TFDAC IRELAND II LIMITED,IRELAND vs. DEPUTY COMMISSIONER OF INCOME TAX INTERNATIONAL TAX CIRCLE 4(1)(2) MUMBAI, MUMBAI

आदेश / O R D E R PER AMIT SHUKLA (J.M): These seven appeals have been filed by different assessees, each arising from its respective final assessment order passed under section 143(3) read with section 144C(13) of the Income- tax Act, 1961 (“the Act”) for the Assessment Year 2022–23, in pursuance of directions issued by the Hon‟ble Dispute Resolution Panel–2, Mumbai (“the DRP”) under section 144C(5). While the appeals are separate in form, the underlying facts, nature of transactions, and legal controversies are materially similar. The orders passed by the respective learned Assessing Officers (“AOs”) and the reasoning adopted by the learned DRP are substantially alike in language and substance. 2. In these circumstances, both the learned Senior Counsel appearing for the assessees and the learned Departmental Representatives for the Revenue submitted that the matters could be heard together and disposed of by a common, consolidated order to avoid prolixity and ensure consistency in judicial determination. Accepting this consensus, we have heard all the appeals together and proceed to adjudicate them through this consolidated order. The decision in the lead appeal will apply mutatis mutandis to the other connected appeals. 3. For the sake of convenience, TFDAC Ireland II Limited is taken as the lead matter, the facts therein being representative of the entire batch.

1. (i) Whether an incorrect rate of tax has been applied; and (j) Whether the same income can be subjected to tax both as “royalty” and as “interest”. A comprehensive mapping of these issues to the specific grounds raised in each appeal forms Annexure–A to this order.

5. The brief facts and the background of the case are that the assessee is a company incorporated on 18 April 2018 under the laws of Ireland, and is a tax resident thereof, holding valid Tax Residency Certificates (“TRCs”) issued by the Irish Revenue Authorities. It forms part of the TFDAC Group, an international aircraft leasing conglomerate consisting of four Irish entities, a finance company (TFDAC Finance (Ireland) Limited), a holding company (TFDAC Holding (Ireland) Limited), and two asset- owning lessor companies engaged in the business of leasing aircraft to operators worldwide. In the relevant year, the group had a leasing footprint in India, China, and Korea, with eight aircraft leased in total.

6. At the very threshold it merits emphasis that Ireland has over the years come to be universally recognised as the epicentre of the global aircraft leasing industry. It is not merely a jurisdiction of convenience but a pre-eminent hub, hosting 19 of the world‟s 20 largest lessors and accounting for approximately 60% of global leasing activity. This position of dominance is anchored in decades of accumulated expertise and experience supported by highly skilled workforce, a sophisticated legal and regulatory infrastructure and its geographic positioning that is strategically aligned to the needs of international commerce. It is in this backdrop, the assessee in regular and ordinary course of its business operation has entered into three separate dry operating lease agreements, each dated 1 February 2019, with InterGlobe Aviation Limited (“IndiGo”), India‟s largest airline operator. These leases pertained to aircraft bearing Manufacturer‟s Serial Numbers (MSNs) 8768, 8710, and 8952, which were to be redelivered to the lessor upon the expiry of the lease term in accordance with clause 16.1 of the respective agreements.

7. For the year under consideration, the assessee filed its return of income on 28 October 2022, declaring nil taxable income. The return was accompanied by detailed notes asserting: (i) that the lease rentals from the dry operating leases did not constitute “royalty” within Article 12(3)(a) of the India–Ireland Double Taxation Avoidance Agreement (“DTAA”), which expressly excludes payments for the use of aircraft; (ii) that, in the absence of a Permanent Establishment (“PE”) in India as defined under Article 5, the income constituted business profits taxable exclusively in Ireland under Article 7; and (iii) without prejudice, that the income was exempt under Article 8(1) of the DTAA as being derived from the operation of aircraft in international traffic.

12. The ld.DRP accordingly attributed 25% of the gross rentals as profits to the alleged PE and applying a tax rate of 40% to such profits, determined an effective rate of 10% of the gross receipts.

13. Pursuant to the ld. DRP‟s directions, the AO passed the final assessment order on 22 January 2025, holding: (i) that the lease rentals constituted “royalty” under section 9(1)(vi) of the Act; (ii) without prejudice, that the assessee had a fixed place PE in India; (iii) that Article 8 did not apply as IndiGo was a domestic airline and the leasing activity was not connected with international traffic; and (iv) that the leases were, in substance, finance leases.

14. Aggrieved, the assessee is before this Tribunal, assailing the findings on both law and facts, and relying on judicial precedents including Union of India v. Azadi Bachao Andolan, Vodafone International Holdings BV, and the Special Bench ruling in InterGlobe Aviation Ltd. to contend that the PPT provisions are inapplicable, that no PE exists in India, and that the lease rentals are excluded from the definition of “royalty” under the DTAA.

15. In all assessee has raised 11 grounds of appeal

, however at the time of hearing, Mr. Sachit Jolly, learned Senior Counsel for the assessee did not press Ground No. 1 (being general in nature) and Ground No. 2 (limitation). These grounds are accordingly dismissed as not pressed. Grounds Nos. 3 to 3.4 assail the jurisdiction of the ld.DRP in travelling beyond the scope of the draft assessment order, which too has not been argued before us.

16. Thus, on merits, the issues for determination crystallise into the following four: (a) Whether, in view of Articles 6 and 7 of the MLI, the assessee is disentitled to the benefits of the India–Ireland DTAA; (b) Whether the leases are to be characterised as operating leases or finance leases; (c) Whether the presence of the leased aircraft in India constitutes a fixed place PE of the assessee; and (d) If a PE is held to exist, whether Article 8(1) of the DTAA nevertheless precludes taxation of the income in India.

