MLI Without Notification Is A Dead Letter How the Sky High Leasing, Kosi Aviation and Sunflower Aircraft Rulings Redefine -The Nestle SA Ripple Effect on India's 90+ MLI-Covered Treaties

1. The Problem: A Decade of Treaty Modernisation at Risk

When India deposited its Ratification Instrument at the OECD on 25 June 2019 and the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (the MLI) entered into force for India on 1 October 2019, it modified - or appeared to modify - over 90 of India's Double Taxation Avoidance Agreements (DTAAs). The headline effect was the automatic introduction of the Principal Purpose Test (PPT) under Articles 6 and 7, which empowers tax authorities to deny treaty benefits where 'one of the principal purposes' of an arrangement is to obtain a tax benefit. Revenue officers across India have invoked the PPT in scores of assessments over the past three years, typically to recharacterise payments, deny treaty rates, and attack holding-company structures.

A series of recent ITAT rulings - Sky High Lxxix Leasing Co. Ltd., Sky High XC Leasing Co. Ltd., Sky High LXXVIII Leasing Co. Ltd., Sky High LXXX Leasing Co. Ltd. And Sky High II Leasing Co. Ltd. Versus The ACIT (IT), Circle-4 (2) (1), Mumbai - 2025 (10) TMI 1217 - ITAT MUMBAI, Sky High Appeal XLIII Leasing Company Limited Versus The Assistant Commissioner of Income Tax (International Tax) Circle 4 (2) (1), Mumbai And Ortus Aircraft Lease 6 (Doublin) Limited, TFDAC Ireland II Limited C/o. Apex Group Versus Deputy Commissioner of Income Tax, International Tax, Circle 3 (2) (2), Mumbai - 2025 (8) TMI 1274 - ITAT MUMBAI, Kosi Aviation Leasing Ltd., C/o DMD Advocates, Hoohly Aviation Leasing Ltd., C/o DMD Advocates, Luni Aviation Leasing Ltd., C/o DMD Advocates And Others Versus Assistant Commissioner of Income Tax, International Taxation, Circle 2 (1) (2), New Delhi, Deputy Commissioner of Income Tax, International Taxation, Circle 1 (1) (1), New Delhi - 2025 (10) TMI 220 - ITAT DELHI, and Sunflower Aircraft Leasing Ltd. v. ACIT (Mumbai, February 2026) - have delivered a judicial verdict that threatens to dismantle this entire enforcement apparatus. The holding, in essence: the MLI's PPT cannot be invoked in an Indian proceeding unless the specific DTAA has been individually notified under section 90(1) of the Income-tax Act incorporating the MLI modifications. A ratification Notification of 2019 announcing India's overall MLI position does not suffice.

The ripple effect is immense. If the ITAT's reasoning holds, every PPT-based addition made by the Revenue in the past four years is at risk of being vacated. And the problem is no longer theoretical; the Revenue is already appealing, and the High Courts will soon adjudicate. This article examines the ITAT's reasoning, identifies the statutory gap the Board must close, and proposes a framework for taxpayers navigating the resulting uncertainty.

2. The Foundational Principle: Nestle SA and the Notification Imperative

The starting point is the Supreme Court's judgment in ASSESSING OFFICER CIRCLE (INTERNATIONAL TAXATION) 2 (2) (2) NEW DELHI Versus M/s NESTLE SA - 2023 (10) TMI 981 - Supreme Court. Faced with the question whether the Most Favoured Nation (MFN) clause in the India-Netherlands, India-France, and India-Switzerland DTAAs automatically triggered reduced withholding rates when the third-State OECD member (Slovenia, Lithuania, Colombia) joined the OECD after India's DTAA with the first-State was signed, the Supreme Court held - overruling long-standing Delhi High Court jurisprudence - that treaty benefits cannot be enforced in India unless a notification under section 90(1) has been issued to give them effect in domestic law.

Two rationes emerged from Nestle SA. First, a DTAA or any protocol or modification to it requires the mandatory procedural step of a section 90(1) notification before it operates in India. The Vienna Convention on the Law of Treaties and the 'subsequent practice' doctrine are subordinate to this domestic procedural requirement. Second, interpretation of treaty terms must be informed by India's settled administrative practice, including the practice of notifying the precise effect of each modification.

