TaxTMI 
TaxTMI 
2025 (8) TMI 1274
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....come Tax, International Tax, Circle 2(1)(2), Mumbai, DAE(SABS) Leasing Ireland 43 Designated Activity Company C/o. DMD Advocates, DAE(SABS) 10296 Ireland Designated Activity Company C/o. DMD Advocates Versus Assistant Commissioner of Income Tax, International Tax, Circle 2(1)(2), Mumbai Shri Amit Shukla, Judicial Member And Ms Padmavathy S, Accountant Member For the Assessee : Shri Sachit Jolly, Sr. Adv.; Shri Mrunal Parekh; Ms.Disha Jham & Shri Hardeep Singh Chawla For the Revenue : Shri Vivek Perampurna- CIT DR & Shri Krishna Kumar, Sr.DR ORDER PER AMIT SHUKLA (J.M): These seven appeals have been filed by different assessee's, each arising from its respective final assessment order passed under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ("the Act") for the Assessment Year 2022-23, in pursuance of directions issued by the Hon'ble Dispute Resolution Panel-2, Mumbai ("the DRP") under section 144C(5). While the appeals are separate in form, the underlying facts, nature of transactions, and legal controversies are materially similar. The orders passed by the respective learned Assessing Officers ("AOs") and the reasoning adopted by the lear....
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....sh entities, a finance company (TFDAC Finance (Ireland) Limited), a holding company (TFDAC Holding (Ireland) Limited), and two asset-owning lessor companies engaged in the business of leasing aircraft to operators worldwide. In the relevant year, the group had a leasing footprint in India, China, and Korea, with eight aircraft leased in total. 6. At the very threshold it merits emphasis that Ireland has over the years come to be universally recognised as the epicentre of the global aircraft leasing industry. It is not merely a jurisdiction of convenience but a pre-eminent hub, hosting 19 of the world's 20 largest lessors and accounting for approximately 60% of global leasing activity. This position of dominance is anchored in decades of accumulated expertise and experience supported by highly skilled workforce, a sophisticated legal and regulatory infrastructure and its geographic positioning that is strategically aligned to the needs of international commerce. It is in this backdrop, the assessee in regular and ordinary course of its business operation has entered into three separate dry operating lease agreements, each dated 1 February 2019, with InterGlobe Aviation Limited ("....
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....reasons given its established aviation ecosystem, professional infrastructure, and strategic location, in line with OECD principles. 9. The AO, however, in the Draft Assessment Order dated 31 March 2024, rejected these submissions and concluded that the Principal Purpose Test ("PPT") under Articles 6 and 7 of the MLI was not satisfied. The AO placed reliance on factors such as: firstly, the ultimate parent entity being a Cayman Islands fund; secondly, the assessee's directors holding positions in multiple other Irish companies; thirdly, day-to-day management being outsourced to Apex Group Limited; and lastly, certain lease management functions being contracted to DVB Bank SE, London. 10. The assessee filed objections before the ld.DRP, reiterating its entitlement to treaty benefits and contending that its incorporation and activities were genuine and commercially driven; that outsourcing administrative functions to a licensed Irish service provider was a standard industry practice and did not undermine its place of management; that the leases were dry operating leases, not finance leases; and that similar arrangements with lessees in China and Korea negated any allegation of ....
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.... 3 to 3.4 assail the jurisdiction of the ld.DRP in travelling beyond the scope of the draft assessment order, which too has not been argued before us. 16. Thus, on merits, the issues for determination crystallise into the following four: (a) Whether, in view of Articles 6 and 7 of the MLI, the assessee is disentitled to the benefits of the India-Ireland DTAA; (b) Whether the leases are to be characterised as operating leases or finance leases; (c) Whether the presence of the leased aircraft in India constitutes a fixed place PE of the assessee; and (d) If a PE is held to exist, whether Article 8(1) of the DTAA nevertheless precludes taxation of the income in India. 17. We now proceed to examine these issues seriatim, analysing the facts, the rival submissions, and the applicable legal principles. We have heard both the parties at length, the material placed on record was perused in detail, and the arguments advanced were considered in the light of the statutory provisions, the DTAA, the MLI, and the judicial precedents cited before us. For the sake of clarity and conciseness, the pertinent observations and finding of the Ld. DRP shall be re....
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....Supreme Court in Assessing Officer (I.T.) v. Nestle SA (2023) 458 ITR 756. The Court, while construing the effect of "Most Favoured Nation" clauses in earlier DTAAs in the light of subsequently negotiated DTAAs with other OECD member states, laid down, in categorical terms, that "the consequences of a subsequent tax treaty on an earlier tax treaty must be separately notified, otherwise the earlier tax treaty continues to remain in force unaltered and unaffected by the subsequent tax treaty". The learned Senior Counsel submitted that this enunciation squarely governs the present case. Absent a specific notification under Section 90(1) of the Income-tax Act, 1961, giving effect to the MLI amendments in the context of the India-Ireland DTAA, the provisions of Articles 6 and 7 of the MLI cannot be enforced so as to curtail the benefits conferred by the DTAA. 21. Without prejudice to this threshold contention, the assessee has further urged that, even assuming arguendo that Articles 6 and 7 of the MLI stand incorporated into the DTAA, the factual substratum of the case does not support the Revenue's allegation that the principal purpose of the assessee's incorporation or of the impug....
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....tral jurisdiction is not, per se, proof of treaty abuse. 25. He thus submitted that, the finding of the ld.DRP and AO that the assessee lacked operational infrastructure in Ireland is both factually inaccurate and legally untenable. In this specialised industry, it is common and legitimate practice to outsource administrative functions to licensed service providers. In the present case, such functions were entrusted to "Apex Group Limited, which is based out of Ireland", while strategic control rested with Irish directors and all professional interfaces banking, legal, company secretarial were Irish. This approach is consistent with recognised industry norms and finds legal support in the observations of the Hon'ble Supreme Court in Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613. The ld. DRP's remark that the directors of the assessee also held positions in numerous other Irish companies should be dismissed as irrelevant, because such cross-directorship is commonplace in Ireland's corporate governance landscape and does not, without more, impugn the genuineness of the assessee's business presence. 26. As to the Revenue's reliance on the letter dated 7 M....
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....ing [BEPS] Project jointly undertaken by the G-20 countries of which India is a member and the OECD. The MLI is a multilateral tax treaty that serves to modify multiple bilateral tax treaties based on reciprocal notifications by the respective treaty partners. 4. India has also included the India Ireland DTAC as a "Covered Tax Agreement" in the list of documents conveyed to the OECD, which is the Depository under Article 39 of MLI. The Depository maintains a database of covered tax agreements conveyed by the parties to the Depository. It is available at http://www.oecd/org/tax/treaties/beps-mli-signatories-and-parties.pdf. 5. The MLI is not an amending protocol. Paragraph 13 of the Explanatory Statement to the MLI explains that the MLI operates to modify tax treaties between two or more Parties. It does not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreement; instead, it is applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. 6. The Synthesised Text is not a legal instrument like a treaty/Agreement/ Convention....
