DAE (SABS) LEASING IRELAND 43 DESIGNATED ACTIVITY COMPANY,MUMBAI V. ASSISTANT COMMISSIONER OF INCOME TAX INT TAX.CIRCLE 2(1)(2), MUMBAI

ITA 1156/MUM/2025

AI Insights

The case involves multiple appeals by different leasing companies, primarily Sky High Appeal XLIII Leasing Company Limited, against the orders of the Assistant Commissioner of Income Tax (International Tax), Mumbai. The appeals were consolidated due to the similarity in facts and legal issues. The primary issues revolved around the characterization of lease agreements as either operating or finance leases, the applicability of the Principal Purpose Test under the Multilateral Instrument (MLI), and the taxability of lease rentals under the India-Ireland DTAA. The Tribunal examined the nature of the leases, the operational and financial arrangements, and the legal implications of the MLI and DTAA.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 717575 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: misc
• Appeal Filed On: 20-02-2025
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIVEK PERAMPURNA
• Assessee Lawyers: SACHIT JOLLY
• Keywords: Set aside; Business income; Capital asset; Revenue expenditure; Business expenditure; Depreciation; Cost of acquisition; Capital receipt; Capital expenditure; Capital Gains; TDS; Search and seizure; Advance ruling; Competent authority; Double taxation relief; Share purchase agreement; Permanent establishment; Non-deduction of tax; Application of stay
• Section: 143(3); 142(1); 68; 90; 234B; 37(1); 5(2)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, „I‟ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & MS PADMAVATHY S, ACCOUNTANT MEMBER ITA No. AY Assessee/ Appellant Respondent ITA No. 1122/Mum/2025 2022-23 Sky High Appeal XLIII Leasing Company Limited 2, Grand Canal Square Grand Canal Harbour Dublin, D02 A342 Ireland C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN: ABFCS0569K The Assistant Commissioner of Income Tax (International Tax) Circle 4(2)(1), Mumbai SA No.38/Mum/2025 (Arising out of ITA No. 1122/Mum/2025 2022-23 Sky High Appeal XLIII Leasing Company Limited 2, Grand Canal Square Grand Canal Harbour Dublin, D02 A342 Ireland C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN: ABFCS0569K The Assistant Commissioner of Income Tax (International Tax) Circle 4(2)(1), Mumbai ITA No. 1106/Mum/2025 2022-23 Ortus Aircraft Lease 6 (Doublin) Limited 32, Molesworth Street, Dublin 2, Ireland. C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN: AADCO1624J Deputy Commissioner of Income Tax, International Tax, Circle 3(2)(2), Mumbai SA No.37/Mum/2025 ITA No.1106/Mum/20 25 2022-23 Ortus Aircraft Lease 6 (Doublin) Limited 32, Molesworth Street, Dublin 2, Ireland. C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 Deputy Commissioner of Income Tax, International Tax, Circle 3(2)(2), Mumbai Printed from counselvise.com ITA No.1198/Mum/2025 and others 2 PAN: AADCO1624J ITA No. 1198/Mum/2025 2022-23 TFDAC Ireland II Limited C/o. Apex Group 2nd Floor, Block 5 Irish Life Centre Abbey Street Lower, Dublin 1 Dublin, Ireland C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN:AAICT4062A Deputy Commissioner of Income Tax, (International Tax) Circle 4(1)(2), Mumbai SA No.41/Mum/2025 (Arising out of ITA No. No.1198/Mum/20 25) 2022-23 TFDAC Ireland II Limited C/o. Apex Group 2nd Floor, Block 5 Irish Life Centre Abbey Street Lower, Dublin 1 Dublin, Ireland C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN:AAICT4062A Deputy Commissioner of Income Tax, (International Tax) Circle 4(1)(2), Mumbai ITA No.1157/Mum/20 25 2022-23 DAE(SY22) Leasing (Ireland) 41 C/o.DMD Advocates 30, Nizamuddin East New Delhi-110 013 PAN:ABJCS6865L Assistant Commissioner of Income Tax, International Tax, Circle 2(1)(2), Mumbai SA No.42/Mum/2025 (Arising out of ITA No.1157/Mum/20 25 2022-23 DAE(SY22) Leasing (Ireland) 41 C/o.DMD Advocates 30, Nizamuddin East New Delhi-110 013 PAN:ABJCS6865L Assistant Commissioner of Income Tax, International Tax, Circle 2(1)(2), Mumbai ITA No. 1108/Mum/2025 2022-23 Ortus Aircraft Lease 5 (Doublin) Limited 32, Molesworth Street, Dublin 2, Ireland. C/o. DMD Advocates Deputy Commissioner of Income Tax, (International Tax) Circle Printed from counselvise.com ITA No.1198/Mum/2025 and others 3 30, Nizamuddin East, New Delhi-110 013 PAN:AADCO1625K 3(2)(2), Mumbai SA No.36/Mum/2025 (Arising out of ITA No. 1108/Mum/2025 2022-23 Ortus Aircraft Lease 5 (Doublin) Limited 32, Molesworth Street, Dublin 2, Ireland. C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN:AADCO1625K Deputy Commissioner of Income Tax, (International Tax) Circle 3(2)(2), Mumbai ITA No. 1156/Mum/2025 2022-23 DAE(SABS) Leasing Ireland 43 Designated Activity Company C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN:ABHCS2781B Assistant Commissioner of Income Tax, International Tax, Circle 2(1)(2), Mumbai SA No.40/Mum/2015 (Arising out of ITA No. 1156/Mum/2025 2022-23 DAE(SABS) Leasing Ireland 43 Designated Activity Company C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN:ABHCS2781B Assistant Commissioner of Income Tax, International Tax, Circle 2(1)(2), Mumbai ITA No. 1155/Mum/2025 2022-23 DAE(SABS) 10296 Ireland Designated Activity Company C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN:ABHCS2781B Assistant Commissioner of Income Tax, International Tax, Circle 2(1)(2), Mumbai SA No.39/Mum/2025 (Arising out of ITA No. 1155/Mum/2025 2022-23 DAE(SABS) 10296 Ireland Designated Activity Company C/o. DMD Advocates 30, Nizamuddin East, New Delhi-110 013 PAN:ABHCS2781B Assistant Commissioner of Income Tax, International Tax, Circle 2(1)(2), Mumbai Printed from counselvise.com ITA No.1198/Mum/2025 and others 4 Assessee by Shri Sachit Jolly, Sr. Adv.; Shri Mrunal Parekh; Ms.Disha Jham & Shri Hardeep Singh Chawla Revenue by Shri Vivek Perampurna- CIT DR & Shri Krishna Kumar, Sr.DR Date of Hearing 15/05/2025 Date of Pronouncement 13/08/2025 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 5 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, ITA No. 1198/Mum/2025 in the case of TFDAC Ireland II Limited is taken as the lead matter, the facts therein being representative of the entire batch. 4. In various grounds of appeal, the following issues have been raised vide several grounds which are as under:- a) Whether the assessments are barred by limitation under section 144C read with section 153 of the Act; (b) Whether the directions issued by the learned DRP travel beyond its jurisdiction; (c) Whether Articles 6 and 7 of the Multilateral Instrument (“MLI”), embodying the Principal Purpose Test (“PPT”), apply to the facts and operate to deny treaty benefits; (d) The true characterisation and taxability of lease rentals and supplementary lease rentals; (e) Applicability of Article 8 of the India–Ireland Double Taxation Avoidance Agreement (“DTAA”); (f) Existence or otherwise of a Permanent Establishment (“PE”) in India; (g) Levy of interest under sections 234A and/or 234B; (h) Initiation and levy of penalty under section 270A read with section 274 of the Act; Printed from counselvise.com ITA No.1198/Mum/2025 and others 6 (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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 7 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. 8. In short, the brief proceedings before the learned Assessing Officer are that on 19th March 2024, the AO issued a notice Printed from counselvise.com ITA No.1198/Mum/2025 and others 8 under section 142(1) calling upon the assessee to explain why the treaty benefits should not be denied by invoking Articles 6 and 7 of the Multilateral Instrument (“MLI”), on the premise that the principal purpose of the assessee‟s incorporation was to obtain the benefits of the India–Ireland DTAA. In its detailed reply dated 26th March 2024, the assessee submitted, inter alia, that: • The leases had been executed in February 2019, well before the MLI provisions became effective on 1 April 2020; • It possessed valid TRCs and was managed from Ireland through a licensed corporate services provider (Apex Group Limited), with Irish directors, bankers, lawyers, and company secretary; • Its leasing operations extended to China and Korea, demonstrating that India was not its sole focus; • The aircraft were registered in its name with the Directorate General of Civil Aviation (DGCA) in India, and bills of sale vested ownership in it; • Operational and remarketing services were sourced from international service providers, including DVB Bank SE, London Branch, with supporting agreements and invoices; and • Ireland was chosen for well-recognised commercial reasons given its established aviation ecosystem, Printed from counselvise.com ITA No.1198/Mum/2025 and others 9 professional infrastructure, and strategic location, in line with OECD principles. 9. The AO, however, in the Draft Assessment Order dated 31 March 2024, rejected these submissions and concluded that the Principal Purpose Test (“PPT”) under Articles 6 and 7 of the MLI was not satisfied. The AO placed reliance on factors such as: firstly, the ultimate parent entity being a Cayman Islands fund; secondly, the assessee‟s directors holding positions in multiple other Irish companies; thirdly, day-to-day management being outsourced to Apex Group Limited; and lastly, certain lease management functions being contracted to DVB Bank SE, London. 10. The assessee filed objections before the ld.DRP, reiterating its entitlement to treaty benefits and contending that its incorporation and activities were genuine and commercially driven; that outsourcing administrative functions to a licensed Irish service provider was a standard industry practice and did not undermine its place of management; that the leases were dry operating leases, not finance leases; and that similar arrangements with lessees in China and Korea negated any allegation of India-specific treaty shopping. 11. The ld.DRP, however, upheld the AO‟s conclusions. It observed that;  the choice of an SPV in Ireland did not establish Ireland as a genuine operational base in the absence of infrastructure or employees; Printed from counselvise.com ITA No.1198/Mum/2025 and others 10  that Irish professional expertise could be availed anywhere; that leasing to other jurisdictions was irrelevant; and  that the assessee retained “ultimate control” over the aircraft in India through rights of repossession and inspection, thereby constituting a fixed place PE in India. On the characterisation of the leases, the ld.DRP held that the arrangements bore the features of finance leases, considering the allocation of risks, non-cancellable terms, sub-leasing rights, and its determination of the aircraft‟s economic life. It also dismissed the Special Bench decision in InterGlobe Aviation Ltd. [2022] 95 ITR(T) 586 (Delhi–Trib.)(SB), holding that it contains only “casual observations.” 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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 11 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 12 (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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 13  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. 19. Expanding upon the first limb, learned Senior Counsel has pointed out that the India–Ireland DTAA was duly notified in the Official Gazette on 11 January 2002. The MLI, on the other hand, was notified separately on 9 August 2019. Although the India–Ireland DTAA is indeed a “Covered Tax Agreement” within the meaning of the MLI, the consequences of MLI (including the changes accepted by Ireland) have not been separately notified by way of a protocol to the India–Ireland DTAA. It is the Revenue‟s position that, by virtue of the MLI‟s notification alone, Articles 6 and 7 and in particular, the principal purpose test automatically becomes part of the India– Ireland DTAA. The corollary of this view is that unless it is established that the principal purpose of incorporation of the assessee in Ireland was not to take benefit of the India–Ireland DTAA, or that the grant of the benefit under the India–Ireland DTAA is not in accordance with the object and purpose of the said DTAA, the beneficial provisions of the DTAA will not be available. 20. In rebuttal, the assessee draws sustenance from the decision of the Hon‟ble Supreme Court in Assessing Officer (I.T.) v. Nestle SA (2023) 458 ITR 756. The Court, while Printed from counselvise.com ITA No.1198/Mum/2025 and others 14 construing the effect of “Most Favoured Nation” clauses in earlier DTAAs in the light of subsequently negotiated DTAAs with other OECD member states, laid down, in categorical terms, that “the consequences of a subsequent tax treaty on an earlier tax treaty must be separately notified, otherwise the earlier tax treaty continues to remain in force unaltered and unaffected by the subsequent tax treaty”. The learned Senior Counsel submitted that this enunciation squarely governs the present case. Absent a specific notification under Section 90(1) of the Income-tax Act, 1961, giving effect to the MLI amendments in the context of the India–Ireland DTAA, the provisions of Articles 6 and 7 of the MLI cannot be enforced so as to curtail the benefits conferred by the DTAA. 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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 15 (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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 16 24. The learned Senior Counsel further challenges the Revenue‟s fixation on the ultimate parent company being based in the Cayman Islands, terming it wholly irrelevant. He submitted that, Examples in the OECD‟s Final Report on BEPS Action Plan 6 make it clear that the ‗principal purpose test‘ is not intended to impugn every structure whose ultimate ownership lies outside the jurisdiction of incorporation. Reliance in this regard was also placed on the judgment of the Hon‟ble Bombay High Court in Bid Services Division (Mauritius) Ltd. v. Authority of Advance Ruling (Income-tax) [2023] 453 ITR 461, wherein it was held that the mere presence of a parent in a tax-neutral jurisdiction is not, per se, proof of treaty abuse. 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- Printed from counselvise.com ITA No.1198/Mum/2025 and others 17 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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 18 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 19 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. 7. The details stated in paragraph 4 and 5 above are clearly explained in the document ―Guidance for the development of synthesized texts – Multilateral Convention to Implement Tax Treaty Measures to Prevent BEPS- BEPS ACTION 15‖ (referred as ―Guidance on Synthesised Text‖ hereafter) which was also developed as part of the Action 15 of the OECD/G20 BEPS project, in the following words: ―3. The purpose of synthesized texts is primarily intended to facilitate the understanding of the MLI. For legal purposes, the provisions of the MLI must be read alongside Covered Tax Agreements as they remain the only legal instruments to be applied, in light of the interaction of the MLI positions of the Contracting Jurisdictions. 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 20 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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 21 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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 22 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: Printed from counselvise.com ITA No.1198/Mum/2025 and others 23 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. 12. The applicable legal instruments in the case of a resident of Ireland earning income from India are the India Ireland DTAC as well as the MLI, both of which have already been duly notified, thereby satisfying the condition laid down in Section 90(1) of the Act, as affirmed by the Hon‘ble Supreme Court in case of M/s Nestle. 