TaxTMI 
TaxTMI 
2025 (10) TMI 220
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.... 1857, 1858/DEL/2025, ITA No.2008/DEL/2025 And ITA No.2022/DEL/2025, SA No. 501/Del/2025 (Arising out of ITA No.1162/Del/2025, SA No. 502/Del/2025 (Arising out of ITA No.1192/Del/2025, SA No. 503/Del/2025 (Arising out of ITA No.1193/Del/2025, SA No. 504/Del/2025 (Arising out of ITA No.1194/Del/2025, SA No. 505/Del/2025 (Arising out of ITA No.1195/Del/2025, SA No. 506/Del/2025 (Arising out of ITA No.1196/Del/2025, SA No. 507/Del/2025 (Arising out of ITA No.1197/Del/2025 Shri Vikas Awasthy, Judicial Member And Shri Avdhesh Kumar Mishra, Accountant Member For the Appellant : Shri Percy Pardiwalla Sr. Advocate with Shri Madhur Agarwal, Advocate Shri Sachit Jolly, Sr. Advocate with Ms. Rashi Khanna, Ms. Viyusti Rawat, Shri Devansh Jain, Ms. Disha Jham, S/Shri Sohum Dua, Abudaya Shankar Bajpai & Hardeep singh Chawla, Advocates Shri Sriram Seshadri, Advocate Shri Ravi Sharma, Advocate with S/Shri Kshitij Bansal, Girish Gurnani, Kumar Saorabh Sharma, Mudit Kakaria, Hrithik Bhatt& Ishan Bhargava, Chartered Accountants For the Respondent : Shri Indruj Singh Rai, Special Counsel for Revenue with S/Shri Sanjeev Menon, Junior Special Counsel & Gaurav Kumar, Advocate ORDER PER BEN....
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....IRBUS A320- 271N bearing Manufacturer's Serial Number (MSN) 7961, initially for a period of 72 months which was subsequently extended to the period of 120 months. The said agreement is at page 158 to 311 of the paper book. Similar lease agreements have been entered between the other assesses as lessor and Indigo as lessee for leasing of A320 AIRBUS Aircrafts (the other lessees being Air India Ltd. and Spice Jet Ltd.). The case of the assessee is that the agreement between the assessee as lessor and Indigo as the lessee is that of an operating lease, hence, lease rentals received by the assessee are not taxable in India as they are covered under Article 8 of India-Ireland DTAA. 6. Per contra, the Assessing Officer treated the said lease as financial lease and held that the interest accruing on financing of Aircrafts and paid as part of lease rentals by the Indian lessee to the assessee (as lessor) are taxable in India under Article 11 of India-Ireland DTAA. Further, the Assessing Officer held that India -Ireland DTAA is a 'Covered Tax Agreement' under the Multilateral Convention to implement Tax Treaty measures to Prevent Base Erosion and Profit Shifting (BEPS) signed by Ireland ....
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....e said findings of the DRP are contrary to the facts and documents available on record. As per DGCA Circular of 1993, the economic life of aircraft is 20 years or 60,000 landing/pressurization cycle. Whereas, in the present case the lease period even after extension is only 120 months i.e. 10 years. The aircraft has still remaining operational life of 10 years. Therefore, it cannot be said that the aircraft was utilized by the lessee for substantial economic life of the asset. 10. On the other hand, Shri Indruj Singh Rai, Special Counsel for the Department relied on the DRP directions dated 29.12.2024 and the impugned assessment order. 11. Both sides heard, orders of the authorities below examined. We find that the issue, whether the lease agreement between the Lessee (assessee) and the Lessor (Indigo) is financial lease or operating lease has been examined by the Coordinate Bench of the Tribunal in the case of Celestial Aviation Trading 15 Ltd. vs. ACIT (supra). After examining the lease agreements threadbare, the Coordinate Bench held as under: "12. We have heard the submissions made by both sides in extenso, perused the orders of authorities below and have conside....
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....ip 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 accordance with Clause 12". Clause 12 of CTA reads as under: "12. RETURN OF AIRCRAFT 12.1 RETURN On the Expiry Date or redelivery of the Aircraft pursuant to Clause 13.2 or termination of the leasing of the Aircraft under the Lease, Lessee will, unless an Event of Loss has occurred, redeliver the Aircraft and the Aircraft Documents and Records at Lessee's expense to Lessor at the Redelivery Location, in accordance with the procedures and in compliance with the conditions set out in Schedule 6, free and clear of all Security Interests (other than Lessor Liens) and in a condition suitable for immed....
