Income Tax Appellate Tribunal - Mumbai
Sky High Xxxiv Leasing Company ... vs Acit International Taxation Circle ... on 30 April, 2026
आयकर अपीलीय अिधकरण, मुंबई पीठ, मुंबई
INCOME TAX APPELLATE TRIBUNAL,
MUMBAI 'I' BENCH, MUMBAI
BEFORE HON'BLE SAKTIJIT DEY, VICE PRESIDENT
AND HON'BLE PRABHASH SHANKAR, ACCOUNTANT MEMBER
ITA 1308/MUM/2025
And
SA No.46/Mum/2025
[Arising out of ITA No.1308Mum/2025]
िनधा रण वष /Assmt. Year: 2022-23)
SKY HIGH XXXIV LEASING ACIT International Taxation
COMPANY LIMITED Circle 4(2)(1) Mumbai
2 Grand Canal Square Grand Canal Room No 627 6th Floor
Harbour Dublin D02a342, Ireland Vs. Kautilya Bhavan G Block
C/O Dmd Advocates 30 Nizamuddin Bandra Kurla Complex Bandra
East New Delhi-110013, Ireland- East Mumbai Maharashtra
110013, 400051
Mumbai-400051, Maharashtra
(Appellant) : (Respondent)
PAN: ABFCS0573F
ITA 1327 & 1328/MUM/2025
And
SA No.45 & 44/Mum/2025
[Arising out of ITA No.1328 & 1327Mum/2025]
िनधा रण वष /Assmt. Year: 2022-23)
Lunar Aircraft Trading Company ACIT International
Limited Taxation Circle 3(1)(2)
Unit J Shannon Business Park Block Mumbai
1 Shannon Co Clare Ireland ACIT International Taxation
C/O DMD Advocates 30 Vs.
Circle 3(1)(2) Mumbai Room
Nizamuddin East New Delhi No 1603, 16th Floor Air India
110013, Ireland-110013, Building Nariman Point
Mumbai Maharashtra 400021
(Appellant) : (Respondent)
PAN: AAECL4895P
1
ITA 1308/MUM/2025
SKY HIGH XXXIV LEASING COMPANY
LIMITED
Shri Sachit Jolly, Sr. Adv. A/w Shri
िनधा रती ारा/Assessee represented by: Hardeep Chawla, Ms. Sherry
Goyal-Adv.
Ms. Shilpa Goel, Special Counsel
राज व ारा/Revenue represented by:
for Revenue (Virtually Present)
ITA 1348/MUM/2025
िनधा रण वष /Assmt. Year: 2022-23)
GAL MSN 6072 & 6184
Limited Assistant Commissioner Of
Income Tax Circle 2(3)(2)
C/O Price Waterhouse &Amp; Co
Llp, 11-A, Sucheta Bhavan, Vishnu International Tax
Digamber Marg,, New Delhi-110002, Vs. Air India Building Nariman Point
Delhi Mumbai-400021, Maharashtra
PAN: AAICG2733P
(अपीलाथ Appellant) ( थ Respondent)
ITA 1349/MUM/2025
िनधा रण वष /Assmt. Year: 2022-23)
JET AIR 17 Limited Assistant Commissioner Of
Income Tax Circle 3(1)(1)
C/O Price Waterhouse &Amp; Co
Llp, 11-A, Sucheta Bhavan, Vishnu International Tax
Digamber Marg,, New Delhi- Vs. Air India Building Nariman
110002, Delhi Point
PAN: AAECJ7988B Mumbai-400021, Maharashtra
(अपीलाथ Appellant) ( थ Respondent)
2
ITA 1308/MUM/2025
SKY HIGH XXXIV LEASING COMPANY
LIMITED
ITA 1350/MUM/2025
िनधा रण वष /Assmt. Year: 2022-23)
Assistant Commissioner Of
Yamuna Aviation Leasing Limited Income Tax Circle 4(3)(2)
C/O Price Waterhouse &Amp; Co International Tax
Llp, 11-A, Sucheta Bhavan,
Room No. 1611, 16th
Vishnu Digamber Marg,, Vs. Air India Building Nariman Point
New Delhi-110002, Delhi
Mumbai-400021,
PAN: AABCY2245F
Maharashtra
(अपीलाथ Appellant) ( थ Respondent)
ITA 1351/MUM/2025
िनधा रण वष /Assmt. Year: 2022-23)
Falgu Aviation Leasing Limited
Assistant Commissioner Of
C/O Price Waterhouse &Amp; Co Income Tax Circle 2(3)(1)
LLP, 11-A, Sucheta Bhavan, Vishnu International Tax
Digamber Marg,, New Delhi- Vs. Air India Building Nariman Point
110002, Delhi
Mumbai-400021, Maharashtra
PAN: AAECF0555G
(अपीलाथ Appellant) ( थ Respondent)
Shri Ravi Sharma (Virtually
िनधा रती ारा/Assessee represented by:
Present)
Ms.Shilpa Goel, Special Counsel
राज व ारा/Revenue represented by:
for Revenue (Virtually Present)
ITA 1805/MUM/2025
िनधा रण वष /Assmt. Year: 2022-23)
Deputy Commissioner Of
PAAL Jupiter Company Limited Income Tax (Circle
2 Grand Parade, Dublin 6, D06 International Taxation )3(3)(2)
Vs.
Cx34, Ireland, Ireland- Kautilya Bhavan, C-41 To C 43,
PAN: AALCP4559R G Block Bkc Mumbai
Mumbai-400051, Maharashtra
3
ITA 1308/MUM/2025
SKY HIGH XXXIV LEASING COMPANY
LIMITED
(अपीलाथ Appellant) ( थ Respondent)
िनधा रती ारा/Assessee represented by: Shri Madhur Agarwal/Fenil Bhatt
Ms. Shilpa Goel, Special Counsel
राज व ारा/Revenue represented by:
for Revenue (Virtually Present)
ITA 1859/MUM/2025
िनधा रण वष /Assmt. Year: 2022-23)
Assistant Commissioner Of
VS MSN 36118 CAV Designated
Income Tax Circle International
Activity Company Taxation 4(3)(1)
2nd Floor, Block 5 Irish Life Centre
Room No. 620, 6th Floor,
Abbey Street, Lower Dublin Dublin Vs. Kautilya Bhavan,C-41 To C-43,
Ireland, Ireland-, Not Listed
G Block Bandra Kurla Compelx
PAN: AAHCV4441J
Mumbai-400051, Maharashtra
(अपीलाथ Appellant) ( थ Respondent)
Shri Sriram Seshadri (Virtually
िनधा रती ारा/Assessee represented by: Present)/Ms. Amulya K. (Vir.
Present)/Shri Mehul Jain
Ms. Shilpa Goel, Special Counsel
राज व ारा/Revenue represented by:
for Revenue (Virtually Present)
सु न वाई की तारीख / Date of conclusion of hearing: 22 nd April-2026
घोषणा की तारीख / Date of pronouncement: 30 t h April-2026
आदे श / ORDER
Per Saktijit Dey, VP:
Captioned Appeals of different assessees are against final assessment orders passed in pursuance to the directions of learned Dispute Resolution Panel ('DRP') 4 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED pertaining to Assessment Year (AY) 2022-23. Of course, there are three stay applications arising out of some of the appeals. Since, the appeals involve common issues, they have been clubbed together and disposed of in a consolidated order, for the sake of convenience.ITA No. 1308/Mum/2025 (SKY HIGH XXXIV Leasing Company Ltd.) (S.A. No. 46/Mum/2025)
A.Y. 2022-23
2. Since, the core issues arising in all these appeals are identical and facts relating to such issues are mostly common, this appeal is taken up as the lead matter and the decision taken here will apply mutatis mutandis to rest of the appeals. Ground No.1 is a general ground, hence, does not require specific adjudication. In Ground No. 2, assessee has challenged the validity of the impugned assessment order as barred by limitation.
Whereas, Ground No.3 to 10 are on various facets of the core issues concerning the taxability of lease rentals received by the assessee on leasing of aircraft.
3. Briefly the facts relating to these issues are, the assessee, a non-resident, was incorporated in Ireland on 11.06.2013 as a limited liability company. The assessee being an Irish resident and holder of a valid Tax Residency Certificate ('TRC') is covered under the India-Ireland Double Taxation Avoidance Agreement ('DTAA'). Further, as per the Irish laws, the assessee is subjected to Irish Corporation Tax at 12.5% on its tax adjusted profits and regularly files its annual returns in Ireland. Be that as it may, the assessee is a wholly owned subsidiary of ICBCIL Aviation Company Ltd. and is engaged in the business of purchasing and leasing aircrafts to third party airlines. The assessee is stated to be in this line of business for more than ten years. In course of such 5 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED business the assessee had leased an aircraft to an Indian entity, M/s InterGlobe Aviation Ltd. under an operating lease agreement executed on 18.07.2014. The leased aircraft was duly registered in the name of the assessee and bill of sale also mentions the assessee as the owner. The lease agreement was executed on dry operating lease basis for a period of 96 months commencing from July, 2014. Though, the lease agreement expired in July 2022, however, the lease terms were extended by another ten months up till June 2023 and thereafter the agreement was terminated. Upon termination of the agreement with M/s IntergGlobe Aviation Ltd., the assessee took possession of the aircraft and leased it out to a third-party airline based out of Indonesia.
4. However, in the year under consideration, the assessee received lease rentals of Rs.27,50,60,204/- towards leasing of the aircraft to M/s IntergGlobe Aviation Ltd.
Invoking Article 8 of India-Ireland DTAA, which provides for taxation of income from shipping and air transport in the country of residence, the assessee filed its return of income in India offering NIL income. The assessee's case was selected for scrutiny. In course of assessment proceedings, the Assessing Officer called upon the assessee to explain as to why the lease rentals received from leasing of aircraft should not be treated as equipment royalty under Article 12(3)(a) of the Treaty as well as under section 9(1)(vi) of the Income-tax Act, 1961 (in short, "the Act"). The Assessing Officer further called upon the assessee to explain why the lease arrangement between the assessee and M/s InterGlobe Aviation Ltd. should not be treated as finance lease and the lease rental should not be treated as interest income in terms with Article 11 of the Treaty.
Proceeding further, the Assessing Officer observed that the assessee being part of a structured arrangement lacking commercial and economic substance, having been setup 6 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED in Ireland only for the purpose of deriving treaty benefits, the India-Ireland DTAA being a Covered Tax Agreement (CTA) under multilateral convention to implement tax treaty related method to prevent base erosion and profit shifting, the treaty benefits should not be made available in terms of Article 6 and 7 of the Multi Lateral Instrument ('MLI') by applying the Principal Purpose Test ('PPT'). In response to the show cause notice issued by the Assessing Officer, the assessee furnished a detailed submission strongly refuting the allegation/charges of the Assessing Officer and staking its claim under Article 8 of the India-Ireland treaty. However, the Assessing Officer did not find the submissions of the assessee acceptable. Ultimately, he held that the assessee, in the first place, is not entitled to treaty benefits in view of the provisions contained under Article 6 and 7 of MLI and applying PPT. Further, he held that the lease rentals received by the assessee comes within the ambit of equipment royalty in terms with Section 9(1)(vi) of the Act as also Article 12(3) of India-Ireland DTAA. Without prejudice, the Assessing Officer held that the lease arrangement between the assessee and the Indian entity is in the nature of finance lease, hence, the lease rental received by the assessee is in the nature of interest income under Article 11 of India-Ireland DTAA. However, ultimately, he brought the lease rental to tax in India by treating it as royalty u/s. 9(1)(vi) read with Article 12(3) of the Treaty. Having done so, the Assessing Officer disallowed the beneficial rate of tax under the treaty, holding that the assessee is not entitled for treaty benefits.
5. Against the draft assessment order so passed, the assessee raised objections before learned DRP. In principle, ld. DRP agreed with the reasoning of the Assessing Officer. In as much as, learned DRP went a step further and held that the leased aircraft 7 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED constitutes a fixed place of business of the assessee in India hence, has to be treated as Permanent Establishment ('PE'). Therefore, alternatively, the lease rental can be taxed as business income in India.
6. Reiterating the submissions made before the Departmental Authorities, Shri Sachit Jolly, learned Senior Counsel appearing for the assessee submitted that assessee and other similarly situated companies in Ireland are setup as special purpose vehicles for leasing of aircrafts. He explained in detail how aircraft leasing is a core business segment in Ireland and most of the aircrafts operating in the world are leased by Irish entities. He submitted, under Article 8 of the India-Ireland treaty, income from leasing of aircrafts is taxable only in the country of residence. He submitted, though, the lease arrangement between the assessee and the Indian entity has all the characteristics of operating lease, the Departmental Authorities have erroneously treated it as finance lease. He submitted, the issue is otherwise fully covered in favour of the assessee by two decisions of the Coordinate Bench, wherein, a comprehensive view has been taken on all aspects of the issue, dealing with each and every reasoning of the Departmental Authorities in taxing the lease rental income in India. In this context, he copiously took us through the observations of the coordinate Bench in order dated 13.08.2025 passed in ITA No. 1122/Mum/2025 and others in case of Sky High Appeal XLIII Leasing Company Ltd. and others vs. ACIT. He also relied upon another decision of the coordinate Bench in case of Kosi Aviation Leasing Ltd. vs. ACIT and others, ITA No. 994/Del/2025 and others disposed 8 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED of vide order dated 30.09.2025. Thus, while summing up, he submitted, the observations of the coordinate Benches deserve to be followed and additions made should be deleted.
7. In reply, Ms. Shilpa Goel, learned Special Counsel appearing for the Revenue, at the very outset, fairly conceded that the issues in dispute are squarely covered by the decisions of the coordinate benches cited by learned counsel for the assessee. Proceeding further, she submitted that she has nothing more to add to the submissions already made by the Department in the appeals considered and decided by the coordinate benches.