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. 30. As noted above, the issue presents two sub-questions:  firstly, whether the provisions of the MLI can be read to restrict the applicability of the India–Ireland DTAA in the absence of a separate notified protocol to that DTAA; and Printed from counselvise.com ITA No.1198/Mum/2025 and others 24  secondly, if the answer to the first is in the affirmative, whether, on the facts of the present case, the principal purpose test in Articles 6 and 7 is satisfied. 31. The relevant background in brief is set out at the outset. The DTAA between India-Ireland was notified in the official gazette on 11th January 2002; The MLI on the other hand was notified on 9th August 2019. Importantly, the India-Ireland DTAA has been designated as a Covered Tax Agreement for the purpose of MLI. Ireland for its part, ratified the MLI with effect from 1st May 2019. The OECD characterizes the BEPS MLI as a 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 25 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 26 notified, the more beneficial scope or lower rates therein became part of the earlier treaty without any further formality. 34. Here it would, therefore, be relevant to refer to the protocols of the India-France and India-Netherlands DTAA, which for sake of ready reference are reproduced below: Relevant extract from the India-France DTAA: ―PROTOCOL At the time of proceeding to the signature of the Convention between France and India for the avoidance of double taxation with respect to taxes on income and on capital, the undersigned have agreed on the following provisions which shall form an integral part of the Convention.‖ xxx ―7. In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.‖ Relevant extract from the India-Netherlands DTAA: ―PROTOCOL At the moment of signing the Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital, this day concluded between the Kingdom of the Netherlands and the Republic of Printed from counselvise.com ITA No.1198/Mum/2025 and others 27 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 28 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”. 37. The Hon‟ble Supreme Court of India in the case of Nestle (supra), accepting the submission of the Revenue and repelling the submission of the taxpayers, held that a separate notification to effectuate the impact of a subsequent DTAA into an earlier DTAA must be issued. The notification of the subsequent DTAA does not ipso facto and automatically lead to amendment of the earlier DTAA. The following relevant findings of the Supreme Court are reproduced hereunder: ―44. The holding in the decisions discussed above may thus be summarized: (i) The terms of a treaty ratified by the Union do not ipso facto acquire enforceability; Printed from counselvise.com ITA No.1198/Mum/2025 and others 29 (ii) The Union has exclusive executive power to enter into international treaties and conventions under Article 73 [read with corresponding Entries - Nos. 10, 13 and 14 of List I of the VII the Schedule to the Constitution of India] and Parliament, holds the exclusive power to legislate upon such conventions or treaties. (iii) Parliament can refuse to perform or give effect to such treaties. In such event, though such treaties bind the Union, vis a vis the other contracting state(s), leaving the Union in default. (iv) The application of such treaties is binding upon the Union. Yet, they \"are not by their own force binding upon Indian nationals\". (v) Law making by Parliament in respect of such treaties is required if the treaty or agreement restricts or affects the rights of citizens or others or modifies the law of India. (vi) If citizens‘ rights or others‘ rights are not unaffected, or the laws of India are not modified, no legislative measure is necessary to give effect to treaties. (vii) In the event of any ambiguity in the provision or law, which brings into force the treaty or obligation, the court is entitled to look into the international instrument, to clear the ambiguity or seek clarity. XXX 46. The legal position discernible from the previous discussion, therefore is that upon India entering into a treaty or protocol does not result in its automatic enforceability in courts and tribunals; the provisions of such treaties and protocols do not therefore, confer rights upon parties, till such time, as appropriate notifications are issued, in terms of Section 90(1). XXX 60. The omission of certain benefits (available to other member countries of OECD who had entered into DTAAs with India) in the subsequent notification, dated 10.07.2000, is another indication that a ―trigger‖ event such as India granting favourable relief to a Printed from counselvise.com ITA No.1198/Mum/2025 and others 30 country per se does not cover all the benefits granted through the later instrument. Therefore, the benefit which India granted France, was within the framework of its treaty originally negotiated. In the case of the other country (granted benefits later, through a convention, by India), a different trajectory of negotiations might have led to different kind of benefits to the third country (UK and Portugal, in the case of France). In other words, the structure of the main DTAA, and its phraseology, based on negotiations with the countries concerned, i.e., Netherlands, France and Switzerland, also plays a role in the kind of benefits that are assured through it. The structure and terms of other DTAAs might be different; the coverage and definition of certain terms (FTS, permanent establishment, etc.) might be dissimilar. The revenue’s argument that grant of automatic benefits based on the other country’s entry into OECD, as unfeasible, has merit. XXX 72. In the opinion of this court, the status of treaties and conventions and the manner of their assimilation is radically different from what the Constitution of India mandates. In each of the said three countries, every treaty entered into the executive government needs ratification. Importantly, in Switzerland, some treaties have to be ratified or approved through a referendum. These mean that after intercession of the Parliamentary or legislative process/procedure, the treaty is assimilated into the body of domestic law, enforceable in courts. 44 Article 89 of the Federal Constitution of the Swiss Federation, available at: (accessed on 11.10.2023).‖ 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 31 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 32 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, Printed from counselvise.com ITA No.1198/Mum/2025 and others 33 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: Printed from counselvise.com ITA No.1198/Mum/2025 and others 34 • 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. 40. In our considered view, the factual matrix of the present case bears a close parallel to that examined by the Hon‟ble Supreme Court in Nestlé SA (supra). In that decision, as in the matter before us, the original bilateral tax treaty in this case the India–Ireland DTAA stood duly notified. Equally, the subsequent multilateral instrument (MLI) had also been formally notified. The pivotal question, however, was not the mere existence of notifications in respect of both instruments, but rather whether the consequential modification of the earlier DTAA, brought about by virtue of the later multilateral instrument, had itself been separately notified for the purposes of domestic application. On the material available on record, it is expressly admitted that Printed from counselvise.com ITA No.1198/Mum/2025 and others 35 although both the India–Ireland DTAA and the MLI have been notified, “the consequence/impact of the MLI on the India– Ireland DTAA is not admittedly and separately notified.” 41. The ratio of the Supreme Court in Nestlé SA leaves no room for ambiguity on this issue. Summarising its conclusions in paragraph 88 of the judgment, the Court emphatically held that a notification under Section 90(1) of the Income-tax Act is an indispensable and mandatory condition for any court, authority or tribunal to give effect to a Double Taxation Avoidance Agreement, or to any protocol or instrument that purports to alter the terms or conditions of such agreement. Put differently, any subsequent treaty-based modification of an existing DTAA can be enforced under municipal law only where a specific Section 90(1) notification has been issued incorporating that modification into Indian law. 42. The Revenue has argued that, since the MLI has been duly notified and the India–Ireland DTAA is a “Covered Tax Agreement”, Articles 6 and 7 (i.e., the PPT suite) automatically apply. With respect, this contention cannot be reconciled with the constitutional and statutory mandate articulated by the Hon‟ble Supreme Court in Nestlé SA. Indeed, the Revenue‟s own explanatory note acknowledges that the MLI “operates to modify tax treaties”, while at the same time conceding that it is “not an amending protocol”, and that the widely circulated “synthesised text” is not in itself a legally binding document. Printed from counselvise.com ITA No.1198/Mum/2025 and others 36 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. 44. The structural design of the MLI itself reinforces this conclusion. Under its operational framework, each contracting State is required to deposit with the OECD a list of bilateral treaties that it wishes to designate as “covered agreements” along with its specific positions and reservations. The effectiveness of those positions, however, remains contingent upon the principle of reciprocity and, most importantly, upon the manner in which each State gives effect to such positions under its own domestic law. It is, therefore, not enough that India has merely notified the MLI or identified the India–Ireland DTAA as a covered tax agreement. Unless the changes contemplated in the MLI are Printed from counselvise.com ITA No.1198/Mum/2025 and others 37 expressly incorporated into Indian law through the statutory mechanism, namely, a specific notification under Section 90(1) those changes cannot operate to alter the manner in which the domestic authorities apply the DTAA. That position now constitutes the law of the land by virtue of the judgment of the Hon‟ble Supreme Court in Nestlé SA, which makes it clear that neither the MLI nor any synthesised text can have domestic legal efficacy unless duly notified under Section 90(1) of the Act. 45. Against this settled backdrop, the approach adopted by the Assessing Officer and the learned DRP in treating the Principal Purpose Test under the MLI as self-executing in relation to the India–Ireland DTAA is wholly unsustainable. Not only does it run counter to the Revenue‟s own description of the MLI, namely, that it “modifies existing treaties” but it is also directly inconsistent with the binding precedent of the Supreme Court. The contradiction is plain: the Revenue recognises that the MLI modifies tax treaties, yet it sidesteps the very legal requirement that Nestlé SA describes as an indispensable precondition, namely, a separate Section 90(1) notification incorporating those treaty modifications into Indian law. 46. When the ratio of Nestlé SA is applied to the facts of the present case, the inevitable conclusion is that the MLI cannot be invoked to curtail or otherwise restrict the benefits available to the assessee under the India–Ireland DTAA unless the specific consequence of the MLI has been notified under Section 90(1). In Printed from counselvise.com ITA No.1198/Mum/2025 and others 38 the absence of such notification, neither the bare provisions of the MLI nor any synthesised text reflecting its intended application can form the basis for altering the application of an already notified DTAA. 47. We are therefore constrained to hold, as a threshold matter, that Articles 6 and 7 of the MLI cannot be invoked against the assessee in the present assessment year, inasmuch as there is no Section 90(1) notification incorporating those provisions into the India–Ireland DTAA. Consequently, the Revenue‟s attempt to deny treaty benefits by invoking the MLI‟s Principal Purpose Test must, on this ground alone, fail. The assessment must proceed on the footing that the MLI has no application in the absence of a statutorily issued notification under Section 90(1). 48. Having thus resolved the threshold question in favour of the assessee, it bears reiteration that this conclusion is not reached on a technicality divorced from substance, but rests on the very constitutional and statutory architecture governing how international agreements enter the domestic legal order. The Hon‟ble Supreme Court in Nestle SA (supra) did not propound an abstract procedural nicety; it articulated a substantive safeguard that treaty modifications altering existing rights or liabilities cannot be judicially enforced until procedure is followed in line with Section 90(1) of the Act. 49. This safeguard is especially critical in the MLI context, where multiple jurisdictions opt into certain provisions, reserve Printed from counselvise.com ITA No.1198/Mum/2025 and others 39 on others, and often apply them with modifications or deferrals. Without a domestic notification that identifies the exact contours of the modification to a given DTAA, there is a real risk that an Indian court or authority may apply an MLI provision in a form or scope that was never domestically assented to. Section 90(1) operates as a bulwark against that risk, ensuring that only those changes consciously adopted into Indian law acquire binding force. 50. We also note that the OECD‟s own commentary on the MLI recognises the role of each jurisdiction‟s domestic law in determining how the MLI takes effect. It expressly acknowledges that a “synthesised text” is a non-binding explanatory aid; it does not, and cannot, supplant the requirement for a legally valid act of incorporation in each jurisdiction. Thus, even on the OECD‟s own terms, the Revenue‟s reliance on a non-notified synthesised text is misplaced. 51. The Department‟s suggestion that the MLI, once notified in general terms, becomes immediately self-executing vis-à-vis all covered agreements, would in effect render otiose the careful statutory scheme of Section 90(1). That interpretation would also run counter to the binding pronouncement in Nestle SA, which squarely holds that each modification with the effect of altering existing law must itself be the subject of a distinct notification. 52. We are conscious that the MLI was conceived as a swift and efficient vehicle for implementing the BEPS treaty-related measures across jurisdictions without the need to bilaterally Printed from counselvise.com ITA No.1198/Mum/2025 and others 40 renegotiate each covered agreement. However, efficiency in the multilateral sphere cannot displace the domestic rule of law requirement that any such modification be consciously received into municipal law through the statutorily prescribed process. 53. The principles enunciated by the Hon‟ble Supreme Court in Nestlé SA (supra) apply to the facts of the present case with full force.  First, the India–Ireland DTAA, which was duly notified in 2002, continues to remain the operative and governing instrument for determining the tax treatment between the two Contracting States. Under domestic law, this position endures unless and until any modification to the DTAA is expressly incorporated by way of a separate notification issued under Section 90(1) of the Income-tax Act.  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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 41 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. 