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....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 Sub-Lessee or the State of Incorporation, the interests of Lessor and Owner are duly registered in the International Registry. (b) Lessee will not: (i) represent that it is the owner of the Aircraft or that it has an economic interest (equivalent to ownership) in the Aircraft for Tax treatment or other purposes; (ii) take any action or fail to take any action if it might reasonably be expected to put Owner's and / or Lessor's rights at risk; (iii) represent to others that Owner or Lessor is associated with or responsible for the business activities and / or flight operations of Lessee; ....
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....emnifies 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, use, condition or other matters relating to the Aircraft; or (ii) any breach by Lessee of its obligations under the Lease. 'Indemnity' has been defined in Schedule-I as under:- Indemnitee means each of Lessor, Owner, GECC, GECAS, the Financing Parties and each of their respective successors and assigns, shareholders, subsidiaries, affiliates, partners, contractors, directors, officers, representative, servants, agents and employees. 13.4 Sale or Re-lease of Aircraft If an Event of Default occurs and is continuing, Lessor may sell or re-lease or otherwise deals with the Aircraft at such ....
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....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 financial lease. For the sake of ready reference relevant excerpts from the said Circular are reproduced herein below:- "To All Authorized Dealers in Foreign Exchange Madam/Sirs, Import of Aircraft/Aircraft Engine/ Helicopter on lease basis Authorised dealers are aware that the Reserve Bank is considering applications from airline companies and air taxi operators for payment of the lease rentals for import of aircraft/aircraft engine/helicopter on lease basis, based on the approval issued by the Director General of Civil Aviation (DGCA), Government of India.....
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.... 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 Revenue has brought to our notice the decision of Special Bench in the case Inter Globe Aviation Ltd. (Indigo) vs. ACIT (supra). Similar arguments were raised by the Revenue in said case. The questions for consideration before the Special Bench was: "(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 gain....
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....o 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 expiry of lease period which is usually six year." [Emphasized by us] 21. Further, the Special Bench on plea taken by the Revenue that lease rents are taxable in India as interest in accordance with Article 11 of India-Ireland DTAA, held as under:- 44.1 We are not convinced by the submissions made by the ld. Special Counsel for the Revenue. It is an undisputed fact that the basic lease Rent of Rs. 673.42 crores paid under the lease agreement is an allowable expenditure and its nature is that of "Rent." In our opinion, the nature of supplementary lease rent cannot be treated oth....
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....e life span of an aircraft is 20 years or 60,000 pressurization/landing cycles. In the present case the aircraft has been leased for a period of 120 months i.e. 10 years. Thus, even after the end of lease period substantial economic life of the asset i.e. the aircraft, is still available for further lease. (iv) The Department in the case of Indigo (lessee) has accepted the fact that the nature of lease is that of operating lease. (v) The Special Bench of Tribunal in the case of lessee, Inter Globe Aviation Ltd. (Indigo) (supra) has held the nature of lease as operating lease. In the case of lessor/appellant, on same set of agreements and facts, the nature of lease cannot be recharacterized as financial lease. 13. The Revenue has not been able to distinguish either facts or findings of the Coordinate Bench in the case of Celestial Aviation Trading 15 Ltd. vs ACIT (supra). Following the aforesaid decision, for parity of reasons we hold that the agreement to lease aircrafts is in the nature of operating lease and not financial lease. The issue is thus decided in favour of the assessee and against the department. (ii) Applicability of MLI to India-Ireland DTAA: ....
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....first relevant to understand the need of having MLI instead of separate agreements with each Sovereign to modify each DTAA separately. He submitted that implementation of the final BEPS package requires changes to model tax conventions, as well as to the bilateral tax treaties based on those model conventions. Since, the number of bilateral treaties was quite large, it would be cumbersome and time consuming to make bilateral updates to each treaty separately. Thus, it would limit the effectiveness of multilateral efforts. In this backdrop MLI was conceptualized and the same has been universally accepted. He further submitted that MLI does not function in the same way as amending protocol to a single existing treaty. MLI would run parallel to DTAA. MLI works on matching principles. Countries could state their own position and probable list of countries to whom MLI would apply. Only those provisions of an existing treaty would be modified, where there was a match of the positions set out by two countries to the MLI. Where there is no match, the MLI provisions would not modify the CTA. Referring to Compatibility Clause of Explanatory Statement to the Multilateral Convention, he submit....
