TaxTMI 
TaxTMI 
2026 (7) TMI 1873
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....s Deputy Commissioner of Income Tax (Circle International Taxation) 3(3)(2), Mumbai And VS MSN 36118 CAV Designated Activity Company Versus Assistant Commissioner of Income Tax Circle International Taxation 4(3)(1), Mumbai HON'BLE SAKTIJIT DEY, VICE PRESIDENT AND HON'BLE PRABHASH SHANKAR, ACCOUNTANT MEMBER For the Assessee : Shri Sachit Jolly, Sr. Adv. A/w Shri Hardeep Chawla, Ms. Sherry Goyal-Adv., Shri Ravi Sharma (Virtually Present), Shri Madhur Agarwal/Fenil Bhatt, Shri Sriram Seshadri (Virtually Present)/Ms. Amulya K. (Vir. Present)/Shri Mehul Jain For the Revenue : Ms. Shilpa Goel, Special Counsel for Revenue (Virtually Present) ORDER PER SAKTIJIT DEY, VP: Captioned Appeals of different assessee's are against final assessment orders passed in pursuance to the directions of learned Dispute Resolution Panel ('DRP') pertaining to Assessment Year (AY) 2022-23. Of course, there are three stay applications arising out of some of the appeals. Since, the appeals involve common issues, they have been clubbed together and disposed of in a consolidated order, for the sake of convenience. ITA No. 1308/Mum/2025 (SKY HIGH XXXIV Leasing Company Ltd.) (S.A. No. 46/Mum....
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....on of income from shipping and air transport in the country of residence, the assessee filed its return of income in India offering NIL income. The assessee's case was selected for scrutiny. In course of assessment proceedings, the Assessing Officer called upon the assessee to explain as to why the lease rentals received from leasing of aircraft should not be treated as equipment royalty under Article 12(3)(a) of the Treaty as well as under section 9(1)(vi) of the Income-tax Act, 1961 (in short, "the Act"). The Assessing Officer further called upon the assessee to explain why the lease arrangement between the assessee and M/s InterGlobe Aviation Ltd. should not be treated as finance lease and the lease rental should not be treated as interest income in terms with Article 11 of the Treaty. Proceeding further, the Assessing Officer observed that the assessee being part of a structured arrangement lacking commercial and economic substance, having been setup in Ireland only for the purpose of deriving treaty benefits, the India-Ireland DTAA being a Covered Tax Agreement (CTA) under multilateral convention to implement tax treaty related method to prevent base erosion and profit shiftin....
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.... India-Ireland treaty, income from leasing of aircrafts is taxable only in the country of residence. He submitted, though, the lease arrangement between the assessee and the Indian entity has all the characteristics of operating lease, the Departmental Authorities have erroneously treated it as finance lease. He submitted, the issue is otherwise fully covered in favour of the assessee by two decisions of the Coordinate Bench, wherein, a comprehensive view has been taken on all aspects of the issue, dealing with each and every reasoning of the Departmental Authorities in taxing the lease rental income in India. In this context, he copiously took us through the observations of the coordinate Bench in order dated 13.08.2025 passed in ITA No. 1122/Mum/2025 and others in case of Sky High Appeal XLIII Leasing Company Ltd. and others vs. ACIT. He also relied upon another decision of the coordinate Bench in case of Kosi Aviation Leasing Ltd. vs. ACIT and others, ITA No. 994/Del/2025 and others disposed of vide order dated 30.09.2025. Thus, while summing up, he submitted, the observations of the coordinate Benches deserve to be followed and additions made should be deleted. 7. In reply, ....
