AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (11) TMI 1491
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....sees in their respective grounds of appeal. Therefore, all these appeals are taken up together for adjudication and are decided by this common order. 2. Shri Percy Pardiwala, Sr. Advocate appearing on behalf of the appellants/assessees at the outset submits that the primary issue in present set of appeals is determination of nature of lease transaction. According to the assessees, Lease Agreement between the assessees as lessors and the Airline Companies as lessee is of Operating Lease. Whereas, the Assessing Officer (AO) has re-characterized the said lease agreement as Financial Lease. The ld. Counsel submitted that the Tribunal in the case of Celestial Aviation Trading 15 Ltd. vs. ACIT reported as 176 taxmann.com 902 (Delhi-Trib) has examined the issue in detail and decided the issue in favour of the assessee holding the lease agreements are in the nature of operating lease. The lease agreements in the present set of appeals are identical, the findings of the AO holding the lease agreements as financial lease are similar to the one as were decided by the Tribunal in the case of Celestial Aviation Trading 15 Ltd. (supra). 2.1. The ld. Counsel submits that though the assessee....
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....inal scheduled expiry date. Clause 3 of ASLA specifically states that the owner of the aircraft shall be the 'Lessor'. In the entire ASLA there is no covenant which refers to the condition that after the end of duration of lease term, the ownership 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....
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....rship; Property Interests; Related Matters (a) Lessee will: (i) fix and maintain Nameplates in a prominent position in the cockpit or cabin of the Aircraft and on each Engine stating "This Aircraft/Engine is owned by (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 ....
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....relevant extract from the said clause is reproduced herein under:- 10. INDEMNITY 10.1 General (a) Lessee agrees to assume liability for and indemnifies 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. ....
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.... "At the end of the lease period, lessee becomes the owner of the leased asset." 16. In the instant case although the AO and the DRP have characterized 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 ....
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....no. 210 to 275 of the paper book) and for MSN 9561 (at pages 276 to 341 of the paper book). Substantial economic life of the aircraft is still left after the end 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? ....
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....362 has differentiated and highlighted characteristics of both Operating Lease and Finance Lease. The Learned Special Counsel for the Revenue has not been able to 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 und....
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....rder of Coordinate Bench, we hold that the lease agreement entered into between the assessees and Aviation Companies is in the nature of operating lease. Thus, the assessee succeeds on ground no.5 to 10 of appeal. 6. The assessee in ground no. 13 of appeal has assailed denial of benefit of Article 8 of India-Ireland Tax Treaty. In similar set of facts in the case of Kosi Aviation Leasing ltd. vs. ACIT in ITA No. 994/Del/2025 decided on 30.09.2025, the Tribunal has examined this issue and held as under:- "43. We have heard the submissions made by rival sides on the issue of applicability of Article 8. The issue has already been considered by the Coordinate Bench of the Tribunal in the case of Sky High Appeal XLIII Leasing Company Ltd. (supra). The Coordinate Bench, while dealing with the issue of applicability of Article 8 has in turn followed the decision in the case Sunflower Aircraft Leasing Limited (surpa). In the said case, the Tribunal inter-alia took note of Article 8 as mentioned in OECD Model Convention and as it exist in India-Ireland DTAA and held as under:- "38. Having so concluded on the primary issue, we turn to the assessee's alternative plea that....
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....e 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-incidental use on an international sector suffices to displace the "solely" domestic exclusion. Counsel relied on decisions such as ABN Amro Bank NV and GE Capital Aviation Services, where similar leasing clauses were given their plain, broad meaning. 41. The Revenue, however, has urged that Article 8 was intended to protect the core transport operations of an airline and that the "rental" limb is to be read as ancillary to such operations. Since the assessee is a pure lessor with no airline operations of its own, and since, according to the Revenue, the leased aircraft were predominantly used on domestic Indian routes, it was contended that the income was n....
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....1) would nonetheless require the profits from such rental to be taxed only in the State of residence, Ireland. In light of our earlier conclusion that no PE exists, the operation of Article 8(1) fortifies the non-taxability of the lease rentals in India. The LD.DRP's contrary view is founded on an impermissible narrowing of treaty language, and cannot be sustained." In the case of Sky High Appeal XLIII Leasing Company Ltd.(supra) the Coordinate Bench of the Tribunal adopted the above findings rendered in the case of Sunflower Aircraft Leasing Limited (surpa) and concluded that the assessee is entitled to avail benefit of Article 8 of the Treaty. 44. The Special Counsel for the Department has raised some additional arguments on issues with regard to applicability of Article 8. We find that in the case of Sunflower Aircraft Leasing Limited (Supra), the Tribunal has already examined Article 8 in OECD Convention viz a viz India-Ireland DTAA. The provisions of Article 8 as given in India-Ireland DTAA are much broader than the OECD Convention. If the submissions of the ld. Special Counsel for the Department are to be accepted then it would mean that the lessor of the ai....
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....at each aircraft has to be seen whether it has flown outside and has operated in international traffic. The assessee earns rentals from lease of aircraft. The lessor has no control on the schedule of the aircrafts or the destination of the aircraft where they are operated. The lessor/assessee does not lay down any restrictions in the lease agreement as to whether the aircraft shall operate in domestic territory or operate internationally. It is the discretion of the lessee to schedule the operation of the aircraft. It is no denying that lessee/Indigo is operating internationally. Therefore, to presume that the aircraft are not operated internationally is superfluous. Nevertheless, the assesses being the lessor of the aircraft would continue to receive rentals even if the aircraft is not put to operation by the lessee. The assessee has filed a certificate of deployment of aircraft issued by the lessee which confirms the fact that leased aircraft has not been deployed anywhere in Ireland during the relevant period and is operated in international traffic. Thus, the condition of Article 8(1) is satisfied. 47. For the reasons mentioned above and in light of order in the case o....