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....s 90(1) on 28/8/2012. No separate notification was issued for each country. - Another Multilateral Competent Authority Agreement(CBCR)was signed by India on 12/5/2016 and notified u/s 286(9) on 28.07.2017, which further refers to agreement u/s 90(1), that had significant impact on rights of taxpayers and casted severe reporting obligations followed by severe penalties in case of default. 15.3. Sh. Indruj Singh further submitted that the global practice amongst most dualist and monist countries is to assimilate MLI into their domestic law by way of single omnibus notification. In fact, countries like Ireland, South Africa etc. also notified MLI under delegated legislative provisions, akin to section 90(1) of the Act. Ireland's MLI position was ratified on 29.01.2019 and notified on 26.10.2018 to have entry into force from 01.05.2019 i.e. before India ratified and notified its own MLI position. Therefore, at the time of India's notification, the MLI provisions that matched and modified the Indo-Irish DTAA were already known. 15.4 The ld. Counsel for the Department to buttress his argument, referred to the Note by the OECD Directorate of Legal Affairs at page 628 to....
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....LI. 15.6 The ld. Counsel for the Department further referred to the Finance Act, 2020, whereby provisions of section 90 of the Act were amended. He pointed that even Finance Act, 2020, recognizes that MLI is in force w.e.f. Financial Year 2020- 21 onwards. 15.7 The ld. Counsel for the Department finally submitted that the coordinate Bench of the Tribunal in the case of SC Lowy P.I. (LUX) SARL vs. ACIT 170 taxmann.com 475 (Delhi Trib.) adjudicated the issue where reference was made to MLI and PPT by the Department. The Bench did not question validity of MLI. 16. Rebutting the submissions made by ld. Special Counsel on behalf of the Department, Shri Sachit Jolly asserted that the same very set of arguments qua single omnibus notification u/s. 90(1) of the Act were made in the case of Sky High Appeal XLIII Leasing Company Ltd. (supra). The written submissions filed by the Department were taken note of and reproduced in the order. The Tribunal after examining the issue rejected all the arguments advanced by the Department and followed the ratio laid down in the case of Nestle SA (supra). The Revenue in the present set of appeals have all together taken a stand inverted to what....
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....er each amendment varying the terms and conditions, the DTAA is required to be notified under the provisions of section 90(1) of the Act. 16.3. On the argument of global practice in notifying MLI by single notification Sh. Jolly submitted that the OECD in the note itself states that the position in international law and domestic law is entirely different. Referring to para 28 to 31 of OECD Note he pointed that OECD itself suggested that whatever has been proposed by the OECD BEPS project or the international practice will not dilute or obviate the requirement in domestic legal system. Thus, how to give effect to amendment/modification to the existing DTAA caused by MLI under domestic law is left to each country. 16.4 The learned counsel for the assessee finally submitted that if the contention of Department with respect to Memorandum explaining amendment to section 90 by the Finance Act, 2020 is accepted, the notification of 2019 will not survive, as it is prior to the said amendment and on the date of notification there was no provision under law for notification of MLI. 17. Shri Percy Pardiwalla, Senior Advocate supplementing the submissions made by Shri Sachit Jolly Sr.....
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.... this, in instant case the Revenue seeks to apply the MLI without any notification of its consequence on the Tax Treaty as required by section 90(1) of the Act, which is contrary to the provisions of the Act as well as the principle enunciated by the Hon'ble Supreme Court. Rebuttal on global practice: Practices in foreign jurisdictions cannot determine India's legal position on treaty implementation. The Hon'ble Supreme Court in Nestle SA (supra) (Para 46) made it abundantly clear that enforceability in India depends solely on compliance with section 90(1) of the Act. Further, Para 31 of the OECD's Legal Note, relied upon by the Ld. DR (Pg 635 of the Ld. DR's compilation (Vol 1)) itself records that treaty partners need not to have identical domestic procedures for the MLI to operate and the implementation depends on each country's legal framework. The fact that some countries use omnibus notification to implement the consequences of MLI on tax treaties does not dilute India's requirement of separate notifications of consequences of MLI for the respective treaties under section 90(1) of the Act. Rebuttal on Note by the OECD ....