Nestle SA was decided in the specific context of MFN clauses, but the ratio is systemic. The Court's reasoning applies to any modification of a DTAA, including modifications effected through the MLI. This proposition lay dormant until the ITAT picked it up and applied it to the MLI's PPT.

3. The Sky High Quartet - Four Rulings, One Doctrine

3.1 Sky High Appeal XLIII Leasing Company Limited Versus The Assistant Commissioner of Income Tax (International Tax) Circle 4 (2) (1), Mumbai And Ortus Aircraft Lease 6 (Doublin) Limited, TFDAC Ireland II Limited C/o. Apex Group Versus Deputy Commissioner of Income Tax, International Tax, Circle 3 (2) (2), Mumbai - 2025 (8) TMI 1274 - ITAT MUMBAI

The first application came in August 2025. The assessee was an Irish aircraft lessor that had leased three aircraft to IndiGo under dry operating leases and claimed exemption under Article 8(1) of the India-Ireland DTAA, which taxes profits from operation or rental of aircraft in international traffic exclusively in the country of residence. The Assessing Officer recharacterised the rentals as royalty under Article 12, asserted a fixed-place Permanent Establishment, and invoked the MLI's PPT under Articles 6 and 7 to deny treaty benefits.

The Mumbai ITAT rejected all three limbs. On the PPT, the Tribunal held that since no notification had been issued under section 90(1) specifically incorporating the MLI modifications into the India-Ireland DTAA, the PPT had no legal force in Indian proceedings. The Revenue's argument that the 2019 generic ratification notification sufficed was rejected on the ground that it announced India's MLI ratification but did not translate any specific modification into Indian law.

3.2 Sky High Lxxix Leasing Co. Ltd., Sky High XC Leasing Co. Ltd., Sky High LXXVIII Leasing Co. Ltd., Sky High LXXX Leasing Co. Ltd. And Sky High II Leasing Co. Ltd. Versus The ACIT (IT), Circle-4 (2) (1), Mumbai - 2025 (10) TMI 1217 - ITAT MUMBAI

In the follow-on ruling in Sky High Lxxix Leasing Co. Ltd., Sky High XC Leasing Co. Ltd., Sky High LXXVIII Leasing Co. Ltd., Sky High LXXX Leasing Co. Ltd. And Sky High II Leasing Co. Ltd. Versus The ACIT (IT), Circle-4 (2) (1), Mumbai - 2025 (10) TMI 1217 - ITAT MUMBAI, the Tribunal reaffirmed and expanded the reasoning. The ITAT expressly applied Nestle SA to the MLI context, noting: 'The India-Ireland DTAA had been duly notified in 2002, while the MLI was notified in 2019. Although the DTAA was designated as a 'Covered Tax Agreement' under the MLI, no separate notification had been issued incorporating the MLI provisions into the DTAA.'

The Tribunal went further and held that even if the PPT were to be notionally applied, the assessee satisfied its requirements - the Irish entity had substantive business reasons, real economic activity, and the DTAA structure was not 'one of the principal purposes' of the arrangement. This alternate finding is important because it provides a fallback even if the High Court reverses the primary 'no notification' reasoning.

3.3 Kosi Aviation Leasing Ltd., C/o DMD Advocates, Hoohly Aviation Leasing Ltd., C/o DMD Advocates, Luni Aviation Leasing Ltd., C/o DMD Advocates And Others Versus Assistant Commissioner of Income Tax, International Taxation, Circle 2 (1) (2), New Delhi, Deputy Commissioner of Income Tax, International Taxation, Circle 1 (1) (1), New Delhi - 2025 (10) TMI 220 - ITAT DELHI,

The Delhi ITAT's consolidated ruling in 75 Kosi Aviation appeals extended the doctrine to all Irish aircraft lessors leasing to Indian airlines. The Tribunal 'reaffirmed that MLI's provisions were not self-executing and could not be applied automatically in the absence of a country-specific notification under section 90(1) of the IT Act.' The general notification of August 2019 that announced India's ratification of MLI was 'held insufficient to alter the terms of any specific DTAA.'

