SUNFLOWER AIRCRAFT LEASING LIMITED,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 4(2)(2) INTERNATIONAL TAX, MUMBAI

The aforesaid appeal has been filled by the assessee against the final assessment order dated 19 January 2025, passed under SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., section 143(3) read with section 144C(13) of the Income-tax Act, 1961 (―the Act‖) by the Assistant Commissioner of Income-tax, Circle–4(2)(2), Mumbai (―the AO‖), pursuant to the directions issued by the Dispute Resolution Panel, New Delhi (―the DRP‖), under section 144C(5) of the Act for the assessment year 2022– 23.

The controversy in the present case has its genesis in the taxability of lease rentals earned by the assessee, an Irish tax resident company from leasing two Airbus A320 aircraft to an Indian airline, M/s InterGlobe Aviation Limited (―IndiGo‖). While the assessee asserts that such income is either (i) taxable solely in Ireland under Article 7 of the Double Taxation Avoidance Agreement between India and Ireland (―India–Ireland DTAA‖) owing to the absence of a Permanent Establishment (―PE‖) in India; or (ii) in the alternative, exempt in India under Article 8(1) of the DTAA being profits from the rental of aircraft in international traffic. However the Revenue authorities have sought to bring the same to tax in India on the twin premises that; (a) the aircraft themselves constituted a ―fixed place‖ PE under Article 5(1) of the DTAA; and (b) the conditions of Article 8(1) were not met.

Brief background and facts qua the issue involved are that the assessee is a company incorporated under the laws of Ireland and fiscally domiciled therein, forming part of the globally recognised AerCap Group, an enterprise acknowledged as one of the largest aircraft leasing companies in the world. The Group‘s SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., principal business encompasses the acquisition, financing, ownership, asset management, and leasing of commercial aircraft to airlines worldwide. Its operational footprint extends to multiple jurisdictions, and its leasing activities are backed by substantive infrastructure and personnel in Ireland. It is an undisputed position on record that the AerCap Group has been engaged in bona fide aircraft leasing operations for decades, including well before the coming into force of the India–Ireland DTAA.

In the normal course of its business, the assessee entered into two dry operating lease agreements with IndiGo, a premier Indian low-cost airline for the lease of two Airbus A320 aircraft: • MSN 3264, and • MSN 3330. These aircraft had been purchased directly from the Original Equipment Manufacturer (Airbus) in 2007 and, prior to their induction into IndiGo‘s fleet, had served multiple lessees in different countries. The leases in question were negotiated, documented, and executed entirely outside India. The delivery of the aircraft to IndiGo occurred in Chile, not in India. The lease for MSN 3264 commenced on 18 October 2016 for a term of 34 months, and, after extensions, concluded with the redelivery of the aircraft to the assessee on 19 July 2021. The lease for MSN 3330 was on broadly similar terms. The redelivery of both aircraft was affected strictly in accordance with the procedures and technical checks prescribed in the lease agreements. There SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., has been no allegation from the Revenue that the leases were sham transactions or that any step in their execution or performance violated Indian law or aviation regulations.

For the relevant previous year, the assessee filed its return of income on 22 October 2022, declaring ‗Nil‘ income. In its computation and supporting notes, the assessee claimed that the lease rentals could not be taxed in India for the following reasons: (i) Article 12(3)(a) — Not Royalty: The payments did not constitute ―royalty‖ as defined in Article 12(3)(a) of the DTAA, which, unlike the domestic law definition in section 9(1)(vi) of the Act, contains a narrower scope for payments relating to the use of industrial, commercial, or scientific equipment. (ii) Article 5 — No PE: The assessee had no PE in India. The business of aircraft leasing was conducted wholly from Ireland. The operational control of the aircraft during the lease rested entirely with IndiGo, as mandated by the contractual terms and by the Directorate General of Civil Aviation (―DGCA‖) regulatory framework. The mere presence of the aircraft in India during the lease period, it was submitted, did not meet the ―disposal test‖ or any other threshold under Article 5(1) for a fixed place PE. (iii) Article 8(1)Rental in International Traffic: Without prejudice to the above, the assessee contended that the rental income from leasing aircraft fell squarely within the protection of Article 8(1) of the DTAA, which, in its broader-than-OECD SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., wording, allocates exclusive taxing rights to the State of residence for ―profits derived… from the operation or rental of ships or aircraft in international traffic.‖ IndiGo had been operating international flights since September 2011, and the leases did not contain any restriction on deploying the aircraft for international traffic.

In the draft assessment order dated 31 March 2024, the AO denied the assessee‘s claim to treaty protection. He invoked the Principal Purpose Test (―PPT‖) as enshrined in Articles 6 and 7 of the Multilateral Instrument (―MLI‖), alleging that the assessee had failed to discharge the burden of proving that the principal purpose of the leases was other than obtaining treaty benefits. Treating the DTAA provisions as inapplicable, he characterised the lease rentals as ―royalty‖ under section 9(1)(vi) of the Act and brought the amounts to tax at the rate applicable to foreign companies.

