ITAT Rules PPT Inapplicable Without MLI Notification

Case Details: Sky High Appeal XLIII Leasing Company Ltd. vs. Assistant Commissioner of Income-tax (International Tax) - [2025] 177 taxmann.com 579 (Mumbai - Trib.)

Judiciary and Counsel Details

• Amit Shukla, Judicial Member
• Sachit Jolly, Sr Adv., Mrunal Parekh, Ms Disha Jham & Hardeep Singh Chawla for the Appellant.
• Vivek Perampurna, CIT-DR & Krishna Kumar, Sr DR for the Respondent.

Facts of the Case

An Ireland-based company leased aircraft to IndiGo under dry operating leases and declared nil income in its return, claiming: (i) lease rentals were not “royalty” under Article 12 of the India-Ireland DTAA, (ii) absence of a PE in India, making income taxable only in Ireland under Article 7, and (iii) exemption under Article 8 for international traffic.

Assessing Officer (AO) rejected this and invoked Multilateral Instrument (MLI) Articles 6 & 7 Principal Purpose Test (PPT) and held that the assessee’s incorporation aimed at treaty benefits. The DRP upheld, citing lack of infrastructure in Ireland, assessee’s control over aircraft in India (fixed place PE), and characterising the leases as finance leases.

AO passed order and held the rentals as “royalty” u/s 9(1)(vi), alternatively taxable as PE profits, denied Article 8 relief, and recharacterised the leases as finance leases. The assessee appealed before the Tribunal.

Tribunal Held

The Tribunal held that the MLI cannot be used to deny tax treaty benefits without a separate, specific notification under Section 90(1) of the Income Tax Act. This is based on the Supreme Court’s binding precedent in Nestle SA [2023] 155 taxmann.com 384 (SC). The ruling clarifies that a new notification is required to incorporate the MLI’s anti-abuse measures into the India-Ireland Double Taxation Avoidance Agreement (DTAA), despite both instruments being separately notified.

The Tribunal concluded that the AO failed to prove that the principal purpose of the lessors’ structure was to obtain treaty benefits. It validated the lessors’ business model, noting that Ireland is a globally recognised hub for the aircraft leasing industry, accounting for 60% of all global leasing activity, and that the lessors had a genuine business presence there with Irish directors and licensed service providers. It was held that genuine commercial considerations are a legally sound basis for a corporate structure and can effectively counter allegations of treaty abuse.

The Tribunal provided crucial clarity by confirming that the agreements in question are bona fide dry operating leases, not finance leases. The Tribunal based its analysis on the actual contractual terms, noting that the lessor, not the lessee, retained ownership and key ownership risks, such as residual value fluctuation. The agreements also explicitly required the return of the aircraft at the end of the term and prohibited the lessee from holding itself out as the owner.

The Tribunal definitively held that no Permanent Establishment (PE) exists in India. It applied the “disposal test” from the Supreme Court’s Formula One precedent [2017] 80 taxmann.com 347 (SC), finding that the aircraft were at the exclusive operational disposal of the lessee (IndiGo), not the lessors. The lessor’s rights of inspection and repossession were characterized as standard asset protection measures, not as a means of carrying on business in India.

Even if a PE had been found, the Tribunal ruled that the income would be exclusively taxable in Ireland under Article 8(1) of the India-Ireland DTAA. It was noted that this article, which explicitly includes “rental of ships or aircraft in international traffic,” is a deliberate departure from the narrower OECD model and prevails over the general business profits rule, ensuring the income is not subject to source-based taxation in India.

List of Cases Reviewed

• Assessing Officer (International Taxation)v. Nestle SA [2023] 155 taxmann.com 384/[2024] 296 Taxman 580/[2023] 458 ITR 756 (SC) (para 53) followed
• Celestial Aviation Trading 15 Ltd. v. Asstt. CIT, International Taxation [2025] 176 taxmann.com 902 (Delhi – Trib.) (para 100) followed
• Sunflower Aircraft Leasing Ltd. v. ACIT [IT Appeal No. 1107 (mum) of 2025, dated 13-8-2025] (para 106) followed

List of Cases Referred To

• InterGlobe Aviation Ltd. (IndiGo) v. Addl. CIT [2021] 131 taxmann.com 98/191 ITD 1 (Delhi – Trib.) (SB) (para 11)
•  Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373/263 ITR 706 (SC) (para 14)
• Vodafone International Holdings B.V. v. Union of India [2012] 17 taxmann.com 202/204 Taxman 408/341 ITR 1 (SC) (para 14)
•  Assessing Officer (International Taxation) v. Nestle SA  [2023] 155 taxmann.com 384/[2024] 296 Taxman 580/[2023] 458 ITR 756 (SC) (para 20)
•  Bid Services Division (Mauritius) Ltd. v. Authority for Advance Ruling (Income-tax) [2023] 148 taxmann.com 215 (Bombay) (para 24)
• CIT v. Shree Rajasthan Syntex Ltd. [2009] 178 Taxman 33/313 ITR 231 (Rajasthan) (para 85)
•  Celestial Aviation Trading 71 Ltd. v. Paramount Airways Pvt. Ltd. [2010] EWHC 185 (Comm) (para 85)
• Celestial Aviation Trading 15 Ltd. v. Asstt. CIT, International Taxation [2025] 176 taxmann.com 902 (Delhi – Trib.) (para 100)
• Sunflower Aircraft Leasing Ltd. v. ACIT [IT Appeal No. 1107 (mum) of 2025] (para 105)