17. We now proceed to examine these issues seriatim, analysing the facts, the rival submissions, and the applicable legal principles. We have heard both the parties at length, the material placed on record was perused in detail, and the arguments advanced were considered in the light of the statutory provisions, the DTAA, the MLI, and the judicial precedents cited before us. For the sake of clarity and conciseness, the pertinent observations and finding of the Ld. DRP shall be referred to and dealt with at the appropriate stages of the discussion herein after, rather than being reproduced in detail at this juncture.

18. We shall now embark upon the examination of the first substantive question that arises for our consideration and adjudication, the applicability of Articles 6 and 7 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (hereinafter, “MLI”) vis-à-vis the India–Ireland Double Taxation Avoidance Agreement (“DTAA”). Learned Senior Counsel for the assessee has, bifurcated this question into two distinct scope :-  The first is an overarching legal and interpretational issue: whether, in the absence of a separately notified protocol or notification specifically amending the India–Ireland DTAA, the provisions of the MLI can be read into that DTAA so as to restrict or alter the benefits otherwise available thereunder.

 The second, which only arises if the first is answered in the affirmative, is a question of factual application: whether, on the facts and circumstances of the present case, the “principal purpose test” embodied in Articles 6 and 7 of the MLI is satisfied, thereby justifying a denial of treaty benefits.

21. Without prejudice to this threshold contention, the assessee has further urged that, even assuming arguendo that Articles 6 and 7 of the MLI stand incorporated into the DTAA, the factual substratum of the case does not support the Revenue‟s allegation that the principal purpose of the assessee‟s incorporation or of the impugned lease transactions was to obtain treaty benefits.

22. In elaboration, the assessee highlights the following salient facts: (a) The assessee was incorporated on 18 April 2018, and the lease agreements for the three aircraft in question MSN 8768, MSN 8710, and MSN 8952 were executed on 1 February 2019, prior to the introduction of the MLI.

(b) The assessee holds a valid Tax Residency Certificate (“TRC”) issued by the Irish Tax Authorities. (c) The India–Ireland DTAA was entered into “for promotion of trade between India and Ireland”, and aircraft leasing is one of the most significant and established industries operating from Ireland. (d) Ireland has been a global hub for aircraft leasing since 1977, “home to 19 out of 20 largest lessors in the world”, and accounting for “60% of world‟s global leasing”. (e) Its advantages include an established aviation knowledge pool, a strategic location between Europe and North America, an English-speaking skilled workforce, membership of the European Union and the OECD, and “ranking in the top 5 in the world for regulation and safety standards”. (f) The assessee‟s directors, bankers, and company secretary are all Irish, and the company being a Special Purpose Vehicle (“SPV”) was managed by “a reputed management service provider (Apex Group Limited) in Ireland”. (g) The assets (three aircraft) were registered in the assessee‟s name, with the bills of sale also issued in its name.

23. On these premises, it was contended that the choice of Ireland was dictated by compelling commercial considerations intrinsic to the global aircraft leasing industry and not by a contrived tax avoidance motive.

25. He thus submitted that, the finding of the ld.DRP and AO that the assessee lacked operational infrastructure in Ireland is both factually inaccurate and legally untenable. In this specialised industry, it is common and legitimate practice to outsource administrative functions to licensed service providers. In the present case, such functions were entrusted to “Apex Group Limited, which is based out of Ireland”, while strategic control rested with Irish directors and all professional interfaces banking, legal, company secretarial were Irish. This approach is consistent with recognised industry norms and finds legal support in the observations of the Hon‟ble Supreme Court in Vodafone International Holdings BV v. Union of India (2012) 6 SCC 613. The ld. DRP‟s remark that the directors of the assessee also held positions in numerous other Irish companies should be dismissed as irrelevant, because such cross- directorship is commonplace in Ireland‟s corporate governance landscape and does not, without more, impugn the genuineness of the assessee‟s business presence.

26. As to the Revenue‟s reliance on the letter dated 7 May 2021 issued by Aircraft Leasing Ireland (“ALI”), the assessee contended that this communication in fact supports its position, for it affirms that “the Irish Regulatory and Tax Authorities encourage aviation business and engage with the aviation business community to foster economic growth of aviation business”.

27. The learned Departmental Representative, CIT-DR, however, referred and relied upon the orders of the AO and ld.DRP. He has also filed a detailed note prepared after receiving instructions from the CBDT. This note asserts that both the India–Ireland DTAA and the MLI have been duly notified under Section 90(1) of the Act, that the DTAA is a Covered Tax Agreement under the MLI, and that no further notification is required for Articles 6 and 7 to operate. It emphasises that the “synthesised text” is merely an aid to understanding and not, in itself, a legal instrument.

28. The note filed by the learned Departmental representative for the sake of ready reference is reproduced hereunder:- 1. ―The Hon‘ble Supreme Court in the case of Assessing Officer v. M/s Nestle SA (Civil Appeal No.1420 of 2023) vide order dated 19-10-2023 had held that a notification under Section 90(1) of the Income-tax Act 1961 is necessary and a mandatory condition for a court, authority, or tribunal to give effect to a DTAA, or any protocol changing its terms or conditions which has the effect of altering the existing provisions of law.

2. India and Ireland have entered into a ―CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNMENT OF IRELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND FOR THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL GAINS‖ (referred as the India Ireland DTAC hereafter), which was signed on 6th November 2000 by the two sides and was duly notified by Notification No. 45/2002 [F. No.503/6/99- FTD], dated 20-02-2002, thereby fulfilling the condition laid down in sub section (1) of section 90 of the Income-tax Act 1961.