Before the ld.DRP, the assessee lodged detailed objections, challenging the AO‘s invocation of the PPT, the characterisation of the leases as giving rise to royalty, and the denial of Article 8(1) relief. Upon a thorough analysis, the LD.DRP dismantled the AO‘s PPT reasoning. It found that: • The AerCap Group had a long-standing global leasing business, pre-dating the India–Ireland DTAA. • The assessee was a genuine Irish company with substantial economic presence in Ireland.

Further, on the nature of the leases, the ld. DRP concurred with the assessee‘s submission that these were genuine dry operating leases, not finance leases. It observed that the aircraft were directly acquired from Airbus in 2007, that IndiGo was the fifth lessee in 2016, and that the leases were terminated and redelivered within five years features inconsistent with financing arrangements. Relevant observations of LD.DRP are as under:

However, in a significant turn, the LD.DRP, by a show- cause notice dated 13 December 2024, raised a new issue: whether the continuous physical presence of the aircraft in India during the lease constituted a ―fixed place‖ PE under Article 5(1) of the DTAA. In its reply dated 19 December 2024, the assessee emphasised that it had no office, personnel, or operational base in India; that its leasing business was controlled entirely from Ireland; and that, under both the leases and Indian aviation law, operational control vested exclusively in IndiGo. The LD.DRP however was unconvinced and drawing heavily on the reasoning in Poompuhar Shipping Corporation Ltd. v. ITO [2014] 360 ITR 257 (Mad), and applying the disposal test articulated by the Supreme Court in Formula One World Championship Ltd. v. CIT (2017) 394 ITR 80 (SC), it held that:

For profit attribution, the Ld. DRP, in the absence of segmental accounts, adopted a deemed attribution of 25% of the gross lease rentals as profits arising in India, taxed at 40%, yielding an effective levy of 10% of gross receipts.

On the alternative claim under Article 8(1), the LD.DRP relied extensively on the OECD Commentary to hold that ―passive‖ leasing without crew provision or operational involvement was not ―operation of aircraft in international traffic.‖ It further found that IndiGo was primarily a domestic operator and that the leases were not ―in respect of‖ international traffic as defined in Article 3(1)(f) of the DTAA.

The AO, in his final order dated 19 January 2025, adopted the LD.DRP‘s findings and computations in their entirety. Thus, not only it was held that Irish Company had a PE in India in the form of Indigo Aircraft, but also denied the benefit of Article 8 of India - Ireland DTAA.

Mr. Jolly then referred to Rules 4 and 5 of the Aircraft Rules, 1937, to submit that no person is allowed to use or operate aircraft in India except in terms of the Rules. One of the essential requirements of running an aircraft in India is registration of the aircraft in India. Further in terms of Rule 6, even personnel who operate such aircraft must be licensed by the DGCA in the prescribed manner. In terms of clause 60 dealing with registration, it was stated that certificate of registration issued by DGCA must carry the following details: ―30. Certificate of Registration – ―……Type of aircraft, constructor’s number, year of manufacture, nationality and registration marks referred to under these rules, full name, nationality and address of the owner, usual station of aircraft and the date of registration and the period of validity of such registration:‖ 15.1. In terms of clause 33, any change in ownership of the aircraft is also required to be notified to the DGCA. He also placed reliance on the Aircraft Leasing Manual issued by DGCA (clause 2.4 and clause 6.2) to submit that a dry lease is an arrangement where the lessor provides an aircraft without crew to the lessee and 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.