8. We have given a thoughtful consideration to rival contentions and perused the materials on record. We have attentively and carefully gone through the decisions of the coordinate Benches cited before us. In case of Sky High Appeal XLIII vs. ACIT (Supra), the issues framed for consideration were as under:-
"a) Whether the assessments are barred by limitation under section 144C read with section 153 of the Act;
(b) Whether the directions issued by the learned DRP travel beyond its jurisdiction;
(c) 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;
(d) The true characterisation and taxability of lease rentals and supplementary lease rentals;
(e) Applicability of Article 8 of the India-Ireland Double Taxation Avoidance Agreement ("DTAA");9
ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED
(f) Existence or otherwise of a Permanent Establishment ("PE") in India;
(g) Levy of interest under sections 234A and/or 234B;
(h) Initiation and levy of penalty under section 270A read with section 274 of the Act;"
9. As could be seen from the issues framed, the issues relevant for deciding the present appeal are issue Nos. (c) to (f). In so far as the issue of applicability of Articles 6 and 7 of MLI and PPT to deny treaty benefits to the assessee, the observations of the Coordinate Bench are as under:
"30. As noted above, the issue presents two sub-questions:
firstly, whether the provisions of the MLI can be read to restrict the applicability of the India-Ireland DTAA in the absence of a separate notified protocol to that DTAA; and 24 ITA No.1198/Mum/2025 and others secondly, if the answer to the first is in the affirmative, whether, on the facts of the present case, the principal purpose test in Articles 6 and 7 is satisfied.
31. The relevant background in brief is set out at the outset. The DTAA between India-Ireland was notified in the official gazette on 11th January 2002; The MLI on the other hand was notified on 9th August 2019. Importantly, the India-Ireland DTAA has been designated as a Covered Tax Agreement for the purpose of MLI. Ireland for its part, ratified the MLI with effect from 1st May 2019. The OECD characterizes the BEPS MLI as a pathbreaking multilateral instrument which enables sovereign Governments to incorporate agreed minimum standards to counter treaty abuse and to strengthen dispute resolution mechanism while retaining sufficient flexibility to preserve specific tax treaty policy objectives. The MLI‟s genesis lay in the desire to overcome the protracted nature of bilateral treaty renegotiations. For a country like India, with over ninety DTAAs, and for treaty partners with similarly extensive networks, individual renegotiation would have been a herculean task. The operational mechanics of the MLI is structured in a manner that promotes efficiency and consensus. Each member state (e.g. India) is required to deposit a signed instrument with the OECD specifying treaties it designates as covered tax agreements, together 10 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED with the amendments or reservations it proposes qua each tax agreement. Where the counterparty to a bilateral treaty (e.g. Ireland) also identifies the same bilateral treaty (e.g. IndiaIreland DTAA) as a covered tax agreement and agrees to the same amendments, then it can be said consensus has been reached qua the amendments. In this way the prolonged and often arduous process of separate bilateral negotiations is largely obviated. However, the manner in which the agreed amendments are implemented continues to remain within the sovereign domain of each contracting state. The OECD does not dictate the modalities through which such amendments are given effect under municipal laws of each member country.
32. It is here that the ratio of Nestle SA (supra) assumes critical importance. The learned Senior Counsel submitted that, under India‟s constitutional practice and Section 90 of the Act, unless the events flowing from the convention (MLI), i.e., introduction of the principal purpose test are read into the India Ireland DTAA by way of a separately notification, the simpliciter notification of the MLI would not lead to automatic amendment of the India-Ireland DTAA.
33. In Nestle SA (supra), the Hon‟ble Supreme Court was faced with a situation where the taxpayers sought to invoke the "Most Favoured Nation" clauses contained in earlier DTAAs namely, the India-France and India-Netherlands agreements in order to import into those treaties certain more favourable provisions contained in subsequent DTAAs that India had entered into with other OECD member states, such as the United Kingdom, Slovenia, Lithuania, and Colombia. The contention was that the MFN clause operated automatically, once the later treaty was 26 ITA No.1198/Mum/2025 and others notified, the more beneficial scope or lower rates therein became part of the earlier treaty without any further formality.
34. Here it would, therefore, be relevant to refer to the protocols of the India-France and India-Netherlands DTAA, which for sake of ready reference are reproduced below: Relevant extract from the India-France DTAA: ―PROTOCOL At the time of proceeding to the signature of the Convention between France and India for the avoidance of double taxation with respect to taxes on income and on capital, the undersigned have agreed on the following provisions which shall form an integral part of the Convention.‖ xxx "7. In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this 11 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.
Relevant extract from the India-Netherlands DTAA:
"PROTOCOL At the moment of signing the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, this day concluded between the Kingdom of the Netherlands and the Republic of India, the undersigned have agreed that the following provisions shall form an integral part of the Convention.
xxx IV. Ad Articles 10, 11 and 12
1. Where tax has been levied at source in excess of the amount of tax chargeable under the provisions of Article 10, 11 or 12, applications for the refund of the excess amount of tax have to be lodged with the competent authority of the State having levied the tax, within a period of three years after the expiration of the calendar year in which the tax has been levied.
2. If after the signature of this convention under any Convention or Agreement between India and a third State which is a member of the OECD India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention.
35. The case of the taxpayers in the context of the India-France DTAA was that subsequent to the said DTAA, India signed the India-UK DTAA wherein the scope of "fee for technical services" was restricted to a large extent. Similarly, the case qua India Netherlands DTAA was that after signing of the said DTAA, India signed the DTAA with Slovenia, Lithuania, and Columbia wherein the rate of dividend was restricted to 5%. The submission was that consequent to the signing of the subsequent DTAAs, i.e. India - UK DTAA and India - Columbia DTAA, India - Lithuania DTAA, India - Slovenia DTAA, the benefits of the subsequent DTAAs shall be read as part of the earlier India-France and India- Netherlands DTAA.12
ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED
36. The Revenue, on the other hand, on a combined reading of Article 253 of the Constitution of India and section 90 of the Act, argued that the notification of the subsequent treaties would not automatically amend the earlier DTAAs and a separate notification was required to effectuate the impact of the subsequent DTAAs on the earlier DTAAs. The submission of the Revenue in para 8 of the Judgment, was that "any convention or event flowing from a convention, as in creation of rights and liabilities of third parties to conventions or treaties do not operate on their own and needs an intervening action by the Union giving effect to such obligation".
37. The Hon‟ble Supreme Court of India in the case of Nestle (supra), accepting the submission of the Revenue and repelling the submission of the taxpayers, held that a separate notification to effectuate the impact of a subsequent DTAA into an earlier DTAA must be issued. The notification of the subsequent DTAA does not ipso facto and automatically lead to amendment of the earlier DTAA. The following relevant findings of the Supreme Court are reproduced hereunder:
"44. The holding in the decisions discussed above may thus be summarized:
(i) The terms of a treaty ratified by the Union do not ipso facto acquire enforceability; and others
(ii) The Union has exclusive executive power to enter into international treaties and conventions under Article 73 [read with corresponding Entries - Nos. 10, 13 and 14 of List I of the VII the Schedule to the Constitution of India] and Parliament, holds the exclusive power to legislate upon such conventions or treaties.
(iii) Parliament can refuse to perform or give effect to such treaties. In such event, though such treaties bind the Union, vis a vis the other contracting state(s), leaving the Union in default.
(iv) The application of such treaties is binding upon the Union. Yet, they "are not by their own force binding upon Indian nationals".
(v) Law making by Parliament in respect of such treaties is required if the treaty or agreement restricts or affects the rights of citizens or others or modifies the law of India.
(vi) If citizens' rights or others' rights are not unaffected, or the laws of India are not modified, no legislative measure is necessary to give effect to treaties.
(vii) In the event of any ambiguity in the provision or law, which brings into force the treaty or obligation, the court is entitled to look into the international instrument, to clear the ambiguity or seek clarity.
13ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED XXX
46. The legal position discernible from the previous discussion, therefore is that upon India entering into a treaty or protocol does not result in its automatic enforceability in courts and tribunals; the provisions of such treaties and protocols do not therefore, confer rights upon parties, till such time, as appropriate notifications are issued, in terms of Section 90(1).
XXX
60. The omission of certain benefits (available to other member countries of OECD who had entered into DTAAs with India) in the subsequent notification, dated 10.07.2000, is another indication that a ―trigger‖ event such as India granting favourable relief to a and others country per se does not cover all the benefits granted through the later instrument. Therefore, the benefit which India granted France, was within the framework of its treaty originally negotiated. In the case of the other country (granted benefits later, through a convention, by India), a different trajectory of negotiations might have led to different kind of benefits to the third country (UK and Portugal, in the case of France). In other words, the structure of the main DTAA, and its phraseology, based on negotiations with the countries concerned, i.e., Netherlands, France and Switzerland, also plays a role in the kind of benefits that are assured through it. The structure and terms of other DTAAs might be different; the coverage and definition of certain terms (FTS, permanent establishment, etc.) might be dissimilar. The revenue's argument that grant of automatic benefits based on the other country's entry into OECD, as unfeasible, has merit.
XXX
72. In the opinion of this court, the status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates. In each of the said three countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/procedure, the treaty is assimilated into the body of domestic law, enforceable in courts. 44 Article 89 of the Federal Constitution of the Swiss Federation, available at: (accessed on 11.10.2023).
"86......In sum, whilst considering treaty interpretation, it is vital to take into account practice of the parties. There is no dispute that treaties constitute binding obligations upon their signatories. Yet, like all compacts, how the parties to any specific instrument view them, give effect to its provisions, and the manner of acceptance of and others such conventions or compacts are in the domain of bilateral relations and diplomacy. Much depends upon the relationship of the parties, the 14 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED mutuality of their interests, and the extent of cooperation or accommodation they extend to each other. In this, a range of interests combine. The issue of treaty interpretation and treaty integration into domestic law is driven by constitutional and political factors subjective to each signatory. Therefore, domestic courts cannot adopt the same approach to treaty interpretation in a black letter manner, as is required or expected of them, while construing enacted binding law. The role of practice- which is, as the previous discussion demonstrates, not bilateral or joint practice, but practice by one, accepted generally by the international community as operating in that particular sphere, which is relevant, and at times determinative.
87. This court is of the opinion that the treaty practice of Switzerland, Netherlands and France is dictated by conditions peculiar to their constitutional and legal regimes. Could it conceivably be argued that in the event of failure of the Swiss Confederation to secure the requisite majority in a referendum or approval by the Swiss Parliament, or in the absence of approval by both houses of the States General in Netherlands, a DTAA provision or trigger event could nevertheless be assimilated into executive decrees? The answer is obviously in the negative. Likewise, the treaty practice in India points to a consistent pattern of behaviour when the signatory to an existing DTAA, points to the event of a third state entering into OECD membership, and a resultant trigger event, the beneficial effect given to the later third party state has to be notified in the earlier DTAA, as a consequential amendment, preceded by exchange of communication (and perhaps, negotiation) and acceptance of that position by India. The essential requirement of a notification under Section 90 of the consequences of the trigger (or causative) event cannot be undermined.
V. Conclusions
88. In the light of the above discussion, it is held and declared that:
a) A notification under section 90(1) is necessary and a mandatory condition for a court, authority, or Tribunal to give effect to a Double Taxation Avoidance Agreement, or any protocol changing its terms or conditions, which has the effect of altering the existing provisions of law.
b) The fact that a stipulation in a Double Taxation Avoidance Agreement or a Protocol with one nation, requires same treatment in respect to a matter covered by its terms, subsequent to its being entered into when another nation (which is member of a multilateral organisation such as Organisation for Economic Cooperation and Development), is given better treatment, does not automatically lead to integration of such term extending the same benefit in regard to a matter covered in the Double Taxation Avoidance Agreement of the first nation, which entered into Double Taxation Avoidance Agreement with India. In such event, the 15 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED terms of the earlier Double Taxation Avoidance Agreement require to be amended through a separate notification under section 90."
38. Thus, the Hon'ble Supreme Court in Nestlé has rendered a landmark ruling on the constitutional status and domestic enforceability of Double Taxation Avoidance Agreements (DTAAs), emphatically clarifying that the assimilation of such international instruments into the Indian legal framework is neither automatic nor mechanical. A DTAA, even when duly signed and ratified, does not per se acquire enforceability within the municipal legal system, unless and until it is expressly brought into force through a notification issued under Section 90(1) of the Income- tax Act. In the absence of such notification, and others treaty provisions, however binding they may be in international law do not confer enforceable rights upon taxpayers before Indian courts and tribunals.
39. The Court further rejected the contention that benefits granted to a foreign State at a subsequent point of time, whether on account of its accession to the OECD or pursuant to later negotiations and protocols, are automatically grafted onto an earlier DTAA with another State. Unlike domestic legislation, which emanates from parliamentary will, treaties are the product of diplomatic engagement and negotiated consensus, reflecting the constitutional and economic realities of the contracting States. Each DTAA is therefore a self-contained instrument, the interpretation of which must remain tethered to its own text, structure and definitional scope; it cannot be expanded by implication merely because similar expressions appear in another DTAA or because a party has subsequently joined a multilateral organisation. Accordingly, the Court held that any extension of treaty benefits to a new OECD member State can take effect only if India consciously accepts such extension, communicates this position to the treaty partner, and issues a fresh notification under Section 90(1). In the absence of such a deliberate and notified amendment, no parity of treatment or "trigger-event-driven" integration can be presumed.
In crystallising these principles, the Supreme Court has reaffirmed that:
• Parliament retains the exclusive authority to legislate upon treaty provisions where they affect the rights of citizens;
• notification under Section 90(1) is a mandatory precondition for the enforceability of any DTAA or protocol that alters existing provisions of law; and • domestic courts cannot apply a rigid black-letter interpretive approach, but must account for the constitutional, diplomatic and practical realities attending upon different treaties.
In essence, Nestlé lays down that treaty benefits do not cascade automatically by reason of external developments such as OECD membership or subsequent bilateral arrangements, and that only a 16 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED deliberate, notified act of incorporation can elevate such benefits into enforceable domestic law.