54. Although it is not necessary to deal with the PPT invocation, nonetheless, for the sake of completeness, and because the lower authorities have made detailed factual findings, we proceed, without prejudice to our threshold holding, to briefly examine whether, even assuming Articles 6 and 7 of the MLI applied, the Revenue has discharged its burden under the PPT. 55. For arguments sake, it is assumed that MLI amends India- Ireland DTAA and Article 6 & 7 of MLI are read into the India- Ireland DTAA whether the principal purpose of the incorporation / transaction was to take tax benefit of India-Ireland DTAA or not? 56. The structure and purpose of the impugned transaction must be examined holistically, not in isolated fragments. The PPT is, by its very language, a general anti-abuse rule of last resort, to be invoked only where it is reasonable to conclude, having regard to all relevant facts and circumstances, that one of the Printed from counselvise.com ITA No.1198/Mum/2025 and others 42 principal purposes of an arrangement was to obtain treaty benefits in a manner contrary to the object and purpose of the treaty provisions. The jurisprudence, both under the OECD Commentary and as developed in domestic contexts applying similar general anti-avoidance standards, has consistently emphasised that the PPT is not intended to be triggered merely because a transaction is structured in a tax-efficient manner. The crucial inquiry is whether the tax benefit was a principal purpose not merely a by-product of the arrangement, and whether the obtaining of such benefit is contrary to the treaty‟s object and purpose. 57. One very important fact which has been argued before us is that once the Irish Tax Authorities have issued a TRC to the assessee, it is not open for the Indian tax authorities to question the residency or the applicability of provisions of Articles 8 and 12 of the India-Ireland DTAA to the assessee since the benefits under those provisions are available to tax resident of Ireland. The Hon‟ble Supreme Court in Union of India v. Azadi Bachao Andolan&Anr. (2004) 10 SCC 1 &Vodafone International Holdings (Supra) has held that TRC is conclusive proof of residency of foreign taxpayers unless it is a case of treaty shopping or fraud. It is inconceivable to presume that Irish tax authorities are not familiar with the principal purpose test and have issued TRCs without application of mind. As a judicial authority, this Tribunal cannot assume any such facts. On the contrary, an act of statutory authority is presumed to be done in accordance with law. Therefore, in the absence of very compelling Printed from counselvise.com ITA No.1198/Mum/2025 and others 43 reasons, the TRC will be presumed to be valid grounds for allowing benefits of the India-Ireland DTAA even after notification of MLI. 58. In any case, the relevant facts which were started before the learned Assessing Officer and learned ld. DRP are that- a. The assessee was incorporated on 18/04/2018 and the leases in question for aircraft bearing MSN 8768, MSN 8710 and 8952 were executed 01/02/2019, which is prior to the introduction of the MLI. b. The assessee holds valid TRC issued by the Irish Tax Authorities. c. The assessee is part of the TFDAC group which consists of 4 Irish companies including the assessee, which are a finance company, TFDAC Finance (Ireland) Limited which finances the asset owning entities; a holding company, TFDAC Holding (Ireland) Limited; TFDAC Ireland I Limited and TFDAC Ireland I Limited, a company that leases aircraft to lessees located in different countries such as China and Korea. d. The TFDAC group had in aggregate leased eight aircraft across India, China and Korea during the relevant year. e. The India-Ireland DTAA was executed for promotion of trade between India and Ireland and aircraft leasing is one of the largest businesses carried on from Ireland. f. Ireland has been a hub for leasing for more than 40 years and is home to 19 out of 20 largest lessors in the world. Printed from counselvise.com ITA No.1198/Mum/2025 and others 44 g. 60% of world‟s global leasing is carried on from Ireland. h. It has established aviation expertise and knowledge pool. i. The strategic geographical location of Ireland serves as a strategic gateway between Europe and North America, facilitating efficient access to key aviation markets. j. The directors of the assessee are Irish, its bankers are Irish, its company secretary is Irish and the assessee, being an SPV, was managed by a reputed management service provider (Apex Group Limited) in Ireland. The assessee had engaged Apex Group Limited as its administrator and company secretary to undertake day-to-day operations. This company is management company incorporated in Ireland and is licensed to provide administration services to companies such as the assessee. k. The assessee held its principal bank account in Ireland. l. The asset (aircraft) was registered in the name of the assessee and the bill of sale was in the name of assessee. m. Further, the agreement with DVB Bank SE was, inter alia, in respect of remarketing of the aircraft after the present lease with Indigo was to end. 59. However, the learned Assessing Officer and learned DRP held that the aforesaid factors are not enough to prove that the principal purpose was not to avail the tax benefits of the India- Ireland DTAA, particularly because the ultimate parent of the Printed from counselvise.com ITA No.1198/Mum/2025 and others 45 assessee is not Irish. The learned DRP, in this regard has repeatedly held as under: ―In summary, Panel is inclined to agree with the finding of the Ld. A.O. that the applicant lacks economic substance in SPV in Ireland and operates as a shell entity for Parent I ultimate holding company located outside Ireland.‖ …. ―The transaction appears structured solely to access benefits under the India-Ireland DTAA, while the ultimate parent is based in the Cayman Islands/ Hong Kong, a tax-free jurisdiction.‖ …. ―Ireland appears to have been chosen purely for tax advantages under the India-Ireland DTAA. The ultimate parent entity is in the Cayman Islands, a jurisdiction offering no taxation on income.‖ 60. It has been pointed out before us by the learned Senior Counsel that one of the cases of an Irish lessor, the ld.DRP had held that since the ultimate parent company of the assessee therein was Irish, relief under India-Ireland DTAA can be availed. Therefore, the test laid down by the ld.DRP is to see whether the ultimate parent of the assessee is Irish or not. Before us learned Counsel had submitted that aforesaid finding of the learned ld.DRP is not correct. 61. In order to properly appreciate the contours of the Principal Purpose Test and its intended application, it is apposite to refer to the OECD‟s BEPS Action Plan 6 Report, which constitutes the foundational basis for the introduction of the MLI. The Final Report on Action Plan 6 elucidates the scope and operation of the Printed from counselvise.com ITA No.1198/Mum/2025 and others 46 Principal Purpose Test through a series of illustrative examples, a few of which are reproduced hereinafter for ease of understanding. ―Example C: RCo, a company resident of State R, is in the business of producing electronic devices and its business is expanding rapidly. It is now considering establishing a manufacturing plant in a developing country in order to benefit from lower manufacturing costs. After a preliminary review, possible locations in three different countries are identified. All three countries provide similar economic and political environments. After considering the fact that State S is the only one of these countries with which State R has a tax convention, the decision is made to build the plant in that State. In this example, whilst the decision to invest in State S is taken in the light of the benefits provided by the State R- State S tax convention, it is clear that the principal purposes for making that investment and building the plant are related to the expansion of RCo’s business and the lower manufacturing costs of that country. In this example, it cannot reasonably be considered that one of the principal purposes for building the plant is to obtain treaty benefits. In addition, given that a general objective of tax conventions is to encourage cross-border investment, obtaining the benefits of the State R-State S convention for the investment in the plant built in State S is in accordance with the object and purpose of the provisions of that convention ---------- Example F: TCO is a publicly-traded company resident of State T. TCO‘s information technology business, which was developed in State T, has grown considerably over the last few years as a result of an aggressive merger and acquisition policy pursued by TCO‘s management. RCO, a company resident of State R (a State that has concluded many tax treaties providing for no or low source taxation of dividends and royalties), is the family-owned holding company of a group that is also active in the information technology sector. Almost all the shares of RCO are owned by residents of State R who are relatives of the entrepreneur who Printed from counselvise.com ITA No.1198/Mum/2025 and others 47 launched and developed the business of the RCO group. RCO‘s main assets are shares of subsidiaries located in neighbouring countries, including SCO, a company resident of State S, as well as patents developed in State R and licensed to these subsidiaries. TCO, which has long been interested in acquiring the business of the RCO group and its portfolio of patents, has made an offer to acquire all the shares of RCO. In this example, in the absence of other facts and circumstances showing otherwise, it would be reasonable to conclude that the principal purposes for the acquisition of RCO are related to the expansion of the business of the TCO group and do not include the obtaining of benefits under the treaty between States R and S. The fact that RCO acts primarily as a holding company does not change that result. It might well be that, after the acquisition of the shares of RCO, TCO‘s management will consider the benefits of the tax treaty concluded between State R and State S before deciding to keep in RCO the shares of SCO and the patents licensed to SCO. This, however,would not be a purpose related to the relevant transaction, which is the acquisition of the shares of RCO ―Example H: TCO is a company resident of State T that is listed on the stock exchange of State T. It is the parent company of a multinational enterprise that conducts a variety of business activities globally (wholesaling, retailing, manufacturing, investment, finance, etc.). Issues related to transportation, time differences, limited availability of personnel fluent in foreign languages and the foreign location of business partners make it difficult for TCO to manage its foreign activities from State T. TCO therefore establishes RCO, a subsidiary resident of State R (a country where there are developed international trade and financial markets as well as an abundance of highly qualified human resources), as a base for developing its foreign business activities. RCO carries on diverse business activities such as wholesaling, retailing, manufacturing, financing and domestic and international investment. RCO possesses the human and financial resources (in various areas such as legal, financial, accounting, taxation, risk management, auditing and internal control) that are necessary to perform these activities. It is clear that RCO‘s activities constitute the active conduct of a business in State R. Printed from counselvise.com ITA No.1198/Mum/2025 and others 48 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 49 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] 62. Having regard to the guidance contained in the OECD BEPS Action Plan 6, it is evident that the Principal Purpose Test is not triggered merely because a taxpayer derives treaty benefits or has, in the course of its decision-making, taken into account the existence of a favourable tax treaty. The true enquiry is whether one of the principal purposes of entering into the relevant arrangement or transaction was to obtain that treaty benefit, divorced from genuine commercial considerations. The OECD Commentary makes it clear through illustrative examples that where investment decisions are driven by legitimate commercial objectives such as business expansion, operational efficiency or access to resources, the mere availability of treaty benefits does not, by itself, taint the arrangement. 63. In the illustrative Example C, the decision to establish a manufacturing facility was principally driven by lower production costs and business expansion, and the treaty benefit was merely Printed from counselvise.com ITA No.1198/Mum/2025 and others 50 incidental. In Example F, the acquisition of a corporate group was prompted by the acquirer‟s need to access proprietary technology and market networks, and the treaty advantage was not a principal purpose. Likewise, Example H demonstrates that establishing a regional headquarters in a jurisdiction with adequate human and financial resources constitutes a bona fide business decision even if treaty benefits accrue as a consequence. Finally, Example G clarifies that even where a jurisdiction is chosen partly because of its treaty network, treaty benefits cannot be denied where substantive economic activities are carried on and real business risks are assumed. 64. Viewed in the light of this guidance, it is clear that the Principal Purpose Test in Articles 6 and 7 of the MLI cannot be read so broadly as to imply that treaty benefits must automatically be denied in every case where the ultimate parent entity of the taxpayer happens to be resident in a third country. Bona fide commercial investments are meant to be protected and the PPT does not seek to impair them. The Assessing Officer and the learned DRP failed to appreciate that the assessee is a separate taxable entity from its shareholders and is itself subject to tax in Ireland at 15 percent on its Irish income. The mere fact that the ultimate shareholder resides outside Ireland does not, by itself, furnish a basis to invoke the PPT. To adopt such an approach would result in wholly unintended and absurd consequences, particularly in cases such as the present where Printed from counselvise.com ITA No.1198/Mum/2025 and others 51 the investment is demonstrably driven by legitimate commercial objectives. 65. In this regard, Ld. Senior Counsel had also drawn our attention to the decision of Hon‟ble Bombay High Court in Bid Services (supra) wherein it was held as under: ―69. It is in this background, that the Authority ought to have applied its mind before suggesting that the Petitioner was a sham or a shell or a conduit incorporated only for the purposes of evading tax in India or as a device. The entire bidding structure as well as the bid has been evaluated by the AAI and pursuant to the evaluation the AAI has entered into the OMDA for modernization of the Mumbai Airport. Neither the AAI nor the Government of India nor any other person have objected to the Petitioner's introduction or investment. It is also not the case of the Revenue nor is there any finding from the Authority that the investment by Petitioner did not have the necessary compliances. There does not appear to be any irregularity in complying with the Bid documents. And even if there was any irregularity, that was a matter between the AAI and the Consortium, which in our view would have been deemed waived, as not only the GVK-SA Consortium was declared a successful bidder but Petitioner has invested in the JV viz. in MIAL but the AAI has also entered into the OMDA with the Consortium for the purposes of the project of modernization of the Mumbai Airport. 