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....ut at the outset. The DTAA between India-Ireland was notified in the official gazette on 11th January 2002; The MLI on the other hand was notified on 9th August 2019. Importantly, the India-Ireland DTAA has been designated as a Covered Tax Agreement for the purpose of MLI. Ireland for its part, ratified the MLI with effect from 1st May 2019. The OECD characterizes the BEPS MLI as a pathbreaking multilateral instrument which enables sovereign Governments to incorporate agreed minimum standards to counter treaty abuse and to strengthen dispute resolution mechanism while retaining sufficient flexibility to preserve specific tax treaty policy objectives. The MLI's genesis lay in the desire to overcome the protracted nature of bilateral treaty renegotiations. For a country like India, with over ninety DTAAs, and for treaty partners with similarly extensive networks, individual renegotiation would have been a herculean task. The operational mechanics of the MLI is structured in a manner that promotes efficiency and consensus. Each member state (e.g. India) is required to deposit a signed instrument with the OECD specifying treaties it designates as covered tax agreements, together with t....
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....n integral part of the Convention. ‖ xxx "7. In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later. Relevant extract from the India-Netherlands DTAA: "PROTOCOL At the moment of signing the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, this day concluded between the Kingdom o....
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....lowing from a convention, as in creation of rights and liabilities of third parties to conventions or treaties do not operate on their own and needs an intervening action by the Union giving effect to such obligation". 37. The Hon'ble Supreme Court of India in the case of Nestle (supra), accepting the submission of the Revenue and repelling the submission of the taxpayers, held that a separate notification to effectuate the impact of a subsequent DTAA into an earlier DTAA must be issued. The notification of the subsequent DTAA does not ipso facto and automatically lead to amendment of the earlier DTAA. The following relevant findings of the Supreme Court are reproduced hereunder: "44. The holding in the decisions discussed above may thus be summarized: (i) The terms of a treaty ratified by the Union do not ipso facto acquire enforceability; and others (ii) The Union has exclusive executive power to enter into international treaties and conventions under Article 73 [read with corresponding Entries - Nos. 10, 13 and 14 of List I of the VII the Schedule to the Constitution of India] and Parliament, holds the exclusive power to legislate upon such co....
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....e coverage and definition of certain terms (FTS, permanent establishment, etc.) might be dissimilar. The revenue's argument that grant of automatic benefits based on the other country's entry into OECD, as unfeasible, has merit. XXX 72. In the opinion of this court, the status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates. In each of the said three countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/procedure, the treaty is assimilated into the body of domestic law, enforceable in courts. 44 Article 89 of the Federal Constitution of the Swiss Federation, available at: (accessed on 11.10.2023). "86......In sum, whilst considering treaty interpretation, it is vital to take into account practice of the parties. There is no dispute that treaties constitute binding obligations upon their signatories. Yet, like all compacts, how the parties to any specific instrument view t....
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....oidance Agreement, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law. b) The fact that a stipulation in a Double Taxation Avoidance Agreement or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organisation such as Organisation for Economic Cooperation and Development), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the Double Taxation Avoidance Agreement of the first nation, which entered into Double Taxation Avoidance Agreement with India. In such event, the terms of the earlier Double Taxation Avoidance Agreement require to be amended through a separate notification under section 90." 38. Thus, the Hon'ble Supreme Court in Nestlé 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 l....
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....matically by reason of external developments such as OECD membership or subsequent bilateral arrangements, and that only a deliberate, notified act of incorporation can elevate such benefits into enforceable domestic law. 40. In our considered view, the factual matrix of the present case bears a close parallel to that examined by the Hon'ble Supreme Court in Nestlé SA (supra). In that decision, as in the matter before us, the original bilateral tax treaty in this case the India-Ireland DTAA stood duly notified. Equally, the subsequent multilateral instrument (MLI) had also been formally notified. The pivotal question, however, was not the mere existence of notifications in respect of both instruments, 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 rati....
