[Opinion] Crosswinds Over Dublin—The Tax Debate in India’s Aviation Sky

Swathanth Rajasekaran, Chavali S Suryanarayana & Divesh Dhawan – [2025] 181 taxmann.com 127 (Article)

India’s aviation sector continues to rely heavily on leased aircraft with nearly 80% of India’s fleet leased from global lessors, a majority of whom are based in Ireland, the world’s dominant aircraft leasing hub. Ireland’s emergence as the global centre for aviation leasing is well-known – a stable legal regime, robust financing ecosystem, favourable tax rates and an extensive tax treaty network have positioned it as the preferred jurisdiction for aircraft lessors.

The Ireland aircraft leasing industry traces its origins back to Guinness Peat Aviation (GPA), which was established in Shannon, County Clare in 1975. During the 1980s, GPA became the leading European commercial aircraft lessor. Although GPA had its downfall in the late 1990s, by then, Ireland had evolved as a mature market for the aviation industry. Over the past five decades, Ireland has become the global hub for commercial aviation leasing and financing. Today, approximately 50% of the world’s commercial aircraft fleet is leased and Irish lessors own and manage ~USD150 billion of assets.

However, this long-standing structure is now at the core of a significant tax controversy in India, particularly relating to withholding tax on operating lease payments made to Irish lessors and Special Purpose Vehicles (SPV). The Indian Revenue authorities are challenging the tax treaty eligibility, beneficial ownership, by alleging lack of substance, and are potentially trying to invoke the Principal Purpose Test (PPT) under the Multilateral Instrument (MLI). As a result, this issue has become commercially material for the lessors and Indian carriers alike, particularly where Indian airlines bear the economic burden of tax cost and demand.

This article examines the evolving dispute, the treaty framework, judicial principles and what awaits, including the increasing relevance of GIFT City for the aviation sector.

1. The Dispute

The core issue stems from the tax treatment of aircraft operating lease rentals paid by Indian airlines to Irish lessors. Under Section 195 of the Income-tax Act, 1961 (‘the Act’), tax must be withheld on payments to non-residents unless not taxable under a tax treaty or the Act.

A critical element of the India-Ireland tax treaty is Article 12(3), which defines “royalties” to expressly exclude payments for the use of, or the right to use, aircraft. This exclusion is central to the aircraft leasing debate.

Payments for aircraft leases, being outside Article 12(3), fall under Article 7 as business profits. Accordingly, lease rentals paid to an Irish lessor are taxable in India only if the lessor has a Permanent Establishment (PE) in India—something global lessors typically do not have given the nature of their operations—making such income non-taxable in India. This treaty protection forms the core of taxpayers’ arguments and explains why the dispute largely turns on treaty eligibility, residence, beneficial ownership, and the PPT.

Separately, Article 8(1) of the India-Ireland tax Treaty specifically covers profits from operating or renting ships or aircraft, as well as incidental containers and related equipment rentals, and allocates exclusive taxing rights to Ireland where the aircraft is operated in international traffic.

On this basis, Irish lessors contend that since Article 12(3) excludes aircraft leasing income from “royalty,” and in the absence of a PE, the income is not taxable in India; and even independently, Article 8(1) exempts such leasing revenue as profits from international traffic operations.

Historically, Irish lessors relied on:

• Treaty protection under the business profits article, claiming no PE in India;
• A residence-based taxation model supported by a Tax Residency Certificate (TRC);
• Commercial and legal substance in Ireland (employees, offices, directors, and regulatory supervision).

On the other hand, Indian tax authorities have increasingly begun to question:

• Whether leasing income is business income or royalty;
• Whether Irish entities have adequate commercial substance;
• Whether treaty benefits are being used primarily for tax avoidance;
• Whether the MLI Principal Purpose Test (PPT) denies benefits.

The Indian tax authorities argue that Article 8 protects only an airline’s core transport operations, and the “rental” limb applies only when ancillary to such operations. For a pure lessor with no airline business, whose aircraft were mainly deployed on domestic Indian routes, they contended that the income did not fall under Article 8 but constituted business profits taxable in India if a PE existed.

Treaty Eligibility – Substance, TRC and Principal Purpose Test

The eligibility for tax treaty benefits depends on satisfying both domestic law documentation (TRC) and treaty-level anti-abuse tests:

i. Tax Residency Certificate (TRC) – Section 90(4) of the Act mandates a valid TRC from the treaty partner country. The Hon’ble Supreme Court in Union of India v. Azadi Bachao Andolan and Vodafone International Holdings BV v. Union of India3 has held that TRC is conclusive proof of residency of foreign taxpayers unless it is a case of treaty shopping or tax authorities can demonstrate sham arrangements.

However, tax assessments have often deviated from this path laid down by the Supreme court by asserting that TRC alone is not conclusive. Actual commercial substance must be demonstrated including Board control, day to day operations & risk control must be undertaken, lease management and decision-making must be borne by the lessors.

ii. “Beneficial Ownership” Requirement – Though the India-Ireland tax treaty does not explicitly require beneficial ownership for business profits, tax authorities have denied benefit of the tax treaty, particularly when the ultimate parent entities of the lessors reside outside Ireland.

iii. Multilateral Instrument (MLI) and the Principal Purpose Test (PPT) – Article 6 and Article 7 of the MLI introduce PPT, allowing denial of treaty benefits if one of the principal purposes of an arrangement is to obtain a treaty benefit and requiring to demonstrate a substance and commercial rationale.

Indian tax authorities allege that aircraft lessors may be treaty-shopping through Ireland given its beneficial tax regime and high concentration of leasing companies. Lessors counter by stressing upon the legitimate commercial objectives, including Ireland’s global leadership in aircraft leasing, established aviation expertise and knowledge pool, strategic geographical location, favourable laws in the event of bankruptcy, and for repossession of aircraft, and aircraft leasing being a substantive business activity in Ireland.

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