HEMANT KUMAR,HARYANA vs. ITO, WARD- 1(3), GURGAON

We have heard the submissions made by ld. Counsel for the assessee, and have examined the orders of authorities below. We find that in ground no. 5 to 12 to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) of appeal, the single issue assailed by the assessees in their respective appeals is with regard to determination of nature of lease agreement. All these lease agreements have been entered in to between the assessees as lessors on the one side and the Aviation Companies as lessee on the other side for leasing of Airbus Aircrafts. The lease agreements in all the cases are identical, and the nature of the transactions is pari materia to the lease transactions of aircraft examined in the case of Celestial Aviation Trading 15 Ltd. vs. ACIT (supra).The Coordinate Bench after hearing both sides and examining lease agreements in detail held as under:- “13. To begin with, it would be relevant to refer to the Lease Agreement entered into between the assessee, the lessor and Indigo, the lessee. The assessee has placed on record Aircraft Specific Lease Agreement (in short 'ASLA) dated 15.04.2021 at page 162 to 209 of the paper book in respect of aircraft bearing MSN 10689. The assessee has also placed on record a copy of Aircrafts Lease Common Terms Agreement (CTA) dated 20.06.2006 entered into between GE Commercial Aviation Services Ltd. and Indigo. To understand the issue, both agreements have to be read together. Aircraft Specific Lease Agreement as the name suggests is in respect of a particular aircraft, whereas, the terms and conditions spelled out in Aircraft Lease Common Terms Agreement is the standard agreement which would be applicable to all the aircrafts taken on lease by Indigo. A perusal of ASLA would show that the assessee is the Lessor and Indigo is the Lessee. The duration of agreement is for a period of 120 months extendable at the option of Lessee to be conveyed in writing to the Lessor before the expiry of 18 months prior to the original scheduled expiry date. Clause 3 of ASLA specifically states that the owner of the aircraft shall be the ‘Lessor’. In the entire ASLA there is no covenant which refers to the condition that after the end of duration of lease term, the ownership in aircraft shall be transferred to the lessee or the lessee at any point of time can exercise option to purchase the aircraft. Clause 10 of ASLA requires the Lessee to pay deposit in cash or in the form of Letter of Credit prior to delivery of aircraft. The Lessor shall return such deposit to the Lessee upon occurrence of the events specified in ASLA which includes, ‘on completion of the Return Occasion. “Return Occasion” is defined in Schedule-I of CTA as:

From perusal of above terms and conditions it can be deduced that the ownership in the aircraft vest with the assessee/lessor at all the time during the period of lease. From conjoint reading of the terms and conditions of CTA and ASLA it emerges that there is no change in the ownership of the aircraft during the currency of lease agreement and at the end of agreement, the lessor continues to be the owner and the Lessee shall pay lease rentals to the assessee/lessor during lease period.

Now to understand the difference between financial lease and operating lease, we need to refer to the definition of ‘Financial Lease’ under other Acts as the expression financial lease and operating lease are not defined under the Income Tax Act. Section 2(ma) of the SARFAESI Act, 2002 defines ‘financial lease’ as under:- “financial lease” means a lease under any lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where the lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be” The Recovery of Debts & Bankruptcy Act, 1993 defines financial lease as under:- to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) “financial lease" means a lease under a lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be” From the aforesaid definitions a subtle trait of financial lease can be identified i.e. "At the end of the lease period, lessee becomes the owner of the leased asset."

In the instant case although the AO and the DRP have characterized the nature of lease as financial lease but both the authorities have ignored the fact that at no point of time, ownership in the asset i.e. aircraft is transferred to the lessee, which is the hallmark of financial lease.

The assessee has drawn our attention to RBI Circular No. 24 dated 01.03.2002 at page 234 of the paper book which deals with Import of Aircraft/Aircraft engine/Helicopter on lease basis. A perusal of RBI Circular No. 24 dated .01.02.2022 would show that there are separate conditions to be satisfied for acquiring aircraft on operating lease basis and under financial lease. For the sake of ready reference relevant excerpts from the said Circular are reproduced herein below:- “To All Authorized Dealers in Foreign Exchange Madam/Sirs, Import of Aircraft/Aircraft Engine/ Helicopter on lease basis Authorised dealers are aware that the Reserve Bank is considering applications from airline companies and air taxi operators for payment of the lease rentals for import of aircraft/aircraft engine/helicopter on lease basis, based on the approval issued by the Director General of Civil Aviation (DGCA), Government of India. to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) 2. It has been decided that authorised dealers may allow remittance of payment of lease rentals, opening of letter of credit towards security deposit etc. in respect of import of aircraft/aircraft engine/helicopter on operating lease basis, after verifying documents to show that necessary approval from the appropriate authorities, like Ministry of Civil Aviation/Director General of Civil aviation, Government of India has been obtained. In this connection attention is also invited to paragraph 8 of Annexure I to A.D.(M.A. Series) Circular No.11 dated May 16, 2000.