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....egal value and that the text of MLI, applied alongside the text of the Covered Tax Agreement, would remain the only legal documents applicable. This is also clearly provided in the Guidance on Synthesised Text in the following words: "2.4.1 General disclaimer 16. Synthesised texts should include before ethe text of the Covered Tax Agreement a disclaimer based on the General sample disclaimer text included in the per-Article-sample boxes section. 17. The general disclaimer would refer to the legal instruments of the synthesised text (the MLI and the Covered Tax Agreement) and to the latest MLI positions submitted by the Contracting Jurisdictions used to produce the synthesised texts. It would mention the date the Contracting Jurisdiction signed the MLI and the date it submitted its MLI positions to the Depositary. 18. The disclaimer would stress that further modifications could be made to the MLI positions and that these modifications could change the effect of the MLI on the Covered Tax Agreement. 19. The disclaimer would state that the synthesised text has no legal value, and that the text of the MLI, applied alongside the text of the C....
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....his Convention. The authentic legal texts of the Convention and the MLI take precedence and remain the legal texts applicable. The provisions of the MLI that are applicable with respect to the provisions of the Convention are included in boxes throughout the text of this document in the context of the relevant provisions of the Convention. The boxes containing the provisions of the MLI have generally been inserted in accordance with the ordering of the provisions of the Convention. Changes to the text of the provisions of the MLI have been made to conform the terminology used in the MLI to the terminology used in the Convention (such as "Covered Tax Agreement" and "Convention", "Contracting Jurisdictions" and "Contracting States"), to ease the comprehension of the provisions of the MLI. The changes in terminology are intended to increase the readability of the document and are not intended to change the substance of the provisions of the MLI. Similarly, changes have been made to parts of provisions of the MLI that describe existing provisions of the Convention: descriptive language has been replaced by legal references of the existing provisions to ease t....
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....nts cited before us. 30. As noted above, the issue presents two sub-questions: * firstly, whether the provisions of the MLI can be read to restrict the applicability of the India-Ireland DTAA in the absence of a separate notified protocol to that DTAA; and * secondly, if the answer to the first is in the affirmative, whether, on the facts of the present case, the principal purpose test in Articles 6 and 7 is satisfied. 31. The relevant background in brief is set out at the outset. The DTAA between India-Ireland was notified in the official gazette on 11th January 2002; The MLI on the other hand was notified on 9th August 2019. Importantly, the India-Ireland DTAA has been designated as a Covered Tax Agreement for the purpose of MLI. Ireland for its part, ratified the MLI with effect from 1st May 2019. The OECD characterizes the BEPS MLI as a path-breaking multilateral instrument which enables sovereign Governments to incorporate agreed minimum standards to counter treaty abuse and to strengthen dispute resolution mechanism while retaining sufficient flexibility to preserve specific tax treaty policy objectives. The MLI's genesis lay in the desire to overcome ....
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....er to the protocols of the India-France and India-Netherlands DTAA, which for sake of ready reference are reproduced below: Relevant extract from the India-France DTAA: "PROTOCOL At the time of proceeding to the signature of the Convention between France and India for the avoidance of double taxation with respect to taxes on income and on capital, the undersigned have agreed on the following provisions which shall form an integral part of the Convention." xxx "7. In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with ....
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....AA. 36. The Revenue, on the other hand, on a combined reading of Article 253 of the Constitution of India and section 90 of the Act, argued that the notification of the subsequent treaties would not automatically amend the earlier DTAAs and a separate notification was required to effectuate the impact of the subsequent DTAAs on the earlier DTAAs. The submission of the Revenue in para 8 of the Judgment, was that "any convention or event flowing from a convention, as in creation of rights and liabilities of third parties to conventions or treaties do not operate on their own and needs an intervening action by the Union giving effect to such obligation". 37. The Hon'ble Supreme Court of India in the case of Nestle (supra), accepting the submission of the Revenue and repelling the submission of the taxpayers, held that a separate notification to effectuate the impact of a subsequent DTAA into an earlier DTAA must be issued. The notification of the subsequent DTAA does not ipso facto and automatically lead to amendment of the earlier DTAA. The following relevant findings of the Supreme Court are reproduced hereunder: "44. The holding in the decisions discussed above may t....
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....might have led to different kind of benefits to the third country (UK and Portugal, in the case of France). In other words, the structure of the main DTAA, and its phraseology, based on negotiations with the countries concerned, i.e., Netherlands, France and Switzerland, also plays a role in the kind of benefits that are assured through it. The structure and terms of other DTAAs might be different; the coverage and definition of certain terms (FTS, permanent establishment, etc.) might be dissimilar. The revenue's argument that grant of automatic benefits based on the other country's entry into OECD, as unfeasible, has merit. XXX 72. In the opinion of this court, the status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates. In each of the said three countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/procedure, the treaty is assimilated into the body of domestic law, enforceable in....
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....ia. The essential requirement of a notification under Section 90 of the consequences of the trigger (or causative) event cannot be undermined. V. Conclusions 88. In the light of the above discussion, it is held and declared that: a) A notification under section 90(1) is necessary and a mandatory condition for a court, authority, or Tribunal to give effect to a Double Taxation Avoidance Agreement, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law. b) The fact that a stipulation in a Double Taxation Avoidance Agreement or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organisation such as Organisation for Economic Co-operation and Development), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the Double Taxation Avoidance Agreement of the first nation, which entered into Double Taxation Avoidance Agreement with India. In such event, the terms of the earl....
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.... the enforceability of any DTAA or protocol that alters existing provisions of law; and * domestic courts cannot apply a rigid black-letter interpretive approach, but must account for the constitutional, diplomatic and practical realities attending upon different treaties. In essence, Nestlé lays down that treaty benefits do not cascade automatically by reason of external developments such as OECD membership or subsequent bilateral arrangements, and that only a deliberate, notified act of incorporation can elevate such benefits into enforceable domestic law. 40. In our considered view, the factual matrix of the present case bears a close parallel to that examined by the Hon'ble Supreme Court in Nestlé SA (supra). In that decision, as in the matter before us, the original bilateral tax treaty in this case the India-Ireland DTAA stood duly notified. Equally, the subsequent multilateral instrument (MLI) had also been formally notified. The pivotal question, however, was not the mere existence of notifications in respect of both instruments, but rather whether the consequential modification of the earlier DTAA, brought about by virtue of the later multilate....
