PPT Provisions Inapplicable Without MLI Notification in India-Ireland Tax Treaty

PPT provisions inapplicable in absence of separate notification incorporating MLI provisions into India-Ireland tax treaty

Background

The Mumbai ITAT in Sky High Appeal XLIII Leasing Company Limited v. ACIT (2025) 177 taxmann.com 579 (Mum)/ TS-1085–ITAT-2025(Mum)  and the Delhi ITAT in Kosi Aviation Leasing Ltd. v. ACIT [ITA No. 994/Del/2025, dated 30-9-2025] have held that operating lease rentals received by them for aircraft leasing could not be taxed in India, while also addressing burning questions on enforceability of Multilateral Instrument(‘MLI’), applicability of principal purpose test (‘PPT’), existence of permanent establishment (‘PE’) and nature of aircraft lease. The said decisions are summarized hereunder.

Brief facts of the Mumbai ITAT case

Sky High Appeal XLIII Leasing Company Limited (‘Assessee’) was an Irish company engaged in the business of leasing aircrafts. It is a part of TFDAC Group, an international aircraft leasing conglomerate. The Assessee entered into three separate dry operating lease agreements with IndiGo for supply of aircrafts. For AY 2022-23, the Assessee filed an NIL return of income claiming that-

• 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.

However, the Assessing Officer (AO’) rejected the aforesaid claim on the grounds that treaty benefits should not be available as-

1. the principal purpose under Articles 6 and 7 of the MLI was not satisfied because Assessee’s incorporation was to obtain treaty benefits and evade tax, and the transaction did not justify the commercial substance. 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.

2. the lease was in essence a finance lease. The lease rentals were Royalty as per section 9 of the Income-tax Act, 1961(‘the Act’), and

• Assessee had a fixed place PE in India and Article 8 will not apply as the lessee was a domestic airline operator and the leasing activity was not connected with international traffic The views of the AO were upheld by Dispute Resolution Panel (DRP’). Accordingly, 25% of the gross rentals were attributed as profits to the alleged PE and applying a tax rate of 40% to such profits, effectively 10% of the gross receipts were assessed to tax.

Issues before the ITAT

The Assessee filed an appeal before ITAT and following issues emerged for determination:

1. Whether in view of principal purpose test (PPT’) provisions of the MLI, the Assessee is disentitled to the benefits of the India-Ireland tax treaty?

2. Whether the leases are to be characterised as operating lease or finance lease?

3. Whether the presence of leased aircraft in India constitutes a fixed place PE of the Assessee?

4. If a PE is held to exist, whether Article 8(1) of the tax treaty nevertheless precludes the income taxation in India?

Decision of the Mumbai ITAT

Applicability of PPT

By placing reliance upon the decision of Supreme Court in the case of AO v. Nestle SA [2023] 155 taxmann.com 384/ 458 ITR 756 (SC) [affirmed in [2024] 165 taxmann.com 334 (SC)], the ITAT held that even if both India-Ireland DTAA and the MLI have been notified, the provisions of MLI would not be enforceable unless the consequence/impact of MLI on the India-Ireland tax treaty is separately notified under Section 90 of the Act. The Tribunal emphasised that such notification is essentially critical in MLI context, where multiple jurisdictions opt into certain provisions, reserve on others and often apply them with modifications or deferrals. Without a domestic notification that identifies the exact contours of modification to a DTAA, there is a risk that the Indian Court or authority may apply an MLI provision in a form or scope that was never domestically assented to. It was further held that synthesised text which incorporates the MLI provisions into the covered tax agreement is an expository compilation, merely intended to facilitate understanding and is not itself a binding legal document. Even otherwise, the Tribunal noted that the Assessee would be entitled to treaty benefits after notification of MLI as it had valid tax residency certificate. The Tribunal rejected Revenue’s argument that the ultimate parent of the Assessee was not Irish, and no operational structure existed in Ireland. The Tribunal observed that-

• the Assessee was managed by a duly licensed Irish management company
• its directors, bankers, company secretary, legal advisors were resident of Ireland,
• leasing was done for multiple jurisdictions (beyond India),
• lease agreement was executed in Ireland. Further, noting that Irish entity was driven by legitimate commercial objectives, the ITAT held that the Assessee was eligible for treaty benefits.