3. India has also signed and ratified the ―MULTILATERAL CONVENTION TO IMPLEMENT TAX TREATY RELATED MEASURES TO PREVENT BASED EROSION AND PROFIT SHIFTING‖ (referred as MLI hereafter), which has also been duly notified by Notification No.57/2019 [F. No.500/71/2015-FTD-I], dated 9-8-2019. This was developed as part of the Action 15 of the Base Erosion and Profit Shifting [BEPS] Project jointly undertaken by the G-20 countries of which India is a member and the OECD. The MLI is a multilateral tax treaty that serves to modify multiple bilateral tax treaties based on reciprocal notifications by the respective treaty partners.

4. India has also included the India Ireland DTAC as a ―Covered Tax Agreement‖ in the list of documents conveyed to the OECD, which is the Depository under Article 39 of MLI. The Depository maintains a database of covered tax agreements conveyed by the parties to the Depository. It is available at http://www.oecd/org/tax/treaties/beps-mli-signatories-and- parties.pdf. 5. The MLI is not an amending protocol. Paragraph 13 of the Explanatory Statement to the MLI explains that the MLI operates to modify tax treaties between two or more Parties. It does not function in the same way as an amending protocol to a single existing treaty, which would directly amend the text of the Covered Tax Agreement; instead, it is applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. 6. The Synthesised Text is not a legal instrument like a treaty/Agreement/ Convention. It is only a document prepared for facilitating stakeholder‘s understanding of how the MLI has impacted a DTAC (covered tax agreement). A Synthesised Text may or may not be prepared by parties to the MLI. Synthesised Text can also be prepared by any person other than the parties to MLI and also published. There is also no obligation on any person, including the parties to ensure uniformity of Synthesised texts prepared and published by them with other Synthesised texts relating to the same treaty prepared by other persons.

4. Parties to the MLI have no legal obligation under the MLI to develop synthesized texts. The Explanatory Statement on the MLI expressly indicates in paragraph 13 that ―some Parties may develop consolidated versions of their Covered Tax Agreements as modified by the Convention (MLI), doing so is not a prerequisite for the application of the MLI.‖ ―13. Challenges in preparing synthesized texts include: I. The MLI is not an amending protocol or an amending instrument in the traditional sense. It applies alongside Covered Tax Agreements modifying their application. … VI. Synthesised texts could be produced by different stakeholders:  There is no assurance of uniformity amongst different versions of Synthesised texts; and in the event of any discrepancy between synthesized texts and the legal instruments, the stakeholders bear no responsibility as synthesized texts are provided for information purposes only. (emphasis supplied) 8. The Guidance on Synthesised Text also recommends a general disclaimer that clarifies that the Synthesised Text has no legal value and that the text of MLI, applied alongside the text of the Covered Tax Agreement, would remain the only legal documents applicable. This is also clearly provided in the Guidance on Synthesised Text in the following words: ―2.4.1 General disclaimer 16. Synthesised texts should include before ethe text of the Covered Tax Agreement a disclaimer based on the General sample disclaimer text included in the per-Article-sample boxes section.

17. The general disclaimer would refer to the legal instruments of the synthesised text (the MLI and the Covered Tax Agreement) and to the latest MLI positions submitted by the Contracting Jurisdictions used to produce the synthesised texts. It would mention the date the Contracting Jurisdiction signed the MLI and the date it submitted its MLI positions to the Depositary.

18. The disclaimer would stress that further modifications could be made to the MLI positions and that these modifications could change the effect of the MLI on the Covered Tax Agreement.

19. The disclaimer would state that the synthesised text has no legal value, and that the text of the MLI, applied alongside the text of the Covered Tax Agreement, would remain the only legal documents applicable.

20. The disclaimer could describe the approach taken when developing the synthesised text.

21. The disclaimer would mention that changes made to the text of the provision of the MLI have been made to conform the terminology used in the MLI to the terminology used in the Covered Tax Agreement and that these changes do not change the substance of the provisions of the MLI.

22. The disclaimer would state that any references made to the provisions of the Covered Tax Agreement are references made to the Covered Tax Agreement as modified by the provisions of the MLI.

23. The disclaimer would include references or hyperlinks to the text of the MLI, the Covered Tax Agreement and the MLI positions of each Contracting Jurisdiction.‖ (emphasis supplied) 9. The Guidance makes it clear again that Synthesised Texts is not a legal instrument and the only legal documents in respect of it are the DTAC (covered tax agreement) and the MLI. 10. A Synthesised Text on India Ireland DTAC and modified by MLI includes a General Disclaimer, prepared in accordance with the Guidance on MLI, right at the beginning of the Synthesised Text, in the following words: ―This document was prepared jointly by the Competent Authorities of India and Ireland and represents their shared understanding of the modifications made to the Convention by the MLI. This document presents the synthesised text for the application of the convention between the Government of the Republic of India and the Government of Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains signed on 6th November 2000 (the “Convention”), as modified by the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting signed by India and by Ireland on 7th June 2017 (the “MLI”). The document was prepared on the basis of the MLI position of India submitted to the Depositary upon ratification on 25th June 2019 and the MLI position of Ireland submitted to the Depositary upon ratification on 29th January 2019. These MLI positions are subject to modifications as provided in the MLI. Modifications made to MLI positions could modify the effects of the MLI on this Convention.

