Aircraft lease rentals to Irish lessors held outside Indian tax net absent PE and valid treaty-based denial under MLI/PPT

Aircraft leasing income from a dry lease to Indian airlines was treated as not taxable in India where the Irish lessors held valid tax residency certificates, carried on genuine business activity, and no sham, round-tripping, or dominant tax-avoidance purpose was shown. Treaty relief could not be denied merely by invoking the MLI Principal Purpose Test without domestic incorporation through notification under section 90(1), and the facts did not establish a fixed place permanent establishment because the aircraft were not at the lessors' disposal. Delayed payment or penal charges for lease rentals were also held not taxable, as they were not business income in the absence of a PE and were excluded from ordinary interest treatment under the treaty; relief was extended consistently with the exempt lease rentals.

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Issues: (i) Whether aircraft leasing income earned by Irish resident lessors from dry lease of aircraft to Indian airlines was taxable in India, including the effect of the Principal Purpose Test under the MLI, characterisation of the arrangement as finance lease, and the allegation of permanent establishment in India; (ii) Whether interest or penal charges for delayed payment of lease rentals were taxable in India.

Issue (i): Whether aircraft leasing income earned by Irish resident lessors from dry lease of aircraft to Indian airlines was taxable in India, including the effect of the Principal Purpose Test under the MLI, characterisation of the arrangement as finance lease, and the allegation of permanent establishment in India.

Analysis: The dispute was held to be covered by the coordinate bench decision in the identical group matter. The benefit of the India-Ireland treaty was held unavailable to be denied merely on the basis of the MLI/PPT, since enforceability of treaty modification required domestic notification under section 90(1) of the Income-tax Act, 1961 and no separate notification incorporating the relevant MLI provisions into the treaty was shown. On facts, the assessee had a valid tax residency certificate and carried on genuine business activity through an Irish corporate structure; no sham, round-tripping, or dominant tax-avoidance purpose was established. The lease agreements and surrounding commercial material showed a dry operating lease, with ownership remaining with the lessor and no purchase option at the end of the term. The aircraft themselves were not at the assessee's disposal so as to constitute a fixed place permanent establishment; the lessee had operational control and the lessor retained only protective rights.

Conclusion: The aircraft leasing income was not taxable in India and the additions on this account were deleted.

Issue (ii): Whether interest or penal charges for delayed payment of lease rentals were taxable in India.

Analysis: The delayed payment charge was held not taxable as business income because no permanent establishment existed in India. It was also outside the ordinary definition of interest under Article 11 because penalty charges for late payment are expressly excluded. Further, the receipt was treated as an integral part of the aircraft lease rental stream and, applying the treaty framework that exempted the underlying aircraft leasing income, the same treatment was extended to the delayed payment charge. The fact that the amount had been offered to tax in the return did not prevent relief where the receipt was not chargeable in law, and the Assessing Officer was directed to verify whether it had already been included in the leasing addition so as to avoid double taxation.

Conclusion: The delayed payment receipts were held not taxable in India.

Final Conclusion: The appeals were allowed and the assessments were to be given effect by deleting the additions on aircraft leasing income and granting corresponding relief on delayed payment charges.

Ratio Decidendi: Treaty benefits cannot be denied on the basis of MLI/PPT without domestic incorporation under section 90(1), and dry aircraft lease rentals received by a non-resident lessor are not taxable in India absent a permanent establishment or a valid treaty basis to characterise the receipts otherwise.

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