TaxTMI 
TaxTMI 
2025 (8) TMI 1367
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....o"). While the assessee asserts that such income is either (i) taxable solely in Ireland under Article 7 of the Double Taxation Avoidance Agreement between India and Ireland ("India-Ireland DTAA") owing to the absence of a Permanent Establishment ("PE") in India; or (ii) in the alternative, exempt in India under Article 8(1) of the DTAA being profits from the rental of aircraft in international traffic. However the Revenue authorities have sought to bring the same to tax in India on the twin premises that; (a) the aircraft themselves constituted a "fixed place" PE under Article 5(1) of the DTAA; and (b) the conditions of Article 8(1) were not met. 3. Brief background and facts qua the issue involved are that the assessee is a company incorporated under the laws of Ireland and fiscally domiciled therein, forming part of the globally recognised AerCap Group, an enterprise acknowledged as one of the largest aircraft leasing companies in the world. The Group's principal business encompasses the acquisition, financing, ownership, asset management, and leasing of commercial aircraft to airlines worldwide. Its operational footprint extends to multiple jurisdictions, and its leasing....
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.... aircraft in India during the lease period, it was submitted, did not meet the "disposal test" or any other threshold under Article 5(1) for a fixed place PE. (iii) Article 8(1)Rental in International Traffic: Without prejudice to the above, the assessee contended that the rental income from leasing aircraft fell squarely within the protection of Article 8(1) of the DTAA, which, in its broader-than-OECD wording, allocates exclusive taxing rights to the State of residence for "profits derived ... from the operation or rental of ships or aircraft in international traffic." IndiGo had been operating international flights since September 2011, and the leases did not contain any restriction on deploying the aircraft for international traffic. 6. In the draft assessment order dated 31 March 2024, the AO denied the assessee's claim to treaty protection. He invoked the Principal Purpose Test ("PPT") as enshrined in Articles 6 and 7 of the Multilateral Instrument ("MLI"), alleging that the assessee had failed to discharge the burden of proving that the principal purpose of the leases was other than obtaining treaty benefits. Treating the DTAA provisions as inapplicable, he c....
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....aft: The Aircrafts, MSN 3330 and 3264 were purchased by the Applicant directly from the Original Equipment Manufacturer during 2007 and the Indian Airlines was not involved in the purchase process thereof. IndiGo was the 5th Lessor during 2016, and can not be said to be a part of financing deal. There was no purchase assignment from lessee IndiGo tripartite agreement between Airbus, Assessee and the Lessee. These aircraft were not purchased pursuant to any purchase assignment agreement between the Lessee and the Assessee. The leases with InterGlobe Aviation Limited were from 2016 till 2021. The aircraft were redelivered within 5 years to the Assessee at the and of the lease during COVID period. It is not a case of Finance Lease." 9. However, in a significant turn, the LD.DRP, by a show- cause notice dated 13 December 2024, raised a new issue: whether the continuous physical presence of the aircraft in India during the lease constituted a "fixed place" PE under Article 5(1) of the DTAA. In its reply dated 19 December 2024, the assessee emphasised that it had no office, personnel, or operational base in India; that its leasing business was controlled entirely from Ireland....
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....sue subsumes within it the question whether mere ownership of an income-producing asset located in the source State, without personnel or operational involvement therein, can, in the context of high-value movable assets such as aircraft, suffice to meet the threshold of a fixed place of business "through which the business of the enterprise is wholly or partly carried on." II). Attribution of Profits to the Alleged PE * In the event that a PE is found to exist, whether the LD.DRP was justified in attributing 25% of the gross lease rentals to such PE in the absence of any segmental accounts or functional analysis, and whether such attribution aligns with the arm's length principle embedded in Article 7(2) of the DTAA. * Ancillary to this is the question whether the application of a flat attribution percentage to gross receipts, without examining the asset ownership function, risk assumption, and funding pattern, results in an artificial inflation of taxable profits. III). Applicability of Article 8(1) - Profits from the Rental of Aircraft in International Traffic * Whether, assuming the non-existence of a PE, the lease rentals derived by the asse....
