TaxTMI 
TaxTMI 
2025 (8) TMI 133
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.... 3. The facts of the case in brief as emanating from records are: The assessee company was incorporated in Ireland and is a Tax Resident of Ireland. The assessee is engaged in the business of leasing of aircrafts. During the period relevant to assessment year under appeal, the assessee had allegedly leased three aircrafts bearing Manufacturer Serial No. (MSN) 10689, 9382 & 9561 to M/s. Inter Globe Aviation Ltd. (Indigo) on an operating lease basis. The assessee filed its return of income for the impugned assessment year with residential status of 'Non-Resident' declaring NIL income. The case of the assessee was selected for scrutiny on the basis of CASS and notice u/s. 143(2) of the Income Tax Act, 1961(hereinafter referred to as the 'the Act') dated 31.05.2023 was issued and served upon the assessee. 3.1. During the Financial Year ended on 31.03.2022, the assessee had received lease rentals amounting to Rs. 74,37,77,694/- from Indigo for use of aircrafts. The assessee claimed that since lease rentals received by the assessee are in respect of operating lease, the lease rents received are covered under Article 8 of India- Ireland DTAA, hence, not taxable in India. The....
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....a perusal of Clause 3 of the ASLA would show that the lessor (Celestial Aviation Trading 15 Ltd. i.e. the assessee) would be the owner of aircraft. He further pointed that as per Clause 8 of the agreement, the term of lease would be 120 months with an option to extend the term of lease for a further period of up to 48 months. He referred to Clause 10 of the agreement to show that as per the agreement lessee (Indigo) shall pay a deposit in cash or in the form of Letter of Credit prior to delivery. The said deposit/letter of credit is returnable on occurrence of any of the following events: "(a) Aircraft suffers any event of loss prior to delivery; (b) The aircraft suffers and event of loss after delivery; (c) On completion of the return occasion; & (d) The aircraft is not delivered to the lessee on or prior final delivery date and the Aircraft Specific Lease Agreement is terminated in accordance with Clause 12." 6. The ld. Counsel pointed that all the above conditions set out in the ASLA clearly indicate that it is a case of operating lease, where the ownership of the aircraft remains with the assessee and the aircraft is handed over to Indigo ....
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....lease agreement is further extended or the aircraft is returned back to the lessor. To further buttress his argument the ld. Counsel referred to the definition of financial lease as defined u/s. 2(ha) of the Act of the Recovery of Debts and Bankruptcy Act, 1993. He asserted that, even the said definition imposes a condition of transfer of ownership of leased assets at the expiry of lease term to the lessee. 9. The ld. Counsel referring to the DRP directions pointed that the DRP has erred in holding that the Economic-Life of an aircraft is 8 years and since the aircraft lease period covers substantial Economic Life of the asset even though ownership not eventually transferred, the lease would be in the nature of Financial Lease. The ld. Counsel assailing findings of the DRP, asserted that it is not the length of lease period that defines nature of lease but terms and conditions which inter alia includes, whether the ownership of the leased asset is to be transferred to the lessee at the end of lease term which determines the nature of lease. 10. The ld. Counsel finally placed reliance on the decision of Special Bench in the case of Inter Globe Aviation Ltd.(Indigo) vs. ACIT re....
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....marily assailed the addition of Rs. 74,37,77,694/- on account of interest income taxable at the rate of 10% holding lease rentals received by the assessee out of Financial Lease. Undisputedly, the assessee is tax resident of Ireland and is engaged in the business of Leasing of Aircrafts. During the period relevant to assessment year under appeal, the assessee leased out three aircrafts bearing MSN 10689, 9382 and 9561 to Indigo. The case of the assessee is that the lease entered into between the assessee and Indigo is operating lease. Hence, the lease rentals received by the assessee from said lessee are not exigible to tax in India. The AO has re-characterized the nature of lease agreement and has held the lease to be finance lease and the lease rentals received by the assessee in the nature of interest taxable at the rate of 10% in accordance with Article 11 of India-Ireland DTAA. 13. To begin with, it would be relevant to refer to the Lease Agreement entered into between the assessee, the lessor and Indigo, the lessee. The assessee has placed on record Aircraft Specific Lease Agreement (in short 'ASLA) dated 15.04.2021 at page 162 to 209 of the paper book in respect of ai....
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.... fully effective certificate of airworthiness issued by the Air Authority. If requested by Lessor, Lessee shall thereupon cause the Aircraft to be deregistered by the Air Authority Lessor shall reasonably cooperate (and shall procure that the Owner reasonably cooperates) with the Lessee in order to effect such deregistration." The above clause makes it unambiguously clear that at the end of Lease period, Lessee is under obligation to return aircraft to the lessor. And on the return of aircraft the lessor shall refund the deposit. 14. Some of the vital covenants of the CTA are examined to determine the nature of lease as under:- (i) Schedule-I to CTA contains definitions. "Owner" has been defined as under: "Owner means the Person identified in the Aircraft Specific Lease Agreement as Owner or, subject to clause 14.3, such other person as Lessor may notify Lessee from time to time." The owner as per ASLA is the assessee. (ii) Clause 8.4 of CTA deals with sub-leasing. "8.4 Subleasing (a) At no time prior to the Return Occasion will Lessee sub-lease, wetlease or otherwise give possession of the Aircraft to any Person except: ....