Whether the leases are to be characterised as operating leases or finance leases

After analysing the contractual terms, ITAT held that the leases in the present case were operating lease since the ownership of the aircraft remained with the Assessee. It examined Circular No.24/2002 wherein the Reserve Bank of India (‘RBI’) categorically stated that a finance lease is one where the lessee has the right to purchase the aircrafts at the end of the lease period and will require prior approval of RBI. However, in the present case there is no such option available. The ITAT also placed reliance on the similar statutory definition of finance lease in Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and Recovery of Debts and Bankruptcy Act, 1993. Further, the ITAT also asserted that depreciation norms may influence book value in a given jurisdiction, however, they do not determine the nature of lease for the purposes of the Act. While holding so, the ITAT referred to similar judgement by Special Bench of Delhi ITAT in the case of Celestial Aviation Trading 15 Ltd. v. ACIT [2025] 176 taxmann.com 902 (Del Trib.) wherein similar arrangements were entered into by Indigo.

Whether leased aircraft in India constitutes a fixed place PE of the Assessee

The ITAT placed reliance upon the finding of ITAT in the case of Sunflower Aircraft Leasing Ltd v. ACIT [2025] 177 taxmann.com 728 (Mum.) wherein two aircraft on dry operating lease were given to IndiGo and the ITAT observed that the leasing arrangement was executed offshore and operational control over the aircraft vested exclusively with IndiGo. Further, the aircraft could not be accessed or used by the assessee at will for its business. Entry to aircraft areas required IndiGo’s operational consent and regulatory clearances. Further, inspections by the Assessee were episodic, noticed, and ancillary to ownership protection. Hence, the disposal test which is a prerequisite for constitution of fixed place PE, was not satisfied in the instant case. The ITAT further held that the rights retained by the Assessee ensuring compliance with maintenance standards and repossession in default are standard lessor protections safeguarding the value of the asset that cannot lead to the conclusion that aircraft is at disposal and under the operational control of the Assessee. The ITAT in the present case applied the reasoning adopted in the case of Sunflower Aircraft Leasing Limited (supra) [ also see Hyatt International Southwest Asia Ltd. v. ADIT [2025] 176 taxmann.com 783 (SC) and ADIT v. E-Funds IT Solution Inc. [2017] 86 taxmann.com 240 /399 ITR 34 (SC)], in which in addition to non-satisfaction of disposal test, it was held that no part of leasing business was carried out in India. The Tribunal gave thoughtful consideration to the submissions made by both the parties, examined the lease agreements and had deliberated on the landmark judicial precedents laid in the case of Formula One World Championship Ltd. v. CIT [2017] 80 taxmann.com 347 /394 ITR 80 (SC);  ADIT v. E-Funds IT Solution Inc.  [2017] 86 taxmann.com 240 /399 ITR 34 (SC) and Hyatt International Southwest Asia Ltd. v. Addl. DIT [2025] 176 taxmann.com 783/478 ITR 238 (SC), all of which illuminate the major parameters of the concept of PE under tax treaties. Considering the above, it was analyzed that a PE would be said to be established certain conditions are observed to be fulfilled in substance like,

• The place is available at the disposal of the foreign entity for conducting its business operations, i.e. the disposal test is fulfilled,
• The place of business has some level of stability, productivity for the conduct of substantive commercial operations and functional reliance on the said location for conduct of the business activities.