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....ss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out, and will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. Accordingly, it is provided that an amendment to section 90 of the Act is necessary in order to achieve the said purpose. 8. The intent of the subsequent amendment to section 90 of the Act, as explained in the Memorandum, makes it clear that the MLI Notification issued in August 2019, is invalid and does not have the legal sanction to restrict the tax treaty benefits under the existing and notified agreements as the right to enter into an agreement to curb non-taxation or reduced taxation through tax evasion or avoidance, was only given once the amendment in section 90 of the Act was made. 9. In light of the foregoing, it is submitted that MLI Notification is invalid and, further, in any event, it is not enforceable in absence of a separate notification for consequences of MLI as agreed upon between the contracting states as can be discerned from the respective i....
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....ndia-Ireland DTAA, notification dated 09.08.2019 vide which MLI was notified, need and objective of MLI and the ratio laid down by the Hon'ble Supreme Court of India in the case of Nestle SA (supra) held as under:- "38. Thus, the Hon'ble Supreme Court in Nestle has rendered a landmark ruling on the constitutional status and domestic enforceability of Double Taxation Avoidance Agreements (DTAAs), emphatically clarifying that the assimilation of such international instruments into the Indian legal framework is neither automatic nor mechanical. A DTAA, even when duly signed and ratified, does not per se acquire enforceability within the municipal legal system, unless and until it is expressly brought into force through a notification issued under Section 90(1) of the Income-tax Act. In the absence of such notification, treaty provisions, however binding they may be in international law do not confer enforceable rights upon taxpayers before Indian courts and tribunals. 39. The Court further rejected the contention that benefits granted to a foreign State at a subsequent point of time, whether on account of its accession to the OECD or pursuant to later negotiation....
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....s, but rather whether the consequential modification of the earlier DTAA, brought about by virtue of the later multilateral instrument, had itself been separately notified for the purposes of domestic application. On the material available on record, it is expressly admitted that although both the India-Ireland DTAA and the MLI have been notified, "the consequence/impact of the MLI on the India Ireland DTAA is not admittedly and separately notified." 41. The ratio of the Supreme Court in Nestle SA (supra) leaves no room for ambiguity on this issue. Summarising its conclusions in paragraph 88 of the judgment, the Court emphatically held that a notification under Section 90(1) of the Income-tax Act is an indispensable and mandatory condition for any court, authority or tribunal to give effect to a Double Taxation Avoidance Agreement, or to any protocol or instrument that purports to alter the terms or conditions of such agreement. Put differently, any subsequent treaty-based modification of an existing DTAA can be enforced under municipal law only where a specific Section 90(1) notification has been issued incorporating that modification into Indian law. 42. The Rev....
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....ow constitutes the law of the land by virtue of the judgment of the Hon'ble Supreme Court in Nestle SA, which makes it clear that neither the MLI nor any synthesised text can have domestic legal efficacy unless duly notified under Section 90(1) of the Act. 45. Against this settled backdrop, the approach adopted by the Assessing Officer and the learned DRP in treating the Principal Purpose Test under the MLI as self executing in relation to the India-Ireland DTAA is wholly unsustainable. Not only does it run counter to the Revenue's own description of the MLI, namely, that it "modifies existing treaties" but it is also directly inconsistent with the binding precedent of the Supreme Court. The contradiction is plain: the Revenue recognises that the MLI modifies tax treaties, yet it sidesteps the very legal requirement that Nestle SA describes as an indispensable precondition, namely, a separate Section 90(1) notification incorporating those treaty modifications into Indian law. 46. When the ratio of Nestle SA (supra) is applied to the facts of the present case, the inevitable conclusion is that the MLI cannot be invoked to curtail or otherwise restrict the b....