40. In our considered view, the factual matrix of the present case bears a close parallel to that examined by the Hon‟ble Supreme Court in Nestlé SA (supra). In that decision, as in the matter before us, the original bilateral tax treaty in this case the India-Ireland DTAA stood duly notified. Equally, the subsequent multilateral instrument (MLI) had also been formally notified. The pivotal question, however, was not the mere existence of notifications in respect of both instruments, but rather whether the consequential modification of the earlier DTAA, brought about by virtue of the later multilateral instrument, had itself been separately notified for the purposes of domestic application. On the material available on record, it is expressly admitted that although both the India-Ireland DTAA and the MLI have been notified, "the consequence/impact of the MLI on the India Ireland DTAA is not admittedly and separately notified."
41. The ratio of the Supreme Court in Nestlé SA leaves no room for ambiguity on this issue. Summarising its conclusions in paragraph 88 of the judgment, the Court emphatically held that a notification under Section 90(1) of the Income-tax Act is an indispensable and mandatory condition for any court, authority or tribunal to give effect to a Double Taxation Avoidance Agreement, or to any protocol or instrument that purports to alter the terms or conditions of such agreement. Put differently, any subsequent treaty-based modification of an existing DTAA can be enforced under municipal law only where a specific Section 90(1) notification has been issued incorporating that modification into Indian law.
42. The Revenue has argued that, since the MLI has been duly notified and the India-Ireland DTAA is a "Covered Tax Agreement", Articles 6 and 7 (i.e., the PPT suite) automatically apply. With respect, this contention cannot be reconciled with the constitutional and statutory mandate articulated by the Hon‟ble Supreme Court in Nestlé SA. Indeed, the Revenue‟s own explanatory note acknowledges that the MLI "operates to modify tax treaties", while at the same time conceding that it is "not an amending protocol", and that the widely circulated "synthesised text" is not in itself a legally binding document.
43. In truth, the so-called synthesised text which incorporates the MLI provisions into the covered tax agreement is nothing more than an expository compilation intended to facilitate understanding. It has neither been notified in the Official Gazette under Section 90(1) nor admitted by the Revenue to be a binding legal instrument. The reason for this is self-evident, unless and until the MLI-based modifications themselves are separately notified, a step which, in light of the principles laid down in Nestlé SA, is a mandatory pre-condition the synthesised text, however convenient for reference, cannot be treated as a source of enforceable law. Consequently, the Department cannot rely 17 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED on the synthesised text to apply the PPT provisions, for that text has no greater legal sanctity than the unincorporated MLI provisions themselves.
44. The structural design of the MLI itself reinforces this conclusion. Under its operational framework, each contracting State is required to deposit with the OECD a list of bilateral treaties that it wishes to designate as "covered agreements" along with its specific positions and reservations. The effectiveness of those positions, however, remains contingent upon the principle of reciprocity and, most importantly, upon the manner in which each State gives effect to such positions under its own domestic law. It is, therefore, not enough that India has merely notified the MLI or identified the India-Ireland DTAA as a covered tax agreement. Unless the changes contemplated in the MLI are expressly incorporated into Indian law through the statutory mechanism, namely, a specific notification under Section 90(1) those changes cannot operate to alter the manner in which the domestic authorities apply the DTAA. That position now constitutes the law of the land by virtue of the judgment of the Hon‟ble Supreme Court in Nestlé SA, which makes it clear that neither the MLI nor any synthesised text can have domestic legal efficacy unless duly notified under Section 90(1) of the Act.
45. Against this settled backdrop, the approach adopted by the Assessing Officer and the learned DRP in treating the Principal Purpose Test under the MLI as self-executing in relation to the India-Ireland DTAA is wholly unsustainable. Not only does it run counter to the Revenue‟s own description of the MLI, namely, that it "modifies existing treaties"
but it is also directly inconsistent with the binding precedent of the Supreme Court. The contradiction is plain: the Revenue recognises that the MLI modifies tax treaties, yet it sidesteps the very legal requirement that Nestlé SA describes as an indispensable precondition, namely, a separate Section 90(1) notification incorporating those treaty modifications into Indian law.
46. When the ratio of Nestlé SA is applied to the facts of the present case, the inevitable conclusion is that the MLI cannot be invoked to curtail or otherwise restrict the benefits available to the assessee under the India-Ireland DTAA unless the specific consequence of the MLI has been notified under Section 90(1). In 38 ITA No.1198/Mum/2025 and others the absence of such notification, neither the bare provisions of the MLI nor any synthesised text reflecting its intended application can form the basis for altering the application of an already notified DTAA.
47. We are therefore constrained to hold, as a threshold matter, that Articles 6 and 7 of the MLI cannot be invoked against the assessee in the present assessment year, inasmuch as there is no Section 90(1) notification incorporating those provisions into the India-Ireland DTAA. Consequently, the Revenue's attempt to deny treaty benefits by invoking the MLI‟s Principal Purpose Test must, on this ground alone, fail. The assessment must proceed on the footing that the MLI has no 18 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED application in the absence of a statutorily issued notification under Section 90(1)."
10. In so far as, issue of recharacterization of operating lease as finance lease, the Coordinate Bench has held as under:
"87. After hearing both the parties and on perusal of the material referred to before us and the contract which has been referred to before us on examining the contract, we find that Clause 2.1, read with Clause 1.1, clearly states that the lessee is not the owner and that the lease is a dry operating lease. Clause 21.1 gives the lessor the right to repossess on default, and Clause 16.1 requires the aircraft to be returned at the end of the lease term. Clauses 1.1 and 10.2 require the lessee to display the owner‟s name and not represent itself as owner. All these clauses confirm that ownership stays with the assessee throughout. 88. It is undisputed that the assessee and IndiGo are unrelated parties dealing at arm‟s length. Unless there is clear evidence of a sham, courts must go by the contract as agreed. The Hon‟ble Supreme Court in Vodafone International Holdings BV v. Union of India has held that form and structure of a genuine transaction should be respected. Applying this principle:
• Operational risks with the lessee do not amount to ownership risks. Examples during COVID-19 and the Russia-Ukraine conflict show the lessor retaining ownership risks.
• Clause 21.1 allows termination on default, consistent with an operating lease.
• The right to sub-lease only with the lessors consent shows that ownership is not transferred.
• Irish depreciation rules are irrelevant to the legal nature of the lease in India.
• The Special Bench decision in InterGlobe Aviation was not a casual observation but a clear finding.
89. Taking all these factors together the contract terms, DGCA‟s guidelines, RBI‟s distinction between operating and finance leases, statutory definitions, earlier judicial decisions including those involving IndiGo, and the English court‟s ruling we conclude that the lease in question is an operating lease. The reasons given by the ld.
DRP are neither factually nor legally sustainable.
90. The ld. DRP, however, has proceeded to classify the lease as a finance lease based on the following points:
19ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED
(a) The lessee bears all risks during the term of the lease.
(b) The lease is non-cancellable.
(c) The lessee has the right to sub-lease.
(d) Under Irish depreciation rules, the cost of an aircraft can be depreciated in 6-8 years, and therefore any lease exceeding 8 years should be treated as a finance lease.
(e) The ld.DRP also concluded that the economic life of an aircraft is 6-8 years or 60,000 flying hours, and any lease beyond that should qualify as a finance lease.
(f) The ld.DRP disregarded the Special Bench ruling in InterGlobe Aviation Ltd. v. ACIT on the ground that its observations on this issue were casual and not part of the core decision.
91. We find each of these points untenable:-
First, there is a fundamental difference between operational risks and ownership risks. The lessee, as operator, naturally bears operational risks, such as fuel costs, crew, maintenance, and daily usage. Ownership risks such as residual value fluctuation, impairment, or inability to repossess in geopolitical crises remain with the lessor. The COVID-19 pandemic and the Russia-Ukraine conflict are telling examples: operators suffered loss of business (operational risk), while owners/lessors also suffered where repossession was impossible (ownership risk). The ld.DRP‟s reasoning blurs this distinction.
Second, the lease is not "non-cancellable" in the absolute sense. Clause 21.1 clearly allows termination in the event of default, which is a normal feature of operating leases.
Third, the mere fact that the lessee can sub-lease is not determinative of ownership. In this agreement, sub-letting is only possible with the lessor‟s prior written consent. This safeguard itself indicates that ownership remains with the lessor.
Fourth, reliance on Irish depreciation rules is wholly misplaced. These rules merely allow an Irish taxpayer to depreciate an aircraft‟s cost over 8 years on a straight-line basis for Irish tax purposes. This does not mean that the aircraft‟s economic life ends in 8 years or that ownership changes. Depreciation rules are applicable only to the owner; they cannot be used to determine whether a lease is a finance lease in the Indian tax context.
Fifth, the ld. DRP‟s assumption that the economic life of an aircraft is 6-8 years or 60,000 flying hours is inconsistent with the DGCA Circular dated 29.07.1993, which prescribes 20 years or 60,000 20 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED pressurisation/landing cycles as the benchmark. Flying hours and pressurisation cycles are not interchangeable measures, and the ld. DRP‟s approach has no technical basis.
Last, the ld. DRP‟s dismissal of the Special Bench ruling in InterGlobe Aviation Ltd. as "casual observations" is unfounded. The Special Bench made a considered finding on this very point after analysing identical agreements, and its conclusion that such arrangements constitute operating leases was part of its adjudication.
92. We therefore hold that the ld. DRP‟s classification of the lease as a finance lease is contrary to the contractual terms, regulatory framework, statutory definitions, and judicial precedents. The lease in question meets all the essential attributes of an operating lease, and nothing in the facts or the law justifies recharacterising it otherwise.
93. Insofar as the proceedings in the case of IndiGo are concerned, useful reference can be made to the following orders passed by Hon‟ble Courts and Tribunals as well the tax department itself.
94. A coordinate bench of the Delhi Tribunal in its order dated 18/11/2016 in ITA Nos.749 & 750/Del/2016, passed in the case of IndiGo for the AYs 2008-09 and 2009-10 held that lessors purchased the aircraft and leased to IndiGo on operating lease basis. The relevant extract of the order is reproduced hereunder:
"4.3 We have heard the rival submissions and perused the relevant material on record. The facts emanating from the orders of authorities are as under:
(i) In the financial year 2005-06, the assessee entered into an agreement with Airbus SAS, France (‗Airbus') for purchase of hundred aircrafts with the option to choose the engines fitted in such aircrafts.
(ii) The assessee selected V-2500 engines manufactured by IAE International Aero Engines AG, Switzerland (‗IAE'). On delivery of aircrafts fitted with the engines supplied by the IAE. Similarly, suppliers of other components of aircrafts also extended credits to the assessee.
(iii) The assessee assigned its interest in purchase agreement to other parties i.e., Genesis Acquisition Ltd., Lare Leasing Ltd. etc. and the assessee acquired the aircrafts on operating lease basis. In view of the arrangement, the aircrafts were purchased by the leasing companies, who were residents of Ireland and leased to assessee on operating lease basis....."
XXX 21 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED "6.5 We find that the Tribunal has also considered the fact of the assessment year under consideration while arriving at the above decision. In our opinion issue has already been considered by the Tribunal in decision (supra), thus respectfully following the above decision we hold that the assessee was not requited to deduct TDS on supplementary lease rental being exempt under section 10(15A) of the Act. Accordingly, the disallowance made under section 40(a)(i) of the Act is deleted and grounds of the appeal from 3 to 3.1 and 4 are allowed.
95. Further, the Hon‟ble Delhi High Court vide order dated 31/10/2017 passed in ITA Nos. 914 and 916 of 2017dismissed the appeal filed by the Revenue against the above-mentioned order of the Hon'ble Tribunal and the SLP filed by the Revenue challenging the order of the Hon‟ble High Court was dismissed by the Hon'ble Supreme Court vide order dated 10/09/2018 passed in SLP (C) Diary No. 29936/2018.
96. Even in the proceedings of IndiGo for AY 2012-13, the AO himself noted in order dated 25/12/2015 that InterGlobe is not the owner of the aircraft. The relevant portion of the order is reproduced hereunder for ready reference:
"In the instant case, the assessee has not purchased the aircraft but has hired it on lease from several concerns like Aether, Celestial Aviation Trading 9 Ltd. etc. All these parties are lessors and are based in Ireland. The assessee company has been paying lease rent to these parties as per the agreement executed between the company (lessee) and the parties (lessors). The depreciation on these aircrafts where, the engines supplied by IAE are fitted, is claimed by the lessors. The assessee has not claimed depreciation on these aircrafts where the engines are fitted because it is not the owner of the aircrafts.....
97. Further, the CIT (A) in case of InterGlobe for AY 2012-13 in its order dated 22/03/2017 noted that the aircraft were returned to the lessors and that the lease is in the nature of operating lease. The relevant para is extracted hereunder:
"10.1.....Since, the delivery schedule of aircrafts is spread over a very long period, the appellant normally replaces its old fleet with new fleet, after the expiry of lease period which is usually six years. The old aircrafts are then returned to the lessors, Since the supply of leased aircraft is low and aircraft manufacturers are chocked with such bulk orders, the lessor can easily lease it out to others. In the process, the appellant saves on maintenance cost also which rises with the age of the aircraft. The usual warranty period is approximately five years and the period of operating lease in case of appellant is six years. As a result, the cost of maintenance by the appellant is also low. Since, the lease rentals factor in itself, the sale price of aircraft to the lessor- higher the price, higher would be the lease rentals i.e. there is direct 22 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED nexus between the two. Therefore, in the books of accounts, the appellant amortizes various discounts received by it over the operating lease period and sets it off against the payments of lease rentals else accounts would not reflect the true profits.
10.2 In the above model of purchase, sale, lease back and return the appellant is able to get heavy discounts on list prices of aircraft and engines besides its capital is not locked up due to sale of aircraft to lessors. If, the appellant initially purchases the aircraft and then sells it to the lessors, the profit made in the said process is assessable as Capital Gains. In case of assignment of purchase order in favour of lessor, the consideration for assignment less cost of right to purchase is assessable as Capital Gains. The cost of the appellant is the amount paid by it net of discounts availed and the discount availed/credits received from engine manufacturers is a part of it. There is no contradiction in this finding and the decision of Hon'ble ITAT treating the discounts/credits from engine manufactures as capital receipt. Capital receipt is to be netted against capital expenditure to arrive at the cost of acquisition of asset (right to purchase) for the purpose of determination of Capital Gains. Since the appellant claims that the purchase order was assigned to the lessor at the purchase price mentioned in the agreement, the credits received become taxable as Capital Gains as cost of acquisition of purchase right gets reduced by the amount of credits.