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....d by the assessee, Mr. Jolly submitted that the assessee had 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. He referred to clauses 12.13.1 and 23.7.1 in this regard. (vii) He further submitted that the aforesaid clauses of the agreement clearly point to an unambiguous conclusion that during the term of the lease, the operational control over the aircraft vested with IndiGo and not the assessee. (viii) He referred to pages 122 and 133 of the LD.DRP Directions to submit that the LD.DRP while deciding the issue of PE against the assessee admitted that the Lessee controls the aircraft for operational purposes. However, on a complete misreading of the assessee's right to inspect the aircraft once a year or on return of aircraft, or at any time while an event of default had occurred and was subsisting, the LD.DRP came to the conclusion that the aircraft was under the ultimate control of the assessee and therefore constituted a fixed place PE in India. (ix) He submitte....
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....e of such a lease vests with the lessee. 15.2. On the strength of the above, he submitted that an aircraft leased on a dry operating lease basis remains under the operational control of the lessee and is operated under the lessee's operator certificate issued by the DGCA. Any deviation from such Rules and instructions invites penal sanctions from the regulator, i.e. DGCA. 15.3. He submitted that neither the AO nor LD.DRP or the DGCA have alleged that the assessee or IndiGo have flouted any of the aforesaid leasing conditions. In this regard, Mr. Jolly referred to the decision of coordinate bench in Caribjet Inc. v. DCIT: [2005] 4 SOT 18 (Mum) in this regard. 15.4. He also referred to the following decisions of the Madras High Court and that of various benches of the Tribunal: a. CIT vs. Van Oord ACZ Equipment BV [2014 SCC Online Mad 10583: (2015) 373 ITR 133: (2015) 273 CTR 548] b. Dy. CIT v Nederlandsche Overzee Baggermaatsehappiji (2010) 39 SOT 556 (Bom) c. Dharti Dredging & Infrastructural Ltd [2011] 9 taxmann.com 327 (Hyderabad): [2011] (44 SOT 586) d. Maersk vs. ACIT [2017] 86 taxmann.com 77 (Delhi-Trib.) 16. On the issue of ....
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....lights from India, to enable the assessee to take benefit of Article 8(1). 17. With regard to all the issues, the submissions of the ld. Senior Counsel can be summarized in the following manner :- A. No Fixed Place PE under Article 5(1) of the DTAA (i) Nature of the Business Model - The assessee is engaged exclusively in the business of dry operating leases of commercial aircraft. In a dry lease arrangement, operational control, navigation, and commercial deployment of the aircraft vest entirely with the lessee airline, here IndiGo. The lessor neither supplies crew nor provides technical or operational services in the source State. All core income-generating functions including marketing, negotiation, execution of lease agreements, financing, asset management, and strategic decisions are undertaken from the assessee's offices in Ireland. (ii) Disposal Test Not Satisfied - Relying extensively on Formula One World Championship Ltd. v. CIT (2017) 394 ITR 80 (SC), Mr. Jolly contended that for a fixed place PE to exist, the asset or premises in the source State must be "at the disposal" of the foreign enterprise in such a manner as to enable it to carry on it....
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....ee's value-creating functions, funding arrangements, and entrepreneurial risks are all located in Ireland. * The presence of the aircraft in India, absent operational control, creates no incremental profit potential in India beyond what is compensated through the lease rentals agreed to at arm's length. * The LD.DRP's "25% of gross receipts" formula is wholly inconsistent with OECD principles and Indian jurisprudence (e.g., DIT v. Morgan Stanley), which reject gross- basis profit attribution in favour of functional analysis. C. Applicability of Article 8(1) of the DTAA The Ld. Counsel in his alternative plea submitted that, even if the Revenue's case on PE were to fail, the lease rentals are protected under Article 8(1) of the DTAA. (i) Broader Wording than OECD Model - Unlike the OECD Model, which limits Article 8 to profits from the "operation of ships or aircraft in international traffic," the India-Ireland DTAA expressly extends the provision to the "rental of ships or aircraft" in international traffic, as well as to the "rental of containers and related equipment" incidental thereto. The inclusion of "rental" in the operative clause re....