70. At their meetings on 20th February 2011 and 28th February 2011 the Board of Directors of the Petitioner authorized the transfer of 13.5% of the paid up capital out of 27% held by it to GAHPL for a consideration of US$ 287,222,000. The Share Purchase Agreement dated 1st March 2011 was entered into in this regard. On 18th April 2011 Petitioner made an application under Section 197 of the Income Tax Act to obtain a NIL withholding tax certificate on the basis that the gain would not be chargeable to tax in India. On 20th May 2011 an order under Section 197 was passed whereby GAHPL was authorized to pay full sale consideration to Petitioner without any deduction of tax at source. Thereafter, on 3rd October 2011 a Addendum to the Printed from counselvise.com ITA No.1198/Mum/2025 and others 52 Share Purchase Agreement was entered into as a consequence of which the consideration was reduced to US$ 231,000,000. This was intimated to Respondent no.2 Assistant Commissioner of Income Tax (International Taxation) by the Chartered Accountant. If there was any doubt on the Petitioner's investment or activities etc., there was no necessity of permitting the purchases of shares, to granting permission to the purchaser to make payment to Petitioner without deducting TDS. 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 53 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 54 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 this connection, we may reiterate the \"look at\" principle enunciated in Ramsay (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax Printed from counselvise.com ITA No.1198/Mum/2025 and others 55 deferment/saving device but that it should apply the \"look at\" test to ascertain its true legal nature [See Craven v. White (supra) which further observed that genuine strategic tax planning has not been abandoned by any decision of the English Courts till date]‖ xxx ―101. A company is a separate legal persona and the fact that all its shares are owned by one person or by the parent company has nothing to do with its separate legal existence. If the owned company is wound up, the liquidator, and not its parent company, would get hold of the assets of the subsidiary. In none of the authorities have the assets of the subsidiary been held to be those of the parent unless it is acting as an agent. Thus, even though a subsidiary may normally comply with the request of a parent company it is not just a puppet of the parent company. The difference is between having power or having a persuasive position. Though it may be advantageous for parent and subsidiary companies to work as a group, each subsidiary will look to see whether there are separate commercial interests which should be guarded.‖ 67. Upon a careful appreciation of the facts placed on record, we find that the assessee was managed by a duly licensed management company, Apex Group Limited, which is itself based in Ireland. It is also not in dispute that the directors, bankers, company secretary and legal advisors of the assessee were all resident in Ireland. In the context of a leasing business, these are not mere formalities but critical elements of the operational structure. Consequently, the conclusion drawn by the Assessing Officer and the learned DRP that the assessee‟s business was not being carried on from Ireland and that no operational structure existed in that jurisdiction is manifestly untenable. 68. On a holistic evaluation of the contemporaneous documentary evidence, commercial rationale and operational Printed from counselvise.com ITA No.1198/Mum/2025 and others 56 history, we are satisfied that the assessee‟s investment and operational arrangement with its Irish affiliate was neither transient nor artificial. The material before us clearly demonstrates that the Irish entity had been established and maintained to carry out substantive commercial functions, that it was adequately staffed with personnel, that it incurred genuine expenditure in the ordinary course of its business, and that it assumed real economic risks. These are classic indicators of a bona fide commercial enterprise, and not of a mere conduit or treaty-shopping vehicle. 69. It is true that the Revenue has sought to place considerable reliance on the magnitude of tax savings that arose to the assessee by virtue of the DTAA rate, as compared with the higher domestic rate. While the quantum of tax benefit may constitute a relevant contextual circumstance, it is not by itself determinative for the purposes of the Principal Purpose Test. The PPT requires a clear demonstration, supported by objective facts, that the dominant purpose of the arrangement was to secure the treaty benefit and that such benefit is contrary to the object and purpose of the convention. In the present case, no such factual foundation has been laid, and in our considered view, the Revenue has not discharged this burden. 70. We must also address the letter dated 07/05/2021 issued by Aircraft Leasing Ireland (“ALI”), on which considerable reliance has been placed by the ld. DRP. On a fair reading, the letter evidences an institutional dialogue between ALI and the Irish Printed from counselvise.com ITA No.1198/Mum/2025 and others 57 regulatory and tax authorities aimed at encouraging aviation business and engaging with the aviation community to foster sectoral growth. It is, in substance, akin to the consultative representations routinely made by industry bodies such as FICCI/CCI/SIAM to the Government of India or the Ministry of Finance in the run-up to the Union Budget, offering sectoral inputs and suggestions. Far from advancing the Revenue‟s case, the letter actually fortifies the assessee‟s contention namely, that the Irish authorities provide audience, continuity, and impetus to the leasing industry. The existence of a robust ecosystem and a wide treaty network in Ireland are, in themselves, legally and commercially sound bases for choosing Ireland as the jurisdiction for aircraft-leasing operations. Taking advantage of a country‟s extensive tax-treaty network is not tantamount to taking a tax benefit in the pejorative sense. This understanding is manifest in Examples G & H of the OECD BEPS Action Plan 6 Report, already reproduced above, which affirm that the presence of a favourable treaty network, when coupled with real commercial substance, does not trigger anti-abuse consequences. 71. We further note that the assessee‟s group has leased aircraft to jurisdictions other than India as well. This cross- border footprint underscores that the choice of Ireland was driven by the broader aviation ecosystem and Ireland‟s well- known leasing infrastructure, rather than by an India-specific intention to access the India–Ireland DTAA. The geographical diversity of lessees coheres with a business model anchored in Printed from counselvise.com ITA No.1198/Mum/2025 and others 58 Ireland‟s industry depth, not in the opportunistic pursuit of a single treaty. 72. It is also pertinent that similar treaty outcomes are available under other Indian DTAAs for instance, with Israel, Sweden, Greece, and the Netherlands. Yet the assessee‟s gravitation toward Ireland is credibly explained by non-tax advantages: an unparalleled ecosystem where 60% of the world‟s leased aircraft are managed, hosting over 50 leasing companies, including 19 of the top 20 global lessors. In short, the centre of gravity is commercial: Ireland‟s regulatory predictability, specialist talent, and deep market infrastructure not a solitary fiscal preference. 73. The ld. DRP‟s observation that the “ultimate income will also be shifted to tax-free jurisdictions” is, with respect, unsupported by particulars. The accounts placed on record indicate no payment by the assessee to its parent or group entities during the relevant year save and except arm‟s-length debt obligations payable to the parent. Expenditure has been incurred on administrative support from Apex Group Limited in Ireland and toward loan servicing/repayment both consistent with ordinary course operations in a leasing SPV. In the absence of cogent material showing siphoning, round-tripping, or below- market transfers, the conjecture of income “shifting” cannot survive judicial scrutiny. 74. In view of the foregoing, once the assessee has produced a valid TRC and the AO/ld. DRP have not recorded compelling Printed from counselvise.com ITA No.1198/Mum/2025 and others 59 grounds to rebut the applicability of the India–Ireland DTAA, the conclusion that the principal purpose of the assessee‟s incorporation was to obtain India–Ireland DTAA benefits is unsustainable. The impugned finding is, therefore, set aside. 75. Alternatively, and without prejudice, we also find merit in the submission that, even under Articles 6 and 7 of the MLI, treaty relief may be granted notwithstanding that one of the principal purposes of an arrangement was to obtain such relief so long as the grant of relief accords with the object and purpose of the relevant DTAA provisions. The PPT is not a blunt instrument; its own text and commentary preserve benefits that serve the treaty‟s design. 76. In this context, we reproduce the OECD‟s illustrations in Example D and Example E from the Final Report of BEPS Action Plan 6, which encapsulate the principle: ―Example D: RCo, a collective investment vehicle resident of State R, manages a diversified portfolio of investments in the international financial market. RCo currently holds 15 per cent of its portfolio in shares of companies resident of State S, in respect of which it receives annual dividends. Under the tax convention between State R and State S, the withholding tax rate on dividends is reduced from 30 per cent to 10 per cent. RCo‘s investment decisions take into account the existence of tax benefits provided under State R‘s extensive tax convention network. A majority of investors in RCo are residents of State R, but a number of investors (the minority investors) are residents of States with which State S does not have a tax convention. Investors‘ decisions to invest in RCo are not driven by any particular investment made by RCo, and RCo‘s investment strategy is not driven by the tax position of its investors. RCo Printed from counselvise.com ITA No.1198/Mum/2025 and others 60 annually distributes almost all of its income to its investors and pays taxes in State R on income not distributed during the year. In making its decision to invest in shares of companies resident of State S, RCo considered the existence of a benefit under the State R-State S tax convention with respect to dividends, but this alone would not be sufficient to trigger the application of paragraph 7. The intent of tax treaties is to provide benefits to encourage cross- border investment and, therefore, to determine whether or not paragraph 7 applies to an investment, it is necessary to consider the context in which the investment was made. In this example, unless RCo‘s investment is part of an arrangement or relates to another transaction undertaken for a principal purpose of obtaining the benefit of the Convention, it would not be reasonable to deny the benefit of the State R-State S tax treaty to RCo. Example E: RCo is a company resident of State R and, for the last 5 years, has held 24 per cent of the shares of company SCo, a resident of State S. Following the entry-into-force of a tax treaty between States R and S (Article 10 of which is identical to Article 10 of this Model), RCo decides to increase to 25 per cent its ownership of the shares of SCo. The facts and circumstances reveal that the decision to acquire these additional shares has been made primarily in order to obtain the benefit of the lower rate of tax provided by Article 10(2)a) of the treaty. In that case, although one of the principal purposes for the transaction through which the additional shares are acquired is clearly to obtain the benefit of Article 10(2)a), paragraph 7 would not apply because it may be established that granting that benefit in these circumstances would be in accordance with the object and purpose of Article 10(2)(a). That subparagraph uses an arbitrary threshold of 25 per cent for the purposes of determining which shareholders are entitled to the benefit of the lower rate of tax on dividends and it is consistent with this approach to grant the benefits of the subparagraph to a taxpayer who genuinely increases its participation in a company in order to satisfy this requirement.‖ Examples D and E further clarify that the PPT must be applied in light of the object and purpose of the treaty. In Printed from counselvise.com ITA No.1198/Mum/2025 and others 61 Example D, the investment in shares of companies in State S by a collective investment vehicle is part of a broader, commercially- driven investment strategy, and the treaty benefit on dividends is merely incidental. The PPT therefore does not apply. In Example E, the taxpayer increases its shareholding from 24% to 25% specifically to qualify for a lower withholding tax rate under the treaty. Although the treaty benefit is clearly one of the purposes of the transaction, that result is expressly contemplated by the treaty itself, which draws an intentional distinction between portfolio and substantial shareholdings. Accordingly, the benefit is granted. The conclusion is that the PPT is not intended to deny treaty relief where the transaction is either commercially driven or squarely within the contemplated purpose of the treaty provisions. 77. It is well settled that the object and purpose of a treaty must be ascertained in a holistic and purposive manner, having regard to the intention of the Contracting States. In the present case, a careful reading of Articles 8 and 12 of the India–Ireland DTAA shows that the treaty consciously departs from the OECD and UN Model Conventions in so far as it limits the source- country‟s taxing rights in respect of aircraft-leasing income. This represents a deliberate and considered policy choice of the two sovereign States. We therefore find merit in the assessee‟s submission that the very object and purpose of the treaty is to exclude aircraft-leasing income from source-based taxation. Printed from counselvise.com ITA No.1198/Mum/2025 and others 62 78. The Hon‟ble Supreme Court in Union of India v. Azadi Bachao Andolan has unequivocally recognised that States are entitled, for legitimate policy reasons, to contractually restrict their own taxing rights in order to promote trade, attract investment, and foster economic cooperation. Applying that principle to the facts at hand, it becomes clear that the Principal Purpose Test is not intended to negate treaty benefits that are claimed in furtherance of the very purpose for which the treaty was concluded. Articles 8 and 12 of the India–Ireland DTAA are specifically designed to remove aircraft-leasing income from the ambit of source-country taxation. A taxpayer claiming such treaty relief is not seeking to subvert the treaty; on the contrary, it is availing a benefit that the treaty itself was designed to confer. 79. In light of the foregoing analysis, we hold that relief from source-country taxation of aircraft-leasing activity constitutes a stated and substantive object of the India–Ireland DTAA. Accordingly, even de hors our threshold finding regarding the non-applicability of the Principal Purpose Test on account of the absence of a Section 90(1) notification, the assessee would, in any event, be entitled to treaty protection. The relief claimed aligns squarely with the treaty‟s object and purpose. We accordingly so hold. 80. In consequence, Grounds of Appeal Nos. 4 to 6.8 stand allowed. Printed from counselvise.com ITA No.1198/Mum/2025 and others 63 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 of the Lease Agreement bearing MSN 8768 Remarks Page No. of the Paperbook 2.1 ―2. Agreement to dry operating lease 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. 252 1.1 ―Owner‖ means Lessor; or any other person that becomes the legal owner of 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. 