It is clarified that financial lease transaction i.e. the lease transaction containing option to purchase the asset at the end of the lease period will continue to require prior approval from the Reserve Bank of India.”

Further, the ld. Counsel for the assessee has drawn our attention to the observations of the DRP in para 17.3 (ii) of the Directions, where the DRP has determined economic life of the Aircraft as 8 years. Referring to DGCA Circular issued in 1993 the DRP concluded that since lease of the aircraft covers substantial commercial life, therefore, the lease should be termed as financial lease. We find above observations of the DRP contrary to the facts on record and the DGCA Circular. The DGCA vide its communiqué dated 29.07.1996 (at pages 231 to 233 of the paper book) has prescribed economic life of an aircraft as 20 years or 60,000 landings/pressurization cycles. In the instant case the lease agreement has been entered between the parties for a period of 120 months i.e. for 10 years, in other cases the lease period is for lesser period i.e. 72 months as is in the case of MSN 9382 (at page no. 210 to 275 of the paper book) and for MSN 9561 (at pages 276 to 341 of the paper book). Substantial economic life of the aircraft is still left after the end of lease period. Therefore, observations of the DRP on Economic Life of the aircraft being utilized under lease agreement is to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) without any basis, hence, the conclusion to re-characterize nature of lease agreement is erroneous.

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?”

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 to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) 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] 21. Further, the Special Bench on plea taken by the Revenue that lease rents are taxable in India as interest in accordance with Article 11 of India-Ireland DTAA, held as under:- 44.1 We are not convinced by the submissions made by the ld. Special Counsel for the Revenue. It is an undisputed fact that the basic lease Rent of Rs.673.42 crores paid under the lease agreement is an allowable expenditure and its nature is that of "Rent." In our opinion, the nature of supplementary lease rent cannot be treated otherwise as both these to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) expenses are payments made under the same agreement for use of aircraft. The Id. Special Counsel for the Revenue has filed copies of 3 lease agreements before us in his paper book. However, from none of these agreements he has been able to demonstrate that the nature of lease is financial lease and not operating lease. We have already held above in the preceding paragraph that the nature of lease in the year under consideration is operating lease. Moreover, both the lower authorities have also accepted this fact. We are, therefore, not convinced by the arguments of the Id. Special Counsel for the Revenue that the present leases are financial merely because lease rent is determinable using LIBOR rate or that delivery of aircraft is taken by the assessee from Air Bus. We find that in the present case the aircrafts were leased for a period of six years. Therefore, the lease rent paid cannot be characterized as "interest." We, therefore, find no merit in the above submissions raised by the Revenue.” [Emphasized by us] Once in the case of Indigo, the Revenue accepts that ownership in the Aircraft is with the lessor, the Revenue on similar set of agreements cannot take a reverse position in the case of lessee and argue that lessee is the owner. The Revenue cannot be allowed to approbate and reprobate on the same set of documents and re-characterize the nature of lease agreement to be a financial lease.

Before the Special Bench in the case of Indigo, the Revenue had vehemently argued that the lease rentals paid by Indigo to the lessee are in the nature of interest, hence, the provisions of Article 11 of India-Ireland DTAA would operate. The Special Bench negating the arguments of the Revenue held that the lease rentals paid by Indigo are in the nature of rent and not interest as the Revenue has failed to demonstrate that the nature of lease is finance lease and not operating lease. Hence, the payments made by lessee are not in the nature of interest. Thus, in light of findings of the Special Bench, we hold that the provisions of Article 11 of India-Ireland DTAA would not operate in the present case.” Thus, in the facts of case in hand and in light of the order of Coordinate 5. Bench, we hold that the lease agreement entered into between the assessees and to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) Aviation Companies is in the nature of operating lease. Thus, the assessee succeeds on ground no.5 to 10 of appeal.