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....hes to designate as "covered agreements" along with its specific positions and reservations. The effectiveness of those positions, however, remains contingent upon the principle of reciprocity and, most importantly, upon the manner in which each State gives effect to such positions under its own domestic law. It is, therefore, not enough that India has merely notified the MLI or identified the India-Ireland DTAA as a covered tax agreement. Unless the changes contemplated in the MLI are expressly incorporated into Indian law through the statutory mechanism, namely, a specific notification under Section 90(1) those changes cannot operate to alter the manner in which the domestic authorities apply the DTAA. That position now constitutes the law of the land by virtue of the judgment of the Hon'ble Supreme Court in Nestlé 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-I....
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.... All these clauses confirm that ownership stays with the assessee throughout. 88. It is undisputed that the assessee and IndiGo are unrelated parties dealing at arm's length. Unless there is clear evidence of a sham, courts must go by the contract as agreed. The Hon'ble Supreme Court in Vodafone International Holdings BV v. Union of India has held that form and structure of a genuine transaction should be respected. Applying this principle: • Operational risks with the lessee do not amount to ownership risks. Examples during COVID-19 and the Russia-Ukraine conflict show the lessor retaining ownership risks. • Clause 21.1 allows termination on default, consistent with an operating lease. • The right to sub-lease only with the lessors consent shows that ownership is not transferred. • Irish depreciation rules are irrelevant to the legal nature of the lease in India. • The Special Bench decision in InterGlobe Aviation was not a casual observation but a clear finding. 89. Taking all these factors together the contract terms, DGCA's guidelines, RBI's distinction between operating and finance leases, statu....
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....tax purposes. This does not mean that the aircraft's economic life ends in 8 years or that ownership changes. Depreciation rules are applicable only to the owner; they cannot be used to determine whether a lease is a finance lease in the Indian tax context. Fifth, the ld. DRP's assumption that the economic life of an aircraft is 6-8 years or 60,000 flying hours is inconsistent with the DGCA Circular dated 29.07.1993, which prescribes 20 years or 60,000 pressurisation/landing cycles as the benchmark. Flying hours and pressurisation cycles are not interchangeable measures, and the ld. DRP's approach has no technical basis. Last, the ld. DRP's dismissal of the Special Bench ruling in InterGlobe Aviation Ltd. as "casual observations" is unfounded. The Special Bench made a considered finding on this very point after analysing identical agreements, and its conclusion that such arrangements constitute operating leases was part of its adjudication. 92. We therefore hold that the ld. DRP's classification of the lease as a finance lease is contrary to the contractual terms, regulatory framework, statutory definitions, and judicial precedents. The lease in question ....
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....he appeal filed by the Revenue against the above-mentioned order of the Hon'ble Tribunal and the SLP filed by the Revenue challenging the order of the Hon'ble High Court was dismissed by the Hon'ble Supreme Court vide order dated 10/09/2018 passed in SLP (C) Diary No. 29936/2018. 96. Even in the proceedings of IndiGo for AY 2012-13, the AO himself noted in order dated 25/12/2015 that InterGlobe is not the owner of the aircraft. The relevant portion of the order is reproduced hereunder for ready reference: "In the instant case, the assessee has not purchased the aircraft but has hired it on lease from several concerns like Aether, Celestial Aviation Trading 9 Ltd. etc. All these parties are lessors and are based in Ireland. The assessee company has been paying lease rent to these parties as per the agreement executed between the company (lessee) and the parties (lessors). The depreciation on these aircrafts where, the engines supplied by IAE are fitted, is claimed by the lessors. The assessee has not claimed depreciation on these aircrafts where the engines are fitted because it is not the owner of the aircrafts..... 97. Further, the CIT (A) in case of....
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....he purchase order was assigned to the lessor at the purchase price mentioned in the agreement, the credits received become taxable as Capital Gains as cost of acquisition of purchase right gets reduced by the amount of credits. 98. Although in the assessment proceedings for AY 2012-13, the AO accepted that the leasing arrangement is in the nature of operating lease, an argument was made by the Revenue before the Special Bench of the Tribunal that the lease arrangements are actually in the nature of finance lease arrangements. 99. However, the Special Bench has rejected that specific submission of the Revenue on the ground that the agreements do not answer the description of finance lease arrangements. The relevant portion of the decision in extracted hereunder for reference: "1.1 Facts of the case, in brief, are that the assessee is a Company engaged in the business of operating low cost Airlines in India under the Name and Brand "IndiGo". It filed its return of income on 21.09.2012 declaring loss of Rs. 170.30 crores. During the course of assessment proceedings, it was observed that M/s. Inter Globe Aviation Ltd., (Assessee) had entered into a Purchase A....
