TaxTMI 
TaxTMI 
2025 (10) TMI 1217
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....s and are disposed of with this common order. The issues contended through various grounds by all the assessee's are tabulated below - 2. For the purpose of adjudication we will consider ITA No. 1546/Mum/2025 as a lead case. The assessee is a company is part of the ICBC Leasing group and is the Special Purpose Vehicle (SPV) / Subsidiary of ICBCIL Aviation Company Limited. The assessee is engaged in Aircraft leasing activity based out of Ireland and is a tax resident of Ireland. During the year under consideration, the assessee has leased Aircraft to Indian Airlines on dry-lease basis and has earned rental income from the same. The assessee filed the return of income for AY 2022-23 on 07.11.2022 declaring Nil income on the ground that as per Article-8 of DTAA between India and Ireland, the lease rental received by the assessee are not taxable in India. The Assessing Officer (AO) however did not accept the submissions of the assessee and held that the lease rentals are taxable in India for the reason that the assessee failed to prove the Principal Purpose Test (PPT) as per Article-6 & 7 of Multilateral Convention to implement tax treaty related measures to prevent base erosion....
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....• Treatment of the lease in the lessors books of account as operating lease is not conclusive for examining the nature for tax purposes. • Absence of residual risk is indicator of a finance lease 4. The DRP also held the lease payment to be taxable in India for the reason that the Aircraft leased by the assessee that is operated in India is a Permanent Establishment (PE) of the assessee. The DRP in this regard held that the lessors i.e. the assessee satisfied all the relevant tests such as ownership test, location test, permanence test, situs test, disposal test, control test and test of quite enjoyment which indicate presence of PE in India. In summary the DRP rejected the objections raised by the assessee for the reason that (i) the assessee has failed the PPT test (ii) the leasing of aircraft is a finance lease and (iii) the aircraft that is leased is the PE of the assessee in India. The assessee is in appeal before the Tribunal against the final order of assessment passed by the AO pursuant to the directions of the DRP. 5. At the outset the ld. AR submitted that the identical issue has been considered by the Co-ordinate Bench in the case of Sky High App....
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....aid understanding, and did not constitute a legal instrument with binding force. • When the ratio laid down by Hon'ble Supreme Court is applied to the present issue then Articles 6 and 7 of the MLI could not be enforced against the assessee in absence of a separate Section 90(1) notification. • The approach of the AO and DRP in treating the PPT as self-executing was unsustainable, since the law required conscious adoption through notification. • The process of notification is not a mere procedural formality but a substantive safeguard to ensure that taxpayers were not subjected to unincorporated treaty obligations, especially where different countries had taken varying positions and reservations under the MLI. • The efficiency at the international level could not override the domestic legal requirement of notification and therefore the revenue's reliance on the MLI to deny treaty benefits is not sustainable. With respect to applicability of PPT on merits of the case the Tribunal held that - • The assessee had a valid Tax Residency Certificate (TRC) issued by Irish authorities. The Hon'ble Supreme Court ruli....
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.... both on legal and factual grounds. On treatment of the assessee's lease transaction as a Finance Lease • The various clauses in the agreement between the assessee and IndiGo clearly state IndiGo is not the owner and that the arrangement is a dry operating lease. • The lessor retains ownership, has repossession rights, and the lessee must return the aircraft at lease end. • IndiGo and the assessee deal at arm's length, and in absence of proof of a sham, the contractual terms cannot be held as non-genuine. • The leases meet all features of operating leases under statutory definitions, judicial precedents, and regulatory framework . • The coordinate bench of Delhi Tribunal (ITA Nos.749 & 750/Del/2016 dated 18.11.2016) and the Hon'ble Delhi High Court (ITA Nos. 914 and 916 of 2017 dated 31.10.2017) in the case of IndiGo i.e. Lessee has held such aircraft arrangements as operating leases and the judicial discipline warrants the applicability of the said ratio to assessee's case who is the other party in the identical transaction more so when the SLP against the order of Hon'ble High Court is rejected by....