3.4 Sunflower Aircraft Leasing Ltd. v. ACIT (Mumbai ITAT, February 2026)

The most recent in the series, Sunflower Aircraft Leasing (February 2026), applies the doctrine in a slightly different factual matrix - the taxpayer was a company in the AerCap group and the Dispute Resolution Panel had held that continuous presence of leased aircraft in India constituted a fixed-place PE. The ITAT rejected the PE argument applying the 'at-the-disposal' test from Formula One World Championship Ltd. Versus Commissioner of Income Tax, International Taxation – 3, Delhi & Anr.-2017 (4) TMI 1109 - Supreme Court, and separately rejected the PPT argument on the Sky High reasoning.

4. The Statutory Anatomy: Why Section 90(1) Notification Is Indispensable

Section 90(1) of the Income-tax Act empowers the Central Government to enter into agreements with foreign governments for the avoidance of double taxation and, critically, to give effect to such agreements in India by notification in the Official Gazette. Section 90(2) provides that the beneficial provisions of the DTAA prevail over the Act to the extent they are more favourable to the taxpayer. The notification mechanism is therefore the statutory conduit through which an international treaty becomes operative in Indian tax administration.

When India ratified the MLI, the instrument was deposited at the OECD and bilateral treaty modifications occurred at the level of public international law. However, under Indian constitutional law, a treaty does not automatically modify domestic statute unless Parliament incorporates it or a notification brings it into effect. The Ratification Notification of 9 August 2019 (Notification S.O. 2887(E) dated 09.08.2019) merely recorded India's ratification; it did not reconstitute the text of each Covered Tax Agreement to embed the MLI modifications.

The Revenue's counter-argument - that the MLI is itself a 'notification' and therefore sufficient - has been rejected by the ITAT on solid textual ground. Section 90(1) contemplates a notification giving effect to 'an agreement' made with a 'foreign government' - a bilateral construct. The MLI is a multilateral convention whose effect on each DTAA is determined by the matching of reservations and options by both Contracting States. Until the modified bilateral text is notified as a consolidated instrument under section 90(1), no domestic authority is seized of its provisions.

5. The Scope of the Problem - Beyond Aircraft Leasing

The Sky High reasoning, if upheld at the High Court level, applies across every provision of the MLI, not just the PPT. Article 3 (Transparent Entities), Article 4 (Dual Resident Entities), Article 5 (Application of Methods for Elimination of Double Taxation), Articles 8 and 9 (Minimum Holding Period for Dividends and Capital Gains from Land-Rich Companies), Article 12 (Commissionaire Arrangements), Article 13 (Specific Activity Exemptions), and Article 14 (Splitting-Up of Contracts) are all affected. Every Revenue reliance on these modifications without a specific section 90(1) notification is vulnerable.

Particularly acute is the impact on Article 9 (Land-Rich Companies capital gains). Several Revenue positions rely on the MLI-introduced 365-day look-through rule to deny capital gains exemptions under treaties with Mauritius (not a Covered Tax Agreement), Singapore (a CTA), France and Luxembourg (both CTAs with modifications). If the Sky High doctrine is upheld, none of these Article 9 provisions are operative in India until individually notified.

The CBDT's Circular No. 01/2025 dated 21 January 2025 on the PPT attempted to provide guidance but did not cure the notification gap. The Circular clarified that the PPT applies prospectively from the MLI effective date and that grandfathering provisions in DTAAs with Mauritius, Singapore and Cyprus remain outside the PPT. What the Circular did not do - and could not do without fresh notifications - is confer domestic legal force on the MLI text. A Circular cannot substitute for a section 90(1) notification.

6. Global Comparative Experience - What Other Jurisdictions Did

The procedural question is not unique to India. Most Inclusive Framework members have dealt with it by publishing 'synthesised texts' - consolidated versions of each DTAA showing the combined effect of the original treaty and the MLI modifications. Ireland, the United Kingdom, Australia, Canada, Japan, the Netherlands, and Singapore have all published synthesised texts for their MLI-affected treaties on their tax administration websites, and these texts are treated as the operative version for domestic administration.

India has, uniquely among major Inclusive Framework members, not published synthesised texts for its Covered Tax Agreements. The CBDT's website continues to show the original pre-MLI text of each DTAA. The absence of a synthesised text is not merely a procedural oversight - it is the precise statutory gap the ITAT has identified. Taxpayers and officers alike are left to reconcile the MLI against each DTAA through private inference, with no official version.