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....hands of assessee and made the addition of the same by observing as under.... Xxx 2. Therefore, the questions that have to be adjudicated by the Special Bench may be summarised as under:(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 gains"? (3) Whether the Ld. CIT(A) is right in making disallowance of Rs. 268,91,48,934/- out of lease rental payments under section 37(1) of the I.T. Act, 1961? (4) Whether payment of Supplementary Lease Rent of Rs. 328,09,64,412 I- is an allowable business expenditure and TDS is not deductible thereon ? Xxx 15.5. The Learned Special Counsel for the Revenue submitted that the 'Credit' is a pure accounting term signifying the amount receivable ~rom another entity in future. The term by itself is not indicative of the nature of receipt. This can assume the character of a capital receipt only, if it ca....
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....(a)(i) as held by the A.O. The objection of the assessee during the course of hearing that Article 11 having not been invoked by the A.O. or Ld. CIT(A), it was not open for the Revenue to urge the application of this Article. However, the applicability of section 195 read with section 40 (a)(i) of the I. T. Act, 1961 is in dispute and the issue before the Tribunal is - whether any amount of tax was deductible under section 195 and whether any disallowance under section 40(a)(i) can be made or not? Xxx 31.4 It is relevant to note under this agreement that there is no consideration flowing form the lessor to the assessee for the assignment of right to acquire the aircraft from Airbus. Post above assignment, the assessee has acquired the aircraft on lease from the lessors. The parties have filed before us copies of lease (i) agreement dated 15.12.2016 with M/s MeR. Aviation Limited (ii) agreement dated 14.06.2007 with M/s Genesis Acquisition Limited (paper book pages 481 to 589) (iii) agreement dated 04.07.2007 with Lara Leasing Ltd. (Paper book pages 590 to 600). It is the submission of the learned senior counsel for the assessee that all these agreements are in the....
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....isions of DTAA shall apply to the extent they are beneficial. Under the DTAA the foremost consideration is whether the non-resident lessor has a permanent establishment (PE) in India as per Article 5 of the relevant. According to him, mere leasing of an aircraft which is located in India ought not to result in an existence of PE and there is also no such allegation made by the lower authorities in the present case. It is his submission that the definition of royalty under the Income-tax Act and Tax Treaty includes a consideration for use and right to use any commercial, scientific and industrial equipment and aircraft do arguably fall within this category of equipment and therefore the corresponding lease rentals may be characterized as royalty. However, certain tax treaties which India has entered into notably with Ireland it has explicitly excluded aircraft from the scope of Royalty. He drew our attention to the relevant provision of DTAA between India and Ireland (Article 12) which are as under:- "1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other State. 2. ....
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....ncurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention. 42.2 In Para-41 above we have examined the nature of Supplementary Rent and it is held that payment of Supplementary Rent is nothing different than the character of basic rent. We find that Supplementary Rent is not a payment made for use of spares, faciliti....
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....charges would fall within the definition of 'interest' and would be chargeable to tax in India under Article 11 of Indo-Irish DTAA. Hence, the tax was liable. to be deducted under Section 195. The failure to deduct tax has rightly invited the consequence under Section 40(a)(i) as held by the AO. The objection of the Appellant during the course of hearing that Article 11 having not been invoked by the AO or CIT(A), it was not open for the Revenue to urge the application of this Article. It is submitted that the applicability of Section 195 read with Section 40(a)(i) is in dispute and the issue before the Hon'ble Bench is whether any amount of tax was deductible under Section 195 and whether any disallowance under section 40(a)(i) can be made or not. The broad question is whether the income of the Lessors from lease rentals is chargeable to tax in India and whether any tax was deductible which has not been so deducted. Addressing this vital question, whether income is chargeable under one Article and not chargeable under the other, cannot be objected to, for the reason that the moot question leading to the disallowance of expense remains the applicability of Sect....