The authentic legal texts of the Convention and the MLI take precedence and remain the legal texts applicable. The provisions of the MLI that are applicable with respect to the provisions of the Convention are included in boxes throughout the text of this document in the context of the relevant provisions of the Convention. The boxes containing the provisions of the MLI have generally been inserted in accordance with the ordering of the provisions of the Convention. Changes to the text of the provisions of the MLI have been made to conform the terminology used in the MLI to the terminology used in the Convention (such as ―Covered Tax Agreement‖ and ―Convention‖, ―Contracting Jurisdictions‖ and ―Contracting States‖), to ease the comprehension of the provisions of the MLI. The changes in terminology are intended to increase the readability of the document and are not intended to change the substance of the provisions of the MLI. Similarly, changes have been made to parts of provisions of the MLI that describe existing provisions of the Convention: descriptive language has been replaced by legal references of the existing provisions to ease the readability. In all cases, references made to the provisions of the convention or to the Convention must be understood as referring to the Convention as modified by the provisions of the MLI, provided such provisions of the MLI have taken effect. References: The authentic legal text of the MLI (in English) can be found on the MLI Depository (OECD) webpage at the following link: http:www.oecd/org/tax/treaties/multilateral-convention-to- implemnt-tax-treaty-related-measures-to-prevent-BEPS.pdf. The authentic legal texts of the Convention (in English) can be found at the following link: In India: https://www.incometaxindia.gov.in/Pages/international- taxation/dtaa.aspx In Ireland: http://www.irishstatutebook.ie/eli/2018/si/440/made/en/pring http://www.irishstatutebook.ie/eli/2001/si/521/made/en/print The MLI position of India submitted to the Depositary upon ratification on 25th June 2019 and the MLI position of Ireland submitted to the Depositary upon ratification on 29th January 2019 can be found on the MLI Depositary (OECD) webpage.‖ 11. From the above details, it is unambiguously clear that the Synthesised Texts of India Ireland DTAC with MLI is not a legal instrument, and is not applicable per se. It is prepared only for the purpose of facilitating the understanding of how MLI impacts the India Ireland DTAC. As it is not a legal instrument, there is no need for its Notification under Section 90(1) of the Income-tax Act 1961. Accordingly, the law laid down by the Hon‘ble Supreme Court in the case of M/s Nestle in respect of Notification of Double Taxation Avoidance Agreements is not applicable to it.

13. Accordingly, the argument made by the applicant is contrary to the legal position, without merit and need not be taken into account by the ITAT.

29. We have heard the rival submissions, material placed on record, notes submitted by the learned CIT-DR and the overall statutory framework and judicial precedents cited before us.

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 path- breaking 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 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. India- Ireland 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 notified, the more beneficial scope or lower rates therein became part of the earlier treaty without any further formality.

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.

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”.

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).‖ Xxx ―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 such conventions or compacts are in the domain of bilateral relations and diplomacy. Much depends upon the relationship of the parties, the mutuality of their interests, and the extent of co- operation 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 Co- operation 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 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, 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 deliberate, notified act of incorporation can elevate such benefits into enforceable domestic law.

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 on the synthesised text to apply the PPT provisions, for that text has no greater legal sanctity than the unincorporated MLI provisions themselves.

 Second, although the Multilateral Instrument was notified in India in 2019, the mere fact of such notification does not, by itself, alter, curtail or restrict the operative provisions of the India–Ireland DTAA. Such alteration or restriction can take effect only where the specific provisions of the MLI sought to be applied have been expressly incorporated into domestic law through a distinct notification under Section 90(1).

 Third, and most material to the present dispute, in the absence of any domestic notification incorporating Articles

6 and 7 of the MLI into the India–Ireland DTAA, the Principal Purpose Test contained in those Articles cannot be invoked against the assessee.

In light of the foregoing, we hold that the absence of a specific Section 90(1) notification incorporating Articles 6 and 7 of the MLI into the India–Ireland DTAA is fatal to the Revenue‟s case. Consequently, the invocation of the MLI to deny the treaty benefits otherwise available under the DTAA cannot be upheld in law.

As part of its activities, RCO also undertakes the development of new manufacturing facilities in State S. For that purpose, it contributes equity capital and makes loans to SCO, a subsidiary resident of State S that RCO established for the purposes of owning these facilities. RCO will receive dividends and interest from SCO. In this example, RCO has been established for business efficiency reasons and its financing of SCO through equity and loans is part of RCO‘s active conduct of a business in State R. Based on these facts and in the absence of other facts that would indicate that one of the principal purposes for the establishment of RCO or the financing of SCO was the obtaining of the benefits of the treaty between States R and S, paragraph 7 would not apply to these transactions.‖ Example G: TCO, a company resident of State T, is a publicly- traded company resident of State T. It owns directly or indirectly a number of subsidiaries in different countries. Most of these companies carry on the business activities of the TCO group in local markets. In one region, TCO owns the shares of five such companies, each located in different neighbouring States. TCO is considering establishing a regional company for the purpose of providing group services to these companies, including management services such as accounting, legal advice and human resources; financing and treasury services such as managing currency risks and arranging hedging transactions, as well as some other non-financing related services. After a review of possible locations, TCO decides to establish the regional company, RCO, in State R. This decision is mainly driven by the skilled labour force, reliable legal system, business friendly environment, political stability, membership of a regional grouping, sophisticated banking industry and the comprehensive double taxation treaty network of State R, including its tax treaties with the five States in which TCO owns subsidiaries, which all provide low withholding tax rates. In this example, merely reviewing the effects of the treaties on future payments by the subsidiaries to the regional company would not enable a conclusion to be drawn about the purposes for the establishment of RCO by TCO. Assuming that the intra-group services to be provided by RCO, including the making of decisions necessary for the conduct of its business, constitute a real business through which RCO exercises substantive economic functions, using real assets and assuming real risks, and that business is carried on by RCO through its own personnel located in State R, it would not be reasonable to deny the benefits of the treaties concluded between State R and the five States where the subsidiaries operate unless other facts would indicate that RCO has been established for other tax purposes or unless RCO enters into specific transactions to which paragraph 7 would otherwise apply (see also example F in paragraph 15 below with respect to the interest and other remuneration that RCO might derive from its group financing activities).” [Emphasis Supplied]

