MLI provisions unenforceable sans separate notification: ITAT Mumbai

Sky High Appeal XLIII Leasing Company Limited Vs ACIT (ITAT Mumbai)

ITAT Mumbai: MLI provisions unenforceable sans separate notification; Relies on Nestle, highlights Revenue’s contradicting stand.

Facts:

• The assessee, Irish companies, are part of international aircraft leasing groups, that is, TFDAC, and are recognized tax residents of Ireland, holding valid Irish Tax Residency Certificates (TRCs).
• They leased aircraft to InterGlobe Aviation Ltd. (in brief, IndiGo), on 1 February 2019 under dry operating lease agreements, for leasing aircraft (MSNs 8768, 8710, and 8952).
• The lease agreements were entered into on 1 February 2019, before the Multilateral Instrument (MLI) provisions became effective in India on 1 April 2020.
• One of the key features of the lease is that the lessee (IndiGo) was required to redeliver the aircraft to the lessors at the end of the lease term.
• For AY 2022–23, the Irish companies filed their Indian tax returns declaring nil taxable income and claimed treaty benefits under the India–Ireland Double Taxation Avoidance Agreement (DTAA).
• The assesse argued that the lease agreements were entered into before MLI provisions took effect. They are genuine tax residents with valid TRCs, managed and operated from Ireland for commercial reasons due to Ireland’s role as a leading aviation leasing hub. No PE exists in India since the lessee has operational control; business is conducted from Ireland. Additionally, Lease rentals for aircraft are specifically excluded from ‘royalty’ under Article 12 of India–India-Ireland DTAA, Article 8 of the DTAA applies, taxing such rental income only in Ireland.

Issues:

• Whether Articles 6 and 7 of the Multilateral Instrument (MLI), embodying the Principal Purpose Test (PPT), apply to the facts and operate to deny treaty benefits under the India–Ireland Double Taxation Avoidance Agreement (DTAA).
• Whether the lease agreements between the Irish lessors and the lessee, IndiGo should be characterized as dry operating leases or finance leases for the purposes of income tax.
• Whether the physical presence of aircraft leased by foreign lessors and operated by an Indian airline constitutes a permanent establishment (PE) of the lessors in India under the India–Ireland Double Taxation Avoidance Agreement (DTAA).

Observations:

• The Tribunal held that Articles 6 and 7 of the MLI cannot be invoked against the taxpayers because there is no specific notification under Section 90(1) of the Indian Income Tax Act incorporating these provisions into the India–Ireland DTAA, in line with the Supreme Court’s decision in Nestle SA. Even if MLI provisions were applicable, the facts did not show that the principal purpose of incorporation or transactions was treaty shopping, supported by extensive commercial substance in Ireland, including Irish directors, bankers, company secretary, licensed management services, valid Tax Residency Certificates, and leasing operations beyond India.
• Regarding the nature of the leases, the Tribunal found that the lease agreements constituted dry operating leases rather than finance leases. The lessors retained ownership and title throughout, with contractual obligations requiring lessees (such as IndiGo) to maintain and redeliver aircraft, and the absence of purchase options or transfer of ownership. The lessees bore operational risks but not ownership risks, consistent with an operating lease. The Tribunal rejected reliance on Irish depreciation rules or sub-leasing rights to characterize the lease as a finance lease. Prior judicial precedents including Special Bench decisions for IndiGo supported this conclusion.
• On the question of PE, the Tribunal agreed with prior findings that the aircraft physically present in India did not constitute a fixed place PE of the Irish lessors. The aircraft were under operational control and disposal of the lessee airline (IndiGo) in India, with the lessors retaining only ownership rights and limited inspection powers. The aircraft did not constitute a business place at the lessor’s disposal for carrying on business in India. The principle that mere location of an asset does not create PE was emphasized, consistent with Supreme Court precedents and treaty interpretation principles.
• Lastly, the Tribunal held that even if a PE existed, Article 8 of the India-Ireland DTAA would mandate exclusive taxation of income from the operation or rental of aircraft in international traffic in Ireland. The leased aircraft formed part of IndiGo’s integrated fleet operating both domestic and international routes, thus falling within the scope of “international traffic” in Article 8(1). Hence, the income from lease rentals was not taxable in India. Consequently, the appeals were allowed, rejecting the Revenue’s efforts to deny treaty benefits by invoking MLI, to re-characterize operating leases as finance leases, and to impose Indian tax on the lease income under PE or royalty/interest head.
• The ITAT took reliance on the Supreme Court (SC) cases like Union of India Azadi Bachao Andolan (2004), Vodafone International Holdings BV v. Union of India (2012), Assessing Officer (I.T.) v. Nestle SA (2023), Formula One World Championship Ltd. v. CIT (2017), E-Funds IT Solution Inc. v. CIT (2018), Hyatt International Southwest Asia Ltd. v. Addl. Director of Income Tax (2015), Asea Brown Boveri Ltd. v. Industrial Finance Corporation of India Ltd., Association of Leasing & Financial Services v. Union of India.

FULL TEXT OF THE ORDER OF ITAT MUMBAI