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....of these agreements he has been able to demonstrate that the nature of lease is financial lease and not operating lease. We have already held above in the preceding paragraph that the nature of lease in the year under consideration is operating lease. Moreover, both the lower authorities have also accepted this fact. We are, therefore, not convinced by the arguments of the ld. Special Counsel for the Revenue that the present leases are financial merely because lease rent is determinable using LIBOR rate or that delivery of aircraft is taken by the assessee from Air Bus. We find that in the present case the aircrafts were leased for a period of six years. Therefore, the lease rent paid cannot be characterised as "interest." We, therefore, find no merit in the above submissions raised by the Revenue." 100. Further, recently, the coordinate bench of the Delhi Tribunal, in the case of Celestial Aviation Trading 15 Ltd. v. Assistant Commissioner of Income Tax, International Taxation, Circle 1(2)(1), New Delhi [ITA No. 1478/DEL/2025, A.Y. 2022-23], in a similar batch of matters involving Irish aircraft lessors leasing aircraft to IndiGo, considered the issue of whether such leas....
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....nt is the standard agreement which would be applicable to all the aircrafts taken on lease by Indigo. A perusal of ASLA would show that the assessee is the Lessor and Indigo is the Lessee. The duration of agreement is for a period of 120 months extendable at the option of Lessee to be conveyed in writing to the Lessor before the expiry of 18 months prior to the original 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 Cl....
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....llowing of this clause 8.4(a)." Clause 8.4 of the CTA restricts the lessee to sub-lease, wet lease or otherwise give possession of aircraft to any person except under certain conditions with prior consent of lessor. (iii) Clause 8.6 of CTA explains Ownership; Property Interest; Related matters. The relevant extract of the same is reproduced as under: "8.6 Ownership; 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 [insert 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....
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....tachment of the airframe to the engine. (vi) The Clause 9 of the CTA lays down the condition and responsibility on lessee to get the aircraft insured. A perusal of Clause 9.1 reveals that it is the responsibility of lessee to maintain the insurance in full force during the term of lease only. After the expiry of lease, the lessee is not responsible for the insurance of the aircraft. (vii) Clause 10 of CTA binds the lessee to indemnify the lessor. The 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, subleasi....
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....f tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be" From the aforesaid definitions a subtle trait of financial lease can be identified i.e. "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 ....
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....ord and the DGCA Circular. The DGCA vide its communiqué dated 29.07.1996 (at pages 231 to 233 of the paper book) has prescribed economic life of an aircraft as 20 years or 60,000 landings/pressurization cycles. In the instant case the lease agreement has been entered between the parties for a period of 120 months i.e. for 10 years, in other cases the lease period is for lesser period i.e. 72 months as is in the case of MSN 9382 (at page 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 recharacterize 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 ....
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....iled copies of the 03 Lease Agreements before us in his paper book. However, he was not able to demonstrate from any of these 03 Agreements that the nature of lease is Finance Lease and not Operating Lease. The Hon'ble Supreme Court in the case of Asea Brown Boveri Limited vs Industrial Finance Corporation of India Ltd., reported in 154 Taxman 512 (SC) and Association of Leasing & Financial Services vs Union of India reported in [2011] 2 scc 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 th....