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....to apply the PPT provisions, for that text has no greater legal sanctity than the unincorporated MLI provisions themselves. 44. The structural design of the MLI itself reinforces this conclusion. Under its operational framework, each contracting State is required to deposit with the OECD a list of bilateral treaties that it wishes to designate as "covered agreements" along with its specific positions and reservations. The effectiveness of those positions, however, remains contingent upon the principle of reciprocity and, most importantly, upon the manner in which each State gives effect to such positions under its own domestic law. It is, therefore, not enough that India has merely notified the MLI or identified the India-Ireland DTAA as a covered tax agreement. Unless the changes contemplated in the MLI are expressly incorporated into Indian law through the statutory mechanism, namely, a specific notification under Section 90(1) those changes cannot operate to alter the manner in which the domestic authorities apply the DTAA. That position now constitutes the law of the land by virtue of the judgment of the Hon'ble Supreme Court in Nestlé SA, which makes it clear that ne....
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....lated a substantive safeguard that treaty modifications altering existing rights or liabilities cannot be judicially enforced until procedure is followed in line with Section 90(1) of the Act. 49. This safeguard is especially critical in the MLI context, where multiple jurisdictions opt into certain provisions, reserve on others, and often apply them with modifications or deferrals. Without a domestic notification that identifies the exact contours of the modification to a given DTAA, there is a real risk that an Indian court or authority may apply an MLI provision in a form or scope that was never domestically assented to. Section 90(1) operates as a bulwark against that risk, ensuring that only those changes consciously adopted into Indian law acquire binding force. 50. We also note that the OECD's own commentary on the MLI recognises the role of each jurisdiction's domestic law in determining how the MLI takes effect. It expressly acknowledges that a "synthesised text" is a non-binding explanatory aid; it does not, and cannot, supplant the requirement for a legally valid act of incorporation in each jurisdiction. Thus, even on the OECD's own terms, the Revenue's reliance o....
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.... Consequently, the invocation of the MLI to deny the treaty benefits otherwise available under the DTAA cannot be upheld in law. 54. Although it is not necessary to deal with the PPT invocation, nonetheless, for the sake of completeness, and because the lower authorities have made detailed factual findings, we proceed, without prejudice to our threshold holding, to briefly examine whether, even assuming Articles 6 and 7 of the MLI applied, the Revenue has discharged its burden under the PPT. 55. For arguments sake, it is assumed that MLI amends India-Ireland DTAA and Article 6 & 7 of MLI are read into the India-Ireland DTAA whether the principal purpose of the incorporation / transaction was to take tax benefit of India-Ireland DTAA or not? 56. The structure and purpose of the impugned transaction must be examined holistically, not in isolated fragments. The PPT is, by its very language, a general anti-abuse rule of last resort, to be invoked only where it is reasonable to conclude, having regard to all relevant facts and circumstances, that one of the principal purposes of an arrangement was to obtain treaty benefits in a manner contrary to the object and purpose of the t....
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....raft to lessees located in different countries such as China and Korea. d. The TFDAC group had in aggregate leased eight aircraft across India, China and Korea during the relevant year. e. The India-Ireland DTAA was executed for promotion of trade between India and Ireland and aircraft leasing is one of the largest businesses carried on from Ireland. f. Ireland has been a hub for leasing for more than 40 years and is home to 19 out of 20 largest lessors in the world. g. 60% of world's global leasing is carried on from Ireland. h. It has established aviation expertise and knowledge pool. i. The strategic geographical location of Ireland serves as a strategic gateway between Europe and North America, facilitating efficient access to key aviation markets. j. The directors of the assessee are Irish, its bankers are Irish, its company secretary is Irish and the assessee, being an SPV, was managed by a reputed management service provider (Apex Group Limited) in Ireland. The assessee had engaged Apex Group Limited as its administrator and company secretary to undertake day-to-day operations. This company is management company ....
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..... "Example C: RCo, a company resident of State R, is in the business of producing electronic devices and its business is expanding rapidly. It is now considering establishing a manufacturing plant in a developing country in order to benefit from lower manufacturing costs. After a preliminary review, possible locations in three different countries are identified. All three countries provide similar economic and political environments. After considering the fact that State S is the only one of these countries with which State R has a tax convention, the decision is made to build the plant in that State. In this example, whilst the decision to invest in State S is taken in the light of the benefits provided by the State R-State S tax convention, it is clear that the principal purposes for making that investment and building the plant are related to the expansion of RCo's business and the lower manufacturing costs of that country. In this example, it cannot reasonably be considered that one of the principal purposes for building the plant is to obtain treaty benefits. In addition, given that a general objective of tax conventions is to encourage cross-border investmen....
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....ailability of personnel fluent in foreign languages and the foreign location of business partners make it difficult for TCO to manage its foreign activities from State T. TCO therefore establishes RCO, a subsidiary resident of State R (a country where there are developed international trade and financial markets as well as an abundance of highly qualified human resources), as a base for developing its foreign business activities. RCO carries on diverse business activities such as wholesaling, retailing, manufacturing, financing and domestic and international investment. RCO possesses the human and financial resources (in various areas such as legal, financial, accounting, taxation, risk management, auditing and internal control) that are necessary to perform these activities. It is clear that RCO's activities constitute the active conduct of a business in State R. As part of its activities, RCO also undertakes the development of new manufacturing facilities in State S. For that purpose, it contributes equity capital and makes loans to SCO, a subsidiary resident of State S that RCO established for the purposes of owning these facilities. RCO will receive dividends and inter....
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....d the five States where the subsidiaries operate unless other facts would indicate that RCO has been established for other tax purposes or unless RCO enters into specific transactions to which paragraph 7 would otherwise apply (see also example F in paragraph 15 below with respect to the interest and other remuneration that RCO might derive from its group financing activities)." [Emphasis Supplied] 62. Having regard to the guidance contained in the OECD BEPS Action Plan 6, it is evident that the Principal Purpose Test is not triggered merely because a taxpayer derives treaty benefits or has, in the course of its decision-making, taken into account the existence of a favourable tax treaty. The true enquiry is whether one of the principal purposes of entering into the relevant arrangement or transaction was to obtain that treaty benefit, divorced from genuine commercial considerations. The OECD Commentary makes it clear through illustrative examples that where investment decisions are driven by legitimate commercial objectives such as business expansion, operational efficiency or access to resources, the mere availability of treaty benefits does not, by itself, taint the arrangeme....
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....ai Airport. Neither the AAI nor the Government of India nor any other person have objected to the Petitioner's introduction or investment. It is also not the case of the Revenue nor is there any finding from the Authority that the investment by Petitioner did not have the necessary compliances. There does not appear to be any irregularity in complying with the Bid documents. And even if there was any irregularity, that was a matter between the AAI and the Consortium, which in our view would have been deemed waived, as not only the GVK-SA Consortium was declared a successful bidder but Petitioner has invested in the JV viz. in MIAL but the AAI has also entered into the OMDA with the Consortium for the purposes of the project of modernization of the Mumbai Airport. 70. At their meetings on 20th February 2011 and 28th February 2011 the Board of Directors of the Petitioner authorized the transfer of 13.5% of the paid up capital out of 27% held by it to GAHPL for a consideration of US$ 287,222,000. The Share Purchase Agreement dated 1st March 2011 was entered into in this regard. On 18th April 2011 Petitioner made an application under Section 197 of the Income Tax Act to ob....
