ITAT affirms tax treaty entitlement of Irish aircraft lessors and rejects automatic application of the principal purpose test provisions under the Multilateral Instrument

The matter concerned seven appeals filed by different Irish aircraft leasing companies for the assessment year (AY) 2022-23. Owing to the similarity of facts and issues, the ITAT heard them together and passed a consolidated order, designating the appeal of TFDAC Ireland II Limited (Taxpayer) as the lead case.

The Taxpayer was an Irish tax resident holding a valid tax residency certificate (TRC) issued by the Irish revenue authorities. The Taxpayer was a part of the global TFDAC Group, engaged in aircraft leasing. In 2019, the Taxpayer had entered into three dry operating lease agreements with InterGlobe Aviation Limited (IndiGo) for leasing aircraft. The Taxpayer filed its tax return declaring nil taxable income on the basis that under the Treaty, the lease rentals constituted business profits taxable exclusively in Ireland, as the Taxpayer did not have a permanent establishment (PE) in India.

In the draft assessment order, the tax officer rejected the Taxpayer’s claims and invoked the PPT provisions under the MLI to deny Treaty benefits on the grounds that the mere incorporation of a company in Ireland did not constitute a genuine operational presence in the absence of adequate infrastructure and employees, and that the decision to establish the entity in Ireland was primarily tax-motivated. Consequently, the tax officer treated the lease rentals as ‘royalty’ taxable under the (Indian) Income Tax Act, 1961 (ITA). The tax officer alternatively held that the Taxpayer had a fixed-place PE in India because it retained ‘ultimate control’ over the aircraft and characterised the lease as a finance lease instead of an operating lease. The tax officer also did not allow the benefit of Article 8 of the Treaty, which allocates Ireland the exclusive right to tax profits derived by an Irish enterprise from the operation or rental of aircraft in international traffic. According to the tax officer, the article did not apply as IndiGo was a domestic airline, and the leasing activity was not connected with international traffic. The dispute resolution panel upheld the conclusions of the tax officer, following which the tax officer passed the final assessment order. The Taxpayer thereafter appealed before the ITAT.

The tax authorities reiterated the conclusions in the assessment order, i.e.:

The ITAT rejected the findings of the tax authorities in the following manner:

Following the Mumbai ITAT’s ruling, the Delhi ITAT also delivered a similar decision in the case of Kosi Aviation Leasing Ltd.⁷ This matter involved a batch of 75 appeals by several Irish aircraft lessors on the common issues of (i) characterisation of lease for aircrafts as operating or financial, (ii) applicability of the MLI provisions under the Treaty, (iii) applicability of Article 8 of the Treaty, which allocates Ireland the exclusive right to tax profits derived by an Irish enterprise from the operation or rental of aircraft in international traffic, and (iv) whether aircraft leased by the appellants to an Indian lessee constituted a PE of the appellants in India.

The Delhi ITAT affirmed the findings of the Mumbai ITAT that the MLI lacks legal binding force without a specific, country-wise notification under section 90(1) of the ITA. The Delhi ITAT also upheld the characterisation of the aircraft lease as an operating lease, ruled that the lessor did not have a PE in India, and held that the lease rental income was taxable exclusively in Ireland under Article 8 of the Treaty. While the Delhi ITAT largely followed the precedent set by the Mumbai ITAT ruling, it is notable for strengthening the legal position for taxpayers by addressing and dismissing several additional arguments raised by the tax department. Specifically, the Delhi ITAT provided a detailed rebuttal to the tax department’s contention regarding the past practice of issuing omnibus notifications for other agreements (like the SAARC agreement and MAAC⁸), noting these instances either predated the Supreme Court’s definitive ruling in Nestle SA or were administratively different and could not override the mandatory notification requirement.

The Delhi ITAT also explicitly rejected the tax authorities’ argument that international traffic under Article 8 of the Treaty should be assessed on a voyage-by-voyage basis, calling the argument misplaced and unsustainable. By systematically addressing and dismissing these new counterarguments, the Delhi ITAT not only established a consistent judicial view but also fortified the legal precedent, providing a greater degree of tax certainty for the international aircraft leasing industry.