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....cation in the Source State - The Ld. DR submitted that during the subsistence of the lease, the aircraft remained continuously present and stationed in India when not in flight. Their habitual base of operation was Indian airports, from which they were scheduled on domestic and international routes. This regular and predictable presence, according to the DR, satisfied the "fixed" element of Article 5(1). (ii) Disposal Test Met Through Ownership and Contractual Rights - While acknowledging that IndiGo exercised day-to-day operational control, the Ld. DR argued that ownership of the aircraft, combined with extensive contractual rights including periodic inspection, monitoring of technical condition, imposition of mandatory maintenance standards, and the ultimate right of repossession conferred a sufficient degree of disposal on the assessee. Such rights, he contended, went beyond mere "protective covenants" and represented substantive control over the asset in India. (iii) Business Carried On Through the Aircraft - The Ld. DR stressed that the very business of the assessee was to lease aircraft and earn rentals from such assets. In this context, the "place of busine....
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....nternational sectors, he argued, was insufficient to trigger Article 8 immunity. (ii) OECD Commentary Persuasive - While conceding that the India-Ireland DTAA uses broader language than the OECD Model, he however submitted that OECD Commentary still provides interpretative guidance. According to that guidance, Article 8 coverage for rental income presupposes that the lessor itself operates the asset in international traffic, or that the rental is part of an overall operation of aircraft in such traffic. In this case, the assessee neither operated nor controlled the deployment of the aircraft. (iii) Purpose of Article 8 Limited - The Ld. DR further argued that the legislative intent behind extending Article 8 to rentals was to cover leasing arrangements ancillary to the lessor's own international operations, not passive leasing to a domestic operator for primarily domestic use. 22. While the ld. LD.DRP had rejected the AO's finding on the PPT, the DR submitted that the structure of the arrangement nonetheless called for strict scrutiny. Given the high withholding tax differential between India and Ireland, and the strategic choice of leasing into India f....
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....ess through which the business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled: (a) there must be a business of an enterprise of a contracting State (FOWC in the instant case); and (b) PE must be a fixed place of business i.e. a place which is at the disposal of the enterprise. It is universally accepted that for ascertaining whether there is a fixed place or not, PE must have three characteristics: stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on. 32. On the other hand, possession of a mailing address in a State without an office, telephone listing or bank account has been held not to constitute a PE [Commr. of Internal Revenue v. Consolidated Premium Iron Ores Ltd., 265 F 2d 320 (6th Cir 1959)]. The mere supply of skilled labour to work in a country did not give rise to a PE of the company supplying the labour [Tekniskil (Sendirian) Berhard v. CIT, 1996 SCC OnLine AAR 12: (1996) 222 ITR 551]. A drilling rig which, although anchored while in operation, was move....
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....d. This ownership and control have been exercised by multiple Irish lessors under similar agreements, illustrating that the lessor retains ultimate control over the asset. The Aircraft performs 2 functions: Lease income for Applicant, and operational income for Indian Aircraft Operator. It is at the disposal of the Applicant for its lease business. The lease rental earning activity played by the Aircraft is the function of the applicant and not of Indian lessor. Thus, this function performed by Aircraft from vantage point of Applicant is that of lease rental, which is the function of the applicant and not the function of Indian operator (which is performs different activity of Airlines operations via the same equipment)." 26. From reading of the aforesaid, it is noticed that the thrust of the case of the ld.DRP is that the aircraft is the place of business which is at the disposal of the Applicant in India for its lease business. This finding of the LD.DRP has been assailed by the assessee on the ground that both factually and legally the aircraft cannot and is not at the disposal of the assessee and that in any case the leasing business is carried from outside....
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....ransported at the sole risk and responsibility of Air India. The identity, commercial responsibility, civil liability, criminal liability and all other obligations arising out of and attached to carrying on the business of operation of aircrafts meant for transporting passengers, mails and goods are borne by Air India. The assessee was leasing out the aircrafts ... " 29. Clauses 2.4 and 6.2 of the Aircraft Leasing Manual issued by DGCA unequivocally clarify that a dry lease is an arrangement where the aircraft is operated under the lessee's operator certificate and the operational control of the aircraft in the case of such a lease vests with the lessee. The Ld. DRP while acknowledging that the present constitutes a dry operating lease, nevertheless concludes that aircraft remained under the control of the lessor/assessee. Such an inference is manifestly erroneous. The LD.DRP has completely failed to appreciate that IndiGo assumed possession of the aircraft in Chile and, consequently, by the time the aircraft entered Indian Territory, it was already under exclusive control and disposal of the lessee that is Indigo and not that of the assessee. 30. We have given our though....
