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Issues: (i) Whether the leased aircraft, by their continuous presence in India and the lessor's retained ownership and inspection or repossession rights, constituted a fixed place permanent establishment of the assessee in India under Article 5(1) of the India-Ireland DTAA. (ii) Whether the lease rentals from the aircraft were taxable in India or were protected by Article 8(1) of the India-Ireland DTAA as profits from the rental of aircraft in international traffic. (iii) Whether the Assessing Officer could alternatively tax the lease rentals as interest income and levy consequential interest.
Issue (i): Whether the leased aircraft, by their continuous presence in India and the lessor's retained ownership and inspection or repossession rights, constituted a fixed place permanent establishment of the assessee in India under Article 5(1) of the India-Ireland DTAA.
Analysis: A fixed place permanent establishment requires a place of business that is fixed and at the disposal of the foreign enterprise, through which its business is carried on. In a dry lease, the lessee has operational control, while the lessor's inspection and repossession rights are protective covenants to safeguard ownership. The assessee carried on its leasing business from outside India, had no personnel or operational infrastructure in India, and the aircraft were under IndiGo's possession and control for operational purposes. Mere ownership of an income-generating movable asset located in India did not satisfy the disposal test or convert the aircraft into a place through which the assessee conducted business in India.
Conclusion: No fixed place permanent establishment existed in India, and this issue is decided in favour of the assessee.
Issue (ii): Whether the lease rentals from the aircraft were taxable in India or were protected by Article 8(1) of the India-Ireland DTAA as profits from the rental of aircraft in international traffic.
Analysis: Article 8(1) of the India-Ireland DTAA expressly covers profits derived from the operation or rental of aircraft in international traffic. The treaty text disjunctively treats rental as an independent source of protected profits and does not require the lessor itself to be an operator. The definition of international traffic turns on whether the aircraft is operated solely between places in India, and not on whether the lessor performs the operations. Since the leased aircraft were part of an airline fleet used on both domestic and international sectors, the rentals fell within the treaty protection. The narrower OECD-based reading adopted by the Revenue could not override the treaty language.
Conclusion: The lease rentals were covered by Article 8(1) and were not taxable in India on the Revenue's approach, and this issue is decided in favour of the assessee.
Issue (iii): Whether the Assessing Officer could alternatively tax the lease rentals as interest income and levy consequential interest.
Analysis: The lease was found to be an operating lease, and there was no finding that the receipts were interest in nature. The alternative characterization as interest was therefore beyond the jurisdiction of the assessment as sustained by the appellate directions. Once the substantive addition was deleted, interest under section 234B also became consequential.
Conclusion: The alternative treatment as interest income was unsustainable, and the interest levy did not survive.
Final Conclusion: The assessment additions were set aside and the assessee's treaty claim succeeded, resulting in complete relief on the disputed taxability of the lease rentals.
Ratio Decidendi: For a fixed place permanent establishment, the foreign enterprise must have a fixed place at its disposal through which it carries on business; mere ownership of a movable income-generating asset under the lessee's operational control is insufficient. Where a treaty expressly protects profits from the rental of aircraft in international traffic, that protection cannot be curtailed by importing a narrower operator-based requirement not found in the treaty text.
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