The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has held that the aircraft lease agreements were operating leases and not finance leases because ownership at all times remained with the lessor, there was no transfer of title to the lessee, and the lessee was bound to return the aircraft at the end of the lease term. It further held that the lease rentals were covered by Article 8 of the India-Ireland Double Taxation Avoidance Agreement (DTAA), since Article 8 expressly applies to profits from the operation or rental of aircraft in international traffic, and the leased aircraft formed part of IndiGo’s fleet operating in international traffic.
The Tribunal also held that Articles 6 and 7 of the Multilateral Instrument (MLI) could not be applied to the India-Ireland DTAA in the absence of a separate notification under Section 90(1) of the Income-tax Act giving domestic effect to those treaty modifications.
On the nature of the lease, the Division Bench comprising Vikas Awasthy (Judicial Member) and Brajesh Kumar Singh (Accountant Member) observed that the lease documents showed all the essential features of an operating lease and not a finance lease. It noted that ownership of the aircraft remained with the lessor throughout the lease period, there was no clause transferring ownership to the lessee at the end of the term, the lessee was obliged to return the aircraft on expiry, and the deposit was refundable on redelivery.
The Tribunal also noted that the lease terms restricted sub-leasing without the lessor’s consent, required display of the owner’s name, vested title in replaced equipment with the owner, and required the lessee to insure the aircraft only during the lease term. It further relied on RBI Circular No. 24, which treated a lease with an option to purchase at the end of the term as a financial lease requiring prior RBI approval, and found that no such approval existed here. The Tribunal also rejected the DRP’s view on economic life, observing that DGCA had prescribed aircraft life as 20 years or 60,000 cycles and therefore substantial economic life remained even after the lease term.
On Article 8 of the India-Ireland DTAA, the Tribunal observed that the treaty text is wider than the OECD Model because it separately covers profits from the “operation or rental of ships or aircraft in international traffic.” The Tribunal held that this wording does not require the lessor itself to be an operator in international traffic and does not impose any test of predominance of international use. It found that once the leased aircraft formed part of IndiGo’s fleet and were used on both domestic and international sectors, they were not operated solely domestically and therefore fell within “international traffic” under the treaty definition. The Tribunal said the Revenue’s attempt to import a narrower OECD-style interpretation into the India-Ireland DTAA was impermissible and contrary to the ordinary meaning of the treaty text.
On the Multilateral Instrument (MLI), the Tribunal observed that although India had signed and notified the MLI and the India-Ireland DTAA was a Covered Tax Agreement, that by itself was not enough to make Articles 6 and 7 of the MLI enforceable in domestic law against the assessees. The Tribunal held that treaty modifications do not become enforceable automatically merely because the MLI has been generally notified. Since the MLI has the effect of modifying or altering the India-Ireland DTAA, a specific notification under Section 90(1) of the Act incorporating those changes into domestic law was mandatory.
The Tribunal rejected the Revenue’s arguments based on omnibus notification, global practice, OECD notes, Finance Act, 2020 amendments, and other multilateral agreements, and held that in the absence of a treaty-specific Section 90(1) notification, Articles 6 and 7 of the MLI, including the Principal Purpose Test, could not be invoked to deny DTAA benefits.
The Tribunal also made strong observations on judicial discipline. It held that the DRP, after noticing earlier coordinate bench decisions, acted in complete violation of judicial discipline in deciding the issues against the assessees and in making adverse comments on binding Tribunal rulings. The Tribunal reiterated that unless a Tribunal order is stayed or reversed by a higher forum, it remains binding on subordinate revenue authorities.
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Briefly, the assessees were Ireland-incorporated and Ireland tax resident entities engaged in leasing commercial aircraft, primarily to InterGlobe Aviation Ltd. (IndiGo) in India. The common issues before the Tribunal were: whether the aircraft leases were finance leases or operating leases, whether the assessees were entitled to the benefit of Article 8 of the India-Ireland DTAA, and whether Articles 6 and 7 of the Multilateral Instrument could be invoked to deny treaty benefits under the India-Ireland DTAA. The Assessing Officer had recharacterized the operating leases as finance leases, denied the benefit of Article 8 of the India-Ireland DTAA, and further held that because the India-Ireland DTAA was a Covered Tax Agreement, Articles 6 and 7 of the MLI automatically overrode the treaty. The DRP also declined relief despite taking note of the earlier Tribunal decisions.