98. Although in the assessment proceedings for AY 2012-13, the AO accepted that the leasing arrangement is in the nature of operating lease, an argument was made by the Revenue before the Special Bench of the Tribunal that the lease arrangements are actually in the nature of finance lease arrangements.
99. However, the Special Bench has rejected that specific submission of the Revenue on the ground that the agreements do not answer the description of finance lease arrangements. The relevant portion of the decision in extracted hereunder for reference:
"1.1 Facts of the case, in brief, are that the assessee is a Company engaged in the business of operating low cost Airlines in India under the Name and Brand "IndiGo". It filed its return of income on 21.09.2012 declaring loss of Rs.170.30 crores. During the course of assessment proceedings, it was observed that M/s. Inter Globe Aviation Ltd., (Assessee) had entered into a Purchase Agreement with AIRBUS SAS, France, for supply of 100 Aircrafts. The assessee had selected V- 2 500 engines manufactured by IAE international aero engines AG,Switzerland (also referred as IAE hereafter) as supplier of engines which are to be fitted in the aircraft. As a consideration for selection of the IAE engines to be fitted in the aircraft to be purchased by the assessee-company, certain credits were allowable to the assessee- company from IAE on the delivery of such aircraft. As per the assessee the aircraft had been acquired on operating lease basis consequent to 23 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED assigning the purchase contract between the assessee company and respective lessor in favour of leasing/finance company. It is further observed that the assessee-company has received credits from IAE and others in respect of supplier furnished equipment on the actual delivery of the aircraft during the year amounting to Rs.7,59,39,25,444/- which have been spread over the period of lease and the proportionate amount aggregating to Rs.2,68,91,48,934/- relatable to this year has been reduced from the expense charge for aircraft lease rentals and also shown under while the balance of Rs.11,80,37,62,420/- has been depicted as deferred incentives under non-current liabilities and current liabilities. As per assessee, since the credit given by IAE are linked to the acquisition of the aircraft by the company, the amount being capital receipt, is not liable to tax.
Xxx 1.4. The A.O, however, noted that assessee has not purchased the Aircraft but has hired it on lease from several concerns. All the parties are lessors and are based in Ireland. The assessee-company has been paying lease rentals to these parties as per the agreement executed between the lessor and lessee. The depreciation on these Aircrafts where engines supplied by IAE are fitted is claimed by the lessors. The assessee has not claimed depreciation on these Aircrafts where the engines are fitted because it is not the owner of the Aircrafts. Whatever lease rent amount decided between the lessor and lessee is paid by the assessee and same were charged to the profit and loss account as revenue expenditure. The A.O. relied upon Explanation-10 to Section 43(1) of the LT. Act and held that contention of assessee is liable to be rejected and the amount of Rs.268. 91 crores being subsidy was treated as revenue receipt in the hands of assessee and made the addition of the same by observing as under....
Xxx
2. Therefore, the questions that have to be adjudicated by the Special Bench may be summarised as under:(1) Whether FIA (Fleet Introductory Assistance) credit received by the Assessee from IAE and other equipment manufacturers is a Capital or revenue receipt arising out of the transaction ?
(2) Whether credits so received are taxable under section 28(i) or 28(iv) of the I.T. Act, 1961 or as a "Commission" income or "Income from capital gains"?
(3) Whether the Ld. CIT(A) is right in making disallowance of Rs.268,91,48,934/- out of lease rental payments under section 37(1) of the I.T. Act, 1961?24
ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED (4) Whether payment of Supplementary Lease Rent of Rs.328,09 ,64,412 I- is an allowable business expenditure and TDS is not deductible thereon ?
Xxx 15.5. The Learned Special Counsel for the Revenue submitted that the 'Credit' is a pure accounting term signifying the amount receivable ~rom another entity in future. The term by itself is not indicative of the nature of receipt. This can assume the character of a capital receipt only, if it can be shown that the amount payable by such entity represents the consideration for transfer of a capital asset which moved from the Recipient of the Credit to the Issuer of the Credit. However, no such event has happened in this case. He submitted that the only other way such receipt can assume the character of a capital receipt is, if it is found that it represents a compensation for the loss of a capital asset or the loss of source of income as in the case of Oberoi Hotels (P) Ltd., vs., CIT reported in 236 ITR 903 (SC) = 2002- TIOL-2355-SC-IT-LB . It is also not an equity, loan or debt. He submitted that it is really incomprehensible that such credits flowing from a commercial agreement being the outcome of the negotiations with regard to the purchase of engines [the Agreement Dated 19.10.2005 supersedes earlier negotiations clearly indicating that the prices and the discounts were negotiated over a long period of time] is sought to be claimed as a capital receipt. This discount can only be get adjusted with the purchase price of the engine, if the assessee chooses to acquire the aircraft with the engine. This is precisely the treatment given in the accounts. The assessee having not chosen to purchase the aircraft, assigning the right to the lessors who pay the purchase price, the receipts would obviously be pure business receipts adding to the profits of the assessee's.
Xxx 21.3. He submitted that the agreement with the Lessors clearly demonstrates that the Lessors only took the title of the aircraft and the actual delivery of the aircraft was taken by the assessee, purportedly as an agent of the assignees. The Lease Agreement clearly provides the formula for working-out the amount of Lease Rent. This takes into account the prevailing LIBOR rates. That is a sufficient evidence to suggest that these are financing arrangements and largely admitted as finance lease. The credits have accordingly been shown in the accounts as income from other sources.
21.4. The Learned Special Counsel for the Revenue submitted that the payment, by whatever name called, of finance charges would fall within the definition of "interest" and would be chargeable to tax in India under Article 11 of Indo-Irish DTAA. Hence, the tax was liable to be deducted under Section 195. The failure to deduct tax has rightly invited the consequence under Section 40(a)(i) as held by the A.O. The 25 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED objection of the assessee during the course of hearing that Article 11 having not been invoked by the A.O. or Ld. CIT(A), it was not open for the Revenue to urge the application of this Article. However, the applicability of section 195 read with section 40 (a)(i) of the I. T. Act, 1961 is in dispute and the issue before the Tribunal is - whether any amount of tax was deductible under section 195 and whether any disallowance under section 40(a)(i) can be made or not?
Xxx 31.4 It is relevant to note under this agreement that there is no consideration flowing form the lessor to the assessee for the assignment of right to acquire the aircraft from Airbus. Post above assignment, the assessee has acquired the aircraft on lease from the lessors. The parties have filed before us copies of lease (i) agreement dated 15.12.2016 with M/s MeR. Aviation Limited (ii) agreement dated 14.06.2007 with M/s Genesis Acquisition Limited (paper book pages 481 to 589) (iii) agreement dated 04.07.2007 with Lara Leasing Ltd. (Paper book pages 590 to 600). It is the submission of the learned senior counsel for the assessee that all these agreements are in the nature of operating lease and that generally the terms of the agreement are for six years. This fact is also not disputed by the lower authorities. Learned Special Counsel for the Revenue has filed copies of the 03 Lease Agreements before us in his paper book. However, he was not able to demonstrate from any of these 03 Agreements that the nature of lease is Finance Lease and not Operating Lease. The Hon‗ble Supreme Court in the case of Asea Brown Boveri Limited vs Industrial Finance Corporation of India Ltd., reported in 154 Taxman 512 (SC) = 2004-TIOL-129-SC-MISC and Association of Leasing & Financial Services vs Union of India reported in [2011] 2 SCC 362 = 2010-TIOL- 87-SC-ST-LB has differentiated and highlighted characteristics of both Operating Lease and Finance Lease. The Learned Special Counsel for the Revenue has not been able to demonstrate how the nature of present lease are not Operating Lease in accordance with the ratio highlighted in the above decisions cited (supra). The Assessing Officer also in his order accepts that the ownership of the aircraft is with the lessor and that the depreciation on these aircrafts, where the engine supplied by the IAE is fitted, is claimed by the lessor. We find the learned CIT(A) has also not disputed this fact and have held that ―since, the delivery schedule of Aircraft spread-over a very long period, the appellant normally replaces its old fleet with new fleet, after the expiry of lease period which is usually six year.
Xxx xxx "42. For Lease Agreements executed after 1st April, 2007, a claim was made by the assessee before the lower authorities that the income is not chargeable to tax in hands of Lessor under Article 12 of the DTAA 26 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED between India and Ireland. We find the AO has not accepted this the reasons of which has already been reproduced at para 1.5 of the order 42.1 Cross border leasing of aircraft enjoyed a special exemption under section 10(15A) of the I.T. Act. However, a sunset clause was introduced by Finance Act, 2005 to provide that this exemption shall not be available for agreements entered after 1st April, 2007. In the aftermath of withdrawal of exemption the tax liability of the lessor is to be governed by the provisions of bilateral tax treaties. Learned Senior counsel for the assessee submitted that as per provisions of section 90 of the Act, provisions of DTAA shall apply to the extent they are beneficial. Under the DTAA the foremost consideration is whether the non-resident lessor has a permanent establishment (PE) in India as per Article 5 of the relevant. According to him, mere leasing of an aircraft which is located in India ought not to result in an existence of PE and there is also no such allegation made by the lower authorities in the present case. It is his submission that the definition of royalty under the Income-tax Act and Tax Treaty includes a consideration for use and right to use any commercial, scientific and industrial equipment and aircraft do arguably fall within this category of equipment and therefore the corresponding lease rentals may be characterized as royalty. However, certain tax treaties which India has entered into notably with Ireland it has explicitly excluded aircraft from the scope of Royalty. He drew our attention to the relevant provision of DTAA between India and Ireland (Article 12) which are as under:-
"1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other contracting State may be taxed in that other State.
2. Contracting State in which they arise, and according to the laws of that State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties or fees for technical services.
3. (a) The term "royalties" as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph film or films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process or for the use of or the right to use industrial, commercial or scientific equipment, other than an aircraft, or for information concerning industrial, commercial or scientific experience;
(b) The term "fees for technical services" means payment of any kind in consideration for the rendering of any managerial, technical or consultancy services including the provision of services by technical 27 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.
4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 1 or Article 14, as the case may be, shall apply.
5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-
division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for and others technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated.
6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
42.2 In Para-41 above we have examined the nature of Supplementary Rent and it is held that payment of Supplementary Rent is nothing different than the character of basic rent. We find that Supplementary Rent is not a payment made for use of spares, facilities or any services. Supplementary Rent is, therefore, a payment made for use of Aircraft. As per provisions of Section 90 of the Income-tax Act, the provisions of a bilateral Tax Treaty will apply to the extent it is more beneficial to the tax payer. We find under Article 12(3)(a) of India-Ireland DTAA, the term "Royalty" is specifically defined to exclude from its scope payment of any kind for use of "Aircraft". We further find the tax treaty also incorporates a separate provision in Article-8 on profits from shipping and air transport. Article 8(1) reads as under:
28ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED "Profits derived by an enterprise of a contractor state from the operation of rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that contractor State."
42.3 This Article states that profits from rental of Aircrafts is taxable only in state of residence of Lessor. We, therefore, find merit in the arguments of the Learned Senior Counsel for the Assessee that as per Articles 12and 8 of the Tax Treaty with Ireland, profits derived by an enterprise of a contracting State from rental of Aircraft are taxable "only" in Ireland. Supplementary Rent of Rs. 276,28,59.821/- paid for Lease Agreements executed after 1-4-2007 are, therefore, not chargeable to tax in India. However, the above figure is subject to verification by the A.O.
43. Learned Special Counsel for the Revenue On the other hand, has filed the following written submission:
"The other contention of the Appellant is that Article 12 of India Ireland DTAA excludes aircraft from the definition of "royalty" and therefore the lease rentals cannot be taxed in India in the hands of Lessors as royalty.
Firstly, the sample agreement with the Lessors clearly demonstrates that the Lessors only took the title of the aircraft and the actual delivery of the aircraft was taken by the Appellant, purportedly as an agent of the assignees. The lease agreement clearly provides the formula for working out the amount of lease rent This takes into account the prevailing LIBOR rates. That goes to suggest that these are financing arrangements. The credits have also been shown in the accounts as other income.
The payment, by whatever name called, of finance charges would fall within the definition of 'interest' and would be chargeable to tax in India under Article 11 of Indo-Irish DTAA. Hence, the tax was liable. to be deducted under Section 195. The failure to deduct tax has rightly invited the consequence under Section 40(a)(i) as held by the AO. The objection of the Appellant during the course of hearing that Article 11 having not been invoked by the AO or CIT(A), it was not open for the Revenue to urge the application of this Article. It is submitted that the applicability of Section 195 read with Section 40(a)(i) is in dispute and the issue before the Hon'ble Bench is whether any amount of tax was deductible under Section 195 and whether any disallowance under section 40(a)(i) can be made or not.
The broad question is whether the income of the Lessors from lease rentals is chargeable to tax in India and whether any tax was deductible which has not been so deducted. Addressing this vital question, whether income is chargeable under one Article and not 29 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED chargeable under the other, cannot be objected to, for the reason that the moot question leading to the disallowance of expense remains the applicability of Section 40(a)(i), There is no attempt to make out a new case for the Revenue. The argument of Article 11 of DTAA only seeks to defend the case of the A.D. under Section 40(a)(i). The basic issue does not change.
44. As stated above, in the impugned order, the ld. CIT(A) has deleted the disallowance made by the AO invoking the provisions of section 40(a)(i). Now, before us, a new plea has been raised by the ld. Special Counsel for the Revenue that payment of supplementary rent is taxable in India as interest as per the provisions of Article 11 of India-Ireland DTAA. We find, Article 11 of this DTAA reads as under:-
"Article 11 of India-Ireland DTAA:
1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.
3. .............................
4. The term "interest" as used in this Article means income from debt- claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures, but does not include any income which is treated as a dividend under Article 1 0. Penalty charges for late payment shall not be regarded as interest for the purpose of this Article.
