Sky High XXXIV Leasing Company Limited Vs ACIT (ITAT Mumbai)
Summary: The Income Tax Appellate Tribunal, Mumbai ‘I’ Bench, comprising Vice President Shri Saktijit Dey and Accountant Member Shri Prabhash Shankar, delivered a consolidated order dated 30 April 2026 concerning the taxability of aircraft lease rentals received by several non-resident aircraft leasing companies for Assessment Year 2022-23. The principal appeal was filed by Sky High XXXIV Leasing Company Limited against the Assistant Commissioner of Income Tax, International Taxation, Mumbai. Connected appeals were filed by Lunar Aircraft Trading Company Limited, GAL MSN 6072 & 6184 Limited, Jet Air 17 Limited, Yamuna Aviation Leasing Limited, Falgu Aviation Leasing Limited, PAAL Jupiter Company Limited and VS MSN 36118 CAV Designated Activity Company. The appeals arose from final assessment orders passed pursuant to directions of the Dispute Resolution Panel (DRP). Since the underlying disputes were substantially identical, the Tribunal treated Sky High XXXIV Leasing Company Limited as the lead case and applied its conclusions to the connected matters. The principal questions concerned the availability of benefits under the India-Ireland Double Taxation Avoidance Agreement, the characterisation of aircraft operating lease rentals, the applicability of the Multilateral Instrument, and the alleged existence of a Permanent Establishment in India.
Sky High XXXIV Leasing Company Limited was incorporated in Ireland on 11 June 2013 and carried on the business of purchasing and leasing aircraft to third-party airlines. The company was a wholly owned subsidiary of ICBCIL Aviation Company Limited and claimed Irish tax residency supported by a valid Tax Residency Certificate. It was subject to Irish corporation tax at 12.5% on its tax-adjusted profits and regularly filed tax returns in Ireland. Under a dry operating lease agreement dated 18 July 2014, the assessee leased an aircraft to InterGlobe Aviation Limited, which operates IndiGo Airlines. The agreement initially covered 96 months from July 2014 and was subsequently extended until June 2023. The aircraft was registered in the name of the Irish lessor, and the bill of sale identified it as the owner. Following termination of the lease, the aircraft was repossessed and leased to another airline operating in Indonesia. During AY 2022-23, the assessee received aircraft lease rentals of ₹27,50,60,204 from InterGlobe Aviation Limited and filed a nil return in India, claiming that the income was taxable exclusively in Ireland under Article 8 of the India-Ireland DTAA.
The Assessing Officer rejected the assessee’s treaty-based claim and proposed to tax the lease receipts in India. According to the Department, the income constituted equipment royalty under Section 9(1)(vi) of the Income-tax Act, 1961 and Article 12(3)(a) of the India-Ireland DTAA. Alternatively, the Assessing Officer contended that the arrangement was a finance lease rather than a genuine operating lease and that the receipts were, in substance, interest income taxable under Article 11 of the treaty. The Department also alleged that the Irish company formed part of a structured arrangement lacking commercial and economic substance and had been established principally to obtain treaty benefits. On that basis, the Assessing Officer invoked Articles 6 and 7 of the Multilateral Instrument (MLI), including the Principal Purpose Test (PPT), to deny treaty protection. The DRP substantially agreed with the assessment reasoning and advanced an additional proposition that the leased aircraft itself constituted a fixed place Permanent Establishment of the lessor in India, thereby permitting taxation of the receipts as business income. The controversy consequently extended to royalty, interest, business profits, treaty abuse and Permanent Establishment principles.
Appearing for the assessee, learned Senior Counsel Shri Sachit Jolly submitted that the company was a genuine Irish aircraft leasing enterprise engaged in established commercial operations and that the relevant contract was an operating lease entered into between unrelated parties on arm’s-length terms. The assessee emphasised that aircraft ownership never passed to InterGlobe Aviation Limited and that the lessee’s obligations concerning operation, maintenance and routine commercial risks could not convert the agreement into a finance lease. The lessor retained the right of repossession, remained exposed to ownership risks and was entitled to recover the aircraft upon expiry or termination of the arrangement. The assessee further argued that Article 8 of the India-Ireland DTAA expressly protected income from aircraft leasing and allocated the relevant taxing rights to Ireland. It placed substantial reliance on the coordinate Bench decision in Sky High Appeal XLIII Leasing Company Limited Vs ACIT, decided on 13 August 2025, and Kosi Aviation Leasing Ltd. Vs ACIT, decided on 30 September 2025. The Revenue’s Special Counsel, Ms. Shilpa Goel, acknowledged that the disputed issues were covered by these earlier coordinate Bench decisions and did not advance any materially different submissions beyond those already considered in those proceedings.
On the applicability of the MLI and the Principal Purpose Test, the Tribunal followed the detailed reasoning in the earlier Sky High Appeal XLIII decision. That decision had examined whether the notification of the MLI, together with the designation of the India-Ireland DTAA as a Covered Tax Agreement, automatically made the PPT enforceable against taxpayers without a separate notification specifying the consequential modification to the bilateral treaty. Relying on the Supreme Court ruling in Assessing Officer Circle (International Taxation) Vs Nestle SA, the coordinate Bench had held that a treaty modification affecting domestic legal rights required appropriate notification under Section 90(1) of the Income-tax Act. It reasoned that neither the standalone notification of the MLI nor a non-binding synthesised treaty text was sufficient to incorporate the MLI-based changes into the India-Ireland DTAA for domestic enforcement. Following this precedent, the Tribunal rejected the Revenue’s attempt to deny treaty benefits merely by invoking Articles 6 and 7 of the MLI and the PPT. The finding concerned the enforceability of the relevant treaty modifications in the circumstances before the Tribunal and was not an independent factual determination that every treaty arrangement automatically satisfied applicable anti-abuse requirements.