On the issue of applicability of Article 8 of the India-Ireland DTAA, Mr. Jolly submitted that if the assessee were to succeed on the issue of PE, this issue would become academic. However, he made the following submissions in this regard since the SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., LD.DRP has recorded findings on this aspect which are part of the assessment order: a. The LD.DRP, while dealing with applicability of Article 8, had based its decision on commentary on Article 8 of the OECD Model Convention, without appreciating the fundamental differences between Article 8 of the India-Ireland DTAA and Article 8 of the OECD Model Convention. b. The LD.DRP did not appreciate that Article 8 of the India- Ireland DTAA provides a specific exemption to income from rental / leasing of aircraft in international traffic. This exemption is not provided in the OECD Model Convention. Therefore, the finding of the LD.DRP that passive leasing income is excluded from the purview of the Article 8 of the India-Ireland DTAA, which finding is based on the Commentary on Article of the OECD Model Convention is patently perverse. He submitted that on this ground alone, the order of the LD.DRP deserves to be set aside. c. However, the LD.DRP, thereafter, goes on to examine the definition of ‗international traffic‘ and, thereafter, holds that IndiGo being a domestic airline operator, the leasing of aircraft by assessee to IndiGo will not constitute income from leasing of aircraft in international traffic. d. He submitted that this finding of the LD.DRP, i.e., IndiGo is a domestic airline operator, is patently perverse since Indigo started its first commercial international flight from September 2011 onwards whereas, the present appeal is concerned with SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., financial year 2021-22 relevant to AY 2022-23. The fact that IndiGo commenced its international flight from September 2011 onwards, is documented on the DGCA portal and is publicly known. e. In view of the above, the findings of the LD.DRP that IndiGo is a domestic operator and, therefore, lease of aircraft by assessee to IndiGo does not constitute leasing of aircraft in international traffic is patently perverse. f. Without prejudice, Mr. Jolly submitted that in terms of definition of term ‗international traffic‘ in article 3(1)(f) of the India-Ireland DTAA, there is no requirement for IndiGo to have international flights from India, to enable the assessee to take benefit of Article 8(1).

With regard to all the issues, the submissions of the ld. Senior Counsel can be summarized in the following manner:- A. No Fixed Place PE under Article 5(1) of the DTAA (i) Nature of the Business Model — The assessee is engaged exclusively in the business of dry operating leases of commercial aircraft. In a dry lease arrangement, operational control, navigation, and commercial deployment of the aircraft vest entirely with the lessee airline, here IndiGo. The lessor neither supplies crew nor provides technical or operational services in the source State. All core income-generating functions including marketing, negotiation, execution of lease agreements, financing, SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., asset management, and strategic decisions are undertaken from the assessee‘s offices in Ireland. (ii) Disposal Test Not Satisfied - Relying extensively on Formula One World Championship Ltd. v. CIT (2017) 394 ITR 80 (SC), Mr. Jolly contended that for a fixed place PE to exist, the asset or premises in the source State must be ―at the disposal‖ of the foreign enterprise in such a manner as to enable it to carry on its business wholly or partly from that location. Mere ownership of an asset located in the source State does not confer such disposal. In the present case, during the lease tenure, the aircraft were under the exclusive possession, custody, and operational control of IndiGo, as mandated by the lease contracts and the DGCA‘s Civil Aviation Requirements. The assessee could neither dictate the routes nor control the schedules, crew, or maintenance, save for enforcing compliance with redelivery conditions at lease-end. (iii) Contractual Rights are Protective, Not Operational — The right to inspect the aircraft, receive periodic reports, or repossess the aircraft in the event of breach are in the nature of protective covenants to safeguard the lessor‘s ownership interest. Such rights are standard in the aircraft leasing industry and do not amount to ―carrying on business‖ from the place of location. He drew a distinction between control over the asset for income production and ownership rights to protect the asset. (iv) Movable Asset Located in India - The Ld. Counsel emphasised that the jurisprudence on fixed place PEs has SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., primarily evolved in the context of immovable property or fixed premises. A movable high-value asset such as an aircraft, which is capable of deployment in multiple jurisdictions and whose presence in the source State is dictated solely by the lessee‘s commercial operations, cannot, per se, constitute a ―fixed place of business‖ for the lessor. (v) Absence of Human Element in India - Citing Morgan Stanley & Co. Inc. v. DIT (2007) 292 ITR 416 (SC), the AR argued that a PE normally presupposes a human element carrying on the core business functions from the fixed place. The assessee has no personnel stationed in India, nor any dependent agent whose presence could trigger a PE under Article 5(5). B. Profit Attribution Methodology Flawed Without prejudice to the primary contention that no PE exists, the Ld. Counsel assailed the LD.DRP‘s attribution of 25% of gross lease rentals as arbitrary and devoid of any functional, asset, and risk (―FAR‖) analysis. Article 7(2) of the DTAA mandates that only those profits which a PE would have earned as a distinct and separate enterprise, performing the same functions and assuming the same risks, may be attributed to it. In the instant case: • The assessee‘s value-creating functions, funding arrangements, and entrepreneurial risks are all located in Ireland. • The presence of the aircraft in India, absent operational control, creates no incremental profit potential in SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., India beyond what is compensated through the lease rentals agreed to at arm‘s length. • The LD.DRP‘s ―25% of gross receipts‖ formula is wholly inconsistent with OECD principles and Indian jurisprudence (e.g., DIT v. Morgan Stanley), which reject gross- basis profit attribution in favour of functional analysis. C. Applicability of Article 8(1) of the DTAA The Ld. Counsel in his alternative plea submitted that, even if the Revenue‘s case on PE were to fail, the lease rentals are protected under Article 8(1) of the DTAA. (i) Broader Wording than OECD Model - Unlike the OECD Model, which limits Article 8 to profits from the ―operation of ships or aircraft in international traffic,‖ the India–Ireland DTAA expressly extends the provision to the ―rental of ships or aircraft‖ in international traffic, as well as to the ―rental of containers and related equipment‖ incidental thereto. The inclusion of ―rental‖ in the operative clause reflects a conscious policy choice by the Contracting States to tax such income exclusively in the State of residence of the lessor, regardless of whether the lessor itself operates the aircraft. (ii) Meaning of ―in International Traffic‖ - Article 3(1)(f) defines the term to include any transport that is not solely between two places in India. IndiGo, as lessee, has operated international routes since September 2011, and the leases placed no contractual restrictions on the deployment of the aircraft for such routes. The test, the AR argued, is capability and SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., entitlement for international deployment, not the proportion of domestic versus international use. (iii) OECD Commentary Not Controlling - Given the textual divergence between the DTAA and the OECD Model, reliance on OECD Commentary to import a requirement of ―active operation‖ by the lessor is misplaced. The AR relied on tribunal decisions in Kuwait Airways Corporation v. DCIT (ITA No. 1310/Mum/2005) and Federal Express Corporation v. ADIT (2011) 45 SOT 46 (Mum) to contend that passive leasing to an airline engaged in international traffic suffices for Article 8 protection. D. Principal Purpose Test (PPT) Rejected by LD.DRP The Ld. Counsel pointed out that the LD.DRP had, on a thorough evaluation, rejected the AO‘s invocation of the PPT under the MLI, having found that: • The AerCap Group‘s leasing business pre-dates the DTAA. • The assessee‘s economic and commercial presence in Ireland is substantive. • The leases were genuine commercial arrangements, not devices to secure treaty benefits. Mr. Jolly submitted that unlike in other matters, after the DRP‘S directions, the treaty entitlement stands affirmed, and the only surviving questions are the existence of a PE and the applicability of Article 8(1).