243 1.1 ―Scheduled Delivery Date means the day in the Scheduled Delivery Month 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. 247 7 (a), (b) “7. Quiet enjoyment and Lessor Covenants (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 263 Printed from counselvise.com ITA No.1198/Mum/2025 and others 64 Clause/Section of the Lease Agreement bearing MSN 8768 Remarks Page No. of the Paperbook 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 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. 268 1.1 10.2 ― Nameplate means a fireproof identification plate of a reasonable size, 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 transfers or assigns its interest in the Aircraft or finances or refinances the Aircraft, then the Lessee will promptly (and in any case within thirty (30) days, 242 269 Printed from counselvise.com ITA No.1198/Mum/2025 and others 65 Clause/Section of the Lease Agreement bearing MSN 8768 Remarks Page No. of the Paperbook 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 (a) The Lessor's representatives (who may also be representatives of the 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 283- 284 Printed from counselvise.com ITA No.1198/Mum/2025 and others 66 Clause/Section of the Lease Agreement bearing MSN 8768 Remarks Page No. of the Paperbook 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 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. 278 13.1, 13.4 ―13.3 Insurance covenants (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; 287- 289 Printed from counselvise.com ITA No.1198/Mum/2025 and others 67 Clause/Section of the Lease Agreement bearing MSN 8768 Remarks Page No. of the Paperbook (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 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. 293 21.1 “21.1 Lessor's rights If an Event of Default occurs the following terms of this Clause 21.1 (Lessor's 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 309- 310 Printed from counselvise.com ITA No.1198/Mum/2025 and others 68 Clause/Section of the Lease Agreement bearing MSN 8768 Remarks Page No. of the Paperbook 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 ―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 313 82. Turning now to the character of the lease, learned Senior Counsel submits that the agreement, on its plain terms and commercial tenor, is an operating lease, not a finance lease. He particularly emphasises two hallmarks absent from the present documentation; first, there is no option to purchase vested in the lessee at the end of the term; second, there is no schedule for acquisition at a residual value in favour of the lessee. In ordinary commercial and legal understanding, these are the distinctive features that typically mark out a finance lease. Their absence, Printed from counselvise.com ITA No.1198/Mum/2025 and others 69 read with the other control-and-title covenants, points decisively to an operating lease. 83. Assailing the approach of the ld. DRP, submitted that the reliance on (i) Irish depreciation rules, (ii) the right to sub-lease conferred (subject to lessor‟s consent), and (iii) the fact that the lessee bears operational risks during the term to then conclude that the instrument is a finance lease is wholly unwarranted. Depreciation rules of a foreign sovereign are accounting/tax norms internal to that sovereign and have no bearing on the juristic allocation of title and risks under the parties‟ contract as applied in India. Likewise, a sub-lease right controlled by the owner‟s consent and restrictions cannot, by itself, transmogrify an operating lease into a finance lease; and the apportionment of operational risks to an operator is entirely orthodox in a dry operating lease and says nothing about ownership risks, which remain with the lessor. 84. With reference to DGCA Circular dated 29.07.1993, learned Senior Counsel further points out that India‟s aviation regulator prescribes the economic life of an aircraft at approximately 20 years or 60,000 pressurisation/landing cycles. Against this statutory-regulatory backdrop, the ld. DRP‟s calculation of an “economic life” of 8 years or 60,000 flying hours is not borne out by the record and, with respect, is perverse on two counts: it (a) substitutes flying hours for the DGCA‟s cycle-based measure, and (b) compresses 20 years into 8 years without any technical basis. The objection of Mr. Jolly against the ld. DRP‟s 8-year Printed from counselvise.com ITA No.1198/Mum/2025 and others 70 threshold is, well accepted for the reason that the invocation of Irish depreciation rules to reason that an aircraft can be depreciated to nil over 6–8 years and, ergo, any lease exceeding 8 years must be a finance lease (with the Indian lessee as “owner”) is flawed at inception. Depreciation norms may influence book value in a given jurisdiction; they do not determine economic life (which, in India, is guided by DGCA), still less do they transfer title or recast the legal nature of a bargain. Indeed, depreciation is an incident of ownership; it presupposes, rather than proves, that the relevant person is the owner. To deploy a foreign depreciation schedule to prove ownership is to reason in a circle. He submitted that, the ld. DRP‟s view that the absence of a purchase option is irrelevant cannot be accepted. RBI Circular No. 24/2002 (dealing with aircraft leases) draws a clear administrative distinction between a finance lease (akin to ECB), one where the lessee has a right to purchase at the end of the term and an operating lease, which contains no such end-of- term acquisition mechanism. He submitted that it is also an admitted factual position that since 2005, when IndiGo commenced operations, hundreds of similarly worded leases have been executed and no regulator, including the RBI, has required finance-lease approvals or otherwise characterised such dry operating leases as finance leases. The consistent regulatory treatment across years reinforces the assessee‟s case. 85. He further submitted that the statutory definitions also align with this position. Section 2(ma) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Printed from counselvise.com ITA No.1198/Mum/2025 and others 71 Interest Act, 2002 and Section 2(ha) of the Recovery of Debts and Bankruptcy Act, 1993 define a finance lease as one in which the lessee becomes the owner at the expiry of the term or upon payment of an agreed residual amount. The Rajasthan High Court in CIT v. Shri Rajasthan Syntex Ltd. (2009) 313 ITR 231 (Raj.) applied a similar lens, emphasising the transfer-of- ownership feature as central to finance leases. None of these indicia is present here. Ld. Counsel also placed reliance on the IndiGo proceedings (the very lessee here) across multiple years. In particular, the order dated 18 November 2016 in ITA Nos. 749 & 750/Del/2016 for AYs 2008-09 & 2009-10 affirmed by the Hon‟ble Delhi High Court with SLP dismissed by the Hon‟ble Supreme Court addressed materially similar dry operating aircraft lease covenants. Further, the Special Bench order for AY 2012-13 in InterGlobe Aviation Ltd. v. ACIT [2022] 95 ITR(T) 586 (Del)(SB) engages the same subject-matter and supports the assessee‟s thesis that such arrangements are to be treated as operating leases. He next cited the decision of the Commercial Court, Queen‟s Bench Division, Celestial Aviation Trading 71 Ltd. v. Paramount Airways Pvt. Ltd. [2010] EWHC 185 (Comm), where a lease in pari materia was held to be an operating lease and not a finance lease, the English court giving effect to title-retention, redelivery and repossession covenants closely comparable to those before us. 86. In response, the learned CIT-DR simply supported the order of the ld. DRP, pressing the same reasons without meeting the Printed from counselvise.com ITA No.1198/Mum/2025 and others 72 contract-text and regulatory-framework points urged for the assessee. 87. After hearing both the parties and on perusal of the material referred to before us and the contract which has been referred to before us on examining the contract, we find that Clause 2.1, read with Clause 1.1, clearly states that the lessee is not the owner and that the lease is a dry operating lease. Clause 21.1 gives the lessor the right to repossess on default, and Clause 16.1 requires the aircraft to be returned at the end of the lease term. Clauses 1.1 and 10.2 require the lessee to display the owner‟s name and not represent itself as owner. All these clauses confirm that ownership stays with the assessee throughout. 88. It is undisputed that the assessee and IndiGo are unrelated parties dealing at arm‟s length. Unless there is clear evidence of a sham, courts must go by the contract as agreed. The Hon‟ble Supreme Court in Vodafone International Holdings BV v. Union of India has held that form and structure of a genuine transaction should be respected. Applying this principle: • Operational risks with the lessee do not amount to ownership risks. Examples during COVID-19 and the Russia–Ukraine conflict show the lessor retaining ownership risks. • Clause 21.1 allows termination on default, consistent with an operating lease. • The right to sub-lease only with the lessor‟s consent shows that ownership is not transferred. Printed from counselvise.com ITA No.1198/Mum/2025 and others 73 • Irish depreciation rules are irrelevant to the legal nature of the lease in India. • The Special Bench decision in InterGlobe Aviation was not a casual observation but a clear finding. 89. Taking all these factors together the contract terms, DGCA‟s guidelines, RBI‟s distinction between operating and finance leases, statutory definitions, earlier judicial decisions including those involving IndiGo, and the English court‟s ruling we conclude that the lease in question is an operating lease. The reasons given by the ld. DRP are neither factually nor legally sustainable. 90. The ld.DRP, however, has proceeded to classify the lease as a finance lease based on the following points: (a) The lessee bears all risks during the term of the lease. (b) The lease is non-cancellable. (c) The lessee has the right to sub-lease. (d) Under Irish depreciation rules, the cost of an aircraft can be depreciated in 6–8 years, and therefore any lease exceeding 8 years should be treated as a finance lease. (e) The ld.DRP also concluded that the economic life of an aircraft is 6–8 years or 60,000 flying hours, and any lease beyond that should qualify as a finance lease. Printed from counselvise.com ITA No.1198/Mum/2025 and others 74 (f) The ld.DRP disregarded the Special Bench ruling in InterGlobe Aviation Ltd. v. ACIT on the ground that its observations on this issue were casual and not part of the core decision. 91. We find each of these points untenable:-  First, there is a fundamental difference between operational risks and ownership risks. The lessee, as operator, naturally bears operational risks, such as fuel costs, crew, maintenance, and daily usage. Ownership risks such as residual value fluctuation, impairment, or inability to repossess in geopolitical crises remain with the lessor. The COVID-19 pandemic and the Russia–Ukraine conflict are telling examples: operators suffered loss of business (operational risk), while owners/lessors also suffered where repossession was impossible (ownership risk). The ld.DRP‟s reasoning blurs this distinction.  Second, the lease is not “non-cancellable” in the absolute sense. Clause 21.1 clearly allows termination in the event of default, which is a normal feature of operating leases.  Third, the mere fact that the lessee can sub-lease is not determinative of ownership. In this agreement, sub-letting is only possible with the lessor‟s prior written consent. This safeguard itself indicates that ownership remains with the lessor.  Fourth, reliance on Irish depreciation rules is wholly misplaced. These rules merely allow an Irish taxpayer to depreciate an aircraft‟s cost over 8 years on a straight-line basis for Irish tax purposes. This does not mean that the Printed from counselvise.com ITA No.1198/Mum/2025 and others 75 aircraft‟s economic life ends in 8 years or that ownership changes. Depreciation rules are applicable only to the owner; they cannot be used to determine whether a lease is a finance lease in the Indian tax context.  Fifth, the ld. DRP‟s assumption that the economic life of an aircraft is 6–8 years or 60,000 flying hours is inconsistent with the DGCA Circular dated 29.07.1993, which prescribes 20 years or 60,000 pressurisation/landing cycles as the benchmark. Flying hours and pressurisation cycles are not interchangeable measures, and the ld. DRP‟s approach has no technical basis.  Last, the ld. DRP‟s dismissal of the Special Bench ruling in InterGlobe Aviation Ltd. as “casual observations” is unfounded. The Special Bench made a considered finding on this very point after analysing identical agreements, and its conclusion that such arrangements constitute operating leases was part of its adjudication. 92. We therefore hold that the ld. DRP‟s classification of the lease as a finance lease is contrary to the contractual terms, regulatory framework, statutory definitions, and judicial precedents. The lease in question meets all the essential attributes of an operating lease, and nothing in the facts or the law justifies recharacterising it otherwise. 93. Insofar as the proceedings in the case of IndiGo are concerned, useful reference can be made to the following orders passed by Hon‟ble Courts and Tribunals as well the tax department itself. Printed from counselvise.com ITA No.1198/Mum/2025 and others 76 94. A coordinate bench of the Delhi Tribunal in its order dated 18/11/2016 in ITA Nos.749 & 750/Del/2016, passed in the case of IndiGo for the AYs 2008-09 and 2009-10 held that lessors purchased the aircraft and leased to IndiGo on operating lease basis. The relevant extract of the order is reproduced hereunder: ―4.3 We have heard the rival submissions and perused the relevant material on record. The facts emanating from the orders of authorities are as under: (i) In the financial year 2005-06, the assessee entered into an agreement with Airbus SAS, France (‗Airbus‘) for purchase of hundred aircrafts with the option to choose the engines fitted in such aircrafts. (ii) The assessee selected V-2500 engines manufactured by IAE International Aero Engines AG, Switzerland (‗IAE‘). On delivery of aircrafts fitted with the engines supplied by the IAE. Similarly, suppliers of other components of aircrafts also extended credits to the assessee. (iii) The assessee assigned its interest in purchase agreement to other parties i.e., Genesis Acquisition Ltd., Lare Leasing Ltd. etc. and the assessee acquired the aircrafts on operating lease basis. In view of the arrangement, the aircrafts were purchased by the leasing companies, who were residents of Ireland and leased to assessee on operating lease basis…..” XXX ― 6.5 We find that the Tribunal has also considered the fact of the assessment year under consideration while arriving at the above decision. In our opinion issue has already been considered by the Tribunal in decision (supra), thus respectfully following the above decision we hold that the assessee was not requited to deduct TDS on supplementary lease rental being exempt under section 10(15A) of the Act. Accordingly, the disallowance made under section 40(a)(i) of the Act is deleted and grounds of the appeal from 3 to 3.1 and 4 are allowed.‖ Printed from counselvise.com ITA No.1198/Mum/2025 and others 77 95. Further, the Hon‟ble Delhi High Court vide order dated 31/10/2017 passed in ITA Nos. 914 and 916 of 2017dismissed the appeal filed by the Revenue against the above-mentioned order of the Hon‟ble Tribunal and the SLP filed by the Revenue challenging the order of the Hon‟ble High Court was dismissed by the Hon'ble Supreme Court vide order dated 10/09/2018 passed in SLP (C) Diary No. 29936/2018. 