Whether Article 8(1) of the tax treaty precludes taxation of the income in India

With reference to Article 8(1), the ITAT placed reliance upon the judgment of Mumbai ITAT in Sunflower Aircraft Leasing Ltd (supra). It was held in that latter judgment that the Article 8(1) of the tax treaty specifically precludes taxation of the income from operation or rental of ships or aircraft in international traffic in India. IndiGo employed aircrafts for both domestic and international traffic. It was also held that deployment of lease aircraft on at least some international traffic brings the income squarely within the scope of Article 8(1). While holding so, the ITAT rejected Revenue’s arguments that Assessee being a pure lessor with no airline operations of its own or that the aircraft should be predominantly used in international traffic, will not be eligible for benefit of Article 8 of DTAA.

Decision of the Delhi ITAT

Delhi ITAT in Kosi Aviation Leasing Ltd. v. ACIT [ITA No. 994/Del/2025, dated 30-9-2025] was dealing with same questions that were before Mumbai ITAT. In this case, the department while arguing enforceability of MLI argued that following vital aspects were not examined by Mumbai ITAT:

1. MLI curtails concession conferred: Since the MLI introduces anti-avoidance measures and only curtails concessions already granted under existing DTAAs, no separate notification under Section 90(1) of the Act is necessary to limit such concessions inasmuch as Central Government does not need further right to limit what it has right to grant in first place.

2. Global Practice: A single omnibus notification is issued by other dualists and monists countries for assimilation of MLI in domestic law.

3. Nestle SA was not examined considering historic precedents: Several other MLIs entered by India were implemented through a single omnibus notification outlining agreement amongst SAARC members, mutual administrative assistance in tax matter (MAAC) and competent authority agreement (CBCR).

4. Legislative assimilation: Memorandum of Finance Act, 2020 while providing for amendment to section 90(1) of the Act with respect to new DTAA’s to be entered into by India reflect that MLI was in effect from FY 2020-21 onwards, thereby putting the issue of legislative assimilation to rest.

However, rejecting the arguments raised by Department, Delhi ITAT held that in the absence of separate notification under Section 90(1) of the Act, MLI cannot be enforced by a single omnibus notification. In this regard, Delhi ITAT while placing reliance on Nestle SA and Sky High observed that:

• Department before Supreme Court in the case of Nestle SA argued that India follows the ‘dualist’ practice, and without enabling legislation, creation of any rights and liabilities of third parties to conventions or treaties, do not operate on their own, and requires an intervening action by the Union, giving effect to such obligation.
• Similar to the most favoured nation protocol, MLI has the effect of modifying or altering existing treaties. The Apex Court in Nestle SA had made it clear that any amendment to DTAA would come into force only after notification under Section 90(1) of the Act. The same analogy has to be applied in the case of MLI which has the effect of amending existing DTAAs. Department in its written submissions before Mumbai ITAT had accepted that MLI operates to modify tax treaties between two or more parties.
• With respect to SAARC, it was observed that said agreement was signed by all member countries on the same date accepting all terms and conditions in the said agreement. Thus, there was no concept of matching principle therein. MAAC and CBSR were merely administrative pacts to cooperate and share information and did not modify or alter substantive rights and obligations under treaty.
• Global practice would not define as to how MLI is to be made effective in India and practice of single omnibus notification is not suffice in India to make MLI workable. Further, the OECD itself also recognizes that the implementation of MLI at the domestic level will be dependent upon the domestic law of each country.
• Before amendment by Finance Act 2020, there was no substantive provision for assimilating MLI into legislation. Thus, notification under section 90 of the Act will be valid only after the section makes provision for same. The MLI electively amends DTAAs to implement BEPS measures and requires a separate notification to bring such amendments into force.

Further, regarding applicability of Article 8 of the India-Ireland DTAA, the department argued that international traffic should be evaluated on a voyage-by-voyage basis. The Delhi ITAT unequivocally dismissed this contention deeming the argument both misplaced and untenable and allowed the benefit under Article 8 of the DTAA based on certificate of deployment wherein lessee confirmed that aircraft was not deployed anywhere in Ireland and was operated in international traffic.

With respect to other issues, Delhi ITAT has relied on the judgment of Mumbai ITAT.