The assessee in ground no. 13 of appeal has assailed denial of benefit of Article 8 of India-Ireland Tax Treaty. In similar set of facts in the case of Kosi Aviation Leasing ltd. vs. ACIT in decided on 30.09.2025, the Tribunal has examined this issue and held as under:- “43. We have heard the submissions made by rival sides on the issue of applicability of Article 8. The issue has already been considered by the Coordinate Bench of the Tribunal in the case of Sky High Appeal XLIII Leasing Company Ltd. (supra). The Coordinate Bench, while dealing with the issue of applicability of Article 8 has in turn followed the decision in the case Sunflower Aircraft Leasing Limited (surpa). In the said case, the Tribunal inter-alia took note of Article 8 as mentioned in OECD Model Convention and as it exist in India-Ireland DTAA and held as under:- “38. Having so concluded on the primary issue, we turn to the assessee‘s alternative plea that the lease rentals are, in any event, governed by Article 8(1) of the India–Ireland DTAA, and therefore taxable exclusively in Ireland. For the sake of ready reference, the difference in the language of Article 8 of India-Ireland DTAA as compared to Article 8 of OECD model convention is as under:- Article 8(1) of the India-Ireland Article 8 of the OECD Model Convention DTAA reads as under: reads as under: “… Article 8 SHIPPING AND “… Article 8 SHIPPING AND TRANSPORT TRANSPORT 1.Profits derived 1.Profits derived by an enterprise of a by an enterprise of a Contracting State from the operation of Contracting State from the ships or aircraft in international traffic operation or rental of ships or shall be taxable only in Contracting aircraft in international traffic State. …” the rental and of containers and related equipment which is incidental to the operation of ships or aircraft in international

Article 8(1) of this treaty reads in material part: “Profits derived by an enterprise of a Contracting State from the operation or rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State.” The text is notable in two respects: first, it disjunctively pairs “operation” and “rental” as independent income-yielding activities; second, it contains no requirement that the rental be merely ancillary to the lessor‘s own operation of ships or aircraft. This wording differs from the OECD Model‘s narrower formulation, and its deliberate adoption by the Contracting States reflects a conscious policy choice to extend the exclusive taxing right to rental income from ships and aircraft, as a distinct category, when such assets are employed in “international traffic”.

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.

The Revenue, however, has urged that Article 8 was intended to protect the core transport operations of an airline and that the “rental” to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) limb is to be read as ancillary to such operations. Since the assessee is a pure lessor with no airline operations of its own, and since, according to the Revenue, the leased aircraft were predominantly used on domestic Indian routes, it was contended that the income was not covered by Article 8 but instead constituted business profits taxable in India if a PE existed. The LD.DRP adopted this line, essentially importing the OECD Model‘s narrower structure into the India-Ireland text.

We are unable to subscribe to this restrictive reading. Treaty interpretation proceeds on the ordinary meaning of the terms used, read in their context and in light of the treaty‘s object and purpose. Where the Contracting States have consciously departed from the OECD Model to insert “rental” as an alternative head to “operation” the text must be given effect in its ordinary sense. To superimpose a requirement that the lessor must itself be an operator in international traffic, or that the rental must be subordinate to such operation, is to read into the provision words which are not there. Likewise, to insist on a quantitative predominance of international usage is to graft a test not found in the treaty. The definition in Article 3(1)(g) sets a binary criterion either the aircraft is operated solely domestically (in which case the exclusion applies) or it is not (in which case it falls within “international traffic”). Once it is shown, as it is here, that the leased aircraft formed part of a fleet used on both domestic and international sectors, the rental income falls within the protective ambit of Article 8(1).

We also take note of the commercial reality that airlines today operate fleets on a network basis, with aircraft rotated between domestic and international sectors depending on operational exigencies, maintenance schedules, and route economics. It is artificial, and contrary to industry practice, to freeze an aircraft‘s character by reference to its predominant usage in a given period. The treaty drafters, in our view, intended to avoid such disputes by linking the test simply to whether the aircraft was “operated solely” domestically. In the present case, the factual matrix including IndiGo‘s undisputed status as an international carrier and the unchallenged deployment of the leased aircraft on at least some international sectors brings the income squarely within the Article 8(1) scope. to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) 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.” In the case of Sky High Appeal XLIII Leasing Company Ltd.(supra) the Coordinate Bench of the Tribunal adopted the above findings rendered in the case of Sunflower Aircraft Leasing Limited (surpa) and concluded that the assessee is entitled to avail benefit of Article 8 of the Treaty.