71. In transnational investments, the use of tax efficient special purpose vehicles is not unknown. Corporations are primarily created for business and commercial purposes. Multinational companies develop corporate structures, joint ventures for operational efficiency, tax planning, risk, mitigation etc. such that better returns can be offered to their shareholders. Corporate structures are created for genuine business purposes generally at the time when investment is being made. These structures are created to avoid double taxation as certain countries are exempted from capital gains. It is not prohibited for the Revenue or the courts to examine the genuineness and the sound commercial purpose of these investment vehicles but the burden is entirely on the Revenue to demonstrate that such incorporation has been effected to achieve a fraudulent dishonest purpose to defeat the law. Therefore, for the authority to find that Petitioner was incorporated in Mauritius on 23rd August 2005 i.e. just two weeks before the submission of the technical and financial bid by the GVK-SA Consortium, when the expression of interest was filed on 20th July 2004 does not appear to be something unusual or suggesting that the same was to defraud the Revenue or perpetrate any illegal activity, especially when the AAI has not only not raised any objection to the Petitioner's investment but entered into OMDA with MIAL into which Petitioner has invested approximately 270 crores. It is clear on the basis of ITREOI, EOI and RFP that the AAI had permitted use of special purpose vehicle structured for the purposes of submitting the technical and financial bid as well as for holding shares in MIAL. We have seen above from the shareholding pattern that Petitioner was part of the technical and financial bid submitted by the GVK-SA Consortium which would hold shares in the proposed joint venture company i.e. MIAL. Bidvest, the ultimate holding company was the evaluated entity and Petitioner is the prime member. Infact, as noted above, the Income Tax Director, International Taxation, New Delhi, had also issued a "Nil" withholding tax certificate to GAPHL who is the purchaser of the 13.5% shares from Petitioner to make payment / remittance of the purchase consideration to Petitioner for transfer of shares without TDS under Section 195 of the Act. Therefore, for the authority to hold that Petitioner's involvement at the stage of bidding process was without the approval of the authorities appears to be without substance. xxx 74. As can be seen, the said paragraphs of the Vodafone International Holding B.V. v. Union of India (supra) support the case of the Petitioner and the Revenue's reliance on the same does not aid the case of the Revenue in the facts of this case.

75. The Advance Ruling Authority appears to have completely lost sight of paragraphs 65 and 66 of the Vodafone International Holding B.V. v. Union of India (supra).

76. In our view, the logic that Petitioner was brought in for ease of doing business or for operational reasons and to provide supportive business environment appears to find favour with the aforesaid observations of the Hon'ble Apex Court.‖ 66. The aforesaid decision supports the submission of the assessee that SPVs, globally work in the same manner and merely because parent company of an SPV is outside the jurisdiction of the SPV, will not disentitle the SPV of the protection of the DTAA between the country in which the SPV is incorporated and the source country of investment/activity. It is also not necessary for the SPV to individually have employees on its rolls. Appointment of independent management service providers is also duly recognized under Indian law. In the present case, too, it is not the case of the tax department that the board of directors of the assessee was functioning outside Ireland or that the lease agreement was not executed in Ireland. Therefore, merely because the assessee was set up like an SPV or its ultimate shareholders were not Irish would mean that the principal purpose of the assessee was to take benefit of the India-Ireland DTAA. The Hon‟ble Supreme Court in the case of Vodafone International Holdings BV(supra) had observed as follows: ―78. Holding Structures are recognized in corporate as well as tax laws. Special Purpose Vehicles (SPVs) and Holding Companies have a place in legal structures in India, be it in company law, takeover code under SEBI or even under the income tax law.

79. When it comes to taxation of a Holding Structure, at the threshold, the burden is on the Revenue to allege and establish abuse, in the sense of tax avoidance in the creation and/or use of such structure(s). In the application of a judicial anti-avoidance rule, the Revenue may invoke the "substance over form" principle or "piercing the corporate veil" test only after it is able to establish on the basis of the facts and circumstances surrounding the transaction that the impugned transaction is a sham or tax avoidant. To give an example, if a structure is used for circular trading or round tripping or to pay bribes then such transactions, though having a legal form, should be discarded by applying the test of fiscal nullity. Similarly, in a case where the Revenue finds that in a Holding Structure an entity which has no commercial/business substance has been interposed only to avoid tax then in such cases applying the test of fiscal nullity it would be open to the Revenue to discard such inter-positioning of that entity. However, this has to be done at the threshold.

80. In consequence, Grounds of Appeal Nos. 4 to 6.8 stand allowed.

Nature of Lease-Operating Lease v. Finance Lease 81. Before us ld. Senior Counsel submitted that the findings of the ld. DRP in this regard is not only contrary to the language of the lease agreement but also contrary to the regulatory framework. He referred to various clauses of the lease agreement dated 01/02/2019 in respect of aircraft bearing MSN 8768 and filed the following chart alongwith his written submissions:-

Clause/Section Remarks Page No. of of the Lease the Agreement Paperbook bearing MSN 8768 2.1 ―2. Agreement to dry operating lease 252 2.1 Agreement to dry operating lease The Lessor agrees to lease the Aircraft to the Lessee on the basis of a dry operating lease and the Lessee agrees to take the Aircraft on lease from the Lessor for the Lease Term on the basis of a dry operating lease in accordance with this Agreement..‖ On perusal of the above, it evident that the Lease Agreement entered between the Appellant and InterGlobe was a dry operating lease. 1.1 ―Owner‖ means Lessor; or any other person that becomes the legal owner of 243 the Aircraft, which the Lessor notifies to the Lessee.‖ On perusal of the above, it would be clear that the owner of the Aircraft is the Lessor, viz., the Appellant.