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.... structured for the purposes of submitting the technical and financial bid as well as for holding shares in MIAL. We have seen above from the shareholding pattern that Petitioner was part of the technical and financial bid submitted by the GVK-SA Consortium which would hold shares in the proposed joint venture company i.e. MIAL. Bidvest, the ultimate holding company was the evaluated entity and Petitioner is the prime member. Infact, as noted above, the Income Tax Director, International Taxation, New Delhi, had also issued a "Nil" withholding tax certificate to GAPHL who is the purchaser of the 13.5% shares from Petitioner to make payment / remittance of the purchase consideration to Petitioner for transfer of shares without TDS under Section 195 of the Act. Therefore, for the authority to hold that Petitioner's involvement at the stage of bidding process was without the approval of the authorities appears to be without substance. xxx 74. As can be seen, the said paragraphs of the Vodafone International Holding B.V. v. Union of India (supra) support the case of the Petitioner and the Revenue's reliance on the same does not aid the case of the Revenue in t....
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....n such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity. However, this has to be done at the threshold. 80. In this connection, we may reiterate the "look at" principle enunciated in Ramsay (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the "look at" test to ascertain its true legal nature [See Craven v. White (supra) which further observed that genuine strategic tax planning has not been abandoned b....
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....gs that arose to the assessee by virtue of the DTAA rate, as compared with the higher domestic rate. While the quantum of tax benefit may constitute a relevant contextual circumstance, it is not by itself determinative for the purposes of the Principal Purpose Test. The PPT requires a clear demonstration, supported by objective facts, that the dominant purpose of the arrangement was to secure the treaty benefit and that such benefit is contrary to the object and purpose of the convention. In the present case, no such factual foundation has been laid, and in our considered view, the Revenue has not discharged this burden. 70. We must also address the letter dated 07/05/2021 issued by Aircraft Leasing Ireland ("ALI"), on which considerable reliance has been placed by the ld. DRP. On a fair reading, the letter evidences an institutional dialogue between ALI and the Irish regulatory and tax authorities aimed at encouraging aviation business and engaging with the aviation community to foster sectoral growth. It is, in substance, akin to the consultative representations routinely made by industry bodies such as FICCI/CCI/SIAM to the Government of India or the Ministry of Finance in th....
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....an servicing/repayment both consistent with ordinary course operations in a leasing SPV. In the absence of cogent material showing siphoning, round-tripping, or below-market transfers, the conjecture of income "shifting" cannot survive judicial scrutiny. 74. In view of the foregoing, once the assessee has produced a valid TRC and the AO/ld. DRP have not recorded compelling grounds to rebut the applicability of the India-Ireland DTAA, the conclusion that the principal purpose of the assessee's incorporation was to obtain India-Ireland DTAA benefits is unsustainable. The impugned finding is, therefore, set aside. 75. Alternatively, and without prejudice, we also find merit in the submission that, even under Articles 6 and 7 of the MLI, treaty relief may be granted notwithstanding that one of the principal purposes of an arrangement was to obtain such relief so long as the grant of relief accords with the object and purpose of the relevant DTAA provisions. The PPT is not a blunt instrument; its own text and commentary preserve benefits that serve the treaty's design. 76. In this context, we reproduce the OECD's illustrations in Example D and Example E from the Final Report of....
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....marily in order to obtain the benefit of the lower rate of tax provided by Article 10(2)a) of the treaty. In that case, although one of the principal purposes for the transaction through which the additional shares are acquired is clearly to obtain the benefit of Article 10(2)a), paragraph 7 would not apply because it may be established that granting that benefit in these circumstances would be in accordance with the object and purpose of Article 10(2)(a). That subparagraph uses an arbitrary threshold of 25 per cent for the purposes of determining which shareholders are entitled to the benefit of the lower rate of tax on dividends and it is consistent with this approach to grant the benefits of the subparagraph to a taxpayer who genuinely increases its participation in a company in order to satisfy this requirement." Examples D and E further clarify that the PPT must be applied in light of the object and purpose of the treaty. In Example D, the investment in shares of companies in State S by a collective investment vehicle is part of a broader, commercially-driven investment strategy, and the treaty benefit on dividends is merely incidental. The PPT therefor....
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....n-applicability of the Principal Purpose Test on account of the absence of a Section 90(1) notification, the assessee would, in any event, be entitled to treaty protection. The relief claimed aligns squarely with the treaty's object and purpose. We accordingly so hold. 80. In consequence, Grounds of Appeal Nos. 4 to 6.8 stand allowed. Nature of Lease-Operating Lease v. Finance Lease 81. Before us ld. Senior Counsel submitted that the findings of the ld. DRP in this regard is not only contrary to the language of the lease agreement but also contrary to the regulatory framework. He referred to various clauses of the lease agreement dated 01/02/2019 in respect of aircraft bearing MSN 8768 and filed the following chart alongwith his written submissions:- Clause/Section of the Lease Agreement bearing MSN 8768 Remarks Page No. of the Paperbook 2.1 "2. Agreement to dry operating lease 2.1 Agreement to dry operating lease The Lessor agrees to lease the Aircraft to the Lessee on the basis of a dry operating lease and the Lessee agrees to take the Aircraft on lease from the Lessor for the Lease Term on the basis of a dry operating lease in accordance with this A....
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....is amply clear ownership is not with Lessee i.e., InterGlobe because the Lessor i.e., the Appellant is guaranteeing quiet enjoyment subject to payment of rent. 263 10.1 "10. Registration and protection of interests 10.1 Registration and filings (a) At all times during the Lease Term, the Lessee will as soon as possible: (i) register and keep the Aircraft and this Agreement registered with the Aviation Authority; (ii) if necessary or, based on the advice of independent and reputable legal counsel, advisable as a result of the Lessee's operation of the Aircraft, register, record or file: (A) that the Owner is the owner of the Aircraft, the Lessor is the lessor of the Aircraft, and that the Security Trustee has a Security Interest in it, and (B) each Transaction Document and Financing Document, on any register or public record in any jurisdiction where the Lessee operates or locates the Aircraft; (iii) make any changes to any registered, recorded or filed details necessary or advisable to as a result of any modification to the Aircraft (such as the permanent replacement of any Engine in accordance with this Agreement) or as a result of any change in any ....
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....sponsible for the use, operation, maintenance or repair of the Aircraft or the Lessee's, any charterer's or any sublessee's business activities; (iii) pledge the credit of the Lessor, the Owner or any Financier; (iv) take or fail to take any action (or knowingly permit an action to be taken or not taken) if this could jeopardise any of the rights of the Lessor, the Owner or any Financier in the Aircraft or under the Transaction Documents, or the validity, enforceability or priority of any Transaction Document or Financing Document; (v) permit the Aircraft or any interests of the Lessor, the Owner or any Financier in it or in the Transaction Documents to become or remain subject to any Security Interest (other than a Permitted Security Interest); or (vi) place the Aircraft at any material risk (as reasonably determined by the Lessor) of being arrested, seized, detained, confiscated, forfeited or compulsorily purchased. (d) The Lessee will provide reasonable cooperation to the Lessor for any actions that the Lessor requests the Lessee to undertake towards protection of title of the Aircraft in accordance with this Agreement." This provides that the lesse....