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....entals paid by Indigo are in the nature of rent and not interest as the Revenue has failed to demonstrate that the nature of lease is finance lease and not operating lease. Hence, the payments made by lessee are not in the nature of interest. Thus, in light of findings of the Special Bench, we hold that the provisions of Article 11 of India-Ireland DTAA would not operate in the present case. 23. Thus, in light of our above findings and the decision of Special Bench, the assessee succeeds on ground no. 3 to 5 of appeal" 101. The agreements before us and the ones before the Delhi Tribunal in the case of Celestial (supra) as well as the Special Bench of the Tribunal in the case of IndiGo for the AY 2012-13 and the division bench in the case of IndiGo for AYs 2008-09 and 2009-10 are substantially similar. We are not reproducing the clause again since we have already extracted the relevant clauses above. Suffice to say that there are no material differences in the agreements before the Delhi Tribunal in the case of Celestial (supra) as well as the Special Bench of the Tribunal in the case of IndiGo for the AY 2012-13 and the division bench in the case of IndiGo for AYs....
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....e is a fixed place of business and secondly, that the place of business must be at the disposal of the foreign enterprise. The relevant findings of the Supreme Court in Formula One (supra) are as under: 30. Emphasising that as a creature of international tax law, the concept of PE has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of PEs contemplated under Article 5 of OECD Model. First, an establishment which is part of the same enterprise under common ownership and control-an office, branch, etc., to which he gives his own description as an ―associated permanent establishment‖. The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a PE. Such PE is given the nomenclature of ―unassociated permanent establishment‖ by Baker. He, however, pointed out that there is a possibility of a third type of PE i.e. a construction or installation site may be regarded as PE under certain circumstances. In the first type of PE i.e. associated permanent establishments, primary requirement is that there must be a fixed place of b....
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....er Article 5(1) of the DTAA. 25. The ld. DRP, while holding that the assessee has a PE in India under Article 5(1) of the India-Ireland DTAA, which is the same as Article 5(1) of the India-UK DTAA, held as under: "Ownership Test: As per Applicant itself, the legal ownership of the Aircraft, the Fixed Place Permanent Establishment, ultimately rest with the Applicant. The Aircraft operates in Indian territory all throughout the A.Y. Location Test: Thus, the Applicant satisfies the location test due to its specific geographical identification with Indian territory and nexus with the Indian business of the Aircraft conducted through the lessee. Permanence or duration test: Moreover, Applicant's operations meet the permanence or duration test, as the Aircraft is an enduring and continuous place of business. The elements of regularity, continuity, and repetitiveness are evident, given the long term and ongoing nature of the operation of the Aircraft in India ..... Test of Disposal: While the lessee operates the aircraft, the Applicant retains ownership and the embedded legal right to repossess the aircraft if terms of the....
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....sessee. Therefore, contractually, the aircraft was under the control and disposal of the lessee/IndiGo. Even the LD.DRP accepts that the aircraft is under the operational control of the lessee/IndiGo at page 132 of its directions wherein it is held that "The aircraft, while operationally controlled by the lessee, forms the core of the Applicant's leasing business." 28. Further, even as per the DGCA Rules and Manuals, the aircraft was required to be under the operational control of the lessee/IndiGo. This has never been doubted by the AO or Ld. DRP or that the DGCA, which is the regulator of aviation in India ever alleged that the assessee or IndiGo have violated these rules and regulations. The decision of coordinate bench in Carbijet (supra) is relevant in this regard since it takes judicial notice of the manner in which aviation sector is regulated and commercially run: "in the present case, all the flights were flown by the assessee under the banner of Air India. They are known as flights of Air India. The schedules are allotted to Air India by International Civil Aviation Authority. The routes are pre-determined. Tickets are issued by Air India. T....
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....coupled with meaningful control and business use, is sufficient. This interpretative standard draws strength from the Supreme Court's exposition in Formula One World Championship Ltd. v. CIT. II. Tripartite Attributes of a PE: A valid PE, in jurisprudential contemplation, must reflect three core characteristics: • Stability - an enduring and identifiable physical presence; • Productivity - the conduct of substantive commercial operations; and 110 ITA No. 1198/Mum/2025 and others • Dependence - functional reliance on the said location for business activities. III. Economic Substance Prevails Over Legal Form: The existence of a separate legal entity, such as Hyatt India Pvt. Ltd., managing day-to-day operations does not nullify the presence of a PE, if the foreign enterprise continues to exercise effective strategic and operational control. The Court reaffirmed that it is the economic reality and not merely the corporate form that governs PE determination. IV. Nexus: Remuneration Structure as Evidence of Commercial The nature of consideration under the SOSA being directly linked to gross oper....