7. Practical Consequences for Taxpayers and the Revenue

7.1 For Taxpayers

The immediate consequence is that every assessment order that relies on the MLI to deny treaty benefits is open to challenge on the Sky High reasoning. Taxpayers with pending assessments for AY 2020-21 onwards should examine whether any Revenue addition has invoked the PPT or any other MLI provision. If so, the Sky High quartet provides a direct appellate path. The Revenue's fallback to the substantive PPT (that the arrangement was treaty-shopping) then becomes the live question, where documentary evidence of commercial substance becomes critical.

For prospective planning, the position is more delicate. The Sky High doctrine is an ITAT position that may or may not survive at the High Court. A taxpayer structuring a new investment cannot rely on the MLI being ineffective; it must plan for the contingency that the Supreme Court eventually holds the 2019 Ratification Notification sufficient, or that the CBDT issues synthesised texts that close the gap.

7.2 For the Revenue

The Revenue faces a twin challenge: (a) defending the existing stock of MLI-based assessments at High Court and Supreme Court levels, and (b) rebuilding its enforcement architecture by pressing the CBDT to issue notifications that close the gap prospectively. Neither is quick. The CBDT-affected MLI modifications are spread across more than 90 Covered Tax Agreements, and each would require its own notification process with attendant inter-ministerial coordination and publication in the Gazette.

7.3 For the CBDT

The most rational response is to publish synthesised texts for each Covered Tax Agreement, accompanied by an omnibus notification under section 90(1) giving effect to the MLI-modified versions. This approach would align India with international best practice, would cure the Sky High infirmity prospectively, and would leave the question of retrospective effect - affecting existing assessments - as the only residual dispute.

8. A Comparative Map - Pre-Sky High vs Post-Sky High

9. The Solution - A Three-Fold CBDT Action Plan

To resolve the statutory gap and restore enforcement capacity, the following three-fold action by the Central Board of Direct Taxes is urgent:

(i) Issue Consolidated Section 90(1) Notifications for Each Covered Tax Agreement: The Board, in consultation with the Ministry of External Affairs, should prepare and notify a synthesised text for each of India's 90-plus Covered Tax Agreements, incorporating the matched MLI modifications. Each synthesised text should be published in the Official Gazette under section 90(1), thereby conferring domestic legal force on the MLI modifications.

(ii) Issue a Comprehensive Procedural Circular on PPT Enforcement: Once the notifications are in place, a procedural Circular should be issued laying down the threshold requirements for invocation of the PPT in assessment proceedings. This would include: a requirement of prior approval from the Principal Commissioner or Commissioner before PPT invocation; a structured evidentiary framework for demonstrating 'principal purpose'; and a protective carve-out for bona fide commercial structures with substantive economic activity.

(iii) Provide a Transitional Safe Harbour for Existing Cases: For assessments that have already invoked the PPT before the fresh notifications, the Board should provide a transitional safe harbour: taxpayers who voluntarily disclose their treaty-based positions within a defined window should be protected from penalty and interest, and the assessment should be limited to substantive merits of the PPT rather than the procedural infirmity. This balances revenue interests with the taxpayers' right to rely on the Sky High doctrine.

10. Conclusion - A Moment of Institutional Reckoning

The Sky High quartet is more than a series of isolated ITAT rulings. It is an institutional reckoning with the gap between India's diplomatic commitments at the OECD and its statutory machinery at home. The MLI is one of the most important modifications to India's treaty network in a generation. It cannot remain suspended between the bilateral text of 2002-era DTAAs and the multilateral text of the 2017 Convention. Either the Board takes the administrative step of issuing synthesised texts with section 90(1) notifications, or the ITAT doctrine will continue to vacate PPT-based additions - one assessment at a time.

For taxpayers, the path is clear in the short term: rely on the Sky High reasoning for pending appellate proceedings, document commercial substance as the fallback PPT defence, and plan prospectively for the contingency that the gap is closed by fresh notifications. For the Revenue, the path is equally clear: press the CBDT for urgent notification action, build the substantive PPT case on commercial-substance evidence, and prepare for High Court defence of the Sky High reasoning.

The MLI was designed to prevent treaty abuse and modernise India's treaty network. Its potential is real. Its current legal effect, until the notification gap is closed, is substantially diminished. The Board's window of opportunity is narrow - before the High Courts calcify the Sky High doctrine into binding precedent, the CBDT should act.