Aircraft lease treated as operating lease, so rentals were not interest under the India-Ireland DTAA.

Aircraft lease documentation was read as an operating lease because the lessor retained ownership throughout, the lessee had to redeliver the aircraft at expiry, no term transferred title, and the contractual restrictions were consistent with a lease rather than a financing arrangement. The indicia of a finance lease were absent since ownership did not pass on expiry or on payment of any residual amount, and the lease term did not exhaust the aircraft's economic life. On that basis, the rentals were treated as rent and not interest under Article 11 of the India-Ireland DTAA, and the addition was deleted.

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Issues: (i) Whether the aircraft lease transactions were operating leases or finance leases and whether the lease rentals were taxable in India as interest under Article 11 of the India-Ireland DTAA.

Analysis: The lease documents, read together, showed that the lessor remained the owner throughout the lease term, the lessee was obliged to redeliver the aircraft on expiry, no covenant transferred ownership to the lessee, and the contractual restrictions on possession, sub-leasing, insurance, indemnity, and title to equipment were consistent with a lease arrangement where title continued with the lessor. The indicia of a finance lease under the relevant statutory definitions were absent because ownership did not pass at the end of the lease or on payment of a residual amount. The lease period also did not exhaust the economic life of the aircraft. The reasoning adopted in the earlier Special Bench decision on similar lease arrangements supported the view that the rentals were in the nature of rent and not interest.

Conclusion: The lease was held to be an operating lease, Article 11 did not apply, and the addition treating the rentals as interest was set aside in favour of the assessee.

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