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....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 on a non-notified synthesised text is misplaced. 51. The Department's suggestion that the MLI, once notified in general terms, becomes immediately self-executing vis-a-vis all covered agreements, would in effect render otiose the careful statutory scheme of Section 90(1). That interpretation would also run counter to the binding pronouncement in Nestle SA, which squarely holds that each modification with the effect of altering existing law must itself be the subject of a distinct notification. 52. We are conscious that the MLI was conceived as a swift and efficient vehicle for implementing the BEPS treaty-related measures across jurisdictions without the need to bilaterally renegotiate each covered agreement. However, efficiency in the multilateral sphere cannot displace the domestic rule of law requirement that any such modification be consciously received into municipal law through the statutorily prescribed process. 53. The principles enunciated by the Ho....
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....Bench to this effect are reproduced here in under:- "77. It is well settled that the object and purpose of a treaty must be ascertained in a holistic and purposive manner, having regard to the intention of the Contracting States. In the present case, a careful reading of Articles 8 and 12 of the India-Ireland DTAA shows that the treaty consciously departs from the OECD and UN Model Conventions in so far as it limits the source country's taxing rights in respect of aircraft-leasing income. This represents a deliberate and considered policy choice of the two sovereign States. We therefore find merit in the assessee's submission that the very object and purpose of the treaty is to exclude aircraft-leasing income from source-based taxation. 78. The Hon'ble Supreme Court in Azadi Bachao Andolan (supra) has unequivocally recognised that States are entitled, for legitimate policy reasons, to contractually restrict their own taxing rights in order to promote trade, attract investment, and foster economic cooperation. Applying that principle to the facts at hand, it becomes clear that the Principal Purpose Test is not intended to negate treaty benefits that are....
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....y, putting the issue of legislative assimilation to rest. v. The order of the Tribunal in the case of SC Lowy P.I. (LUX) S.A.R.L.vs.ACIT (International Taxation) 170 taxmann.com 475, where provisions of MLI i.e. PPT were interpreted in the context of modification of existing DTAA between India-Luxembourg. The ld. Special Counsel focused his submissions on the above aspects. 26. To begin with it would be pertinent to first refer to the relevant provisions of section 90(1) of the Act that mandates for the notification whenever the Central Govt. enter into an agreement with the Government of any country outside India or any amendment/alteration to existing DTAA is made by way of subsequent protocol, agreement, etc. The provisions of section 90(1) of the Act are reproduced herein under: "90(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or (ii) income-tax cha....
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....o in exercise of executive power of the Union. It was urged that without Parliamentary legislation, such treaties are unenforceable, having regard to the express terms of Article 2531-2 which clothe Parliament alone with the power to make laws "notwithstanding" other provisions in that chapter- which delineates and distributes legislative power between the Union and States. Counsel submitted that India follows the "dualist" practise, which means that international treaties and conventions are not, upon their ratification, automatically assimilated into municipal law (i.e. the national legal system) but would require enabling legislation. This is in contrast to those countries which are "monist", wherein the treaty provisions are enforceable like municipal law, and are to be given equal weight by courts. 8. The ASG relied upon the decisions in Gramaphone Co. of India Ltd. v. Birendra Bahadur Pandey 1984 [2] SCR 664 and Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373/263 ITR 706/2003 (Supp 4) SCR 222 to urge that the position in India is entrenched that without enabling legislation, any convention or event flowing from a convention, as in creation of rights and ....
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....nd Parliament, holds the exclusive power to legislate upon such conventions or treaties. (iii) Parliament can refuse to perform or give effect to such treaties. In such event, though such treaties bind the Union, vis a vis the other contracting state(s), leaving the Union in default. (iv) The application of such treaties is binding upon the Union. Yet, they "are not by their own force binding upon Indian nationals". (v) Law making by Parliament in respect of such treaties is required if the treaty or agreement restricts or affects the rights of citizens or others or modifies the law of India. (vi) If citizens' rights or others' rights are not unaffected, or the laws of India are not modified, no legislative measure is necessary to give effect to treaties. (vii) In the event of any ambiguity in the provision or law, which brings into force the treaty or obligation, the court is entitled to look into the international instrument, to clear the ambiguity or seek clarity." The Hon'ble Apex Court, after accepting contentions of the Revenue that issuance of notification u/s 90(1) of the Act is necessary to give effect to any amendmen....