Rebuttal to Assessee‘s Reliance on Formula One and Morgan Stanley (i) Distinguishing Formula One — The Ld. DR argued that Formula One involved the use of a racing circuit by a foreign enterprise for a limited duration during an annual event, whereas here, the aircraft were stationed in India on a near- continuous basis for years. This factual distinction, he claimed, rendered Formula One inapposite.

Profit Attribution Justified (i) Rationale for 25% Attribution — The Ld. DR defended the LD.DRP‘s approach of attributing 25% of gross lease rentals to the alleged PE. He argued that the absence of segmental accounts from the assessee necessitated a reasonable estimation. In the circumstances, 25% was not arbitrary but a conservative figure given the high value and income-generating capacity of the aircraft deployed in India.

Inapplicability of Article 8(1) of the DTAA (i) Nexus with International Traffic Absent — The Ld DR contended that Article 8(1) protection applies only where the rental of the aircraft is integrally linked to its operation ―in international traffic.‖ Here, the aircraft were predominantly used by IndiGo on domestic routes. The occasional or incidental operation on international sectors, he argued, was insufficient to trigger Article 8 immunity. (ii) OECD Commentary Persuasive — While conceding that the India–Ireland DTAA uses broader language than the OECD Model, he however submitted that OECD Commentary still SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., provides interpretative guidance. According to that guidance, Article 8 coverage for rental income presupposes that the lessor itself operates the asset in international traffic, or that the rental is part of an overall operation of aircraft in such traffic. In this case, the assessee neither operated nor controlled the deployment of the aircraft. (iii) Purpose of Article 8 Limited — The Ld. DR further argued that the legislative intent behind extending Article 8 to rentals was to cover leasing arrangements ancillary to the lessor‘s own international operations, not passive leasing to a domestic operator for primarily domestic use.

While the ld. LD.DRP had rejected the AO‘s finding on the PPT, the DR submitted that the structure of the arrangement nonetheless called for strict scrutiny. Given the high withholding tax differential between India and Ireland, and the strategic choice of leasing into India from Ireland, the DR argued that such transactions warranted a narrow construction of treaty provisions to prevent base erosion. DECISION 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 SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., 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.

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 business of an enterprise is wholly or partly carried on. It entails two requirements which need to be fulfilled:

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)].

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. 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.

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.

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 SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., 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.

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 SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., 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...‖

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 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.

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, SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., 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; SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., • Productivity – the conduct of substantive commercial operations; and • 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 reality and not merely the corporate form that governs PE determination. IV. Remuneration Structure as Evidence of Commercial Nexus: 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.

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.

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.

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.

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.

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.‖

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 SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., 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.

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:-

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.

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 SA No.35/Mum/2025 Sunflower Aircraft Leasing Ltd., 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 both domestic and international sectors, the rental income falls within the protective ambit of Article 8(1).

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.

In Ground of Appeal