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....extended periods. However, the crucial question is whether they constituted a "fixed place of business" at the disposal of the assessee through which its business was carried on. The assessee's business is that of dry leasing aircraft an activity executed entirely from Ireland, with negotiations, contract execution, and management undertaken outside India. Operational control over the aircraft, including deployment, routing, scheduling, and crewing, vested exclusively with IndiGo. The rights retained by the assessee such as periodic inspection, ensuring compliance with maintenance standards, and repossession in default are standard lessor protections safeguarding the value of the asset, not indicia of the asset being at the lessor's disposal for carrying on business in the source State. In the Hyatt case, the Supreme Court emphasised that a foreign enterprise's business must actually be conducted 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 hig....
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....then in every lease of equipment, the foreign enterprise will be held to have a PE in India. The Madras High Court in Van Oord ACZ (supra) and benches of the Tribunal have held this in several decisions. 36. Insofar as the decision of the Madras High Court in Poomphuar (supra) is concerned, the Madras High Court in the case of Van Oord ACZ (supra) dealt with the case of leasing dredging equipment by a Dutch company to an Indian Company. The Revenue contended the presence of the ship/barge constituted PE of the Netherlands Company in India. In response, the Assessee therein contended that the leasing of equipment on bareboat basis/ dry lease would not constitute a PE in India. The Madras High Court after analyzing another earlier decision of the Madras High Court in Poompuhar Shipping Corporation Ltd. (supra) held that leasing of equipment 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 Cre....
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....hips 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. ..." 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 that 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 shall be taxable only in that Contracting State‖ The text is notable in two respects: first, it disjunctively pairs "operation" and "rental" as independent income yielding activities; second, it contains no requirement that the rental be merely ancillary to the lessor's own operation of ships or aircraft. This wording differs from the OECD M....
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....y 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 within the protective ambit of Article 8(1). 43. We also take note of the commercial reality that airlines today operate fleets on a network basis, with aircraft rotated between domestic and international sectors depending on operational exigencies, maintenance schedules, and route economics. It is artificial, and contrary to industry practice,....
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....roduced hereunder:- "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 aircraft should also be an operator in international traffic as is the case in wet lease. This amounts to inserting the condition in the 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 ....
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....d 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 of Sky High Appeal XLIII Leasing Company Ltd. (supra), we hold the lease rental received by the assessee/appellant are covered by Article 8 of India-Ireland Treaty. 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." 13. Thus, viewed in the context of the ratio laid down by the Coordinate benches in the decisions cited supra, we have no hesitation in holding that the issues arising in the present appeal concerning the taxability of lease rentals are squarely covered in favour of the assessee in absence of any factual difference.....
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....ived by the assessee on leasing of aircraft. 20. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to Ground Nos. 4 to 30 of the present appeal. Hence, grounds are treated to be allowed to that extent. Ground No. 3 has become academic, hence, kept open. In so far as, Grounds No. 31 and 32, they have either become consequential or premature. Hence, do not require adjudication. 21. Accordingly, appeal is partly allowed. ITA 1349/MUM/2025(JET AIR 17 Limited) A.Y. 2022-23 22. Ground Nos. 1 and 2 are general grounds, hence, do not require specific adjudication. In Ground No. 3, assessee has challenged the validity of the impugned assessment order as barred by limitation. Whereas, Ground Nos. 4 to 30 are on various facets of the core issue concerning the taxability of lease rentals received by the assessee on leasing of aircraft. 23. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to....