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....ve a legal binding force is issuance of notification u/s. 90(1) of the Act. 32. The contention of the Revenue is that while rendering the judgment in the case of Nestle SA (supra) emphasis has been given on the 'past practices' of issuance of notification for each country to give effect to MFN clause that was introduced by way of protocol. Whereas, in the case of MLI the past practices is only to issue one omnibus notification u/s. 90(1) of the Act and not separate notifications for each country. In support, the Department has referred to MLI with SAARC nations. In so far as MLI in respect of SAARC countries is concerned (available at page no. 1 to 16 of the paper book Vol- II filed by the Department). We find that the said agreement has been signed by all the member countries on the same date accepting all the Terms and Conditions in the said agreement. Thus, there is no concept of a matching principle therein. Further reliance is also placed on MAAC MLI. It is an administrative pact to cooperate and share information and does not amend or override existing bilateral tax treaties. Hence, it does not modify /alter substantive rights and obligations under Treaty. Reference has al....
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....mestic law (a "dualist" system). In the first case, changes to the rights and obligations of taxpayers may flow directly from the ratification of the MLI while, in the second case, such changes to the rights and obligations of taxpayers will generally flow from domestic legislation. 29. The approach to the domestic implementation of the MLI will generally follow the way in which bilateral tax treaties themselves are implemented at the domestic level. In some jurisdictions, the reference to the applicable rule in domestic law will be directly to the bilateral treaty (typically in monist systems) while in other jurisdictions, the reference to the applicable rule in domestic law will be to domestic legislation which transposes the bilateral treaty (typically in dualist systems). Accordingly, when the MLI has modified a tax treaty, the reference to the applicable rule in domestic law may either be to the bilateral treaty itself as modified by the MLI (the same answer as in public international law terms) or it may be to domestic legislation which transposes the modifications made by the MLI to the bilateral treaty (hence a different answer in public international law terms and....
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....the provisions of section 90 of the Act have been explained. The provisions of section 90(1) of the Act have been amended to align DTAA with MLI. That means prior to said amendment there was no substantive provision for assimilating MLI into legislation. As a corollary the notification u/s 90 of the Act is valid only after the section makes provision for the same. Further, it is discernable from the said amendment that MLI has the effect of amending DTAA to implement BEPS measures. Such amendments are not enforceable in absence of separate notification for effectuating amended provisions of the DTAA. 36. The last argument of the ld. Special Counsel for the department is that in the case of SC Lowy P.I. (LUX) S.A.R.L.(supra) provision of MLI i.e. PPT were interpreted in the context of modification of existing DTAA between India and Luxemburg. We find that Revenues reliance on the said case is misplaced. The issue of applicability of MLI was never raised before the Tribunal in the said case. The issue before the Coordinate Bench in the said case was denial of DTAA benefits on wrong assumption of facts. The appellant in the said case never challenged applicability of MLI in the abs....
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....asserted that Article 8(1) of India-Ireland DTAA is not applicable to dry leases. In fact, the provisions are not workable in respect of dry leases. Article 8(1) allocates taxing rights with respect to profits derived from the operation or rental of ships or aircraft in international traffic. 'International Traffic' is defined in Article 3(1)(f) of the Tax Treaty. The definition of "international traffic," seeks to allocate taxing rights between the resident state and the source state, with the source state having exclusive rights to tax where operations/transport are carried out solely within the source state. Such exclusion provided in the definition of "international traffic" makes the definition an integral and inseparable part of Article 8(1). The definition of "international traffic" is workable only in the case of wet leases, i.e., where Irish entity is operating the aircraft itself. In such cases, the income of the Irish entity will be exempt under Article 8(1), unless the income arises solely from operations carried out within India.If the definition is applied to the facts of the given case, it leads to an absurdity, as the exception for domestic operations would apply on....