1.1 ―Scheduled Delivery Date means the day in the Scheduled Delivery Month 247 specified by the Lessee in the Delivery Confirmation Letter. Scheduled Delivery Month means March 2019. Scheduled Expiry Date means: (a) the date falling seventy two (72) months after the Delivery Date; or (b) if the Lessee has issued a Scheduled Expiry Date Amendment Notice to the Lessor in accordance with Clause 2.3 ( ), the date specified by the Lessee in the Scheduled Expiry Date Amendment Notice‖ On perusal of the above, it is evident that the lease term between InterGlobe and the Appellant is for 72 months and can be extended, but after the expiry of the lease term, the aircraft has to be re-delivered to the Appellant. 7 (a), (b) “7. Quiet enjoyment and Lessor Covenants 263 (a) The Lessor will not, and the Lessor will procure that any person lawfully acting through the Lessor will not, interfere with the Lessee's right under this Agreement to have undisturbed and uninterrupted quiet use, operation and possession of the Aircraft during the Lease Term unless an Event of Default has occurred and is continuing. The Lessor's exercise of any of its rights in Clause/Section Remarks Page No. of of the Lease the Agreement Paperbook bearing MSN 8768 accordance with the Transaction Documents will not be deemed to be any such interference. (b) The Lessor will provide to the Lessee a Letter of Quiet Enjoyment signed by the Security Trustee (on behalf of itself and each of the other Financiers) before Delivery (and in accordance with Clause 22.3(a)(ii) (Assignment, Security Interests)). The Security Trustee's exercise of any of its rights in accordance with the Transaction Documents will not be an interference with the Lessee's right under this Agreement to have undisturbed and uninterrupted quiet use, operation and possession of the Aircraft during the Lease Term, unless that exercise breaches the express terms of the Letter of Quiet Enjoyment provided by the Security Trustee to the Lessee..” On perusal of the above, it is amply clear ownership is not with Lessee i.e., InterGlobe because the Lessor i.e., the Appellant is guaranteeing quiet enjoyment subject to payment of rent. 10.1 ―10. Registration and protection of interests 268 10.1 Registration and filings (a) At all times during the Lease Term, the Lessee will as soon as possible: (i) register and keep the Aircraft and this Agreement registered with the Aviation Authority; (ii) if necessary or, based on the advice of independent and reputable legal counsel, advisable as a result of the Lessee's operation of the Aircraft, register, record or file: (A) that the Owner is the owner of the Aircraft, the Lessor is the lessor of the Aircraft, and that the Security Trustee has a Security Interest in it, and (B) each Transaction Document and Financing Document, on any register or public record in any jurisdiction where the Lessee operates or locates the Aircraft; (iii) make any changes to any registered, recorded or filed details necessary or advisable to as a result of any modification to the Aircraft (such as the permanent replacement of any Engine in accordance with this Agreement) or as a result of any change in any law.‖ On perusal of the above, it is amply clear that the Lessee, viz., InterGlobe, did/does not have title/ownership interest in the Aircraft. Moreover, in terms of the Lease Agreement, InterGlobe was obligated to register the Lease Agreement with Aviation Authority. 1.1 ― Nameplate means a fireproof identification plate of a reasonable size, 242 attached (in compliance with the Aviation Authority's regulations) in a clearly visible place on the Airframe (in the cockpit or by the left-hand forward entrance door) and on each Engine, stating: (1) the manufacturer's serial number of the Airframe or Engine; and (2) that the Aircraft or Engine is owned by the Owner, leased by the Lessor to the Lessee and is mortgaged in favour of the Security Trustee‖ ―10.2 Protection of interests (a) Before Delivery the Lessee will procure that there is attached a Nameplate on the Airframe and each Engine. The Lessee will promptly (and in any case within thirty (30) days) replace any Nameplate becoming detached from the Airframe or an Engine or otherwise becoming illegible, lost, damaged or destroyed for any reason. If at any time after Delivery the Lessor or the Owner 10.2 transfers or assigns its interest in the Aircraft or finances or refinances the 269 Aircraft, then the Lessee will promptly (and in any case within thirty (30) days, Clause/Section Remarks Page No. of of the Lease the Agreement Paperbook bearing MSN 8768 or such longer period as agreed by the Lessor, of the Lessor's request) attach such new Nameplates the Lessor requests to reflect the changes (and the Lessor will reimburse the Lessee for all External Costs the Lessee incurs in doing so). (b) The Lessee will take all reasonable steps to ensure that the interests of the Lessor, the Owner and the Financiers in the Aircraft are, when appropriate, made known to third parties dealing with the Lessee or the Aircraft. (c) The Lessee will not: (i) represent or hold out 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) represent or hold out to other parties (and the Lessee will procure that any charterer or sublessee does not represent or hold out to other parties) that the Lessor, the Owner or any Financier is associated with or responsible for the use, operation, maintenance or repair of the Aircraft or the Lessee's, any charterer's or any sublessee's business activities; (iii) pledge the credit of the Lessor, the Owner or any Financier; (iv) take or fail to take any action (or knowingly permit an action to be taken or not taken) if this could jeopardise any of the rights of the Lessor, the Owner or any Financier in the Aircraft or under the Transaction Documents, or the validity, enforceability or priority of any Transaction Document or Financing Document; (v) permit the Aircraft or any interests of the Lessor, the Owner or any Financier in it or in the Transaction Documents to become or remain subject to any Security Interest (other than a Permitted Security Interest); or (vi) place the Aircraft at any material risk (as reasonably determined by the Lessor) of being arrested, seized, detained, confiscated, forfeited or compulsorily purchased. (d) The Lessee will provide reasonable cooperation to the Lessor for any actions that the Lessor requests the Lessee to undertake towards protection of title of the Aircraft in accordance with this Agreement.‖ This provides that the lessee will fix and maintain the lease identification in prominent position in the cockpit or cabin of the aircraft and on each engine, inter alia, stating that that the aircraft/ engine is owned by the Applicant and is leased to the Lessee, and may not be in the possession or operation of any other person, without the Applicant's express written consent. On perusal of the above, it is amply clear that the Lessee, viz., InterGlobe, did / does not have title/ownership interest in the Aircraft. In fact, in terms of the Lease Agreement, InterGlobe was obligated to disclose to third parties that it did not have any ownership interest in the Aircraft. 12.8 ―12.8 Inspection 283- (a) The Lessor's representatives (who may also be representatives of the 284 Owner or any Financier, or of a potential future lessor, future owner, future financier or future operator of the Aircraft) may inspect the Aircraft, including the Aircraft Documents, at any time during the Lease Term, subject to the other terms of this Clause 12.8 (Inspection). The Lessor will provide the Lessee with six (6) weeks' notice (or such shorter period as may be agreed by the Lessee, acting reasonably) to perform it's routine inspections (being those not performed by a proposed future lessor, future owner, future financier or future operator of the Aircraft) which will be performed at a location and time specified by the Lessee no more than once in any twelve (12) month period Clause/Section Remarks Page No. of of the Lease the Agreement Paperbook bearing MSN 8768 except: (i) where the interval is reduced to enable an inspection to occur at the same time as the repainting or a major airframe check, Six Year Check or Twelve Year Check of the Aircraft; (ii) for any inspection of an Engine or the APU while it is having a shop visit performed on it; (iii) as stated in Clause 12.8(b) (Inspection); or (iv) during the last twelve (12) months of the Lease Term in connection with the proposed sale or re-leasing of the Aircraft. The Lessee will comply with any reasonable requests of the Lessor's representatives, including any request to travel on the Aircraft's flight deck as an observer, subject to all laws.‖ On perusal of the above, it is clear that the Lessor has right of inspection over the Aircraft as per the terms of the Lease Agreement. This demonstrates InterGlobe, did/does not have title/ownership interest in the Aircraft and had to maintain the Aircraft during the time it was on lease with InterGlobe. 12.1 ―12. Maintenance 278 12.1 General requirements The Lessee will ensure that each of the following terms of this Clause 12.1 (General requirements) is satisfied at all times during the Lease Term: (a) Only maintenance facilities satisfying the requirements to be a Maintenance Facility maintain and repair the Aircraft. (b) The Aircraft is kept in a good operating condition and is kept safe for operation, serviceable and airworthy in all respects. (c) The Aircraft has a valid certificate of airworthiness (issued by the Aviation Authority in the appropriate public transport category). (d) The Aircraft complies, using a Permitted Compliance, with all Mandatory Requirements required to be complied with on or before the Mandatory Requirements Period End. (e) The Aircraft is maintained and repaired in accordance with this Agreement, the Maintenance Manuals, the Maintenance Programme, and the regulations of the Aviation Authority and the Compliance Authority. (f) The Maintenance Programme is no less restrictive than the MPD, and is cross referenced to the Maintenance Manuals, the MPD and each Manufacturer's planning documents. (g) The Aircraft is maintained and repaired in the same manner as or in a better manner than, and with at least the same care as, the Lessee uses for other similar aircraft and engines operated by it, and without discriminating against the Aircraft.‖ On perusal of the above, it can be observed that InterGlobe has to maintain the aircraft in a good operating condition as per the lease agreement.