44.1 We are not convinced by the submissions made by the ld. Special Counsel for the Revenue. It is an undisputed fact that the basic lease rent of Rs. 673.42 crores paid under the lease agreement is an allowable expenditure and its nature is that of "Rent." In our opinion, the nature of supplementary lease rent cannot be treated otherwise as both these expenses are payments made under the same agreement for use of aircraft. The ld. Special Counsel for the Revenue has filed copies of 3 lease agreements before us in his paper book. However, from none of these agreements he has been able to demonstrate that the nature of lease is financial lease and not operating lease. We have already held above in the preceding paragraph that the nature of lease in the year under consideration is operating lease. Moreover, both the lower 30 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED authorities have also accepted this fact.We are, therefore, not convinced by the arguments of the ld. Special Counsel for the Revenue that the present leases are financial merely because lease rent is determinable using LIBOR rate or that delivery of aircraft is taken by the assessee from Air Bus. We find that in the present case the aircrafts were leased for a period of six years. Therefore, the lease rent paid cannot be characterised as "interest." We, therefore, find no merit in the above submissions raised by the Revenue."
100. Further, recently, the coordinate bench of the Delhi Tribunal, in the case of Celestial Aviation Trading 15 Ltd. v. Assistant Commissioner of Income Tax, International Taxation, Circle 1(2)(1), New Delhi [ITA No. 1478/DEL/2025, A.Y. 2022-23], in a similar batch of matters involving Irish aircraft lessors leasing aircraft to IndiGo, considered the issue of whether such leases were in the nature of operating leases or finance leases. After a detailed examination of the lease agreements between the lessor entities and Indigo, the Tribunal concluded that the leases were in the nature of operating lease and not finance lease and accordingly, could not be characterised as "interest" within the meaning of Article 11 of the India-Ireland DTAA. The findings of the Hon‟ble Tribunal in the said case are reproduced hereunder for the sake of ready reference:
"12. We have heard the submissions made by both sides in extenso, perused the orders of authorities below and have considered the documents and decisions referred to during the course of submissions by the rival sides. The assessee in appeal has primarily assailed the addition of Rs.74,37,77,694/- on account of interest income taxable at the rate of 10% holding lease rentals received by the assessee out of Financial Lease. Undisputedly, the assessee is tax resident of Ireland and is engaged in the business of Leasing of Aircrafts. During the period relevant to assessment year under appeal, the assessee leased out three aircrafts bearing MSN 10689, 9382 and 9561 to Indigo. The case of the assessee is that the lease entered into between the assessee and Indigo is operating lease. Hence, the lease rentals received by the assessee from said lessee are not exigible to tax in India. The AO has re-characterized the nature of lease agreement and has held the lease to be finance lease and the lease rentals received by the assessee in the nature of interest taxable at the rate of 10% in accordance with Article 11 of India-Ireland DTAA.
13. To begin with, it would be relevant to refer to the Lease Agreement entered into between the assessee, the lessor and Indigo, the lessee. The assessee has placed on record Aircraft Specific Lease Agreement (in short 'ASLA) dated 15.04.2021 at page 162 to 209 of the paper book in respect of aircraft bearing MSN 10689. The assessee has also placed on record a copy of Aircrafts Lease Common Terms Agreement (CTA) dated 20.06.2006 entered into between GE Commercial Aviation Services Ltd. and Indigo. To understand the issue, both agreements have to be read together. Aircraft Specific Lease Agreement as the 31 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED name suggests is in respect of a particular aircraft, whereas, the terms and conditions spelled out in Aircraft Lease Common Terms Agreement is the standard agreement which would be applicable to all the aircrafts taken on lease by Indigo. A perusal of ASLA would show that the assessee is the Lessor and Indigo is the Lessee. The duration of agreement is for a period of 120 months extendable at the option of Lessee to be conveyed in writing to the Lessor before the expiry of 18 months prior to the original scheduled expiry date. Clause 3 of ASLA specifically states that the owner of the aircraft shall be the Lessor'. In the entire ASLA there is no covenant which refers to the condition that after the end of duration of lease term, the ownership in aircraft shall be transferred to the lessee or the lessee at any point of time can exercise option to purchase the aircraft. Clause 10 of ASLA requires the Lessee to pay deposit in cash or in the form of Letter of Credit prior to delivery of aircraft. The Lessor shall return such deposit to the Lessee upon occurrence of the events specified in ASLA which includes, ‗on completion of the Return Occasion. ―Return Occasion‖ is defined in Schedule-I of CTA as:
"Return Occasion means the date on which the Aircraft is redelivered to Lessor in accordance with Clause 12.
Clause 12 of CTA reads as under:
12. RETURN OF AIRCRAFT 12.1 RETURN On the Expiry Date or redelivery of the Aircraft pursuant to Clause 13.2 or termination of the leasing of the Aircraft under the Lease, Lessee will, unless an Event of Loss has occurred, redeliver the Aircraft and the Aircraft Documents and Records at Lessee's expense to Lessor at the Redelivery Location, in accordance with the procedures and in compliance with the conditions set out in Schedule 6, free and clear of all Security Interests (other than Lessor Liens) and in a condition suitable for immediate operation under FAR Part 121 or as otherwise agreed by Lessor and Lessee and, in any case, qualifying for and having a valid and fully effective certificate of airworthiness issued by the Air Authority. If requested by Lessor, Lessee shall thereupon cause the Aircraft to be deregistered by the Air Authority Lessor shall reasonably cooperate (and shall procure that the Owner reasonably cooperates) with the Lessee in order to effect such deregistration.
The above clause makes it unambiguously clear that at the end of Lease period, Lessee is under obligation to return aircraft to the lessor. And on the return of aircraft the lessor shall refund the deposit.
14. Some of the vital covenants of the CTA are examined to determine the nature of lease as under:-32
ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED
(i) Schedule-I to CTA contains definitions. ―Owner‖ has been defined as under:
"Owner means the Person identified in the Aircraft Specific Lease Agreement as Owner or, subject to clause 14.3, such other person as Lessor may notify Lessee from time to time."
The owner as per ASLA is the assessee.
(ii) Clause 8.4 of CTA deals with sub-leasing.
"8.4 Subleasing
(a) At no time prior to the Return Occasion will Lessee sub-lease, wetlease or otherwise give possession of the Aircraft to any Person except:
(i) when the prior written consent of Lessor has been obtained (not to be unreasonably withheld or delayed); or
(ii) where the Aircraft is delivered to a manufacturer or maintenance facility for work to be done on it as required or permitted under the Lease; or
(iv) to a Permitted Sub-Lessee as set forth in Clause 8.4(b); or
(v) on a wet lease complying with the provisions of the following of this clause 8.4(a)."
Clause 8.4 of the CTA restricts the lessee to sub-lease, wet lease or otherwise give possession of aircraft to any person except under certain conditions with prior consent of lessor.
(iii) Clause 8.6 of CTA explains Ownership; Property Interest; Related matters. The relevant extract of the same is reproduced as under:
"8.6 Ownership; Property Interests; Related Matters
(a) Lessee will:
(i) fix and maintain Nameplates in a prominent position in the cockpit or cabin of the Aircraft and on each Engine stating "This Aircraft/Engine is owned by (insert name of Owner and is leased to [insert name of Lessee] and may not be or remain in the possession of or be operated by, any other person without the prior written consent of linsert name of Lessor]"; and
(ii) take all reasonable steps to make sure that other relevant Persons know about the interests of Owner and Lessor as owner and lessor 33 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED respectively in the Aircraft, including (without limitation) ensuring that wherever necessary as a matter of applicable Law in the State of Registry or in the jurisdiction of incorporation of any Permitted Sub-
Lessee or the State of Incorporation, the interests of Lessor and Owner are duly registered in the International Registry.
(b) Lessee will not:
(i) represent that it is the owner of the Aircraft or that it has an economic interest (equivalent to ownership) in the Aircraft for Tax treatment or other purposes;
(ii) take any action or fail to take any action if it might reasonably be expected to put Owner's and / or Lessor's rights at risk;
(iii) represent to others that Owner or Lessor is associated with or responsible for the business activities and / or flight operations of Lessee; or
(iv) allow the Aircraft or Owner's or Lessor's interest in it to become or remain subject to any Security Interest (other than a Permitted Lien); nor
(v) consent to any interests conflicting with (whether or not taking priority over) the interests of Lessor or Owner to be registered at the International Registry without the prior written consent of Lessor or Owner (as the case may be).
The aforesaid covenant ensures that the name of the owner at all times is displayed on the aircraft. The reason for having this clause is obviously to display the name of owner and lessee during the period of Lease Agreement which is substantially less than the Economic Life of the Aircraft.
(iv) In Clause 8.13 Aircraft Lease Common Terms Agreement deals with title on equipment change, the same reads as under:- ― "8.13 Title on an Equipment Change Title to any equipment that becomes a Part or an Engine after the Delivery Date (whether by way of replacement, as the result of an Equipment Change or otherwise) shall, save as otherwise provided in a bill of sale or similar instrument delivered by Lessee in favour of Owner) vest in Owner solely by virtue of its attachment to the Airframe or an Engine and it shall then be subject to the Lease as if it were attached to the Aircraft at Delivery. If so requested by Lessor, Lessee will provide a properly executed bill of sale or similar instrument to evidence the vesting of title to any such equipment, free and clear of all Security Interests, in Owner.
34ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED A perusal of aforesaid Clause shows that in case of change in any equipment which is part of engine. The ownership in that equipment shall solely vest with the owner by virtue of its attachment of the airframe to the engine.
(vi) The Clause 9 of the CTA lays down the condition and responsibility on lessee to get the aircraft insured. A perusal of Clause 9.1 reveals that it is the responsibility of lessee to maintain the insurance in full force during the term of lease only. After the expiry of lease, the lessee is not responsible for the insurance of the aircraft.
(vii) Clause 10 of CTA binds the lessee to indemnify the lessor. The relevant extract from the said clause is reproduced herein under:-
10. INDEMNITY 10.1 General (a) Lessee agrees to assume liability for and indemnifies each of the Indemnitees against and agrees to pay on demand Losses which an Indemnitee may suffer at any time whether directly or indirectly as a result of any act or omission in relation to:
(i) the ownership (but only to the extent arising out of the use, possession, leasing, operation or maintenance of the Aircraft by Lessee or any Permitted Sub-Lesse), maintenance, repair, possession, transfer of ownership or possession, import, export, registration, storage, modification, leasing, insurance, inspection, testing, design, sub-
leasing, use, condition or other matters relating to the Aircraft; or
(ii) any breach by Lessee of its obligations under the Lease. ‗Indemnity' has been defined in Schedule-I as under:- Indemnitee means each of Lessor, Owner, GECC, GECAS, the Financing Parties and each of their respective successors and assigns, shareholders, subsidiaries, affiliates, partners, contractors, directors, officers, representative, servants, agents and employees.
13.4 Sale or Re-lease of Aircraft If an Event of Default occurs and is continuing, Lessor may sell or re- lease or otherwisde deals with the Aircraft at such time and in such manner and on such terms as Lessor considers appropriate in its absolute discretion, free and clear of any interest of Lessee, as if the Lease had never been entered into.
Thus, in the event of default the Lessee has to return aircraft to the Lessor and thereafter, the Lessor can sale or re-lease the aircraft.
14. From perusal of above terms and conditions it can be deduced that the ownership in the aircraft vest with the assessee/lessor at all the 35 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED time during the period of lease. From conjoint reading of the terms and conditions of CTA and ASLA it emerges that there is no change in the ownership of the aircraft during the currency of lease agreement and at the end of agreement, the lessor continues to be the owner and the Lessee shall pay lease rentals to the assessee/lessor during lease period.
15. Now to understand the difference between financial lease and operating lease, we need to refer to the definition of ‗Financial Lease' under other Acts as the expression financial lease and operating lease are not defined under the Income Tax Act. Section 2(ma) of the SARFAESI Act, 2002 defines ‗financial lease' as under:-
"financial lease‖ means a lease under any lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where the lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be"
The Recovery of Debts & Bankruptcy Act, 1993 defines financial lease as under:-
"financial lease" means a lease under a lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be"
From the aforesaid definitions a subtle trait of financial lease can be identified i.e. "At the end of the lease period, lessee becomes the owner of the leased asset."
16. In the instant case although the AO and the DRP have characterized the nature of lease as financial lease but both the authorities have ignored the fact that at no point of time, ownership in the asset i.e. aircraft is transferred to the lessee, which is the hallmark of financial lease.
17. The assessee has drawn our attention to RBI Circular No. 24 dated 01.03.2002 at page 234 of the paper book which deals with Import of Aircraft/Aircraft engine/Helicopter on lease basis. A perusal of RBI Circular No. 24 dated 01.02.2022 would show that there are separate conditions to be satisfied for acquiring aircraft on operating lease basis and under financial lease. For the sake of ready reference relevant excerpts from the said Circular are reproduced herein below:-
36ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED To All Authorized Dealers in Foreign Exchange Madam/Sirs, Import of Aircraft/Aircraft Engine/ Helicopter on lease basis Authorised dealers are aware that the Reserve Bank is considering applications from airline companies and air taxi operators for payment of the lease rentals for import of aircraft/aircraft engine/helicopter on lease basis, based on the approval issued by the Director General of Civil Aviation (DGCA), Government of India.
2. It has been decided that authorised dealers may allow remittance of payment of lease rentals, opening of letter of credit towards security deposit etc. in respect of import of aircraft/aircraft engine/helicopter on operating lease basis, after verifying documents to show that necessary approval from the appropriate authorities, like Ministry of Civil Aviation/Director General of Civil aviation, Government of India has been obtained. In this connection attention is also invited to paragraph 8 of Annexure I to A.D.(M.A. Series) Circular No.11 dated May 16, 2000.
3. It is clarified that financial lease transaction i.e. the lease transaction containing option to purchase the asset at the end of the lease period will continue to require prior approval from the Reserve Bank of India.