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....hotel. Such performance-based remuneration goes well beyond passive consultancy or auxiliary functions. V. Intermittent Presence of Employees is Sufficient to Establish Continuity: The Court clarified that continuous and coordinated business engagement, even through multiple short-term visits by employees, suffices to establish a PE. The absence of a single individual exceeding the nine-month threshold under Article 5(2)(i) is not determinative, so long as business presence is substantively maintained. VI. Exclusion for Auxiliary Activities Inapplicable: Rejecting the assessee's reliance on the judgment of UAE Exchange Centre, the Court held that the strategic oversight, managerial control, and supervisory authority exercised by the appellant were central to the hotel's core operations and could not be characterized as mere preparatory or auxiliary activities. VII. Profit Attribution Unaffected by Global Losses: The Court unequivocally held that taxability of profits attributable to a PE in India stands independent of the foreign enterprise's global profit or loss. Article 7 of the DTAA entitles the source State to tax income attribut....
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....hasised that mere location or access is insufficient unless the enterprise can, as a matter of right and in practice, employ that place as an instrumentality of its business; the aircraft here could not be accessed or used by the assessee at will for its business every entry to airside/hangar areas required IndiGo's operational consent and regulatory clearances, and inspections were episodic, noticed, and ancillary to ownership protection. The assessee's business is the grant of lease rights executed offshore; the asset's Indian location under IndiGo's aegis does not convert the aircraft into a fixed establishment at the assessee's disposal. 33. The Revenue's contention that the aircraft themselves constituted a "place of business" because they were the source of the assessee's income overlooks this distinction between the situs of the asset and the locus of business activity. In Formula One, the Supreme Court held that the race circuit in India was at the disposal of the foreign enterprise during the race event, enabling it to carry on its core business there. Here, by contrast, the aircraft were never placed at the disposal of the assessee in India ....
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....Ld. DRP's findings in the present case are based entirely on the earlier decision of the Madras High Court in Poompuhar Shipping(supra). The relevant findings of the Hon'ble Madras High Court in the case of Van Oord (supra) are extracted hereunder for ready reference: "34. .... In Poompuhar Shipping's case, referred supra, it was a case of hiring of ship on time-charter basis, whereas in the present case, dredging equipment is leased out on bareboat basis, namely, without master and crew. Therefore, on facts, the decision in Poompuhar Shipping case, referred supra, is distinguishable. 35. The learned standing counsel for the Department referring to paragraph (2) of article 5 which states that an installation or structure used for the exploration of natural resources is a permanent establishment, provided that the activities continue for more than 183 days, pleaded that the stand of the Department is justified. 36. We are not inclined to accept such a plea, as in the case on hand the dredging equipment was leased out on bare boat basis, viz., without master and crew. Therefore, it will not come under the permanent establishment and the entire c....
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....by the Contracting States reflects a conscious policy choice to extend the exclusive taxing right to rental income from ships and aircraft, as a distinct category, when such assets are employed in "international traffic." 40. The assessee's case is that it is an Irish enterprise engaged in the business of dry leasing aircraft to IndiGo, that the leased aircraft formed part of IndiGo's integrated fleet and were deployed interchangeably on domestic and international routes, and that such integration necessarily brought them within the scope of "international traffic" as defined in Article 3(1)(g) of the treaty. That definition excludes only those cases where the ship or aircraft is "operated solely between places in the other Contracting State"; the moment the operation is not exclusively domestic, it satisfies the definition. The assessee points out that IndiGo is an international carrier with scheduled flights to multiple foreign destinations, and that the aircraft type and configurations leased were suitable and certified for such operations. It was emphasised that the treaty text does not stipulate any predominance or threshold of international usage; a single non-inci....