The Special Counsel for the Department has raised some additional arguments on issues with regard to applicability of Article 8. We find that in the case of Sunflower Aircraft Leasing Limited (Supra), the Tribunal has already examined Article 8 in OECD Convention viz a viz India-Ireland DTAA. The provisions of Article 8 as given in India-Ireland DTAA are much broader than the OECD Convention. If the submissions of the ld. Special Counsel for the Department are to be accepted then it would mean that the lessor of the aircraft should also be an operator in international traffic as is the case in wet lease. This amounts to inserting the condition in the treaty which cannot be done. This is contrary to the principles of Vienna Convention on the laws of treaties. The treaties are to be interpreted in the ordinary meaning of the text in its context and object. The treaty cannot be read in a manner which would result in absurdity.

The argument of Special Counsel for the Revenue was that “international traffic “must be read with reference to each voyage/journey and not the aircraft. Before proceedings further, it would be relevant to refer to the provisions of Article 8(1) of India-Ireland DTAA, the same reads as under:- “1. Profits derived by an enterprise of a Contracting State from the operation or rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State. to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) Here it would also be relevant to refer to the definition of ‘international traffic’ as defined under Article 3(1)(f) of the Treaty: “the term “international traffic” means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State,” The definition of “international traffic “if applied in context to facts of the instant case, international traffic means any transport by aircraft operated by an enterprise of India, except when aircraft is operated solely between places in Ireland. Accordingly, an aircraft operated by Indian lessee (Indigo) shall be considered as operating in international traffic. The lessee operates aircraft in and outside India and does not operate aircraft solely in Ireland. Further, neither Article 8(1) nor Article 3(1)(f) defining ‘international traffic’ refers to voyage/journey. Therefore, argument of the ld. Special Counsel for the Department referring to voyage/journey to test check international traffic is misplaced, hence, unsustainable. When the meaning are self-explanatory in the DTAA there is no need to travel to OECD Conventions which are only guiding light and have no binding force.

The third limb of the argument by Special Counsel is that each aircraft has to be seen whether it has flown outside and has operated in international traffic. The assessee earns rentals from lease of aircraft. The lessor has no control on the schedule of the aircrafts or the destination of the aircraft where they are operated. The lessor/assesseedoes not lay down any restrictions in the lease agreement as to whether the aircraft shall operate in domestic territory or operate internationally. It is the discretion of the lessee to schedule the operation of the aircraft. It is no denying that lessee/Indigo is operating internationally. Therefore, to presume that the aircraft are not operated internationally is superfluous. Nevertheless, the assesses being the lessor of the aircraft would continue to receive rentals even if the aircraft is not put to operation by the lessee. The assessee has filed a certificate of deployment of aircraft issued by the lessee which confirms the fact that leased aircraft has not been deployed anywhere in Ireland during the relevant period and is operated in international traffic. Thus, the condition of Article 8(1) is satisfied.

For the reasons mentioned above and in light of order in the case of Sky High Appeal XLIII Leasing Company Ltd. (supra), we hold the lease rental to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) received by the assessee/appellant are covered by Article 8 of India-Ireland Treaty. Hence, the assessee would get the benefit of Article 8. In the result, this issue is decided in favour of the assessee/appellant and against the Department.”

Since, facts in the impugned assessment year with respect to the claim under Article 8 is identical to the one adjudicated in Kosi Aviation Leasing ltd. vs. ACIT (supra), the findings given by the Tribunal in the aforesaid case would mutatis mutandis apply to the instant set of appeals.

The ld. Counsel for the assessee has made statement at Bar that he is not pressing ground no. 2 and 4 of appeal challenging validity of final assessment order as well as the directions of the DRP. Accordingly, ground no. 2 and 4 of appeal are dismissed as not pressed.

The assessees in appeal has raised ground challenging levy of interest u/s.234B of the Act. Charging of interest u/s.234B of the Act is mandatory and consequential; hence, the said ground is dismissed.

The assessees has assailed initiation of penalty proceedings u/s. 274 r.w.s. 270A of the Act. Challenge to penalty proceedings at this stage is premature. Accordingly, the said ground in the respective appeals is dismissed.

The assessee in ground no. 3 of appeal has assailed the validity of assessment order on the ground of limitation. No submissions were made by the ld. Counsel for the assessee on this issue, hence, this ground is left open. to 1386, 1419 to 1421, 1465 & 1479/Del/2025 (AY 2022-23) 12. Accordingly, the appeals by the assessees are partly allowed in the terms aforesaid. Order pronounced in the open court on Wednesday the 29th day of October, 2025.