modifying it, through a specific notification in the Official Gazette. Without such notification, the Court said, no court, tribunal or authority can use the amended treaty provision in the country.
This is not a technicality invented for MFN clauses. It reflects India’s dualistic attitude towards international law, that ratification makes India internationally bound as per public international law, but the rights and obligations under domestic law do not change. The treaty commitment has to be incorporated into domestic law separately. The Court’s language was not limited to MFN clauses, but addressed, rather, any protocol or agreement that would change the current laws and regulations.
III. The Sky High Cases
In 2019, India signed and ratified the MLI, and in a single covering notification, India’s overall stance was put forward: the treaties it wished to be covered by the MLI, and the specific articles of the MLI (Article 6 and Article 7 (PPT)) that aimed to affect them. What India did not do, is to give a treaty specific notification bringing together the text changes as made by the MLI in each of the DTAs.
The matter ended up in the ITAT Mumbai in the case of Sky High Leasing Company Ltd. vs. ACIT, in which an Irish aircraft lessor leased aircraft to IndiGo, through the India-Ireland DTAA. Under Article 7 and 6 of the PPT, the Assessing Officer denied the treaty benefits, citing that the arrangement was made mostly for tax purposes. The taxpayer’s reply was directly based on the case of Nestlé SA – if the MFN had to be notified to become domestic law, then the wholesale amendment of the terms of the treaty by the MLI must follow suit. The Mumbai ITAT agreed, saying that the 2019 blanket ratification notification was not enough, and there was no particular Section 90(1) notification in which the synthesised text of the MLI was included in India-Ireland DTAA “so, the reliance of the Revenue on the said PPT would not have any legal basis. It also concluded that as the OECD has incorporated the synthesised text in its documents for interpretive convenience, there was no independent binding effect on the text without that notification.
The argument was then applied in companion decisions, such as Kosi Aviation by ITAT Delhi and, more recently, Sunflower Aircraft Leasing (February 2026), which applied the same notification-gap reasoning and also adopted the Supreme Court’s “at the disposal” test from Formula One, to block a permanent establishment claim. This is now known as “Sky High quartet” of cases.
The other compelling case for the Revenue, and the one it did make, was the textual one: Article 90(1) was satisfied by the notification of the MLI in 2019 because the MLI’s compatibility clauses were self-executing, meaning that they provide for article-by-article changes to existing treaty text without any requirement for a separate protocol to be negotiated between the parties when the MLI enters into force. The distinction that ITAT had made was not accepted by the ITAT: In the MFN context, it was made clear that what mattered was whether the change was made, and not whether it was negotiated or self-executing.
IV. Why This Matters Beyond Aviation
The immediate cases are a narrow commercial niche, cross-border aircraft leasing, which has been sensitised to extensive treaty-shopping litigation. However, the doctrinal impact is greater. The PPT is the main means by which the Revenue (since the entry into force of the MLI) has tried to block arrangements it considers to be primarily (or mainly) tax motivated and replacing India’s domestic General Anti-Avoidance Rule at the treaty level. The ITAT denied the benefit on the notification gap alone, regardless of how compelling the anti-avoidance case was. It also lays bare the real conflict between what India has said to its treaty partners and OECD members about how its covered agreements have been governed and what the dates were when the PPT was put into effect as a representation that has been made binding domestically, per the reasoning. The Revenue has already started taking appeals and a Supreme Court judgment is imminent. This gap is not substantive, but rather a failure of domestic implementation machinery and it has been addressed differently at other jurisdictions. The United Kingdom did not grant the MLI direct effect on a treaty by treaty basis, as is done in the example of the United States of America, but instead was done by statutory instrument in the Taxation (International and Other Provisions) Act 2010, a comparable approach has been taken in Australia in the International Tax Agreements Act. Both leave a lot less room for the now existing uncertainty in India with respect to notifications.
V. The Path Forward
The remedy is a mere administrative one, not legislative, but now presents the Government with a problem that they set themselves. The Central Board of Direct Taxes (CBDT) could fill the void by making treaty-specific notifications which would include the synthesised text of the MLI in every covered DTAA, without any need for a fresh statutory amendment. However, the notification leaves open a question in the ruling: would it have a retroactive effect on transactions made since 2019 when the MLI was first ratified or would it be effective only from the date of notification? In the absence of an express retroactive effect, the PPT challenges for the intervening years would still be open to the same attack on jurisdiction used successfully by the Sky High quartet and the Government’s exposure could not be limited to the period of the gap.
The other way round i.e. challenging the ITAT’s reasoning with the High Courts without giving the notification first is also expensive. The Government’s own position in Nestlé SA, that a specific Section 90(1) notification is necessary to give the treaty modification domestic force, would then be against it: having persuaded the Supreme Court that a specific notification is required for a treaty modification to have a domestic effect, the Revenue can hardly argue for a lighter standard when the treaty modification in question is the PPT itself. Either approach leaves the interpretation of the treaty and use of MLI in the future uncertain until the question of the retroactivity of the treaty or the notification standard is determined by a higher court. In the meantime, taxpayers with PPT-based assessments have a live and jurisdictionally based argument
VI. Conclusion
The Sky High line of cases is in essence a series of cases about how taxes are implemented, not how a particular taxpayer chooses to structure their affairs, and thus should be considered more carefully than it currently has. At the time, Nestlé SA was understood as a narrow ruling about MFN clauses in three European treaties and an extension to the MLI now shows that there is another underlying issue – how India converts its international tax commitments into domestically enforceable law, whose revaluation will impact the credibility of India’s anti-avoidance regime more broadly.
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