TaxTMI 
TaxTMI 
TaxTMI 
MLI, PPT and Aircraft Leasing: Operating vs. Finance Lease and PE Risk in Aircraft Leasing: Reassessing Source Taxation of Aircraft Rentals under the India-Ireland Treaty
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....ends jurisprudence on (i) characterisation of aircraft leases as operating vs. finance leases, (ii) the existence of a permanent establishment (PE) where aircraft are leased into India on a dry basis, and (iii) the scope of Article 8 of the India-Ireland Double Taxation Avoidance Agreement (DTAA) concerning "operation or rental" of aircraft in international traffic. The Tribunal's ruling thus has far-reaching implications for cross-border leasing structures, interpretation of the MLI, and treaty application u/s 90 of the Act. Key Legal Issues The Tribunal crystallised the determinative issues into four principal questions: * whether Articles 6 and 7 of the MLI (embodying the PPT) could be invoked to deny treaty benefits under the India-Ireland DTAA in the absence of a separate domestic notification; * whether the aircraft leases were to be characterised as operating leases or finance leases; * whether the presence of the leased aircraft in India constituted a fixed place PE of the lessors under Article 5 of the DTAA; and * whether, in any event, Article 8(1) of the DTAA required that profits from rental of aircraft in international traffic be taxed exclusively in Irel....
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....TAA and any duly notified modifications u/s 90(1). In substance, the Tribunal held that permitting the PPT to apply solely on the basis of a general MLI notification would undermine the constitutional architecture and section 90(1) as understood in Nestle SA. Accordingly, Articles 6 and 7 of the MLI could not be invoked to deny DTAA benefits in the absence of a specific notification incorporating those provisions into the India-Ireland DTAA. 2. PPT application on facts (in the alternative) Though the Tribunal had already negatived the PPT on jurisdictional grounds, it proceeded, ex abundanti cautela, to examine whether, assuming arguendo the MLI applied, the Revenue had discharged its burden under the PPT. The lessors relied on extensive factual material to show that Ireland was chosen for bona fide commercial reasons: Ireland's well-known status as the global hub for aircraft leasing; long-standing aviation ecosystem; Irish directors, bankers, and advisors; management by an Irish licensed corporate services provider; registration of aircraft in the lessors' names; and leasing operations spanning multiple jurisdictions (India, China, Korea). The Tribunal also noted that....
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....nducted a detailed contractual and regulatory analysis and found this reasoning untenable. Key clauses of the lease clearly established: * the agreements were expressly described as "dry operating leases"; * ownership of the aircraft vested with the lessors throughout; the lessee was expressly prohibited from holding itself out as owner or having an ownership-equivalent economic interest; * nameplates on the airframes and engines were required to state that the aircraft were owned by the lessor and merely leased to the lessee; * on default, the lessor could terminate and repossess; upon expiry, the lessee was obliged to redeliver the aircraft in specified condition; * sub-leasing was limited and permitted only with the lessor's consent; and * risk allocation for operation, maintenance, and insurance was entirely consistent with standard industry dry leasing practice, focusing operational risk on the lessee but leaving residual ownership risk with the lessor. The Tribunal then aligned these terms with: * statutory definitions of "finance lease" in the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, both of which require that the lessee become owner at t....
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.... under the full control of the Indian operator does not constitute a PE of the foreign owner. It emphasised that conflating the situs of the asset with the locus of business activity would render any cross-border equipment lease into a PE situation, contrary to both treaty text and case law. Accordingly, no fixed place PE existed under Article 5(1) of the DTAA. 5. Article 8(1) - "operation or rental" of aircraft in international traffic Having held that no PE existed, the Tribunal nevertheless examined the lessors' alternative reliance on Article 8(1). Crucially, the India-Ireland DTAA departs from the OECD Model by explicitly covering "operation or rental of ships or aircraft in international traffic"; rental is an independent limb, not merely ancillary to self-operation. The Tribunal held: * the wording of Article 8(1) in this DTAA must be given effect according to its plain meaning; it is impermissible to read back the OECD Model's narrower structure; * the definition of "international traffic" hinges only on whether the aircraft are operated solely between places in the other contracting State; once aircraft form part of a fleet deployed on both domestic and int....
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....ble exclusively in Ireland. The DTAA's deliberate extension to "rental" must be honoured, and the "solely domestic" condition for exclusion is not met. Obiter elements include the Tribunal's broader reflections on the role of TRCs, treaty shopping, and the importance of industry practice (outsourcing to management companies, SPV structures) in assessing PPT and PE questions. The Tribunal followed or relied upon multiple precedents: * Nestle SA - for the mandatory requirement of a section 90(1) notification to give domestic effect to treaty modifications, extended here to the MLI; * Azadi Bachao Andolan, Vodafone, Bid Services - to uphold bona fide use of treaty and holding structures, and the evidentiary role of TRCs; * Formula One, E-Funds, Hyatt International - to articulate the "disposal test" and functional analysis for PEs; * Madras High Court in Van Oord ACZ - to distinguish dry leasing from wet leasing and deny PE where control over the asset vests with the Indian operator; * Special Bench in InterGlobe Aviation Ltd. and Delhi ITAT in Celestial Aviation - to characterise similar IndiGo leases as operating leases and to reject their treatment as interest u....