The Tribunal also accepted the reasoning that the aircraft leasing arrangements were genuine operating leases rather than finance leases. The underlying contractual terms established that ownership remained with the Irish lessor, the aircraft had to be returned at the end of the agreement, and the lessor retained rights to terminate the arrangement and repossess the aircraft upon default. The lessee could not independently represent itself as the owner, and any permitted subleasing remained subject to the lessor’s consent. The Tribunal’s reasoning distinguished operational risks, such as maintenance, crew, fuel and day-to-day aircraft use, from ownership risks, including residual value fluctuations, impairment and difficulties in repossession. It rejected the proposition that Irish depreciation rules, lease duration or the allocation of operational responsibilities necessarily converted an operating lease into a finance lease. The earlier coordinate Bench had considered the Supreme Court’s decision in Vodafone International Holdings B.V. Vs Union of India and the Special Bench findings in InterGlobe Aviation Ltd. concerning the legal character of aircraft leasing agreements. On this reasoning, the rentals were not liable to be recharacterised as interest on a financing transaction or as equipment royalty merely because the aircraft was commercially operated by an Indian airline.
Regarding Permanent Establishment, the Tribunal followed the coordinate Bench’s analysis of Article 5 of the India-Ireland DTAA and the requirement that a fixed place of business must be available at the disposal of the foreign enterprise through which its business is carried on. The Revenue had contended that the aircraft operating in Indian territory was itself a fixed place of business of the Irish lessor. The Tribunal rejected that approach because the aircraft had been handed over to the Indian airline for commercial operation and was not a fixed place available at the disposal of the lessor for carrying on its own business in India. The operational control exercised by the Indian airline did not establish the necessary business presence or disposal rights in favour of the Irish company. The coordinate Bench had examined authorities concerning Permanent Establishments, including Formula One World Championship Ltd. Vs CIT, in distinguishing an enterprise’s ownership of assets from the existence of a taxable fixed-place business presence. Independently, the Tribunal accepted that Article 8 of the India-Ireland DTAA covered the income from aircraft leasing and allocated the relevant taxing rights exclusively to Ireland. Accordingly, the Revenue’s alternative arguments based on a fixed-place Permanent Establishment, business income, equipment royalty and interest income could not sustain the additions.
Applying the above reasoning to the lead appeal, the Tribunal held that the aircraft lease rental additions could not survive and allowed the grounds challenging their taxability in India. It similarly applied the findings to the connected appeals of Lunar Aircraft Trading Company Limited, GAL MSN 6072 & 6184 Limited, Jet Air 17 Limited, Yamuna Aviation Leasing Limited, Falgu Aviation Leasing Limited, PAAL Jupiter Company Limited and VS MSN 36118 CAV Designated Activity Company because the material facts and legal controversies were substantially identical. Grounds challenging the validity of assessment orders on limitation or other procedural grounds were treated as academic or kept open wherever the substantive treaty findings rendered their adjudication unnecessary. Consequential and premature grounds were disposed of according to their nature. In its final operative paragraph, the Tribunal partly allowed all the captioned appeals and dismissed the connected stay applications. The order therefore granted substantial relief to the Irish aircraft lessors by rejecting the Indian taxation of qualifying aircraft operating lease receipts under the India-Ireland DTAA, while leaving certain independent procedural issues undecided. Its importance lies in the application of established principles concerning international tax treaty interpretation, operating lease characterisation, fixed-place Permanent Establishments and the domestic enforceability of MLI-based treaty modifications.
Cases Discussed
- Kosi Aviation Leasing Ltd. Vs ACIT, ITA No. 994/Del/2025 and connected appeals, decided on 30.09.2025 (ITAT Delhi). The Tribunal followed this coordinate Bench decision, which held that qualifying aircraft operating lease rentals received by Irish lessors were protected under Article 8 of the India-Ireland DTAA and could not be taxed in India on the Revenue’s proposed characterisation.
- Sky High Appeal XLIII Leasing Company Limited Vs ACIT, [2025] 177 taxmann.com 579 (ITAT Mumbai), decided on 13.08.2025. The principal precedent followed in the consolidated order. It addressed the applicability of the MLI Principal Purpose Test, aircraft operating leases, royalty and interest characterisation, Permanent Establishment and treaty protection under Article 8.
- Assessing Officer Circle (International Taxation) Vs Nestle SA, 2023 INSC 928, Civil Appeal No. 1420 of 2023, decided on 19.10.2023 (Supreme Court). Relied upon through the coordinate Bench decision for the requirement of appropriate notification under Section 90(1) before modifications to a tax treaty become enforceable under Indian domestic law.
- InterGlobe Aviation Ltd. Vs DCIT, ITA No. 751/Del/2016 (ITAT Delhi). The InterGlobe Aviation litigation, including the Special Bench consideration discussed in the reproduced precedent, supported the classification of relevant aircraft agreements as operating leases rather than finance leases.
- Formula One World Championship Ltd. Vs Commissioner of Income Tax, [2017] 394 ITR 80 (Supreme Court). Discussed in connection with the requirement that a fixed place of business be at the disposal of a foreign enterprise for establishing a Permanent Establishment.
- Vodafone International Holdings B.V. Vs Union of India & Anr., [2012] 341 ITR 1; (2012) 6 SCC 613 (Supreme Court). Referred to in the reproduced coordinate Bench reasoning for respecting genuine commercial arrangements and their legal structure unless sufficient grounds exist for disregarding them.