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.... of the Lease Agreement. This demonstrates InterGlobe, did/does not have title/ownership interest in the Aircraft and had to maintain the Aircraft during the time it was on lease with InterGlobe. 283- 284 12.1 "12. Maintenance 12.1 General requirements The Lessee will ensure that each of the following terms of this Clause 12.1 (General requirements) is satisfied at all times during the Lease Term: (a) Only maintenance facilities satisfying the requirements to be a Maintenance Facility maintain and repair the Aircraft. (b) The Aircraft is kept in a good operating condition and is kept safe for operation, serviceable and airworthy in all respects. (c) The Aircraft has a valid certificate of airworthiness (issued by the Aviation Authority in the appropriate public transport category). (d) The Aircraft complies, using a Permitted Compliance, with all Mandatory Requirements required to be complied with on or before the Mandatory Requirements Period End. (e) The Aircraft is maintained and repaired in accordance with this Agreement, the Maintenance Manuals, the Maintenance Programme, and the regulations of the Aviation Authority and the Compliance Authority. ....
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....ut and keep in full force and effect ground risks insurance cover in respect of the Aircraft on standard terms and for at least the Insured Value, until the Aircraft is insured again in accordance with this Agreement;" On perusal of the above, it is clear that the obligation to get the aircraft insured during the lease term was passed on to InterGlobe. The Appellant submits that this nowhere indicates that InterGlobe was the owner of the Aircraft as the obligation to get the Aircraft insured on Interglobe was only for the period of the Lease Agreement which is substantially less than the entire life of the Aircraft 287- 289 16.1 "16. Redelivery 16.1 Redelivery and Redelivery Procedure Unless the Aircraft has suffered an Event of Loss, the Lessor and the Lessee will comply with the Redelivery Procedure and the Lessee will redeliver the Aircraft to the Lessor on the Expiry Date (as determined ignoring paragraph (d) of the definition of Expiry Date), at the Redelivery Location and satisfying the following conditions: the Aircraft will be in a condition demonstrating that the Lessee has performed all of its obligations under Clause 11 (Control and operation ) and Clau....
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....orisations necessary for taking these actions.:" On perusal of the above, the Appellant in its capacity as has the sole discretion to require the Lessee to redeliver the Aircraft in event of a default. This shows that the Appellant may or may not be the owner, but lessee is definitely not the owner of the Aircraft. 309- 310 22 "22. Assignment 22.1 Assignment by Lessee The Lessee will not sell, assign, novate, transfer or delegate any of its rights or obligations (voluntarily, involuntarily, by operation of law or otherwise) under any Transaction Document. 22.2 Assignment by Lessor or Owner (a) The Lessor or the Owner may sell, assign, novate or transfer, any of their respective rights or obligations under any Transaction Document, or any of their respective rights or interests in the Aircraft, if each of the following terms of this Clause 22.2 (Assignment by Lessor or Owner) is satisfied:" On perusal of the above, the Appellant in its capacity as owner (not as mortgagee) has the sole discretion to sell / dispose, re-lease or deal with the leased Aircraft in any manner in which it so decides. This shows that the Applicant may or may not be the owner, but l....
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....ny lease exceeding 8 years must be a finance lease (with the Indian lessee as "owner") is flawed at inception. Depreciation norms may influence book value in a given jurisdiction; they do not determine economic life (which, in India, is guided by DGCA), still less do they transfer title or recast the legal nature of a bargain. Indeed, depreciation is an incident of ownership; it presupposes, rather than proves, that the relevant person is the owner. To deploy a foreign depreciation schedule to prove ownership is to reason in a circle. He submitted that, the ld. DRP's view that the absence of a purchase option is irrelevant cannot be accepted. RBI Circular No. 24/2002 (dealing with aircraft leases) draws a clear administrative distinction between a finance lease (akin to ECB), one where the lessee has a right to purchase at the end of the term and an operating lease, which contains no such end-of-term acquisition mechanism. He submitted that it is also an admitted factual position that since 2005, when IndiGo commenced operations, hundreds of similarly worded leases have been executed and no regulator, including the RBI, has required finance-lease approvals or otherwise characterise....
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.... the end of the lease term. Clauses 1.1 and 10.2 require the lessee to display the owner's name and not represent itself as owner. All these clauses confirm that ownership stays with the assessee throughout. 88. It is undisputed that the assessee and IndiGo are unrelated parties dealing at arm's length. Unless there is clear evidence of a sham, courts must go by the contract as agreed. The Hon'ble Supreme Court in Vodafone International Holdings BV v. Union of India has held that form and structure of a genuine transaction should be respected. Applying this principle: * Operational risks with the lessee do not amount to ownership risks. Examples during COVID-19 and the Russia-Ukraine conflict show the lessor retaining ownership risks. * Clause 21.1 allows termination on default, consistent with an operating lease. * The right to sub-lease only with the lessor's consent shows that ownership is not transferred. * Irish depreciation rules are irrelevant to the legal nature of the lease in India. * The Special Bench decision in InterGlobe Aviation was not a casual observation but a clear finding. 89. Taking all these factors together t....
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....ish taxpayer to depreciate an aircraft's cost over 8 years on a straight-line basis for Irish tax purposes. This does not mean that the aircraft's economic life ends in 8 years or that ownership changes. Depreciation rules are applicable only to the owner; they cannot be used to determine whether a lease is a finance lease in the Indian tax context. * Fifth, the ld. DRP's assumption that the economic life of an aircraft is 6-8 years or 60,000 flying hours is inconsistent with the DGCA Circular dated 29.07.1993, which prescribes 20 years or 60,000 pressurisation/landing cycles as the benchmark. Flying hours and pressurisation cycles are not interchangeable measures, and the ld. DRP's approach has no technical basis. * Last, the ld. DRP's dismissal of the Special Bench ruling in InterGlobe Aviation Ltd. as "casual observations" is unfounded. The Special Bench made a considered finding on this very point after analysing identical agreements, and its conclusion that such arrangements constitute operating leases was part of its adjudication. 92. We therefore hold that the ld. DRP's classification of the lease as a finance lease is contrary to the contractual terms, ....
