ITAT Delhi on Article 11(3)(c) in India-Ireland DTAA

D.C. Agrawal – [2025] 177 taxmann.com 480 (Article)

Interest Income and International Tax Treaties

The treatment of interest income under international tax treaties has been a recurring issue in Indian tax jurisprudence, particularly in sectors involving large cross-border financial flows. One such area is aircraft leasing and financing, where Indian airlines often lease aircraft from global lessors, giving rise to complex tax implications. The classification and taxation of such income, especially when routed through jurisdictions with favourable treaty terms, have been subject to close judicial scrutiny.

Background of the Celestial Aviation Case

A critical decision addressing this issue is the ruling in Celestial Aviation Trading 15 Ltd. v. Asstt. CIT [2025] 176 taxmann.com 902 (Delhi-Trib.), delivered by the Delhi Bench of the ITAT in July 2025. The assessee, a tax resident of Ireland, had earned interest income in India arising from its leasing and financing arrangements. The dispute centered on whether such interest income was taxable in India under the domestic law provisions or entitled to protection under the India–Ireland Double Taxation Avoidance Agreement (DTAA).

Interpretation of Article 11 of India–Ireland DTAA

At the heart of the case was the interpretation of Article 11 of the DTAA, which specifically deals with the taxation of “Interest.” The assessee argued that its income fell squarely within the scope of Article 11, which provides for concessional tax treatment in the source country, subject to certain conditions. The Revenue, however, questioned whether the income truly constituted “interest” under treaty provisions, or whether it could be recharacterized in a manner that allowed full domestic taxation. The tribunal’s analysis of the definitional scope of “interest” under Article 11 played a pivotal role in resolving the issue.

Significance for Aviation Leasing Structures

This ruling holds significant implications for the aviation leasing industry in India, where financing and leasing arrangements often involve tax residents of treaty jurisdictions such as Ireland. By clarifying the treaty interpretation, the ITAT has provided important guidance for taxpayers structuring cross-border leasing transactions and claiming treaty benefits. The decision also reflects the increasing judicial emphasis on aligning domestic tax positions with treaty obligations, thereby reinforcing certainty for global investors in India’s aviation sector.

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