96. Even in the proceedings of IndiGo for AY 2012-13, the AO himself noted in order dated 25/12/2015 that InterGlobe is not the owner of the aircraft. The relevant portion of the order is reproduced hereunder for ready reference: ―In the instant case, the assessee has not purchased the aircraft but has hired it on lease from several concerns like Aether, Celestial Aviation Trading 9 Ltd. etc. All these parties are lessors and are based in Ireland. The assessee company has been paying lease rent to these parties as per the agreement executed between the company (lessee) and the parties (lessors). The depreciation on these aircrafts where, the engines supplied by IAE are fitted, is claimed by the lessors. The assessee has not claimed depreciation on these aircrafts where the engines are fitted because it is not the owner of the aircrafts…..‖ 97. Further, the CIT (A) in case of InterGlobe for AY 2012-13 in its order dated 22/03/2017 noted that the aircraft were returned to the lessors and that the lease is in the nature of operating lease. The relevant para is extracted hereunder: ―10.1…..Since, the delivery schedule of aircrafts is spread over a very long period, the appellant normally replaces its old fleet with new fleet, after the expiry of lease period which is usually six years. The old aircrafts are then returned to the lessors, Since the supply of leased aircraft is low and aircraft Printed from counselvise.com ITA No.1198/Mum/2025 and others 78 manufacturers are chocked with such bulk orders, the lessor can easily lease it out to others. In the process, the appellant saves on maintenance cost also which rises with the age of the aircraft. The usual warranty period is approximately five years and the period of operating lease in case of appellant is six years. As a result, the cost of maintenance by the appellant is also low. Since, the lease rentals factor in itself, the sale price of aircraft to the lessor- higher the price, higher would be the lease rentals i.e. there is direct nexus between the two. Therefore, in the books of accounts, the appellant amortizes various discounts received by it over the operating lease period and sets it off against the payments of lease rentals else accounts would not reflect the true profits. 10.2 In the above model of purchase, sale, lease back and return the appellant is able to get heavy discounts on list prices of aircraft and engines besides its capital is not locked up due to sale of aircraft to lessors. If, the appellant initially purchases the aircraft and then sells it to the lessors, the profit made in the said process is assessable as Capital Gains. In case of assignment of purchase order in favour of lessor, the consideration for assignment less cost of right to purchase is assessable as Capital Gains. The cost of the appellant is the amount paid by it net of discounts availed and the discount availed/credits received from engine manufacturers is a part of it. There is no contradiction in this finding and the decision of Hon'ble ITAT treating the discounts/credits from engine manufactures as capital receipt. Capital receipt is to be netted against capital expenditure to arrive at the cost of acquisition of asset (right to purchase) for the purpose of determination of Capital Gains. Since the appellant claims that the purchase order was assigned to the lessor at the purchase price mentioned in the agreement, the credits received become taxable as Capital Gains as cost of acquisition of purchase right gets reduced by the amount of credits. 98. Although in the assessment proceedings for AY 2012-13, the AO accepted that the leasing arrangement is in the nature of operating lease, an argument was made by the Revenue before Printed from counselvise.com ITA No.1198/Mum/2025 and others 79 the Special Bench of the Tribunal that the lease arrangements are actually in the nature of finance lease arrangements. 99. However, the Special Bench has rejected that specific submission of the Revenue on the ground that the agreements do not answer the description of finance lease arrangements. The relevant portion of the decision in extracted hereunder for reference: “1.1 Facts of the case, in brief, are that the assessee is a Company engaged in the business of operating low cost Airlines in India under the Name and Brand \"IndiGo\". It filed its return of income on 21.09.2012 declaring loss of Rs.170.30 crores. During the course of assessment proceedings, it was observed that M/s. Inter Globe Aviation Ltd., (Assessee) had entered into a Purchase Agreement with AIRBUS SAS, France, for supply of 100 Aircrafts. The assessee had selected V-2 500 engines manufactured by IAE international aero engines AG,Switzerland (also referred as IAE hereafter) as supplier of engines which are to be fitted in the aircraft. As a consideration for selection of the IAE engines to be fitted in the aircraft to be purchased by the assessee-company, certain credits were allowable to the assessee-company from IAE on the delivery of such aircraft. As per the assessee the aircraft had been acquired on operating lease basis consequent to assigning the purchase contract between the assessee- company and respective lessor in favour of leasing/finance company. It is further observed that the assessee-company has received credits from IAE and others in respect of supplier furnished equipment on the actual delivery of the aircraft during the year amounting to Rs.7,59,39,25,444/- which have been spread over the period of lease and the proportionate amount aggregating to Rs.2,68,91,48,934/- relatable to this year has been reduced from the expense charge for aircraft lease rentals and also shown under while the balance of Rs.11,80,37,62,420/- has been depicted as deferred incentives under non-current liabilities and current liabilities. As per assessee, since the credit given by IAE are linked to the acquisition of the aircraft by the company, the amount being capital receipt, is not liable to tax. Printed from counselvise.com ITA No.1198/Mum/2025 and others 80 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 81 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 82 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 83 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:- Printed from counselvise.com ITA No.1198/Mum/2025 and others 84 \"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. 4. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 1 or Article 14, as the case may be, shall apply. 5. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the royalties or fees for Printed from counselvise.com ITA No.1198/Mum/2025 and others 85 technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the State in which the permanent establishment or fixed base is situated. 6. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.‖ 42.2 In Para-41 above we have examined the nature of Supplementary Rent and it is held that payment of Supplementary Rent is nothing different than the character of basic rent. We find that Supplementary Rent is not a payment made for use of spares, facilities or any services. Supplementary Rent is, therefore, a payment made for use of Aircraft. As per provisions of Section 90 of the Income-tax Act, the provisions of a bilateral Tax Treaty will apply to the extent it is more beneficial to the tax payer. We find under Article 12(3)(a) of India-Ireland DTAA, the term \"Royalty\" is specifically defined to exclude from its scope payment of any kind for use of \"Aircraft\". We further find the tax treaty also incorporates a separate provision in Article-8 on profits from shipping and air transport. Article 8(1) reads as under: \"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.\" Printed from counselvise.com ITA No.1198/Mum/2025 and others 86 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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 87 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. 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.\" Printed from counselvise.com ITA No.1198/Mum/2025 and others 88 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 89 India-Ireland DTAA. The findings of the Hon‟ble Tribunal in the said case are reproduced hereunder for the sake of ready reference: ―12. We have heard the submissions made by both sides in extenso, perused the orders of authorities below and have considered the documents and decisions referred to during the course of submissions by the rival sides. The assessee in appeal has primarily assailed the addition of Rs.74,37,77,694/- on account of interest income taxable at the rate of 10% holding lease rentals received by the assessee out of Financial Lease. Undisputedly, the assessee is tax resident of Ireland and is engaged in the business of Leasing of Aircrafts. During the period relevant to assessment year under appeal, the assessee leased out three aircrafts bearing MSN 10689, 9382 and 9561 to Indigo. The case of the assessee is that the lease entered into between the assessee and Indigo is operating lease. Hence, the lease rentals received by the assessee from said lessee are not exigible to tax in India. The AO has re-characterized the nature of lease agreement and has held the lease to be finance lease and the lease rentals received by the assessee in the nature of interest taxable at the rate of 10% in accordance with Article 11 of India-Ireland DTAA. 13. To begin with, it would be relevant to refer to the Lease Agreement entered into between the assessee, the lessor and Indigo, the lessee. The assessee has placed on record Aircraft Specific Lease Agreement (in short 'ASLA) dated 15.04.2021 at page 162 to 209 of the paper book in respect of aircraft bearing MSN 10689. The assessee has also placed on record a copy of Aircrafts Lease Common Terms Agreement (CTA) dated 20.06.2006 entered into between GE Commercial Aviation Services Ltd. and Indigo. To understand the issue, both agreements have to be read together. Aircraft Specific Lease Agreement as the 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 90 prior to the original scheduled expiry date. Clause 3 of ASLA specifically states that the owner of the aircraft shall be the ‗Lessor‘. In the entire ASLA there is no covenant which refers to the condition that after the end of duration of lease term, the ownership in aircraft shall be transferred to the lessee or the lessee at any point of time can exercise option to purchase the aircraft. Clause 10 of ASLA requires the Lessee to pay deposit in cash or in the form of Letter of Credit prior to delivery of aircraft. The Lessor shall return such deposit to the Lessee upon occurrence of the events specified in ASLA which includes, ‗on completion of the Return Occasion. ―Return Occasion‖ is defined in Schedule-I of CTA as: ―Return Occasion means the date on which the Aircraft is redelivered to Lessor in accordance with Clause 12‖. Clause 12 of CTA reads as under: ―12. RETURN OF AIRCRAFT 12.1 RETURN On the Expiry Date or redelivery of the Aircraft pursuant to Clause 13.2 or termination of the leasing of the Aircraft under the Lease, Lessee will, unless an Event of Loss has occurred, redeliver the Aircraft and the Aircraft Documents and Records at Lessee's expense to Lessor at the Redelivery Location, in accordance with the procedures and in compliance with the conditions set out in Schedule 6, free and clear of all Security Interests (other than Lessor Liens) and in a condition suitable for immediate operation under FAR Part 121 or as otherwise agreed by Lessor and Lessee and, in any case, qualifying for and having a valid and fully effective certificate of airworthiness issued by the Air Authority. If requested by Lessor, Lessee shall thereupon cause the Aircraft to be deregistered by the Air Authority Lessor shall reasonably cooperate (and shall procure that the Owner reasonably cooperates) with the Lessee in order to effect such deregistration.‖ The above clause makes it unambiguously clear that at the end of Lease period, Lessee is under obligation to return aircraft to the lessor. And on the return of aircraft the lessor shall refund the deposit. Printed from counselvise.com ITA No.1198/Mum/2025 and others 91 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 92 \"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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 93 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 94 (ii) any breach by Lessee of its obligations under the Lease. ‗Indemnity‘ has been defined in Schedule-I as under:- Indemnitee means each of Lessor, Owner, GECC, GECAS, the Financing Parties and each of their respective successors and assigns, shareholders, subsidiaries, affiliates, partners, contractors, directors, officers, representative, servants, agents and employees. 13.4 Sale or Re-lease of Aircraft If an Event of Default occurs and is continuing, Lessor may sell or re-lease or otherwisde deals with the Aircraft at such time and in such manner and on such terms as Lessor considers appropriate in its absolute discretion, free and clear of any interest of Lessee, as if the Lease had never been entered into. Thus, in the event of default the Lessee has to return aircraft to the Lessor and thereafter, the Lessor can sale or re-lease the aircraft. 14. From perusal of above terms and conditions it can be deduced that the ownership in the aircraft vest with the assessee/lessor at all the time during the period of lease. From conjoint reading of the terms and conditions of CTA and ASLA it emerges that there is no change in the ownership of the aircraft during the currency of lease agreement and at the end of agreement, the lessor continues to be the owner and the Lessee shall pay lease rentals to the assessee/lessor during lease period. 15. Now to understand the difference between financial lease and operating lease, we need to refer to the definition of ‗Financial Lease‘ under other Acts as the expression financial lease and operating lease are not defined under the Income Tax Act. Section 2(ma) of the SARFAESI Act, 2002 defines ‗financial lease‘ as under:- ―financial lease‖ means a lease under any lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where the lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be‖ Printed from counselvise.com ITA No.1198/Mum/2025 and others 95 The Recovery of Debts & Bankruptcy Act, 1993 defines financial lease as under:- ――financial lease\" means a lease under a lease agreement of tangible asset, other than negotiable instrument or negotiable document, for transfer of lessor's right therein to the lessee for a certain time in consideration of payment of agreed amount periodically and where lessee becomes the owner of the such assets at the expiry of the term of lease or on payment of the agreed residual amount, as the case may be‖ From the aforesaid definitions a subtle trait of financial lease can be identified i.e. \"At the end of the lease period, lessee becomes the owner of the leased asset.\" 16. In the instant case although the AO and the DRP have characterized the nature of lease as financial lease but both the authorities have ignored the fact that at no point of time, ownership in the asset i.e. aircraft is transferred to the lessee, which is the hallmark of financial lease. 17. The assessee has drawn our attention to RBI Circular No. 24 dated 01.03.2002 at page 234 of the paper book which deals with Import of Aircraft/Aircraft engine/Helicopter on lease basis. A perusal of RBI Circular No. 24 dated 01.02.2022 would show that there are separate conditions to be satisfied for acquiring aircraft on operating lease basis and under financial lease. For the sake of ready reference relevant excerpts from the said Circular are reproduced herein below:- ―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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 96 aircraft/aircraft engine/helicopter on lease basis, based on the approval issued by the Director General of Civil Aviation (DGCA), Government of India. 