[Opinion] ITAT Upholds Treaty Benefits in Aircraft Industry Amid MLI Row

Dr. Prajakta Mondhe – [2025] 179 taxmann.com 176 (Article)

Recently, the Honorable (‘Hon’ble’) Mumbai Income Tax Appellate Tribunal (‘Tribunal’)1 in the case of an Assessee has held that, to invoke the Articles of Multilateral Instruments(‘MLI’) incorporated in a Double Taxation Avoidance Agreement (‘DTAA’), a separate notification under section 90(1) of the Income -tax Act, 1961 (‘the Act’) shall be required to bring it into effect. The Tribunal has placed reliance on the Landmark Supreme Court (‘SC’) judgment in the case of Assessing Officer (International Taxation) v. Nestle SA2. The judgment passed by the Tribunal has raised a discussion amongst the authorities and the taxpayers that whether the SC judgment can be applied in this case and can this have the effect of not adopting the MLI articles incorporated in the respective treaties. In a way, this would mean that the MLI would be redundant until a separate notification under section 90(1) of the Act is issued to that effect.

Let us understand the facts of the case in detail and the analysis done for the same.

Sky High Appeal XLIII Leasing Company Ltd. (‘the Company’), an Ireland based Company, was engaged in the business of leasing aircraft to operators worldwide. In pursuance of its business operations, it entered into a lease agreement with InterGlobe Aviation Limited (‘IndiGo’). As per the terms of the lease, the aircrafts were to be used by IndiGo and were to be redelivered to the lessor upon the expiry of the lease term. The Company was in receipt of the lease rentals form IndiGo. During the year under consideration, the Company filed a NIL return of Income in India on the following contentions

• • Lease rentals did not constitute Royalty as per the Article 12(3)(a) of the India-Ireland Double Taxation Avoidance Agreement (‘DTAA’), as the same expressly excludes payments for the use of aircraft.
  • Further, the income would fall under the head Business Income and would not be taxable in India in the absence of Permanent Establishment(‘PE’) in India.
  •  Without prejudice to the above, the said income was exempt under Article 8(1) of the DTAA as it was derived from the operation of aircraft in international traffic.

During the assessment proceedings, the Learned(‘Ld’) Assessing Officer(‘AO’) contended that the Company is not eligible for the DTAA benefits on the premise that the principal purpose of the Company’s incorporation was to obtain the benefits of the DTAA. Thus, while passing the Draft Assessment Order, the Ld AO held that Principal Purpose Test (‘PPT’) under Articles 6 and 7 of the MLI was not satisfied and hence the benefit of India Ireland DTAA cannot be given to the Company. The Articles are reproduced below for ease of reference –

Article 6 – MLI

“Intending to eliminate double taxation with respect to the taxes covered by this 1 [Convention] without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in this [Convention] for the indirect benefit of residents of third jurisdictions),”

Article 7 – MLI

“Notwithstanding any provisions of [the Convention], a benefit under [the Convention] shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of [the Convention].”

Thus, the AO held that the main purpose of the said transaction was to get the DTAA benefits and evade tax, and the transaction did not justify the commercial substance, hence the Company was not entitled to claim the DTAA benefits.

The major reasons behind the above as mentioned by the AO were that the ultimate parent entity was Caymans Island Funds, the directors were holding positions in multiple other Irish companies, the day-to-day management were outsourced to Apex Group Limited and certain lease functions being contracted to London.

Aggrieved by the Draft Assessment Order, the Company filed objections before the Hon’ble Dispute Resolution Panel(‘DRP’) highlighting that the Company is very well eligible for the DTAA benefits iterating that operations were commercial and genuine and the outsourcing of admin functions was a standard industry practice. Further, the Company had not entered into such agreements only with India; similar arrangements were entered by the Company with China and Korea as well. Thus, the case was not of any India-specific treaty shopping.

However, the Hon’ble DRP upheld the contention of the AO and observed that

• •  Choice of SPV in Ireland would not justify commercial or genuine operations and that the Irish professional expertise can be availed anywhere
  • As per the lease agreement the Company retained ultimate control over the aircraft as it had the right of repossession and inspection, thus it constituted a Fixed place PE in India

Thus, the DRP held that the Company had a PE in India and thus accordingly attributed 25% of the gross rentals as profits to it, which were, in turn taxable at a rate of 40%. Pursuant to the DRP directions, the AO passed the final Assessment Order holding –

• • The lease rentals were Royalty as per section 9 of the Income-tax Act, 1961(‘the Act’)
  • The Company has a fixed place PE in India
  •  Article 8 of the DTAA would not apply as the transaction was not related to international traffic.

Aggrieved by the said contention, the Company filed an appeal before the Tribunal.

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