TaxTMI 
TaxTMI 
TaxTMI 
Rental of Aircraft in International Traffic: Dry Leasing and Permanent Establishment: Article 8(1) of the India-Ireland Tax Treaty
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....ons. First, it clarifies the "disposal test" for fixed place PE in the context of high-value movable assets such as aircraft deployed in India under dry leases. Second, it reconciles and applies domestic and treaty jurisprudence, including leading Supreme Court precedents (Formula One, e-Funds, Hyatt) and the Madras High Court's line of authority in Poompuhar Shipping and Van Oord. Third, it interprets Article 8(1) of the India-Ireland DTAA, which contains a broader "operation or rental" formulation than the OECD Model, confirming treaty protection for passive aircraft leasing income when the aircraft form part of international traffic. Key Legal Issues 1. Existence of a Fixed Place Permanent Establishment The primary issue was whether the continuous physical presence of the leased aircraft in India, combined with the lessor's ownership and contractual rights (inspection and repossession), amounted to a "fixed place of business through which the business of an enterprise is wholly or partly carried on" under Article 5(1) of the India-Ireland DTAA. This is essentially an issue of treaty interpretation and application of the "disposal test" developed in case law. 2. Attri....
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....l, which define dry lease as an arrangement where operational control rests with the lessee and operations are under the lessee's operator certificate. * The lessor's rights were limited to standard protective covenants: periodic inspections, monitoring of maintenance standards and repossession on default. On these facts, it was argued that the aircraft were at the disposal of the Indian airline, not the lessor, and that the lessor's leasing business (contracting, financing, risk management) was conducted entirely from Ireland. The physical presence of the aircraft in India was a consequence of the lessee's commercial operations, not the lessor's business activities. (c) Revenue's Position and DRP's Reasoning The Revenue, and earlier the Dispute Resolution Panel (DRP), advanced a theory that the aircraft themselves constituted the "place of business" in India. They pointed to: * continuous physical presence of the aircraft in India; * ownership and inspection/repossession rights as evidence of "ultimate control"; and * the fact that lease income arose from commercial exploitation of the aircraft in India. The DRP, drawing on Poompuhar Shippin....
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....d distinguished its earlier decision in Poompuhar Shipping (time-charter with crew-effectively a wet lease). By analogy, the Tribunal found that the present dry leases closely matched Van Oord, not Poompuhar, and that the DRP's reliance on Poompuhar without appreciating this distinction was misplaced. Consistently with other Tribunal decisions (e.g. Nederlandsche Overzee Baggermaatschappij, Dharti Dredging), it concluded that dry leasing per se does not give rise to a fixed place PE where operational control lies with the lessee. The Tribunal therefore held that no PE existed under Article 5 of the India-Ireland DTAA, making the PE-based attribution question academic in outcome, though still examined conceptually. 2. Profit Attribution to an Alleged PE Assuming arguendo the existence of a PE, the Tribunal considered the DRP's method of attributing 25% of gross lease rentals to India. Article 7(2) of the DTAA mandates that profits attributable to a PE must reflect what an independent enterprise, performing similar functions and assuming similar risks, would earn. This incorporates the arm's length principle and requires a FAR analysis. The assessee highlighted that:....
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....e lessee as a "domestic operator" was factually inaccurate and contrary to publicly available regulatory data; and * fleet-based operations make artificial any attempt to segregate aircraft by predominant route type. (c) Rejection of OECD Commentary-based Restrictions The DRP had relied heavily on OECD Commentary to argue that Article 8 should not cover "passive" leasing unaccompanied by crew or operational involvement, especially where the lessor itself does not operate in international traffic. The Tribunal held that such an approach was untenable in light of the express wording of the India-Ireland DTAA: * where the treaty text consciously goes beyond the OECD Model, commentary on the latter cannot be used to narrow the former; * to insist that the lessor itself be an operator in international traffic, or that leasing be merely ancillary to such operations, would be to add conditions not present in the treaty; and * similarly, imposing a "predominant international use" threshold has no textual foundation. Accordingly, once the aircraft formed part of a fleet used on at least some international routes, the rental income qualified as "profits ... from the ... rental of ....
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....dispose of the appeal, the Tribunal consciously decided the Article 8(1) issue in light of detailed DRP findings and arguments from both sides. 3. Ancillary Holdings * The DRP's characterisation of the leases as finance leases and of income as "interest" was implicitly rejected; the transactions were confirmed as operating leases, and any attempt by the Assessing Officer to treat the income as interest post-DRP directions was held ultra vires. * Levy of interest u/s 234B and initiation of penalty proceedings were held to fall with the deletion of the substantive additions-these are consequential holdings. Conclusion The Tribunal's decision provides a robust and principled exposition of PE and Article 8 allocation rules in the context of cross-border aircraft leasing. On PE, it fortifies the disposal test as the central criterion, resists attempts to conflate asset location with business presence, and aligns Indian jurisprudence with international practice on dry/bareboat charters. On Article 8, it recognises that India-Ireland treaty negotiators deliberately extended exclusive residence-State taxation to rental of ships and aircraft used in international traffic, inc....