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.... order dated 31/10/2017 passed in ITA Nos. 914 and 916 of 2017dismissed the appeal filed by the Revenue against the above-mentioned order of the Hon'ble Tribunal and the SLP filed by the Revenue challenging the order of the Hon'ble High Court was dismissed by the Hon'ble Supreme Court vide order dated 10/09/2018 passed in SLP (C) Diary No. 29936/2018. 96. Even in the proceedings of IndiGo for AY 2012-13, the AO himself noted in order dated 25/12/2015 that InterGlobe is not the owner of the aircraft. The relevant portion of the order is reproduced hereunder for ready reference: "In the instant case, the assessee has not purchased the aircraft but has hired it on lease from several concerns like Aether, Celestial Aviation Trading 9 Ltd. etc. All these parties are lessors and are based in Ireland. The assessee company has been paying lease rent to these parties as per the agreement executed between the company (lessee) and the parties (lessors). The depreciation on these aircrafts where, the engines supplied by IAE are fitted, is claimed by the lessors. The assessee has not claimed depreciation on these aircrafts where the engines are fitted because it is not the owner....
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....termination of Capital Gains. Since the appellant claims that the purchase order was assigned to the lessor at the purchase price mentioned in the agreement, the credits received become taxable as Capital Gains as cost of acquisition of purchase right gets reduced by the amount of credits. 98. Although in the assessment proceedings for AY 2012-13, the AO accepted that the leasing arrangement is in the nature of operating lease, an argument was made by the Revenue before the Special Bench of the Tribunal that the lease arrangements are actually in the nature of finance lease arrangements. 99. However, the Special Bench has rejected that specific submission of the Revenue on the ground that the agreements do not answer the description of finance lease arrangements. The relevant portion of the decision in extracted hereunder for reference: "1.1 Facts of the case, in brief, are that the assessee is a Company engaged in the business of operating low cost Airlines in India under the Name and Brand "IndiGo". It filed its return of income on 21.09.2012 declaring loss of Rs. 170.30 crores. During the course of assessment proceedings, it was observed that M/s. Inter Globe Avia....
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....ng subsidy was treated as revenue receipt in the hands of assessee and made the addition of the same by observing as under.... xxx 2. Therefore, the questions that have to be adjudicated by the Special Bench may be summarised as under:(1) Whether FIA (Fleet Introductory Assistance) credit received by the Assessee from IAE and other equipment manufacturers is a Capital or revenue receipt arising out of the transaction ? (2) Whether credits so received are taxable under section 28(i) or 28(iv) of the I.T. Act, 1961 or as a "Commission" income or "Income from capital gains"? (3) Whether the Ld. CIT(A) is right in making disallowance of Rs. 268,91,48,934/- out of lease rental payments under section 37(1) of the I.T. Act, 1961? (4) Whether payment of Supplementary Lease Rent of Rs. 328,09,64,412 I- is an allowable business expenditure and TDS is not deductible thereon ? xxx 15.5. The Learned Special Counsel for the Revenue submitted that the 'Credit' is a pure accounting term signifying the amount receivable ~rom another entity in future. The term by itself is not indicative of the nature of receipt. This can assume ....
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....rightly invited the consequence under Section 40(a)(i) as held by the A.O. The objection of the assessee during the course of hearing that Article 11 having not been invoked by the A.O. or Ld. CIT(A), it was not open for the Revenue to urge the application of this Article. However, the applicability of section 195 read with section 40 (a)(i) of the I. T. Act, 1961 is in dispute and the issue before the Tribunal is - whether any amount of tax was deductible under section 195 and whether any disallowance under section 40(a)(i) can be made or not? xxx 31.4 It is relevant to note under this agreement that there is no consideration flowing form 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 dated 04.07.2007 with Lara Leasing Ltd. (Paper book pages 590 to 600). It is the submission of the learned senior counsel for t....
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....provisions of section 90 of the Act, provisions of DTAA shall apply to the extent they are beneficial. Under the DTAA the foremost consideration is whether the non-resident lessor has a permanent establishment (PE) in India as per Article 5 of the relevant. According to him, mere leasing of an aircraft which is located in India ought not to result in an existence of PE and there is also no such allegation made by the lower authorities in the present case. It is his submission that the definition of royalty under the Income-tax Act and Tax Treaty includes a consideration for use and right to use any commercial, scientific and industrial equipment and aircraft do arguably fall within this category of equipment and therefore the corresponding lease rentals may be characterized as royalty. However, certain tax treaties which India has entered into notably with Ireland it has explicitly excluded aircraft from the scope of Royalty. He drew our attention to the relevant provision of DTAA between India and Ireland (Article 12) which are as under:- "1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other contracting State may b....
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....s for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention." 42.2 In Para-41 above we have examined the nature of Supplementary Rent and it is held that payment of Supplementary Rent is nothing different than the character of basic rent. We find that Supplementary Rent is not a payment m....
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....tever name called, of finance charges would fall within the definition of 'interest' and would be chargeable to tax in India under Article 11 of Indo-Irish DTAA. Hence, the tax was liable. to be deducted under Section 195. The failure to deduct tax has rightly invited the consequence under Section 40(a)(i) as held by the AO. The objection of the Appellant during the course of hearing that Article 11 having not been invoked by the AO or CIT(A), it was not open for the Revenue to urge the application of this Article. It is submitted that the applicability of Section 195 read with Section 40(a)(i) is in dispute and the issue before the Hon'ble Bench is whether any amount of tax was deductible under Section 195 and whether any disallowance under section 40(a)(i) can be made or not. The broad question is whether the income of the Lessors from lease rentals is chargeable to tax in India and whether any tax was deductible which has not been so deducted. Addressing this vital question, whether income is chargeable under one Article and not chargeable under the other, cannot be objected to, for the reason that the moot question leading to the disallowance of expense rem....
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....paper book. However, from none of these 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 ld. 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 characterised as "interest." We, therefore, find no merit in the above submissions raised by the Revenue." 100. Further, recently, the coordinate bench of the Delhi Tribunal, in the case of Celestial Aviation Trading 15 Ltd. v. Assistant Commissioner of Income Tax, International Taxation, Circle 1(2)(1), New Delhi [ITA No. 1478/DEL/2025, A.Y. 2022-23], in a similar batch of matters involving Irish aircraft lessors leasing aircraft to IndiGo, considered the is....
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....ase Common Terms Agreement is the standard agreement which would be applicable to all the aircrafts taken on lease by Indigo. A perusal of ASLA would show that the assessee is the Lessor and Indigo is the Lessee. The duration of agreement is for a period of 120 months extendable at the option of Lessee to be conveyed in writing to the Lessor before the expiry of 18 months prior to the original scheduled expiry date. Clause 3 of ASLA specifically states that the owner of the aircraft shall be the 'Lessor'. In the entire ASLA there is no covenant which refers to the condition that after the end of duration of lease term, the ownership in aircraft shall be transferred to the lessee or the lessee at any point of time can exercise option to purchase the aircraft. Clause 10 of ASLA requires the Lessee to pay deposit in cash or in the form of Letter of Credit prior to delivery of aircraft. The Lessor shall return such deposit to the Lessee upon occurrence of the events specified in ASLA which includes, 'on completion of the Return Occasion. "Return Occasion" is defined in Schedule-I of CTA as: "Return Occasion means the date on which the Aircraft is redelivered to Lessor in accor....