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....per OECD. The definition of international traffic as per OECD and India-Ireland DTAA are at variance. Therefore, to say the definition of "international traffic" is not workable in the facts of instant case is an incorrect statement. Dehors, the fact of operation of the aircraft by the lessee in international traffic, such usage has nothing to do with the rentals. The rentals have been received by the assessee for leasing the aircrafts. 41.1. The ld. Counsel for the assessee further submitted that in the case of Sunflower Aircraft Leasing Ltd. (supra) in para 38 and 39 of the order has examined the distinction in the language of Article 8 in India-Ireland DTAA vis-avis the OECD Convention and the definition of "international traffic" in India-Ireland DTAA. Further, in para 42 of the order, the Coordinate Bench has held that the definition of "international traffic", if read in the context of Article 8, does not lead to any absurd result but leads to a clear understanding that if aircraft is not used solely within India/Ireland, it constitutes "international traffic". The fact that lessee InterGlobe Aviation Ltd. ("IndiGo") is free to use the aircraft for international operations....
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....lent to inserting conditions in the Treaty, which don't actually exist. This is contrary to the principle contained in the Vienna Convention on the Law of Treaties, 1969, that interpretation must be based on the ordinary meaning of the text in its context and object. This issue is squarely covered by favorable decision of the Hon'ble ITAT Mumbai in the case of Sky High Appeal XVIlI Leasing Company Limited (supra) (Para 42, Pg 151-152 of CLC) wherein it was held that "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." As regards the definition of international traffic, it is submitted that when ead literally, in the context of dry operating leases, no absurdity arises, and it is evident that even dry leasing of aircraft is covered within ambit of Article 8(1) read with Article 3. The language of Article 8(1) and Article 3 of the Treaty consciously depart from the corresponding Articles in the OECD Model Convention. Hence, the Ld. DR's reliance on the OCED Model Convention commentary is misplac....
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....ely 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 the rental and 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 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 is incidental to the operation of ships or aircraft in international traffic....
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.... 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 on both domestic and international sectors, the rental income falls with....
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.... treaty which cannot be done. This is contrary to the principles of Vienna Convention on the laws of treaties. The treaties are to be interpreted in the ordinary meaning of the text in its context and object. The treaty cannot be read in a manner which would result in absurdity. 45. The argument of Special Counsel for the Revenue was that "international traffic "must be read with reference to each voyage/journey and not the aircraft. Before proceedings further, it would be relevant to refer to the provisions of Article 8(1) of India-Ireland DTAA, the same reads as under:- "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. Here it would also be relevant to refer to the definition of 'international traffic' as defined under Article 3(1)(f) of the Treaty: "the term "international traffic" means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship....
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....Hence, the assessee would get the benefit of Article 8. In the result, this issue is decided in favour of the assessee/appellant and against the Department. (iv) Existence of PE in the form of aircraft in India: 48. Shri Sachit Jolly submitted that the issue regarding existing of Permanent Establishment (PE) in India by virtue of aircraft in India has already been considered by the Mumbai Bench of the Tribunal in the case of Sky High Appeal XLIII Leasing Company Ltd. (supra). He placed reliance on the findings of the Tribunal on this issue. 49. Shri Indruj Singh Rai Special Counsel for the Department fairly stated that he has nothing more to add on this issue and supported findings of the AO and the DRP. 50. In so far as the issue relating to existence of PE is concerned, we find that this issue has been dealt in detail by the Coordinate Bench in the case of Sky High Appeal XLIII Leasing Company Ltd. (supra). The Tribunal after placing reliance on the decision rendered in the case of Sunflower Aircraft Leasing Limited (supra) held that the existence of leased asset i.e. aircraft in India does not constitute PE. No substantial argument has been advanced on this issue fro....
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....med that it is the economic reality and not merely the corporate form that governs PE determination. IV. Remuneration Structure as Evidence of Commercial Nexus: The nature of consideration under the SOSA being directly linked to gross operating profits and revenues evinces a deep-rooted commercial nexus with the core operations of the 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 ....
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....onducted through the alleged PE; here, no such conduct of business in India is shown. The aircraft, though valuable business assets, did not serve as a "place" through which the assessee's leasing business was carried on in India. Thus, we reject the premise that continuous physical presence of high value asset in India ipso facto supplies "fixed place" limb. The Hon'ble Supreme Court has emphasised 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 ....
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....nt on bareboat basis/ dry lease would not constitute PE of the Netherlands entity in India since the entire control of the equipment was with the Indian Company. The Hon'ble Madras High Court also pointed out that the earlier decision in Poompuhar Shipping (supra) dealt with the case of wet leasing, i.e. leasing equipment with Master and Crew and therefore not applicable. This aspect is of crucial importance since the 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 explo....