13.1, 13.4 ―13.3 Insurance covenants 287- 289 (a) The Lessee will ensure that the Insurance complies with all laws of the State of Registration, and any state the Aircraft is operated to, from, over or within, and which relate to the operation of the Aircraft, including any law that if not complied with could result in: (i) the Aircraft being arrested, seized, detained, confiscated, forfeited or compulsorily purchased; (ii) the Insurance not being valid as a whole or in part; or (iii) the interests of the Indemnitees in the Insurance or the Aircraft being prejudiced. (b) The Lessee will comply with each Insurance policy and will not do, or fail to do, anything that: (i) results in or could result in the Insurance not being valid as a whole or in part or that could make it void as a whole or in part; (ii) could exclude from coverage by the Insurance any particular liability that would otherwise be covered by the Insurance; Clause/Section Remarks Page No. of of the Lease the Agreement Paperbook bearing MSN 8768 (iii) results in any change to the Insurance, or the creation of any Security Interest (other than a Permitted Security Interest) in the Insurance that could adversely affect the interests of the Lessor, the Owner, any Financier or any other Indemnitee under the Insurance; or (iv) (iv) breaches any law in respect of any insurance requirement for the Aircraft.‖ ―13.4 Failure to insure If at any time during the Lease Term the Insurance is not in full force and effect in accordance with this Agreement. (a) the Lessee will immediately: (i) ground the Aircraft and keep it grounded at the location where it is when the Insurance ceases being in full force and effect; and will then, at the Lessor's direction, and if the Lessor is able to procure suitable insurance cover, fly the Aircraft to a location (of the Lessor's choice) and then keep it grounded; and (ii) take out and keep in full force and effect ground risks insurance cover in respect of the Aircraft on standard terms and for at least the Insured Value, until the Aircraft is insured again in accordance with this Agreement;‖ On perusal of the above, it is clear that the obligation to get the aircraft insured during the lease term was passed on to InterGlobe. The Appellant submits that this nowhere indicates that InterGlobe was the owner of the Aircraft as the obligation to get the Aircraft insured on Interglobe was only for the period of the Lease Agreement which is substantially less than the entire life of the Aircraft 16.1 ―16. Redelivery 293 16.1 Redelivery and Redelivery Procedure Unless the Aircraft has suffered an Event of Loss, the Lessor and the Lessee will comply with the Redelivery Procedure and the Lessee will redeliver the Aircraft to the Lessor on the Expiry Date (as determined ignoring paragraph (d) of the definition of Expiry Date), at the Redelivery Location and satisfying the following conditions: a) the Aircraft will be in a condition demonstrating that the Lessee has performed all of its obligations under Clause 11 (Control and operation ) and Clause 12 (Maintenance); b) the Aircraft will satisfy the Operating Redelivery Conditions (subject only to any Redelivery Reservations agreed in the Redelivery Reservations Agreement); and c) the Aircraft will be free from all Security Interests, other than the Lessor Security Interests,‖ On perusal of the above, it is evident that InterGlobe has no ownership in the Aircraft and is required to redeliver the Aircraft to the Appellant on expiry (or earlier termination) of the lease term. 21.1 “21.1 Lessor's rights 309- If an Event of Default occurs the following terms of this Clause 21.1 (Lessor's 310 rights) will apply: (a) The Lessor may (without prejudice to any of its other rights under this Agreement) take any of the following actions: (i) accept such repudiation and with immediate effect terminate the leasing of the Aircraft under this Agreement (but without prejudice to the Lessee's continuing obligations under this Agreement) by giving the Lessee notice, and on the issuing of the notice all of the Lessee's rights under this Agreement will cease; (ii) take appropriate court action or actions to enforce the Lessee's obligations under this Agreement or to recover damages for its breach of this Agreement; or (iii) take the following actions: A. by giving the Lessee notice require the Lessee to redeliver the Aircraft to the Lessor at the Redelivery Location (or another location the Lessor requires) on the date required in the notice; B. with or without notice take possession of the Aircraft (which for the purposes of this Clause 21.1(a)(iii) (Lessor's rights) will also include any engines (even if they are not the Engines) then installed on the Airframe); and the Lessor may Clause/Section Remarks Page No. of of the Lease the Agreement Paperbook bearing MSN 8768 enter any premises (subject to security procedures required by law) belonging to or in the occupation of or under the control of the Lessee where the Aircraft or any part of it is located; C. cause the Aircraft to be redelivered to the Lessor at the Redelivery Location (or another location the Lessor requires); or D. pursue or enforce any other rights or remedies under any law in any applicable jurisdiction. The Lessee irrevocably authorises the Lessor to procure Redelivery or in directing the Lessee's (or other) pilots to fly the Aircraft to that airport, and the Lessee confirms and agrees that the Lessor will have all the powers and authorisations necessary for taking these actions.:” On perusal of the above, the Appellant in its capacity as has the sole discretion to require the Lessee to redeliver the Aircraft in event of a default. This shows that the Appellant may or may not be the owner, but lessee is definitely not the owner of the Aircraft. 22 313 ―22. Assignment 22.1 Assignment by Lessee The Lessee will not sell, assign, novate, transfer or delegate any of its rights or obligations (voluntarily, involuntarily, by operation of law or otherwise) under any Transaction Document. 22.2 Assignment by Lessor or Owner (a) The Lessor or the Owner may sell, assign, novate or transfer, any of their respective rights or obligations under any Transaction Document, or any of their respective rights or interests in the Aircraft, if each of the following terms of this Clause 22.2 (Assignment by Lessor or Owner) is satisfied: ‖ On perusal of the above, the Appellant in its capacity as owner (not as mortgagee) has the sole discretion to sell / dispose, re-lease or deal with the leased Aircraft in any manner in which it so decides. This shows that the Applicant may or may not be the owner, but lessee is definitely not the owner of the Aircraft