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.... following of this clause 8.4(a)." Clause 8.4 of the CTA restricts the lessee to sub-lease, wet lease or otherwise give possession of aircraft to any person except under certain conditions with prior consent of lessor. (iii) Clause 8.6 of CTA explains Ownership; Property Interest; Related matters. The relevant extract of the same is reproduced as under: "8.6 Ownership; Property Interests; Related Matters (a) Lessee will: (i) fix and maintain Nameplates in a prominent position in the cockpit or cabin of the Aircraft and on each Engine stating "This Aircraft/Engine is owned by (insert name of Owner and is leased to [insert name of Lessee] and may not be or remain in the possession of or be operated by, any other person without the prior written consent of linsert name of Lessor]"; and (ii) take all reasonable steps to make sure that other relevant Persons know about the interests of Owner and Lessor as owner and lessor respectively in the Aircraft, including (without limitation) ensuring that wherever necessary as a matter of applicable Law in the State of Registry or in the jurisdiction of incorporation of any Permitted ....
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....ment of the airframe to the engine. (vi) The Clause 9 of the CTA lays down the condition and responsibility on lessee to get the aircraft insured. A perusal of Clause 9.1 reveals that it is the responsibility of lessee to maintain the insurance in full force during the term of lease only. After the expiry of lease, the lessee is not responsible for the insurance of the aircraft. (vii) Clause 10 of CTA binds the lessee to indemnify the lessor. The relevant extract from the said clause is reproduced herein under:- 10. INDEMNITY 10.1 General (a) Lessee agrees to assume liability for and indemnifies each of the Indemnitees against and agrees to pay on demand Losses which an Indemnitee may suffer at any time whether directly or indirectly as a result of any act or omission in relation to: (i) the ownership (but only to the extent arising out of the use, possession, leasing, operation or maintenance of the Aircraft by Lessee or any Permitted Sub-Lesse), maintenance, repair, possession, transfer of ownership or possession, import, export, registration, storage, modification, leasing, insurance, inspection, testing, design, sub-leasing,....
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...., other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be" From the aforesaid definitions a subtle trait of financial lease can be identified i.e. "At the end of the lease period, lessee becomes the owner of the leased asset." 16. In the instant case although the AO and the DRP have characterized the nature of lease as financial lease but both the authorities have ignored the fact that at no point of time, ownership in the asset i.e. aircraft is transferred to the lessee, which is the hallmark of financial lease. 17. The assessee has drawn our attention to RBI Circular No. 24 dated 01.03.2002 at page 234 of the paper book which deals with Import of Aircraft/Aircraft engine/Helicopter on lease basis. A perusal of RBI Circular No. 24 dated 01.02.2022 would show that there are separate conditions to be satisfied for acquiring aircraft on operating lease basis and under financ....
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....d the DGCA Circular. The DGCA vide its communiqué dated 29.07.1996 (at pages 231 to 233 of the paper book) has prescribed economic life of an aircraft as 20 years or 60,000 landings/pressurization cycles. In the instant case the lease agreement has been entered between the parties for a period of 120 months i.e. for 10 years, in other cases the lease period is for lesser period i.e. 72 months as is in the case of MSN 9382 (at page no. 210 to 275 of the paper book) and for MSN 9561 (at pages 276 to 341 of the paper book). Substantial economic life of the aircraft is still left after the end of lease period. Therefore, observations of the DRP on Economic Life of the aircraft being utilized under lease agreement is without any basis, hence, the conclusion to re-characterize nature of lease agreement is erroneous. 19. The ld. DR has vehemently argued that the lessee (Indigo) had originally entered into an agreement for purchase of aircraft with Airbus and it was subsequently that the present assessee stepped in at the time of delivery of aircraft and financed Indigo for acquiring the aircraft from Airbus. The ld. Counsel for the assessee to counter argument of the Reven....
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.... copies of the 03 Lease Agreements before us in his paper book. However, he was not able to demonstrate from any of these 03 Agreements that the nature of lease is Finance Lease and not Operating Lease. The Hon'ble Supreme Court in the case of Asea Brown Boveri Limited vs Industrial Finance Corporation of India Ltd., reported in 154 Taxman 512 (SC) and Association of Leasing & Financial Services vs Union of India reported in [2011] 2 scc 362 has differentiated and highlighted characteristics of both Operating Lease and Finance Lease. The Learned Special Counsel for the Revenue has not been able to demonstrate how the nature of present lease are not Operating Lease in accordance with the ratio highlighted in the above decisions cited (supra). The Assessing Officer also in his order accepts that the ownership of the aircraft is with the lessor and that the depreciation on these aircrafts, where the engine supplied by the lAE is fitted, is claimed by the lessor. We find the learned CIT(A) has also not disputed this fact and have held that "since, the delivery schedule of Aircraft spread-over a very long period, the appellant normally replaces its old fleet with new fleet, after the ex....
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....ls paid by Indigo are in the nature of rent and not interest as the Revenue has failed to demonstrate that the nature of lease is finance lease and not operating lease. Hence, the payments made by lessee are not in the nature of interest. Thus, in light of findings of the Special Bench, we hold that the provisions of Article 11 of India-Ireland DTAA would not operate in the present case. 23. Thus, in light of our above findings and the decision of Special Bench, the assessee succeeds on ground no. 3 to 5 of appeal" 101. The agreements before us and the ones before the Delhi Tribunal in the case of Celestial (supra) as well as the Special Bench of the Tribunal in the case of IndiGo for the AY 2012-13 and the division bench in the case of IndiGo for AYs 2008-09 and 2009-10 are substantially similar. We are not reproducing the clause again since we have already extracted the relevant clauses above. Suffice to say that there are no material differences in the agreements before the Delhi Tribunal in the case of Celestial (supra) as well as the Special Bench of the Tribunal in the case of IndiGo for the AY 2012-13 and the division bench in the case of IndiGo for AYs 2008-09 a....
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....With this, it is required to be considered, that the basic distinguishing feature between the lease being finance lease or operating lease would be, that in case of finance lease, at some point of time, the ownership transfers to the lessee, or the lessee has the option to purchase, the hired assets, in consideration of a token price. Obviously, in that event, the lease rent, or hire charges, called by whatever name, with passage of time, partake the character of the price of the asset in possession of the lessee, or hirer, under the finance lease agreement, as distinct from the lease in question, where there is a very specific stipulation in clause 8 that on termination of the lease, the leased plant and machinery are to be returned to the lessor, in the condition, as they were taken, except normal wear and tear." 103. That apart, sections 2(ma) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and section 2(ha) of the Recovery of Debts and Bankruptcy Act, 1993 which defined „finance lease' to mean where the lessee becomes the owner of such assets at the expiry of the term of lease or on payment of the agreed resid....