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....tests which is factually not correct since the Aircraft Lease Agreement (ALA), gives IndiGo quiet possession, maintenance obligations, licensing responsibilities, and exclusive operational control. • The assessee retains only limited inspection and repossession rights, which do not amount to operational control. • As per the DGCA Rules and Manuals, a dry lease vests operational control in the lessee, not the lessor. • Though the DRP accepts IndiGo has operational control, the inferance that the aircraft are still under the assessee's control is not correct. • The aircrafts are already under IndiGo's disposal when they enter India, since delivery occur outside India. • In the recent decision of the Hon'ble Supreme Court in the case of Hyatt International Southwest Asia Ltd. v. Addl. Director of Income Tax in Civil Appeal No. 9766 of 2015 (SC) laid down the principles that • Disposal Test for PE - a fixed place of business in India that is at its disposal, and through which its business is wholly or partly carried on • Tripartite Attributes of a PE - Stability, Productivity, and Dependence ....
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.... (iv) The aircraft is owned by the assessee on which depreciation is claimed (page 186 of paper book) and the assessee bears the economic risk and rewards associated with the aircraft (v) The economic life of the aircraft is 25 years which is identical to aircraft owned by the assessees' in the above case (vi) As per DGCA records the assessee is the owner of the aircraft and Air India to whom the aircraft is leased is the operator (vii) The clauses in the Lease Agreement states the assessee as the owner and the does not provide an option to the leassee to purchase the asset at the end of the lease period (viii) The various clauses as listed below demonstrates the lease agreement is an operating lease and not finance lease - • • Lessor continues to be the owner of the aircraft (FPB Pg. No. 133-144) • Clause 14.1 14.2: Registration and nameplate of the lessor on the aircraft (FPB Pg. No. 234-235) • Clause 15.1: Ownership of Lessor during lease period (FPB Pg. No. 236) • Clause 16.2: repossession (FPB Pg. No. 237) • Clause 12.1: Restricted Covenants for use of a....
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....this Article. 59. As can be observed from the above, Article 11(4) of India-Ireland DTAA expressly excludes penalty charges for late payment from the definition of interest. In the instant case, the default interest is in the nature of penalty to penalize Air India for delay/ as compensation for the loss suffered by the assessee due to delay by the Lessee in meeting its obligation of making the payment of lease rentals on time. The same is calculated on pro-rata basis the number of days delay in meeting the obligation. Accordingly, the same does not qualify as interest under Article 11 (4) of India-Ireland DTAA and is not taxable under that Article. 60. Without prejudice, even if such interest is treated as lease rentals, such amount should not be taxable as the same is exempt from tax in India as per beneficial provision of Article 12 read with Article 7 of India-Ireland tax treaty for detailed reasons as stated above. 61. Though the Appellant had offered the said amount to tax while filing the return of income (refer FPB No. 106), it was contended before the DRP that the same is not taxable for the reasons stated above. The DRP has not considered the sa....
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.... assessee is not having a PE in India. Accordingly we are of the view that the impugned receipts cannot be taxed under Article 7. Now coming to taxability under Article 11, sub-clause (4) of Article 11 specifically excludes penalty charges for late payment from the ambit of interest. Therefore even if the late payment fee is considered as interest under Article 11 the same in our view cannot be taxed under the said Article due to the provisions contained in sub-clause (4). It is nobody's case that the impugned income is chargeable under Article 12. Now coming to Article 8, on perusal sub-clause (3) of the said article we notice that it talks about interest income as under - 3. For the purposes of this Article, interest on funds connected directly with the operation of ships or aircraft in international traffic shall be regarded as profits derived from the operation of such ships or aircraft; and the provisions of Article 11 shall not apply in relation to such interest, provided that such funds are incidental to that operation. 13. According to OECD (2019), Model Tax Convention on Income and on Capital 2017 the above sub-clause would apply to interest income generate....