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.... a Permitted Lien); nor (v) consent to any interests conflicting with (whether or not taking priority over) the interests of Lessor or Owner to be registered at the International Registry without the prior written consent of Lessor or Owner (as the case may be)." The aforesaid covenant ensures that the name of the owner at all times is displayed on the aircraft. The reason for having this clause is obviously to display the name of owner and lessee during the period of Lease Agreement which is substantially less than the Economic Life of the Aircraft. (iv) In Clause 8.13 Aircraft Lease Common Terms Agreement deals with title on equipment change, the same reads as under:- "8.13 Title on an Equipment Change Title to any equipment that becomes a Part or an Engine after the Delivery Date (whether by way of replacement, as the result of an Equipment Change or otherwise) shall, save as otherwise provided in a bill of sale or similar instrument delivered by Lessee in favour of Owner) vest in Owner solely by virtue of its attachment to the Airframe or an Engine and it shall then be subject to the Lease as if it were attached to the Aircraft at De....
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....s if the Lease had never been entered into. Thus, in the event of default the Lessee has to return aircraft to the Lessor and thereafter, the Lessor can sale or re-lease the aircraft. 14. From perusal of above terms and conditions it can be deduced that the ownership in the aircraft vest with the assessee/lessor at all the time during the period of lease. From conjoint reading of the terms and conditions of CTA and ASLA it emerges that there is no change in the ownership of the aircraft during the currency of lease agreement and at the end of agreement, the lessor continues to be the owner and the Lessee shall pay lease rentals to the assessee/lessor during lease period. 15. Now to understand the difference between financial lease and operating lease, we need to refer to the definition of 'Financial Lease' under other Acts as the expression financial lease and operating lease are not defined under the Income Tax Act. Section 2(ma) of the SARFAESI Act, 2002 defines 'financial lease' as under:- "financial lease" means a lease under any lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right there....
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....raft engine/helicopter on operating lease basis, after verifying documents to show that necessary approval from the appropriate authorities, like Ministry of Civil Aviation/Director General of Civil aviation, Government of India has been obtained. In this connection attention is also invited to paragraph 8 of Annexure I to A.D.(M.A. Series) Circular No.11 dated May 16, 2000. 3. It is clarified that financial lease transaction i.e. the lease transaction containing option to purchase the asset at the end of the lease period will continue to require prior approval from the Reserve Bank of India." The contention of the assessee is that the lessee is paying lease rentals in accordance with aforesaid RBI Circular and for the financial lease transaction where the ownership in the asset is transferred to the lessee, the lessee was required to take prior approval from the RBI, no such approval has been taken by the lessor in the present case. This fact remains un-rebutted. No material is available on record to suggest that the above RBI Circular has been violated by the lessor or the lessee. 18. Further, the ld. Counsel for the assessee has drawn our attention to the observat....
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....ent of Rs. 328,09,64,412 l-is an allowable business expenditure and TDS is not deductible thereon?" 20. While answering the aforesaid questions the Special Bench took note of the agreement between Indigo and Howth Aircraft Leasing Ltd., assignee and observed that Indigo is not the owner of Aircraft and the Revenue failed to demonstrate that the lease is in the nature of operating lease. The Special Bench further observed that the lower authorities have admitted the fact that ownership of the aircraft is with the lessor and depreciation on these aircraft is claimed by the lessor. The relevant extracts of findings of the Special Bench on this issue are reproduced herein below:- "31.4. It is relevant to note under this agreement that there is no consideration flowing from the lessor to the assessee for the assignment of right to acquire the aircraft from Airbus. Post above assignment, the assessee has acquired the aircraft on lease from the lessors. The parties have filed before us copies of lease i) agreement dated 15.12.2016 with M/s MeR. Aviation Limited (ii) agreement dated 14.06.2007 with M/s Genesis Acquisition Limited (paper book pages 481 to 589) (iii) agreement da....
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....ese agreements he has been able to demonstrate that the nature of lease is financial lease and not operating lease. We have already held above in the preceding paragraph that the nature of lease in the year under consideration is operating lease. Moreover, both the lower authorities have also accepted this fact. We are, therefore, not convinced by the arguments of the Id. Special Counsel for the Revenue that the present leases are financial merely because lease rent is determinable using LIBOR rate or that delivery of aircraft is taken by the assessee from Air Bus. We find that in the present case the aircrafts were leased for a period of six years. Therefore, the lease rent paid cannot be characterized as "interest." We, therefore, find no merit in the above submissions raised by the Revenue." [Emphasized by us] Once in the case of Indigo, the Revenue accepts that ownership in the Aircraft is with the lessor, the Revenue on similar set of agreements cannot take a reverse position in the case of lessee and argue that lessee is the owner. The Revenue cannot be allowed to approbate and reprobate on the same set of documents and re-characterize the nature of lease agreement to b....