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....MANENT ESTABLISHMENT 1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on. 24. The Hon'ble Supreme Court in the case of Formula One World Championship v. CIT (2017) 394 80 (SC) held that two crucial tests are required to be examined in order to determine whether a foreign enterprise has a fixed place PE under Article 5(1) of the India-UK DTAA or not. Firstly, there is a fixed place of business and secondly, that the place of business must be at the disposal of the foreign enterprise. The relevant findings of the Supreme Court in Formula One (supra) are as under: 30. Emphasising that as a creature of international tax law, the concept of PE has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of PEs contemplated under Article 5 of OECD Model. First, an establishment which is part of the same enterprise under common ownership and control-an office, branch, etc., to which he gives his own description as an "associated permanent establishment". The second type is an agent, though legall....
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....terprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as "at the disposal" of the enterprise when the enterprise has right to use the said place and has control thereupon. Ergo, in the absence of satisfaction of the disposal test, PE of the foreign enterprise cannot be deemed to exist under Article 5(1) of the DTAA. 25. The ld. DRP, while holding that the assessee has a PE in India under Article 5(1) of the India-Ireland DTAA, which is the same as Article 5(1) of the India-UK DTAA, held as under: "Ownership Test: As per Applicant itself, the legal ownership of the Aircraft, the Fixed Place Permanent Establishment, ultimately rest with the Applicant. The Aircraft operates in Indian territory all throughout the A.Y. Location Test: Thus, the Applicant satisfies the location test due to its specific geographical identification with Indian territory and nexus with the Indian business of the Aircraft conducted through the lessee. Permanence or duration test: Moreover,....
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....igated IndiGo to maintain the requisite licences, certificates and permits for use of aircraft in India. d. Clauses 12.13.1 and 23.7.1 permitted the assessee a limited right to inspect the aircraft once a year, or before the return of the aircraft upon expiry of the lease period, or at any time while an event of default was subsisting, to ensure that the aircraft was functional and operational. This did not give operational control over the aircraft to the assessee. Therefore, contractually, the aircraft was under the control and disposal of the lessee/IndiGo. Even the LD.DRP accepts that the aircraft is under the operational control of the lessee/IndiGo at page 132 of its directions wherein it is held that "The aircraft, while operationally controlled by the lessee, forms the core of the Applicant's leasing business." 28. Further, even as per the DGCA Rules and Manuals, the aircraft was required to be under the operational control of the lessee/IndiGo. This has never been doubted by the AO or Ld. DRP or that the DGCA, which is the regulator of aviation in India ever alleged that the assessee or IndiGo have violated these rules and regulations. The de....
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....preme Court Hyatt International Southwest Asia Ltd. can be summarized in the following manner:- I. Disposal Test for PE (Article 5(1) of the DTAA): A "fixed place" Permanent Establishment (PE) is constituted when a foreign enterprise possesses a fixed place of business in India that is at its disposal, and through which its business is wholly or partly carried on. The exclusive legal possession is not a prerequisite; even temporary or shared access, if coupled with meaningful control and business use, is sufficient. This interpretative standard draws strength from the Supreme Court's exposition in Formula One World Championship Ltd. v. CIT. II. Tripartite Attributes of a PE: A valid PE, in jurisprudential contemplation, must reflect three core characteristics: * Stability - an enduring and identifiable physical presence; * Productivity - the conduct of substantive commercial operations; and * Dependence - functional reliance on the said location for business activities. III. Economic Substance Prevails Over Legal Form: The existence of a separate legal entity, such as Hyatt India Pvt. Ltd., ma....
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....f ownership does not ipso facto satisfy this requirement. The business of the foreign enterprise, as a matter of factual and functional analysis, must be conducted through the place in question; the mere fact that the asset generating income is situated in the source State is not determinative. 32. Applying these principles to the present case, the aircraft leased by the assessee to IndiGo were indeed present in India for extended periods. However, the crucial question is whether they constituted a "fixed place of business" at the disposal of the assessee through which its business was carried on. The assessee's business is that of dry leasing aircraft an activity executed entirely from Ireland, with negotiations, contract execution, and management undertaken outside India. Operational control over the aircraft, including deployment, routing, scheduling, and crewing, vested exclusively with IndiGo. The rights retained by the assessee such as periodic inspection, ensuring compliance with maintenance standards, and repossession in default are standard lessor protections safeguarding the value of the asset, not indicia of the asset being at the lessor's disposal for carrying ....
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....ly incorrect. The leasing business of the assessee was carried on from outside India and not through the aircraft in India. It is nobody's case that the assessee or IndiGo executed the lease agreement sitting in the aircraft in India. Therefore, apart from the non-satisfaction of the disposal test in the instant case, no part of the business of the assessee can be said to be carried on in India. If the logic of the DRP is accepted then in every lease of equipment, the foreign enterprise will be held to have a PE in India. The Madras High Court in Van Oord ACZ (supra) and benches of the Tribunal have held this in several decisions. 36. Insofar as the decision of the Madras High Court in Poomphuar (supra) is concerned, the Madras High Court in the case of Van Oord ACZ (supra) dealt with the case of leasing dredging equipment by a Dutch company to an Indian Company. The Revenue contended the presence of the ship/barge constituted PE of the Netherlands Company in India. In response, the Assessee therein contended that the leasing of equipment on bareboat basis/ dry lease would not constitute a PE in India. The Madras High Court after analyzing another earlier decision of the M....
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....1) of the India-Ireland DTAA, and therefore taxable exclusively in Ireland. For the sake of ready reference, the difference in the language of Article 8 of India-Ireland DTAA as compared to Article 8 of OECD model convention is as under:- Article 8(1) of the India-Ireland DTAA reads as under: "... Article 8 SHIPPING AND TRANSPORT 1.Profits derived by an enterprise of a Contracting State from the operation or rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State. ..." Article 8 of the OECD Model Convention reads as under: "... Article 8 SHIPPING AND TRANSPORT 1.Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State. ..." 39. Article 8(1) of this treaty reads in material part: "Profits derived by an enterprise of a Contracting State from the operation or rental of ships or aircraft in international traffic and the rental of containers and related equipment which....
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....ness profits taxable in India if a PE existed. The LD.DRP adopted this line, essentially importing the OECD Model's narrower structure into the India-Ireland text. 42. We are unable to subscribe to this restrictive reading. Treaty interpretation proceeds on the ordinary meaning of the terms used, read in their context and in light of the treaty's object and purpose. Where the Contracting States have consciously departed from the OECD Model to insert "rental" as an alternative head to "operation," the text must be given effect in its ordinary sense. To superimpose a requirement that the lessor must itself be an operator in international traffic, or that the rental must be subordinate to such operation, is to read into the provision words which are not there. Likewise, to insist on a quantitative predominance of international usage is to graft a test not found in the treaty. The definition in Article 3(1)(g) sets a binary criterion either the aircraft is operated solely domestically (in which case the exclusion applies) or it is not (in which case it falls within "international traffic"). Once it is shown, as it is here, that the leased aircraft formed part of a fleet used o....