DTAA benefits in India | TRC Form 10F MLI principal purpose test India
A US private equity fund sells its stake in an Indian portfolio company. Long-term capital gains tax in India would be substantial. The fund’s holding entity is in Mauritius, structured to access the India-Mauritius DTAA’s capital gains exemption for shares acquired before 1 April 2017. The transaction documentation is clean. Then the income-tax officer asks for the Mauritius entity’s Tax Residency Certificate, Form 10F, and supporting documentation to satisfy the Principal Purpose Test introduced by the MLI. The fund’s tax counsel realises that for some of the portfolio years, the entity did not file a TRC and Form 10F was on the older format. The treaty benefit isn’t lost, but it has to be reconstructed under audit pressure. DTAA benefits in India come with conditions, the conditions have hardened progressively since 2017, and the documentation and substance requirements are no longer afterthoughts.
What’s the DTAA Framework and What Documentation Is Required?
India has tax treaties (DTAAs) with most major investing jurisdictions, providing relief from double taxation through reduced withholding rates, exemptions, or credit mechanisms. The treaties cover dividend, interest, royalty, fees for technical services (FTS), business profits, capital gains, and other income categories. Treaty benefits are claimed by withholding agents at the time of payment or by the recipient at the time of return filing.
The Documentation
To claim treaty benefits, the non-resident recipient must provide:
Tax Residency Certificate (TRC): TRC from the home country tax authority, certifying that the recipient is a tax resident of that country for the relevant period. Without a TRC, treaty benefits cannot be claimed under Section 90 of the Income-tax Act.
Form 10F: A self-declaration providing additional information that the TRC may not contain, including name, status, nationality, tax identification number, address, and period of residence covered. Form 10F filing has moved to mandatory online filing through the income tax portal, and historical paper forms are no longer accepted.
Beneficial ownership analysis: Many treaties require the recipient to be the beneficial owner of the income, not merely a conduit. The beneficial owner determination considers substance: where decisions are made, where assets are held, and where risks are borne. Mere legal ownership of the receiving entity isn’t enough, the substance test increasingly drives treaty benefit availability.
Limitation of Benefits (LOB) clauses: Several treaties, including India-US and India-Singapore among others, contain LOB clauses that condition treaty benefits on specific shareholder, public-listing, active-business, or expenditure tests. DTAA benefits in India under LOB-containing treaties require the recipient to qualify under one of the prescribed tests.
How Did the MLI and Principal Purpose Test Change Things?
The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent BEPS (the MLI) entered into force for India on 1 October 2019. The MLI overlays modifications onto India’s existing tax treaties where both India and the treaty partner have notified the treaty as a Covered Tax Agreement.
The Principal Purpose Test
The most consequential modification is the Principal Purpose Test (PPT). The PPT denies treaty benefits where it can be reasonably concluded that obtaining the benefit was one of the principal purposes of the arrangement or transaction, unless granting the benefit is in line with the object and purpose of the relevant treaty provisions. The PPT is a minimum standard under the MLI, India has adopted it for all covered tax agreements.
Country Specific Positions
The India-Singapore DTAA: PPT applies from 1 April 2020.
The India-Cyprus DTAA: PPT applies from 1 April 2021 (no LOB clause, so PPT is the sole anti-abuse provision).
The India-Mauritius DTAA: Mauritius did not include the India treaty as a Covered Tax Agreement under its MLI position, so the MLI’s PPT does not directly apply via the MLI. However, the 2024 Protocol to the India-Mauritius DTAA introduced PPT directly into the bilateral treaty, with the CBDT clarifying in early 2025 that PPT will not apply to grandfathered transactions (i.e., capital gains on shares acquired before 1 April 2017).
The Interaction With GAAR
The PPT and India’s domestic GAAR (under what was Chapter X-A of the 1961 Act, carried into the 2025 Act) can both apply. The PPT operates within the treaty framework, GAAR operates under domestic law. Where both apply, the PPT may have a broader sweep (any one of the principal purposes being treaty benefit, even alongside genuine commercial purposes, triggers PPT) compared to GAAR’s “main purpose” test. DTAA benefits in India under any treaty signed post-MLI need to be analysed for both PPT (treaty level) and GAAR (domestic level) risk.
What Should Recipients and Withholding Agents Actually Do?
Get the TRC for Each Financial Year
The TRC must cover the relevant period. A TRC obtained for one year doesn’t carry forward. For recurring flows, the recipient should obtain a fresh TRC annually before the first remittance of the financial year. Withholding agents in India should require TRC + Form 10F before applying treaty rates.
Document Beneficial Ownership
For treaty-resident entities receiving Indian-source income, contemporaneous documentation of beneficial ownership (corporate governance, board minutes, substance in the residence jurisdiction, employees, premises, decision-making) supports the position at audit. Mauritius and Singapore conduit cases have been increasingly challenged on substance grounds.
Conduct PPT Analysis at Structuring Stage
The PPT applies to the arrangement as a whole. Investment structures that look like they were designed primarily for treaty benefits (intermediate holding entities with no operations, layered structures with no clear commercial rationale) are more likely to be PPT-challenged. The PPT analysis should be done before the structure is set, not after. DTAA benefits in India are increasingly contingent on the structure being defensible on substance, not merely formally compliant.
Plan for Grandfathering Carefully
Pre-2017 capital gains from Mauritius and Singapore investments remain grandfathered, but the documentation supporting acquisition date and continuity of holding has to be impeccable. Lost documentation is lost grandfathering.
Frequently Asked Questions
Q1. Is a TRC always sufficient for treaty access?
No. A TRC is necessary but not sufficient. The recipient must also satisfy any LOB conditions in the relevant treaty (where applicable), must be the beneficial owner of the income, and must not fall foul of the PPT. The TRC is the threshold document, not the conclusive test.
Q2. What’s the withholding tax position on dividends under a treaty without a TRC?
Without a TRC and Form 10F, treaty rates cannot be applied. The withholding agent must apply the domestic rate (currently 20% plus surcharge and cess for dividends to non-residents). The recipient can subsequently claim treaty benefit by filing return of income with documentation, but the cash-flow impact at remittance is the higher domestic rate.
Q3. Does the MLI’s PPT apply to grandfathered Mauritius capital gains?
The CBDT clarified that PPT (whether through MLI or through the 2024 Protocol to the India-Mauritius DTAA) will not apply to grandfathered transactions, i.e., capital gains on shares acquired before 1 April 2017. For shares acquired on or after that date, the PPT applies and the benefit is not automatic.
Q4. Can withholding be skipped entirely under a treaty’s exemption clause?
For some categories (e.g., interest qualifying under specific exemptions, business profits in the absence of a PE), treaty provisions may result in zero or low withholding. The recipient must furnish TRC, Form 10F, and any other documentation the withholding agent requires. The withholding agent’s risk is real: if the documentation is later challenged, the agent may be held responsible for the under-deducted tax, plus interest and penalty. Conservative withholding agents apply treaty rates only where documentation is complete and recent jurisprudence supports the position.
Conclusion
DTAA benefits in India can provide significant relief from double taxation, but treaty access is not based on the DTAA alone. TRC and Form 10F compliance, beneficial ownership, LOB requirements, the MLI, and the Principal Purpose Test all form part of the analysis.
For businesses, investors, and non-resident entities receiving income from India, treaty planning should therefore begin before the transaction or payment takes place. Proper documentation and a substance-based review can help establish that the treaty benefit is supported not only by the paperwork but also by the commercial reality of the arrangement.