• 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.

(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.

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.

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? (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 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 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 or other personnel but does not include payments for services mentioned in Articles 14 and 15 of this Convention.

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 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. 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 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.

―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:- (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 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.‖ 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.

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 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]

26. With this, it is required to be considered, that the basic distinguishing feature between the lease being finance lease or operating lease would be, that in case of finance lease, at some point of time, the ownership transfers to the lessee, or the lessee has the option to purchase, the hired assets, in consideration of a token price. Obviously, in that event, the lease rent, or hire charges, called by whatever name, with passage of time, partake the character of the price of the asset in possession of the lessee, or hirer, under the finance lease agreement, as distinct from the lease in question, where there is a very specific stipulation in clause 8 that on termination of the lease, the leased plant and machinery are to be returned to the lessor, in the condition, as they were taken, except normal wear and tear.‖ 103. That apart, sections 2(ma) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and section 2(ha) of the Recovery of Debts and Bankruptcy Act, 1993 which defined „finance lease‟ to mean where the lessee becomes the owner of such assets at the expiry of the term of lease or on payment of the agreed residual amount. Even the RBI in its Circular No.24/2002 categorically stated that a finance lease, which is akin to ECB is one where the lessee has the right to purchase the aircrafts at the end of the lease period and will require prior approval of RBI. Therefore, the finding of the ld. DRP to this effect is patently erroneous and set aside.

Existence of PE And applicability of Article 8 105. 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.

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. 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 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.

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 long- term 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).‖

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.”

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...‖

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 • 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. 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.

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.

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.

Article 8(1) of the India-Ireland DTAA Article 8 of the OECD Model Convention reads as under: reads as under: ―… Article 8 ―… Article 8 SHIPPING AND TRANSPORT SHIPPING AND TRANSPORT 1.Profits derived by an 1.Profits derived by an enterprise of a enterprise of a Contracting State Contracting State from the operation from the operation of ships or or rental of ships or aircraft in aircraft in international traffic international traffic and the rental of shall be taxable only in that containers and related equipment Contracting State. …‖ which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State. …‖

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.

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.”

Order pronounced on 13th August, 2025.