The contention of the assessee is that the lessee is paying lease rentals in accordance with aforesaid RBI Circular and for the financial lease transaction where the ownership in the asset is transferred to the lessee, the lessee was required to take prior approval from the RBI, no such approval has been taken by the lessor in the present case. This fact remains un-rebutted. No material is available on record to suggest that the above RBI Circular has been violated by the lessor or the lessee.
18. Further, the ld. Counsel for the assessee has drawn our attention to the observations of the DRP in para 17.3 (ii) of the Directions, where the DRP has determined economic life of the Aircraft as 8 years. Referring to DGCA Circular issued in 1993 the DRP concluded that since lease of the aircraft covers substantial commercial life, therefore, the lease should be termed as financial lease. We find above observations of the DRP contrary to the facts on record and the DGCA Circular. The DGCA vide its communiqué dated 29.07.1996 (at pages 231 to 233 of the paper book) has prescribed economic life of an aircraft as 20 years or 60,000 landings/pressurization cycles. In the instant case the lease agreement has been entered between the parties for a period of 120 months i.e. for 10 years, in other cases the lease period is for lesser period i.e. 72 months as is in the case of MSN 9382 37 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED (at page no. 210 to 275 of the paper book) and for MSN 9561 (at pages 276 to 341 of the paper book). Substantial economic life of the aircraft is still left after the end of lease period. Therefore, observations of the DRP on Economic Life of the aircraft being utilized under lease agreement is without any basis, hence, the conclusion to recharacterize nature of lease agreement is erroneous.
19. The ld. DR has vehemently argued that the lessee (Indigo) had originally entered into an agreement for purchase of aircraft with Airbus and it was subsequently that the present assessee stepped in at the time of delivery of aircraft and financed Indigo for acquiring the aircraft from Airbus. The ld. Counsel for the assessee to counter argument of the Revenue has brought to our notice the decision of Special Bench in the case Inter Globe Aviation Ltd. (Indigo) vs. ACIT (supra). Similar arguments were raised by the Revenue in said case. The questions for consideration before the Special Bench was:
"(1) Whether FIA (Fleet Introductory Assistance) credit received by the Assessee from IAE and other equipment manufacturers is a Capital or revenue receipt arising out of the transaction?
(2) Whether credits so received are taxable under section 28(i) or 28(iv) of the I.T. Act, 1961 or as a "Commission" income or "Income from capital gains"?
(3) Whether the Ld. CIT(A) is right in making disallowance of Rs.268,91,48,934/- out of lease rental payments under section 37(1) of the I.T. Act, 1961?
(4) Whether payment of Supplementary Lease Rent of Rs.328,09,64,412 l-is an allowable business expenditure and TDS is not deductible thereon?
20. While answering the aforesaid questions the Special Bench took note of the agreement between Indigo and Howth Aircraft Leasing Ltd., assignee and observed that Indigo is not the owner of Aircraft and the Revenue failed to demonstrate that the lease is in the nature of operating lease. The Special Bench further observed that the lower authorities have admitted the fact that ownership of the aircraft is with the lessor and depreciation on these aircraft is claimed by the lessor. The relevant extracts of findings of the Special Bench on this issue are reproduced herein below:-
"31.4. It is relevant to note under this agreement that there is no consideration flowing from the lessor to the assessee for the assignment of right to acquire the aircraft from Airbus. Post above assignment, the assessee has acquired the aircraft on lease from the lessors. The parties have filed before us copies of lease i) agreement dated 15.12.2016 with M/s MeR. Aviation Limited (ii) agreement dated 14.06.2007 with M/s Genesis Acquisition Limited (paper book pages 38 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED 481 to 589) (iii) agreement dated 04.07.2007 with Lara Leasing Ltd. (Paper book pages 590 to 600). It is the submission of the learned senior counsel for the assessee that all these agreements are in the nature of operating lease and that generally the terms of the agreement are for six years. This fact is also not disputed by the lower authorities. Learned Special Counsel for the Revenue has filed copies of the 03 Lease Agreements before us in his paper book. However, he was not able to demonstrate from any of these 03 Agreements that the nature of lease is Finance Lease and not Operating Lease . The Hon'ble Supreme Court in the case of Asea Brown Boveri Limited vs Industrial Finance Corporation of India Ltd., reported in 154 Taxman 512 (SC) and Association of Leasing & Financial Services vs Union of India reported in [2011] 2 scc 362 has differentiated and highlighted characteristics of both Operating Lease and Finance Lease. The Learned Special Counsel for the Revenue has not been able to demonstrate how the nature of present lease are not Operating Lease in accordance with the ratio highlighted in the above decisions cited (supra). The Assessing Officer also in his order accepts that the ownership of the aircraft is with the lessor and that the depreciation on these aircrafts, where the engine supplied by the lAE is fitted, is claimed by the lessor . We find the learned CIT(A) has also not disputed this fact and have held that "since, the delivery schedule of Aircraft spread-over a very long period, the appellant normally replaces its old fleet with new fleet, after the expiry of lease period which is usually six year." [Emphasized by us]
21. Further, the Special Bench on plea taken by the Revenue that lease rents are taxable in India as interest in accordance with Article 11 of India-Ireland DTAA, held as under:-
44.1 We are not convinced by the submissions made by the ld. Special Counsel for the Revenue. It is an undisputed fact that the basic lease Rent of Rs.673.42 crores paid under the lease agreement is an allowable expenditure and its nature is that of "Rent." In our opinion, the nature of supplementary lease rent cannot be treated otherwise as both these expenses are payments made under the same agreement for use of aircraft. The Id. Special Counsel for the Revenue has filed copies of 3 lease agreements before us in his paper book. However, from none of these agreements he has been able to demonstrate that the nature of lease is financial lease and not operating lease. We have already held above in the preceding paragraph that the nature of lease in the year under consideration is operating lease. Moreover, both the lower authorities have also accepted this fact. We are, therefore, not convinced by the arguments of the Id. Special Counsel for the Revenue that the present leases are financial merely because lease rent is determinable using LIBOR rate or that delivery of aircraft is taken by the assessee from Air Bus. We find that in the present case the aircrafts were leased for a period of six years. Therefore, the lease rent paid cannot be characterized as "interest." We, therefore, find no merit in the above submissions raised by the Revenue."39
ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED [Emphasized by us] Once in the case of Indigo, the Revenue accepts that ownership in the Aircraft is with the lessor, the Revenue on similar set of agreements cannot take a reverse position in the case of lessee and argue that lessee is the owner. The Revenue cannot be allowed to approbate and reprobate on the same set of documents and re-characterize the nature of lease agreement to be a financial lease.
22. Before the Special Bench in the case of Indigo, the Revenue had vehemently argued that the lease rentals paid by Indigo to the lessee are in the nature of interest, hence, the provisions of Article 11 of India-Ireland DTAA would operate. The Special Bench negating the arguments of the Revenue held that the lease rentals paid by Indigo are in the nature of rent and not interest as the Revenue has failed to demonstrate that the nature of lease is finance lease and not operating lease. Hence, the payments made by lessee are not in the nature of interest. Thus, in light of findings of the Special Bench, we hold that the provisions of Article 11 of India-Ireland DTAA would not operate in the present case.
23. Thus, in light of our above findings and the decision of Special Bench, the assessee succeeds on ground no. 3 to 5 of appeal"
101. The agreements before us and the ones before the Delhi Tribunal in the case of Celestial (supra) as well as the Special Bench of the Tribunal in the case of IndiGo for the AY 2012-13 and the division bench in the case of IndiGo for AYs 2008-09 and 2009-10 are substantially similar. We are not reproducing the clause again since we have already extracted the relevant clauses above. Suffice to say that there are no material differences in the agreements before the Delhi Tribunal in the case of Celestial (supra) as well as the Special Bench of the Tribunal in the case of IndiGo for the AY 2012-13 and the division bench in the case of IndiGo for AYs 2008-09 and 2009-10. Therefore, on that ground alone, the assessee deserves to succeed."
11. In so far as the issues whether the assessee would be covered under Article 8 of India-Ireland DTAA and treatment of the leased aircraft as the fixed place PE of the assessee, the Coordinate Bench has held as under:
"105. In so far as the issue relating to the existence of a permanent establishment is concerned, it is pertinent to note that we have dealt similar issue in the case of Sunflower Aircraft Leasing Ltd. vs. ACIT in ITA No.1107/Mum/2025 order of even date. The factual backdrop as well as the legal matrix in the said decision is substantially similar to one before us. The ld.DRP has recorded same finding holding that the Aircraft leased to IndiGo constitute PE of assessee in India.40
ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED Accordingly for the sake of consistency and judicial discipline, and in order to avoid repetition of what has already been elaborately dealt with, we deem it apposite to reproduce the relevant portion of the findings recorded in the aforesaid decision, which we find squarely applicable to the present case as well. Similarly, the issue of Article- 8 has also been dealt with extensively in the said order, which is applicable in the present cases also mutatis mutandis. The said findings reads as under:
"23. We have heard both the parties at length and perused the relevant finding and the material placed before us. Firstly, on the issue of existence of PE, the relevant finding and the facts as culled out from the order of the Ld. DRP has held that the aircraft leased by the assessee to IndiGo constitute fixed place PE of the assessee in India in terms of Article 5 of the India-Ireland DTAA. It is, therefore, relevant to first see the definition of fixed place PE under Article 5(1) of the India-Ireland DTAA which reads as under:
ARTICLE 5 PERMANENT ESTABLISHMENT
1. For the purposes of this Convention, the term "permanent establishment" means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
24. The Hon'ble Supreme Court in the case of Formula One World Championship v. CIT (2017) 394 80 (SC) held that two crucial tests are required to be examined in order to determine whether a foreign enterprise has a fixed place PE under Article 5(1) of the India-UK DTAA or not. Firstly, there is a fixed place of business and secondly, that the place of business must be at the disposal of the foreign enterprise. The relevant findings of the Supreme Court in Formula One (supra) are as under:
30. Emphasising that as a creature of international tax law, the concept of PE has a particularly strong claim to a uniform international meaning, Philip Baker discerns two types of PEs contemplated under Article 5 of OECD Model. First, an establishment which is part of the same enterprise under common ownership and control--an office, branch, etc., to which he gives his own description as an ―associated permanent establishment‖. The second type is an agent, though legally separate from the enterprise, nevertheless who is dependent on the enterprise to the point of forming a PE. Such PE is given the nomenclature of ―unassociated permanent establishment‖ by Baker. He, however, pointed out that there is a possibility of a third type of PE i.e. a construction or installation site may be regarded as PE under certain circumstances. In the first type of PE i.e. associated permanent establishments, primary requirement is that there must be a fixed place of business through which the 41 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled: (a) there must be a business of an enterprise of a contracting State (FOWC in the instant case); and (b) PE must be a fixed place of business i.e. a place which is at the disposal of the enterprise. It is universally accepted that for ascertaining whether there is a fixed place or not, PE must have three characteristics: stability, productivity and dependence. Further, fixed place of business connotes existence of a physical location which is at the disposal of the enterprise through which the business is carried on.
32. On the other hand, possession of a mailing address in a State without an office, telephone listing or bank account has been held not to constitute a PE [Commr. of Internal Revenue v. Consolidated Premium Iron Ores Ltd., 265 F 2d 320 (6th Cir 1959)]. The mere supply of skilled labour to work in a country did not give rise to a PE of the company supplying the labour [Tekniskil (Sendirian) Berhard v. CIT, 1996 SCC OnLine AAR 12: (1996) 222 ITR 551]. A drilling rig which, although anchored while in operation, was moved to a new site every few months, has been held not to constitute a PE [Lower Tax Court of the Hague, 10-9-1990, noted in 1991 Tax Notes Intl 161]. Similarly, a remotely operated vessel which was used to inspect and repair submarine pipelines was held not to constitute a PE because a moving vessel is not a fixed place of business [CIT v. Subsea Offshore Ltd., (1998) 66 ITD 296: 17 Tax Notes Intl 1795 (ITAT)].
33. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be "at the disposal" of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as ―at the disposal‖ of the enterprise when the enterprise has right to use the said place and has control thereupon.
Ergo, in the absence of satisfaction of the disposal test, PE of the foreign enterprise cannot be deemed to exist under Article 5(1) of the DTAA.
25. The ld. DRP, while holding that the assessee has a PE in India under Article 5(1) of the India-Ireland DTAA, which is the same as Article 5(1) of the India-UK DTAA, held as under:
"Ownership Test: As per Applicant itself, the legal ownership of the Aircraft, the Fixed Place Permanent Establishment, ultimately rest with the Applicant. The Aircraft operates in Indian territory all throughout the A.Y. 42 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED Location Test: Thus, the Applicant satisfies the location test due to its specific geographical identification with Indian territory and nexus with the Indian business of the Aircraft conducted through the lessee.
Permanence or duration test: Moreover, Applicant's operations meet the permanence or duration test, as the Aircraft is an enduring and continuous place of business. The elements of regularity, continuity, and repetitiveness are evident, given the longterm and ongoing nature of the operation of the Aircraft in India .....
Test of Disposal:
While the lessee operates the aircraft, the Applicant retains ownership and the embedded legal right to repossess the aircraft if terms of the lease are violated. This ownership and control have been exercised by multiple Irish lessors under similar agreements, illustrating that the lessor retains ultimate control over the asset.
The Aircraft performs 2 functions: Lease income for Applicant, and operational income for Indian Aircraft Operator. It is at the disposal of the Applicant for its lease business.
The lease rental earning activity played by the Aircraft is the function of the applicant and not of Indian lessor. Thus, this function performed by Aircraft from vantage point of Applicant is that of lease rental, which is the function of the applicant and not the function of Indian operator (which is performs different activity of Airlines operations via the same equipment)
26. From reading of the aforesaid, it is noticed that the thrust of the case of the ld.DRP is that the aircraft is the place of business which is at the disposal of the Applicant in India for its lease business. This finding of the LD.DRP has been assailed by the assessee on the ground that both factually and legally the aircraft cannot and is not at the disposal of the assessee and that in any case the leasing business is carried from outside India.