2. It has been decided that authorised dealers may allow remittance of payment of lease rentals, opening of letter of credit towards security deposit etc. in respect of import of aircraft/aircraft engine/helicopter on operating lease basis, after verifying documents to show that necessary approval from the appropriate authorities, like Ministry of Civil Aviation/Director General of Civil aviation, Government of India has been obtained. In this connection attention is also invited to paragraph 8 of Annexure I to A.D.(M.A. Series) Circular No.11 dated May 16, 2000. 3. It is clarified that financial lease transaction i.e. the lease transaction containing option to purchase the asset at the end of the lease period will continue to require prior approval from the Reserve Bank of India.‖ The contention of the assessee is that the lessee is paying lease rentals in accordance with aforesaid RBI Circular and for the financial lease transaction where the ownership in the asset is transferred to the lessee, the lessee was required to take prior approval from the RBI, no such approval has been taken by the lessor in the present case. This fact remains un-rebutted. No material is available on record to suggest that the above RBI Circular has been violated by the lessor or the lessee. 18. Further, the ld. Counsel for the assessee has drawn our attention to the observations of the DRP in para 17.3 (ii) of the Directions, where the DRP has determined economic life of the Aircraft as 8 years. Referring to DGCA Circular issued in 1993 the DRP concluded that since lease of the aircraft covers substantial commercial life, therefore, the lease should be termed as financial lease. We find above observations of the DRP contrary to the facts on record and the DGCA Circular. The DGCA vide its communiqué dated 29.07.1996 (at pages 231 to 233 of the paper book) has prescribed economic life of an aircraft as 20 years or 60,000 landings/pressurization cycles. In the instant case the lease agreement has been entered between the parties for a period of Printed from counselvise.com ITA No.1198/Mum/2025 and others 97 120 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 without any basis, hence, the conclusion to re- characterize nature of lease agreement is erroneous. 19. The ld. DR has vehemently argued that the lessee (Indigo) had originally entered into an agreement for purchase of aircraft with Airbus and it was subsequently that the present assessee stepped in at the time of delivery of aircraft and financed Indigo for acquiring the aircraft from Airbus. The ld. Counsel for the assessee to counter argument of the Revenue has brought to our notice the decision of Special Bench in the case Inter Globe Aviation Ltd. (Indigo) vs. ACIT (supra). Similar arguments were raised by the Revenue in said case. The questions for consideration before the Special Bench was: ―(1) Whether FIA (Fleet Introductory Assistance) credit received by the Assessee from IAE and other equipment manufacturers is a Capital or revenue receipt arising out of the transaction? (2) Whether credits so received are taxable under section 28(i) or 28(iv) of the I.T. Act, 1961 or as a \"Commission\" income or \"Income from capital gains\"? (3) Whether the Ld. CIT(A) is right in making disallowance of Rs.268,91,48,934/- out of lease rental payments under section 37(1) of the I.T. Act, 1961? (4) Whether payment of Supplementary Lease Rent of Rs.328,09,64,412 l-is an allowable business expenditure and TDS is not deductible thereon?‖ 20. While answering the aforesaid questions the Special Bench took note of the agreement between Indigo and Howth Aircraft Leasing Ltd., assignee and observed that Indigo is not the owner of Aircraft and the Revenue failed to demonstrate that the lease is in the nature of operating lease. The Special Bench further observed that the lower authorities have admitted the fact that Printed from counselvise.com ITA No.1198/Mum/2025 and others 98 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] Printed from counselvise.com ITA No.1198/Mum/2025 and others 99 21. Further, the Special Bench on plea taken by the Revenue that lease rents are taxable in India as interest in accordance with Article 11 of India-Ireland DTAA, held as under:- 44.1 We are not convinced by the submissions made by the ld. Special Counsel for the Revenue. It is an undisputed fact that the basic lease Rent of Rs.673.42 crores paid under the lease agreement is an allowable expenditure and its nature is that of \"Rent.\" In our opinion, the nature of supplementary lease rent cannot be treated otherwise as both these expenses are payments made under the same agreement for use of aircraft. The Id. Special Counsel for the Revenue has filed copies of 3 lease agreements before us in his paper book. However, from none of these agreements he has been able to demonstrate that the nature of lease is financial lease and not operating lease. We have already held above in the preceding paragraph that the nature of lease in the year under consideration is operating lease. Moreover, both the lower authorities have also accepted this fact. We are, therefore, not convinced by the arguments of the Id. Special Counsel for the Revenue that the present leases are financial merely because lease rent is determinable using LIBOR rate or that delivery of aircraft is taken by the assessee from Air Bus. We find that in the present case the aircrafts were leased for a period of six years. Therefore, the lease rent paid cannot be characterized as \"interest.\" We, therefore, find no merit in the above submissions raised by the Revenue.‖ [Emphasized by us] Once in the case of Indigo, the Revenue accepts that ownership in the Aircraft is with the lessor, the Revenue on similar set of agreements cannot take a reverse position in the case of lessee and argue that lessee is the owner. The Revenue cannot be allowed to approbate and reprobate on the same set of documents and re-characterize the nature of lease agreement to be a financial lease. 22. Before the Special Bench in the case of Indigo, the Revenue had vehemently argued that the lease rentals paid by Indigo to the lessee are in the nature of interest, hence, the provisions of Article 11 of India-Ireland DTAA would operate. The Special Bench negating the arguments of the Revenue held that the lease rentals paid by Indigo are in the nature of rent and not interest as the Printed from counselvise.com ITA No.1198/Mum/2025 and others 100 Revenue has failed to demonstrate that the nature of lease is finance lease and not operating lease. Hence, the payments made by lessee are not in the nature of interest. Thus, in light of findings of the Special Bench, we hold that the provisions of Article 11 of India-Ireland DTAA would not operate in the present case. 23. Thus, in light of our above findings and the decision of Special Bench, the assessee succeeds on ground no. 3 to 5 of appeal‖ 101. The agreements before us and the ones before the Delhi Tribunal in the case of Celestial (supra) as well as the Special Bench of the Tribunal in the case of IndiGo for the AY 2012-13 and the division bench in the case of IndiGo for AYs 2008-09 and 2009-10 are substantially similar. We are not reproducing the clause again since we have already extracted the relevant clauses above. Suffice to say that there are no material differences in the agreements before the Delhi Tribunal in the case of Celestial (supra) as well as the Special Bench of the Tribunal in the case of IndiGo for the AY 2012-13 and the division bench in the case of IndiGo for AYs 2008-09 and 2009-10. Therefore, on that ground alone, the assessee deserves to succeed. 102. We now proceed to deal with finding of the DRP that the option to purchase the asset of the end of the term is not relevant for deciding the lease. We are afraid such a finding is palpably wrong. The Rajasthan High Court in the case of CIT vs. Shri Rajasthan Syntex Ltd (supra) in this regard held as under: ―25. We need not multiply all the cases, as the best, and nearest case we find is, that of Hon'ble Supreme Court, in the Shaan Finance (P.) Ltd.'s case (supra), whereof it has been held by the Hon'ble Supreme Court as under:— Printed from counselvise.com ITA No.1198/Mum/2025 and others 101 \"17. Neither of these cases deals with an agreement of hire of machinery in contradistinction to an agreement of hire-purchase. When the machinery is given on hire by the owner to the hirer on payment of hire charges, the income derived by the owner is business income. The owner is also entitled to depreciation on the machinery so hired out. The hirer, on the other hand, who pays hire charges, is entitled to claim these as revenue expenditure. The hirer has not acquired any new asset. A transaction of hire is, therefore, of bailment of the machinery. There is no extinguishment of any right of the owner in the machinery. There is merely a license given to the hirer to use, for a temporary period, the machinery so hired. In the case of Damodar Valley Corpn. v. State of Bihar AIR 1961 SC 440, this Court examined the contract under which the machinery and equipment was supplied by the corporation to the contractors. The question was whether it was a mere contract of hiring or a sale or a hire-purchase. The court said :— 'It is well-settled that a mere contract of hiring, without more, is a species of the contract of hiring, without more, is a species of the contract of bailment, which does not create a title in the bailee, but the law of hire-purchase has undergone considerable development during the last half a century or more and has introduced a number of variations, thus leading to categories, and it becomes a question of some nicety as to which category a particular contract between the parties comes under'. We need not dwell on the niceties of a hire-purchase contract between the parties of a hire- purchase contract since we are concerned only with contracts of hire simpliciter.\" (p. 316) 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 102 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. 104. In view of the reasons stated above, we are of the view that the ld.DRP grossly erred in holding that the leases in question are not operating lease. Therefore, for the reasons stated above, we set aside the findings of the ld.DRP in this regard and hold that the leases in question are dry operating lease. Hence, income therefrom cannot be characterized as interest income. Accordingly, Ground of Appeal Nos.7 to 8.4 are allowed. 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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 103 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 104 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 105 drilling rig which, although anchored while in operation, was moved to a new site every few months, has been held not to constitute a PE [Lower Tax Court of the Hague, 10-9-1990, noted in 1991 Tax Notes Intl 161]. Similarly, a remotely operated vessel which was used to inspect and repair submarine pipelines was held not to constitute a PE because a moving vessel is not a fixed place of business [CIT v. Subsea Offshore Ltd., (1998) 66 ITD 296: 17 Tax Notes Intl 1795 (ITAT)]. 33. The principal test, in order to ascertain as to whether an establishment has a fixed place of business or not, is that such physically located premises have to be “at the disposal” of the enterprise. For this purpose, it is not necessary that the premises are owned or even rented by the enterprise. It will be sufficient if the premises are put at the disposal of the enterprise. However, merely giving access to such a place to the enterprise for the purposes of the project would not suffice. The place would be treated as ―at the disposal‖ of the enterprise when the enterprise has right to use the said place and has control thereupon. Ergo, in the absence of satisfaction of the disposal test, PE of the foreign enterprise cannot be deemed to exist under Article 5(1) of the DTAA. 25. The ld. DRP, while holding that the assessee has a PE in India under Article 5(1) of the India-Ireland DTAA, which is the same as Article 5(1) of the India-UK DTAA, held as under: ―Ownership Test: As per Applicant itself, the legal ownership of the Aircraft, the Fixed Place Permanent Establishment, ultimately rest with the Applicant. The Aircraft operates in Indian territory all throughout the A.Y. 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 106 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).‖ 26. From reading of the aforesaid, it is noticed that the thrust of the case of the ld.DRP is that the aircraft is the place of business which is at the disposal of the Applicant in India for its lease business. This finding of the LD.DRP has been assailed by the assessee on the ground that both factually and legally the aircraft cannot and is not at the disposal of the assessee and that in any case the leasing business is carried from outside India. 27. Further, certain important clauses from ALA need to be noted:- a. Clause 21.2.1 of the ALA, provides that the lessee/IndiGo had the right to the quiet use, possession and enjoyment of the Aircraft and, provided that IndiGo was not in breach of the ALA, the Printed from counselvise.com ITA No.1198/Mum/2025 and others 107 assessee had a corresponding obligation to ensure the same without interfering with IndiGo‟s right to use the aircraft in its commercial wisdom. Therefore, the aircraft was under operational control of the lessee/IndiGo b. Similarly, clause 12.1 obligated IndiGo to maintain the aircraft and clause 12.3.2 required IndiGo to comply with all airworthiness directives in India. c. Clause 20.2 obligated IndiGo to maintain the requisite licences, certificates and permits for use of aircraft in India. d. Clauses 12.13.1 and 23.7.1 permitted the assessee a limited right to inspect the aircraft once a year, or before the return of the aircraft upon expiry of the lease period, or at any time while an event of default was subsisting, to ensure that the aircraft was functional and operational. This did not give operational control over the aircraft to the assessee. Therefore, contractually, the aircraft was under the control and disposal of the lessee/IndiGo. Even the LD.DRP accepts that the aircraft is under the operational control of the lessee/IndiGo at page 132 of its directions wherein it is held that “The aircraft, while operationally controlled by the lessee, forms the core of the Applicant's leasing business.” 28. Further, even as per the DGCA Rules and Manuals, the aircraft was required to be under the operational control of the lessee/IndiGo. This has never been doubted by the AO or Ld. DRP or that the DGCA, which is the regulator of aviation in India ever alleged that the assessee or IndiGo have violated these rules and regulations. The decision of coordinate bench in Carbijet (supra) Printed from counselvise.com ITA No.1198/Mum/2025 and others 108 is relevant in this regard since it takes judicial notice of the manner in which aviation sector is regulated and commercially run: “in the present case, all the flights were flown by the assessee under the banner of Air India. They are known as flights of Air India. The schedules are allotted to Air India by International Civil Aviation Authority. The routes are pre-determined. Tickets are issued by Air India. The passengers, mails and goods are transported at the sole risk and responsibility of Air India. The identity, commercial responsibility, civil liability, criminal liability and all other obligations arising out of and attached to carrying on the business of operation of aircrafts meant for transporting passengers, mails and goods are borne by Air India. The assessee was leasing out the aircrafts...