27. noted:- Further, certain important clauses from ALA need to be noted:
a. Clause 21.2.1 of the ALA, provides that the lessee/IndiGo had the right to the quiet use, possession and enjoyment of the Aircraft and, provided that IndiGo was not in breach of the ALA, the assessee had a corresponding obligation to ensure the same without interfering with IndiGo‟s right to use the aircraft in its commercial wisdom. Therefore, the aircraft was under operational control of the lessee/IndiGo 43 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED b. Similarly, clause 12.1 obligated IndiGo to maintain the aircraft and clause 12.3.2 required IndiGo to comply with all airworthiness directives in India.
c. Clause 20.2 obligated IndiGo to maintain the requisite licences, certificates and permits for use of aircraft in India.
d. Clauses 12.13.1 and 23.7.1 permitted the assessee a limited right to inspect the aircraft once a year, or before the return of the aircraft upon expiry of the lease period, or at any time while an event of default was subsisting, to ensure that the aircraft was functional and operational. This did not give operational control over the aircraft to the assessee.
Therefore, contractually, the aircraft was under the control and disposal of the lessee/IndiGo. Even the LD.DRP accepts that the aircraft is under the operational control of the lessee/IndiGo at page 132 of its directions wherein it is held that "The aircraft, while operationally controlled by the lessee, forms the core of the Applicant's leasing business."
28. Further, even as per the DGCA Rules and Manuals, the aircraft was required to be under the operational control of the lessee/IndiGo. This has never been doubted by the AO or Ld. DRP or that the DGCA, which is the regulator of aviation in India ever alleged that the assessee or IndiGo have violated these rules and regulations. The decision of coordinate bench in Carbijet (supra) is relevant in this regard since it takes judicial notice of the manner in which aviation sector is regulated and commercially run:
"in the present case, all the flights were flown by the assessee under the banner of Air India. They are known as flights of Air India. The schedules are allotted to Air India by International Civil Aviation Authority. The routes are pre-determined. Tickets are issued by Air India. The passengers, mails and goods are transported at the sole risk and responsibility of Air India. The identity, commercial responsibility, civil liability, criminal liability and all other obligations arising out of and attached to carrying on the business of operation of aircrafts meant for transporting passengers, mails and goods are borne by Air India. The assessee was leasing out the aircrafts..
29. Clauses 2.4 and 6.2 of the Aircraft Leasing Manual issued by DGCA unequivocally clarify that a dry lease is an arrangement where the aircraft is operated under the lessee‟s operator certificate and the operational control of the aircraft in the case of such a lease vests with the lessee. The Ld. DRP while acknowledging that the present constitutes a dry operating lease, nevertheless concludes that aircraft remained under the control of the lessor/assessee. Such an inference is manifestly erroneous. The LD.DRP has completely failed to 44 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED appreciate that IndiGo assumed possession of the aircraft in Chile and, consequently, by the time the aircraft entered Indian Territory, it was already under exclusive control and disposal of the lessee that is Indigo and not that of the assessee.
30. We have given our thoughtful consideration to the entire gamut of rival submissions, perused the material placed before us, examined the lease agreements and related correspondence, and considered the applicable law, including the principles laid down by the Hon‟ble Supreme Court in; i) Formula One World Championship Ltd. v. CIT [(2017) 394 ITR 80 (SC)], ii) E-Funds IT Solution Inc. v. CIT [(2018) 13 SCC 294], and the latest judgment of, iii) Hyatt International Southwest Asia Ltd. v. Addl. Director of Income Tax in Civil Appeal No. 9766 of 2015 (SC), all of which illuminate the contours of the concept of "Permanent Establishment" under tax treaties. The relevant principles laid down by the Hon‟ble Supreme Court Hyatt International Southwest Asia Ltd. can be summarized in the following manner:-
I. Disposal Test for PE (Article 5(1) of the DTAA):
A "fixed place" Permanent Establishment (PE) is constituted when a foreign enterprise possesses a fixed place of business in India that is at its disposal, and through which its business is wholly or partly carried on. The exclusive legal possession is not a prerequisite; even temporary or shared access, if coupled with meaningful control and business use, is sufficient. This interpretative standard draws strength from the Supreme Court‟s exposition in Formula One World Championship Ltd. v. CIT.
II. Tripartite Attributes of a PE:
A valid PE, in jurisprudential contemplation, must reflect three core characteristics:
• Stability - an enduring and identifiable physical presence;
• Productivity - the conduct of substantive commercial operations; and 110 ITA No.1198/Mum/2025 and others • Dependence - functional reliance on the said location for business activities.
III. Economic Substance Prevails Over Legal Form:
The existence of a separate legal entity, such as Hyatt India Pvt. Ltd., managing day-to-day operations does not nullify the presence of a PE, if the foreign enterprise continues to exercise effective strategic and operational control. The Court reaffirmed that it is the economic 45 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED reality and not merely the corporate form that governs PE determination.
IV. Nexus: Remuneration Structure as Evidence of Commercial The nature of consideration under the SOSA being directly linked to gross operating profits and revenues evinces a deep-rooted commercial nexus with the core operations of the hotel. Such performance-based remuneration goes well beyond passive consultancy or auxiliary functions.
V. Intermittent Presence of Employees is Sufficient to Establish Continuity:
The Court clarified that continuous and coordinated business engagement, even through multiple short-term visits by employees, suffices to establish a PE. The absence of a single individual exceeding the nine-month threshold under Article 5(2)(i) is not determinative, so long as business presence is substantively maintained.
VI. Exclusion for Auxiliary Activities Inapplicable:
Rejecting the assessee‟s reliance on the judgment of UAE Exchange Centre, the Court held that the strategic oversight, managerial control, and supervisory authority exercised by the appellant were central to the hotel‟s core operations and could not be characterized as mere preparatory or auxiliary activities.
VII. Profit Attribution Unaffected by Global Losses:
The Court unequivocally held that taxability of profits attributable to a PE in India stands independent of the foreign enterprise‟s global profit or loss. Article 7 of the DTAA entitles the source State to tax income attributable to the PE, based on local economic presence and business activity, irrespective of consolidated group profitability.
31. The essence distilled from these authorities is that a fixed place PE under Article 5(1) requires three cumulative elements: (i) the existence of a "place of business", (ii) that such place must be "fixed", and (iii) that the enterprise must carry on its business wholly or partly through that place. The "disposal test" whether the foreign enterprise has the place at its disposal so as to be able to conduct its business from there is pivotal. Mere ownership of an asset or the exercise of protective rights as an incident of ownership does not ipso facto satisfy this requirement. The business of the foreign enterprise, as a matter of factual and functional analysis, must be conducted through the place in question; the mere fact that the asset generating income is situated in the source State is not determinative.46
ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED
32. Applying these principles to the present case, the aircraft leased by the assessee to IndiGo were indeed present in India for extended periods. However, the crucial question is whether they constituted a "fixed place of business" at the disposal of the assessee through which its business was carried on. The assessee‟s business is that of dry leasing aircraft an activity executed entirely from Ireland, with negotiations, contract execution, and management undertaken outside India. Operational control over the aircraft, including deployment, routing, scheduling, and crewing, vested exclusively with IndiGo. The rights retained by the assessee such as periodic inspection, ensuring compliance with maintenance standards, and repossession in default are standard lessor protections safeguarding the value of the asset, not indicia of the asset being at the lessor‟s disposal for carrying on business in the source State. In the Hyatt case, the Supreme Court emphasised that a foreign enterprise‟s business must actually be conducted through the alleged PE; here, no such conduct of business in India is shown. The aircraft, though valuable business assets, did not serve as a "place" through which the assessee‟s leasing business was carried on in India. Thus, we reject the premise that continuous physical presence of high value asset in India ipso facto supplies "fixed place" limb. The Hon‟ble Supreme Court has emphasised that mere location or access is insufficient unless the enterprise can, as a matter of right and in practice, employ that place as an instrumentality of its business; the aircraft here could not be accessed or used by the assessee at will for its business every entry to airside/hangar areas required IndiGo‟s operational consent and regulatory clearances, and inspections were episodic, noticed, and ancillary to ownership protection. The assessee‟s business is the grant of lease rights executed offshore; the asset‟s Indian location under IndiGo‟s aegis does not convert the aircraft into a fixed establishment at the assessee‟s disposal.
33. The Revenue‟s contention that the aircraft themselves constituted a "place of business" because they were the source of the assessee‟s income overlooks this distinction between the situs of the asset and the locus of business activity. In Formula One, the Supreme Court held that the race circuit in India was at the disposal of the foreign enterprise during the race event, enabling it to carry on its core business there. Here, by contrast, the aircraft were never placed at the disposal of the assessee in India to conduct its business they were placed at the disposal of the lessee, which operated them for its own commercial purposes. The absence of the assessee‟s personnel or operational infrastructure in India further reinforces the absence of a fixed place PE. In the light of the functional analysis mandated by E-Funds, the "disposal test" is not met.
34. Here in this case there is nothing on record to show that there were any stationed personnel of the assessee and otherwise also ld. DRP observation on PE was not predicated on Article 5(2) of service PE at all.
47ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED
35. In so far as finding that leasing business is carried on through the aircraft, the said finding is patently incorrect. The leasing business of the assessee was carried on from outside India and not through the aircraft in India. It is nobody‟s case that the assessee or IndiGo executed the lease agreement sitting in the aircraft in India. Therefore, apart from the non-satisfaction of the disposal test in the instant case, no part of the business of the assessee can be said to be carried on in India. If the logic of the DRP is accepted then in every lease of equipment, the foreign enterprise will be held to have a PE in India. The Madras High Court in Van Oord ACZ (supra) and benches of the Tribunal have held this in several decisions.
36. Insofar as the decision of the Madras High Court in Poomphuar (supra) is concerned, the Madras High Court in the case of Van Oord ACZ (supra) dealt with the case of leasing dredging equipment by a Dutch company to an Indian Company. The Revenue contended the presence of the ship/barge constituted PE of the Netherlands Company in India. In response, the Assessee therein contended that the leasing of equipment on bareboat basis/ dry lease would not constitute a PE in India. The Madras High Court after analyzing another earlier decision of the Madras High Court in Poompuhar Shipping Corporation Ltd. (supra) held that leasing of equipment on bareboat basis/ dry lease would not constitute PE of the Netherlands entity in India since the entire control of the equipment was with the Indian Company. The Hon‟ble Madras High Court also pointed out that the earlier decision in Poompuhar Shipping (supra) dealt with the case of wet leasing, i.e. leasing equipment with Master and Crew and therefore not applicable. This aspect is of crucial importance since the Ld. DRP‟s findings in the present case are based entirely on the earlier decision of the Madras High Court in Poompuhar Shipping(supra). The relevant findings of the Hon‟ble Madras High Court in the case of Van Oord (supra) are extracted hereunder for ready reference:
"34. .... In Poompuhar Shipping's case, referred supra, it was a case of hiring of ship on time-charter basis, whereas in the present case, dredging equipment is leased out on bareboat basis, namely, without master and crew. Therefore, on facts, the decision in Poompuhar Shipping case, referred supra, is distinguishable. The learned standing counsel for the Department referring to paragraph (2) of article 5 which states that an installation or structure used for the exploration of natural resources is a permanent establishment, provided that the activities continue for more than 183 days, pleaded that the stand of the Department is justified.
36. We are not inclined to accept such a plea, as in the case on hand the dredging equipment was leased out on bare boat basis, viz., without master and crew. Therefore, it will not come under the permanent establishment and the entire control over the equipment was not with the foreign company but with the Indian company.48
ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED
37. Before us ld. Counsel had relied upon the decision of the Co- ordinate Bench in the case of Nederlandsche Overzee Baggermaatsehappiji (supra) and also judgment of ITAT Hyderabad Bench in the case of Dharti Dredging & Infrastructual Ltd.(supra) wherein the aforesaid judgment of the Hon‟ble Madras High Court has been considered. Accordingly, we hold that there is no PE of the assessee in India in terms of Article 5 of India-Ireland DTAA.
38. Having so concluded on the primary issue, we turn to the assessee‟s alternative plea that the lease rentals are, in any event, governed by Article 8(1) of the India-Ireland DTAA, and therefore taxable exclusively in Ireland. For the sake of ready reference, the difference in the language of Article 8 of India-Ireland DTAA as compared to Article 8 of OECD model convention is as under:-
Article 8(1) of the Article 8 of the OECD India-Ireland DTAA Model Convention reads as under: ―... reads as under: Article 8 ".....Article 8 SHIPPING AND SHIPPING AND TRANSPORT TRANSPORT 1 Profits derived by an 1. Profits derived by enterprise of a Contracting an enterprise of a State from the operation or Contracting State from rental of ships or aircraft in the operation of ships international traffic and the or aircraft in rental of containers and international traffic related equipment which is shall be taxable only in incidental to the operation of that Contracting ships or aircraft in State....." international traffic shall be taxable only in that Contracting State. ..."
39. Article 8(1) of this treaty reads in material part: ―Profits derived by an enterprise of a Contracting State from the operation or rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State‖ The text is notable in two respects: first, it disjunctively pairs "operation" and "rental" as independent income- yielding activities; second, it contains no requirement that the rental be merely ancillary to the lessor‟s own operation of ships or aircraft. This wording differs from the OECD Model‟s narrower formulation, and its deliberate adoption by the Contracting States reflects a 49 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED conscious policy choice to extend the exclusive taxing right to rental income from ships and aircraft, as a distinct category, when such assets are employed in "international traffic."
40. The assessee‟s case is that it is an Irish enterprise engaged in the business of dry leasing aircraft to IndiGo, that the leased aircraft formed part of IndiGo‟s integrated fleet and were deployed interchangeably on domestic and international routes, and that such integration necessarily brought them within the scope of "international traffic" as defined in Article 3(1)(g) of the treaty. That definition excludes only those cases where the ship or aircraft is "operated solely between places in the other Contracting State"; the moment the operation is not exclusively domestic, it satisfies the definition. The assessee points out that IndiGo is an international carrier with scheduled flights to multiple foreign destinations, and that the aircraft type and configurations leased were suitable and certified for such operations. It was emphasised that the treaty text does not stipulate any predominance or threshold of international usage; a single non-incidental use on an international sector suffices to displace the "solely" domestic exclusion. Counsel relied on decisions such as ABN Amro Bank NV and GE Capital Aviation Services, where similar leasing clauses were given their plain, broad meaning.
41. The Revenue, however, has urged that Article 8 was intended to protect the core transport operations of an airline and that the "rental" limb is to be read as ancillary to such operations. Since the assessee is a pure lessor with no airline operations of its own, and since, according to the Revenue, the leased aircraft were predominantly used on domestic Indian routes, it was contended that the income was not covered by Article 8 but instead constituted business profits taxable in India if a PE existed. The LD.DRP adopted this line, essentially importing the OECD Model‟s narrower structure into the India-Ireland text.
42. We are unable to subscribe to this restrictive reading. Treaty interpretation proceeds on the ordinary meaning of the terms used, read in their context and in light of the treaty‟s object and purpose. Where the Contracting States have consciously departed from the OECD Model to insert "rental" as an alternative head to "operation," the text must be given effect in its ordinary sense. To superimpose a requirement that the lessor must itself be an operator in international traffic, or that the rental must be subordinate to such operation, is to read into the provision words which are not there. Likewise, to insist on a quantitative predominance of international usage is to graft a test not found in the treaty. The definition in Article 3(1)(g) sets a binary criterion either the aircraft is operated solely domestically (in which case the exclusion applies) or it is not (in which case it falls within "international traffic"). Once it is shown, as it is here, that the leased aircraft formed part of a fleet used on 50 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED both domestic and international sectors, the rental income falls within the protective ambit of Article 8(1).
43. We also take note of the commercial reality that airlines today operate fleets on a network basis, with aircraft rotated between domestic and international sectors depending on operational exigencies, maintenance schedules, and route economics. It is artificial, and contrary to industry practice, to freeze an aircraft‟s character by reference to its predominant usage in a given period. The treaty drafters, in our view, intended to avoid such disputes by linking the test simply to whether the aircraft was "operated solely"
domestically. In the present case, the factual matrix including IndiGo‟s undisputed status as an international carrier and the unchallenged deployment of the leased aircraft on at least some international sectors brings the income squarely within the Article 8(1) scope.
44. The allocation rule in Article 8(1) is a specific provision which prevails over the general rule for business profits as provided in Article 7. Even if we had found that the assessee had a PE in India, Article 8(1) would nonetheless require the profits from such rental to be taxed only in the State of residence, Ireland. In light of our earlier conclusion that no PE exists, the operation of Article 8(1) fortifies the non-taxability of the lease rentals in India. The LD.DRP‟s contrary view is founded on an impermissible narrowing of treaty language, and cannot be sustained."
106. In view of the detailed findings extracted herein above which, as noted, arise from an identical factual matrix and legal consideration, we see no reason to depart from the conclusions so reached. The reasoning adopted therein applies mutatis mutandis to the present appeals as well. We, therefore, unhesitatingly hold that the assessee does not have a PE in India within the meaning of India- Ireland DTAA. Having reached such a conclusion, it necessarily follows that the assessee is entitled to avail the benefit of Article 8 of the said Convention. Consequently, the issue relating to the existence of a PE, as well as the applicability of Article 8, is decided in favour of the assessee."
12. Thus, as could be seen from the aforesaid observations of the Coordinate Bench, each and every reasoning of the Departmental Authorities based on which the lease rentals were brought to tax in India, were comprehensively dealt with and rejected with sound reasoning. In case of Kosi Aviation Leasing Ltd. vs. ACIT (Supra), the Coordinate Bench, while 51 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED following the ratio laid down in case of Sky High Appeal XLIII (Supra), has given its finding on certain additional submissions made by learned Special Counsel appearing for the Department. The observations of the Coordinate Bench are reproduced hereunder:-
" 44. The Special Counsel for the Department has raised some additional arguments on issues with regard to applicability of Article 8. We find that in the case of Sunflower Aircraft Leasing Limited (Supra), the Tribunal has already examined Article 8 in OECD Convention viz a viz India-Ireland DTAA. The provisions of Article 8 as given in India-Ireland DTAA are much broader than the OECD Convention. If the submissions of the ld. Special Counsel for the Department are to be accepted then it would mean that the lessor of the aircraft should also be an operator in international traffic as is the case in wet lease. This amounts to inserting the condition in the treaty which cannot be done. This is contrary to the principles of Vienna Convention on the laws of treaties. The treaties are to be interpreted in the ordinary meaning of the text in its context and object. The treaty cannot be read in a manner which would result in absurdity.
45. The argument of Special Counsel for the Revenue was that "international traffic "must be read with reference to each voyage/journey and not the aircraft. Before proceedings further, it would be relevant to refer to the provisions of Article 8(1) of India-Ireland DTAA, the same reads as under:-
"1. Profits derived by an enterprise of a Contracting State from the operation or rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State.
Here it would also be relevant to refer to the definition of 'international traffic' as defined under Article 3(1)(f) of the Treaty:
"the term "international traffic" means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State,"
The definition of "international traffic "if applied in context to facts of the instant case, international traffic means any transport by aircraft operated by an enterprise of India, except when aircraft is operated solely between places in Ireland. Accordingly, an aircraft operated by Indian lessee 52 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED (Indigo) shall be considered as operating in international traffic. The lessee operates aircraft in and outside India and does not operate aircraft solely in Ireland. Further, neither Article 8(1) nor Article 3(1)(f) defining 'international traffic' refers to voyage/journey. Therefore, argument of the ld. Special Counsel for the Department referring to voyage/journey to test check international traffic is misplaced, hence, unsustainable. When the meaning are self-explanatory in the DTAA there is no need to travel to OECD Conventions which are only guiding light and have no binding force.
46. The third limb of the argument by Special Counsel is that each aircraft has to be seen whether it has flown outside and has operated in international traffic. The assessee earns rentals from lease of aircraft. The lessor has no control on the schedule of the aircrafts or the destination of the aircraft where they are operated. The lessor/assesseedoes not lay down any restrictions in the lease agreement as to whether the aircraft shall operate in domestic territory or operate internationally. It is the discretion of the lessee to schedule the operation of the aircraft. It is no denying that lessee/Indigo is operating internationally. Therefore, to presume that the aircraft are not operated internationally is superfluous. Nevertheless, the assesses being the lessor of the aircraft would continue to receive rentals even if the aircraft is not put to operation by the lessee. The assessee has filed a certificate of deployment of aircraft issued by the lessee which confirms the fact that leased aircraft has not been deployed anywhere in Ireland during the relevant period and is operated in international traffic. Thus, the condition of Article 8(1) is satisfied.
47. For the reasons mentioned above and in light of order in the case of Sky High Appeal XLIII Leasing Company Ltd. (supra), we hold the lease rental received by the assessee/appellant are covered by Article 8 of India-Ireland Treaty. Hence, the assessee would get the benefit of Article 8. In the result, this issue is decided in favour of the assessee/appellant and against the Department."
13. Thus, viewed in the context of the ratio laid down by the Coordinate benches in the decisions cited supra, we have no hesitation in holding that the issues arising in the present appeal concerning the taxability of lease rentals are squarely covered in favour of the assessee in absence of any factual difference. Therefore, respectfully following the decisions of the Coordinate Benches (Supra) we hold that the lease rentals are not taxable in India in terms with Article 8 of India-Ireland DTAA, as such lease rentals 53 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED are taxable in the country of residence of the recipient, which in the present case is Ireland. Accordingly, we direct the Assessing Officer to delete the addition. These grounds are allowed.
14. In view of our decision in the foregoing paragraphs, ground no.2 has become academic, hence, kept open. In so far as, Grounds Nos. 11 and 12 relating to chargeability of interest and initiation of penalty proceedings u/s.
270A are concerned, in our view, such issues either being consequential or premature, do not require adjudication.
15. In view of our decision in the main appeal, the stay application has become infructuous. Accordingly, appeal is partly allowed and stay application is dismissed.
ITA 1327 & 1328/MUM/2025 (Lunar Aircraft Trading Company Ltd.) SA No.45 & 44/Mum/2025 A.Y. 2022-23
16. Ground No.1 is a general ground, hence, does not require specific adjudication. In Ground No. 2, assessee has challenged the validity of the impugned assessment orders as barred by limitation. Whereas, Ground No.3 to 10 are on various facets of the core issue concerning the taxability of lease rentals received by the assessee on leasing of aircraft.
17. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to Ground Nos.3 to 54 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED 10 of the present appeals. Hence, these grounds to that extent are allowed.
Ground No. 2 has become academic, hence, kept open. In so far as, Grounds No. 11 and its sub grounds, they have either become academic or consequential and premature. Hence, do not require adjudication now.
18. Accordingly, appeals are partly allowed. Corresponding stay applications, having become infructuous, are dismissed.
ITA 1348/MUM/2025(GAL MSN 6072 & 6184 Ltd.) A.Y. 2022-23
19. Ground Nos.1 and 2 are general grounds, hence, do not require specific adjudication. In Ground No.3, assessee has challenged the validity of the impugned assessment order as barred by limitation. Whereas, Ground Nos. 4 to 30 are on various facets of the core issue concerning the taxability of lease rentals received by the assessee on leasing of aircraft.
20. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to Ground Nos.4 to 30 of the present appeal. Hence, grounds are treated to be allowed to that extent. Ground No. 3 has become academic, hence, kept open. In so far as, Grounds No. 31 and 32, they have either become consequential or premature.
Hence, do not require adjudication.
21. Accordingly, appeal is partly allowed.
55ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED ITA 1349/MUM/2025(JET AIR 17 Limited) A.Y. 2022-23
22. Ground Nos.1 and 2 are general grounds, hence, do not require specific adjudication. In Ground No.3, assessee has challenged the validity of the impugned assessment order as barred by limitation. Whereas, Ground Nos. 4 to 30 are on various facets of the core issue concerning the taxability of lease rentals received by the assessee on leasing of aircraft.
23. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to Ground Nos.4 to 30 of the present appeal. Hence, grounds are treated to be allowed to that extent. Ground Nos. 3, 31 and 32 have become academic. In so far as, Grounds No. 33 and 34, they have either become consequential or premature.
Hence, do not require adjudication.
24. Accordingly, appeal is partly allowed.
ITA 1350/MUM/2025(Yamuna Aviation Leasing Limited) A.Y. 2022-23
25. Ground Nos.1 and 2 are general grounds, hence, do not require specific adjudication. In Ground No.3, assessee has challenged the validity of the impugned assessment order as barred by limitation. Whereas, Ground Nos. 4 56 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED to 30 are on various facets of the core issue concerning the taxability of lease rentals received by the assessee on leasing of aircraft.
26. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to Ground Nos.4 to 30 of the present appeal. Hence, grounds are treated to be allowed to that extent. Ground Nos. 3 and 31 have become academic. In so far as, Grounds No. 32 and 33, they have either become consequential or premature. Hence, do not require adjudication.
27. Accordingly, appeal is partly allowed.
ITA 1351/MUM/2025(Falgu Aviation Leasing Limited) A.Y. 2022-23
28. Ground Nos.1 and 2 are general grounds, hence, do not require specific adjudication. In Ground No.3, assessee has challenged the validity of the impugned assessment order as barred by limitation. Whereas, Ground Nos. 4 to 30 are on various facets of the core issue concerning the taxability of lease rentals received by the assessee on leasing of aircraft.
29. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to Ground Nos.4 to 30 of the present appeal. Hence, grounds are treated to be allowed to that extent. Ground Nos. 3 and 31 to 34 have become academic. In so far as, 57 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED Grounds No. 35 and 36, they have either become consequential or premature.
Hence, do not require adjudication.
30. Accordingly, appeal is partly allowed.
ITA 1859/MUM/2025(VS MSN 36118 CAV Designated Activity Company) A.Y. 2022-23
31. Ground No.1 is a general ground, hence, does not require specific adjudication. In Ground Nos.2 to 4, assessee has challenged the validity of the impugned assessment order. Whereas, Ground Nos. 5 to 17 are on various facets of the core issue concerning the taxability of lease rentals received by the assessee on leasing of aircraft.
32. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to Ground Nos.5 to 17 of the present appeal. Hence, grounds are treated to be allowed to that extent. Ground No. 31 to 34 have become academic. Ground Nos. 2 to 4 have become academic. Ground No. 18 is consequential.
33. Accordingly, appeal is partly allowed.
ITA 1805/MUM/2025(PAAL Jupiter Company Limited) A.Y. 2022-23
34. Ground Nos.1 and 3 are general grounds, hence, do not require specific adjudication. In Ground Nos.2 assessee has challenged the validity of the 58 ITA 1308/MUM/2025 SKY HIGH XXXIV LEASING COMPANY LIMITED impugned assessment order. Whereas, Ground Nos. 4 to 21 are on various facets of the core issue concerning the taxability of lease rentals received by the assessee on leasing of aircraft.
35. Due to parity of facts, our decision in the foregoing paragraphs, qua ground Nos. 3 to 10 of M/s Sky High XXXIV Leasing Company Limited, ITA No. 1308/Mum/2025, supra, will apply mutatis mutandis to Ground Nos.4 to 21 of the present appeal. Hence, grounds are treated to be allowed to that extent. Ground Nos. 2 has become academic, hence kept open. Ground Nos.
22 and 23 being consequential and premature, respectively, do not require adjudication.
36. Accordingly, appeal is partly allowed.
37. To sum up, all the captioned appeals are partly allowed and stay applications are dismissed.
Order pronounced in the open court on 30/04/2026 Sd/- Sd/-
PRABHASH SHANKAR SAKTIJIT DEY
ACCOUNTANT MEMBER VICE PRESIDENT
Mumbai
Dated: 30/04/2026
Aks/-
59
ITA 1308/MUM/2025
SKY HIGH XXXIV LEASING COMPANY
LIMITED
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT - concerned
5. DR, ITAT, Mumbai
6. Guard File
BY ORDER,
(Dy./Asstt. Registrar)
ITAT, Mumbai
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