‖ 29. Clauses 2.4 and 6.2 of the Aircraft Leasing Manual issued by DGCA unequivocally clarify that a dry lease is an arrangement where the aircraft is operated under the lessee‟s operator certificate and the operational control of the aircraft in the case of such a lease vests with the lessee. The Ld. DRP while acknowledging that the present constitutes a dry operating lease, nevertheless concludes that aircraft remained under the control of the lessor/assessee. Such an inference is manifestly erroneous. The LD.DRP has completely failed to appreciate that IndiGo assumed possession of the aircraft in Chile and, consequently, by the time the aircraft entered Indian Territory, it was already under exclusive control and disposal of the lessee that is Indigo and not that of the assessee. 30. We have given our thoughtful consideration to the entire gamut of rival submissions, perused the material placed before us, examined the lease agreements and related correspondence, and considered the applicable law, including the principles laid down Printed from counselvise.com ITA No.1198/Mum/2025 and others 109 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 110 • 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, Printed from counselvise.com ITA No.1198/Mum/2025 and others 111 managerial control, and supervisory authority exercised by the appellant were central to the hotel‟s core operations and could not be characterized as mere preparatory or auxiliary activities. VII. Profit Attribution Unaffected by Global Losses: The Court unequivocally held that taxability of profits attributable to a PE in India stands independent of the foreign enterprise‟s global profit or loss. Article 7 of the DTAA entitles the source State to tax income attributable to the PE, based on local economic presence and business activity, irrespective of consolidated group profitability. 31. The essence distilled from these authorities is that a fixed place PE under Article 5(1) requires three cumulative elements: (i) the existence of a “place of business”, (ii) that such place must be “fixed”, and (iii) that the enterprise must carry on its business wholly or partly through that place. The “disposal test” whether the foreign enterprise has the place at its disposal so as to be able to conduct its business from there is pivotal. Mere ownership of an asset or the exercise of protective rights as an incident of ownership does not ipso facto satisfy this requirement. The business of the foreign enterprise, as a matter of factual and functional analysis, must be conducted through the place in question; the mere fact that the asset generating income is situated in the source State is not determinative. 32. Applying these principles to the present case, the aircraft leased by the assessee to IndiGo were indeed present in India for extended periods. However, the crucial question is whether they constituted a “fixed place of business” at the disposal of the assessee through which its business was carried on. The Printed from counselvise.com ITA No.1198/Mum/2025 and others 112 assessee‟s business is that of dry leasing aircraft an activity executed entirely from Ireland, with negotiations, contract execution, and management undertaken outside India. Operational control over the aircraft, including deployment, routing, scheduling, and crewing, vested exclusively with IndiGo. The rights retained by the assessee such as periodic inspection, ensuring compliance with maintenance standards, and repossession in default are standard lessor protections safeguarding the value of the asset, not indicia of the asset being at the lessor‟s disposal for carrying on business in the source State. In the Hyatt case, the Supreme Court emphasised that a foreign enterprise‟s business must actually be conducted through the alleged PE; here, no such conduct of business in India is shown. The aircraft, though valuable business assets, did not serve as a “place” through which the assessee‟s leasing business was carried on in India. Thus, we reject the premise that continuous physical presence of high value asset in India ipso facto supplies “fixed place” limb. The Hon‟ble Supreme Court has emphasised that mere location or access is insufficient unless the enterprise can, as a matter of right and in practice, employ that place as an instrumentality of its business; the aircraft here could not be accessed or used by the assessee at will for its business every entry to airside/hangar areas required IndiGo‟s operational consent and regulatory clearances, and inspections were episodic, noticed, and ancillary to ownership protection. The assessee‟s business is the grant of lease rights executed offshore; the asset‟s Indian location under IndiGo‟s aegis does not convert the aircraft into a fixed establishment at the assessee‟s disposal. Printed from counselvise.com ITA No.1198/Mum/2025 and others 113 33. The Revenue‟s contention that the aircraft themselves constituted a “place of business” because they were the source of the assessee‟s income overlooks this distinction between the situs of the asset and the locus of business activity. In Formula One, the Supreme Court held that the race circuit in India was at the disposal of the foreign enterprise during the race event, enabling it to carry on its core business there. Here, by contrast, the aircraft were never placed at the disposal of the assessee in India to conduct its business they were placed at the disposal of the lessee, which operated them for its own commercial purposes. The absence of the assessee‟s personnel or operational infrastructure in India further reinforces the absence of a fixed place PE. In the light of the functional analysis mandated by E-Funds, the “disposal test” is not met. 34. Here in this case there is nothing on record to show that there were any stationed personnel of the assessee and otherwise also ld. DRP observation on PE was not predicated on Article 5(2) of service PE at all. 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 Printed from counselvise.com ITA No.1198/Mum/2025 and others 114 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. Printed from counselvise.com ITA No.1198/Mum/2025 and others 115 35. The learned standing counsel for the Department referring to paragraph (2) of article 5 which states that an installation or structure used for the exploration of natural resources is a permanent establishment, provided that the activities continue for more than 183 days, pleaded that the stand of the Department is justified. 36. We are not inclined to accept such a plea, as in the case on hand the dredging equipment was leased out on bare boat basis, viz., without master and crew. Therefore, it will not come under the permanent establishment and the entire control over the equipment was not with the foreign company but with the Indian company.‖ 37. Before us ld. Counsel had relied upon the decision of the Co-ordinate Bench in the case of Nederlandsche Overzee Baggermaatsehappiji (supra) and also judgment of ITAT Hyderabad Bench in the case of Dharti Dredging & Infrastructual Ltd.(supra) wherein the aforesaid judgment of the Hon‟ble Madras High Court has been considered. Accordingly, we hold that there is no PE of the assessee in India in terms of Article 5 of India-Ireland DTAA. 38. Having so concluded on the primary issue, we turn to the assessee‟s alternative plea that the lease rentals are, in any event, governed by Article 8(1) of the India–Ireland DTAA, and therefore taxable exclusively in Ireland. For the sake of ready reference, the difference in the language of Article 8 of India-Ireland DTAA as compared to Article 8 of OECD model convention is as under:- Printed from counselvise.com ITA No.1198/Mum/2025 and others 116 Article 8(1) of the India-Ireland DTAA reads as under: ―… Article 8 SHIPPING AND TRANSPORT 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. …‖ Article 8 of the OECD Model Convention reads as under: ―… Article 8 SHIPPING AND TRANSPORT 1.Profits derived by an enterprise of a Contracting State from the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State. …‖ 39. Article 8(1) of this treaty reads in material part: ―Profits derived by an enterprise of a Contracting State from the operation or rental of ships or aircraft in international traffic and the rental of containers and related equipment which is incidental to the operation of ships or aircraft in international traffic shall be taxable only in that Contracting State.‖ The text is notable in two respects: first, it disjunctively pairs “operation” and “rental” as independent income-yielding activities; second, it contains no requirement that the rental be merely ancillary to the lessor‟s own operation of ships or aircraft. This wording differs from the OECD Model‟s narrower formulation, and its deliberate adoption by the Contracting States reflects a conscious policy choice to extend the exclusive taxing right to rental income from ships and aircraft, as a distinct category, when such assets are employed in “international traffic.” 40. The assessee‟s case is that it is an Irish enterprise engaged in the business of dry leasing aircraft to IndiGo, that the leased aircraft formed part of IndiGo‟s integrated fleet and were deployed Printed from counselvise.com ITA No.1198/Mum/2025 and others 117 interchangeably on domestic and international routes, and that such integration necessarily brought them within the scope of “international traffic” as defined in Article 3(1)(g) of the treaty. That definition excludes only those cases where the ship or aircraft is “operated solely between places in the other Contracting State”; the moment the operation is not exclusively domestic, it satisfies the definition. The assessee points out that IndiGo is an international carrier with scheduled flights to multiple foreign destinations, and that the aircraft type and configurations leased were suitable and certified for such operations. It was emphasised that the treaty text does not stipulate any predominance or threshold of international usage; a single non-incidental use on an international sector suffices to displace the “solely” domestic exclusion. Counsel relied on decisions such as ABN Amro Bank NV and GE Capital Aviation Services, where similar leasing clauses were given their plain, broad meaning. 41. The Revenue, however, has urged that Article 8 was intended to protect the core transport operations of an airline and that the “rental” limb is to be read as ancillary to such operations. Since the assessee is a pure lessor with no airline operations of its own, and since, according to the Revenue, the leased aircraft were predominantly used on domestic Indian routes, it was contended that the income was not covered by Article 8 but instead constituted business profits taxable in India if a PE existed. The LD.DRP adopted this line, essentially importing the OECD Model‟s narrower structure into the India–Ireland text. 42. We are unable to subscribe to this restrictive reading. Treaty interpretation proceeds on the ordinary meaning of the Printed from counselvise.com ITA No.1198/Mum/2025 and others 118 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). 43. We also take note of the commercial reality that airlines today operate fleets on a network basis, with aircraft rotated between domestic and international sectors depending on operational exigencies, maintenance schedules, and route economics. It is artificial, and contrary to industry practice, to freeze an aircraft‟s character by reference to its predominant usage in a given period. The treaty drafters, in our view, intended to avoid such disputes by linking the test simply to whether the aircraft was “operated solely” domestically. In the present case, the factual matrix including IndiGo‟s undisputed status as an international carrier and the unchallenged deployment of the leased aircraft on at least some international sectors brings the income squarely within the Article 8(1) scope. Printed from counselvise.com ITA No.1198/Mum/2025 and others 119 44. The allocation rule in Article 8(1) is a specific provision which prevails over the general rule for business profits as provided in Article 7. Even if we had found that the assessee had a PE in India, Article 8(1) would nonetheless require the profits from such rental to be taxed only in the State of residence, Ireland. In light of our earlier conclusion that no PE exists, the operation of Article 8(1) fortifies the non-taxability of the lease rentals in India. The LD.DRP‟s contrary view is founded on an impermissible narrowing of treaty language, and cannot be sustained.” 106. In view of the detailed findings extracted herein above which, as noted, arise from an identical factual matrix and legal consideration, we see no reason to depart from the conclusions so reached. The reasoning adopted therein applies mutatis mutandis to the present appeals as well. We, therefore, unhesitatingly hold that the assessee does not have a PE in India within the meaning of India-Ireland DTAA. Having reached such a conclusion, it necessarily follows that the assessee is entitled to avail the benefit of Article 8 of the said Convention. Consequently, the issue relating to the existence of a PE, as well as the applicability of Article 8, is decided in favour of the assessee. 107. In so far as the remaining grounds of appeal are concerned, it is pertinent to observe that those grounds are purely consequential in nature such as the levy of interest u/s. 234A and 234B and/or have been rendered academic and infructuous in light of our conclusions on the principal issue discussed Printed from counselvise.com ITA No.1198/Mum/2025 and others 120 above. No separate adjudication is therefore, required on those grounds. 108. In the result, and for the reasons set out herein before, the appeals filed by the assessee stand allowed. 109. In view of the fact that the appeals themselves have been disposed of in favour of the assessee, the stay applications filed by them no longer survive for consideration and are accordingly rendered infructuous. 110. In the result, appeals of the assessees are allowed and stay applications of the assessees are dismissed. Order pronounced on 13th August, 2025. Sd/- (PADMAVATHY S) Sd/- (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 13/08/2025 KARUNA, sr.ps Printed from counselvise.com ITA No.1198/Mum/2025 and others 121 Enclosure: Annexure-A Name of Appellan t Income Tax Appeal No. Issue-wise Grounds of Appeal No. in the Appeals Limitati on w.r.t. Section 153 of the Income- tax Act, 1961 (“Act”) Direction s issued by Ld. DRP are beyond jurisdicti on Applicabili ty of Article 6 & 7 of MLI – principal purpose test Nature of lease rental & supplementary lease rental and their taxability Applicabili ty Article 8 of the India – Ireland DTAA Existen ce of PE Interes t under sectio ns 234A and/ or 234B of the Act Penalt y under sectio n 270A r.w.s. 274 of the Act Levy of incorre ct rate of tax Not taxabl e as both, royalt y u/s 9(1)(v i) of the Act and, also interes t as per India - Irelan d DTA A TFDAC Ireland II Ltd. 1198/Mum/20 25 2 3 to 3.4 4 to 6.8 7 to 7.1 0 8 to 8.4 9 to 9.7 10 to 10.10 11 11.1 N.A. N.A. DAE (SABS) 10296 Ireland Designat ed Activity Compan y 1155/Mum/20 25 2 3 to 3.4 4 to 5.11 6 to 6.1 3 Not Applicab le (“N.A.”) 9 to 9.3 7 to 7.10 10 10.1 N.A. 8 DAE (SABS) LEASIN G (Ireland) 43 Designat ed Activity Compan y 1156/Mum/20 25 2 3 to 3.2 4 to 5.11 6 to 6.1 3 N.A. 9 to 9.3 8 to 8.10 10 10.1 N.A. 7 DAE (SY22) Leasing (Ireland) 41 Designat ed Activity Compan y 1157/Mum/ 2025 2 3 to 3.2 4 to 5.11 6 to 6.1 0 N.A. 8 to 8.2 7 to 7.12 9 9.1 N.A. N.A. Sky High XLIII Leasing Compan y Ltd 1122/Mum/20 25 2 3 to 3.3 4 to 6.7 7 to 7.1 2 N.A. 8 to 8.9 9 to 9.10 10 11 N.A. N.A. Ortus Aircraft Lease 5 (Dublin) Ltd 1108/Mum/20 25 2 3 to 3.4 4 to 6.8 8 to 8.1 3 N.A. 10 to 10.2 9 to 9.10 11.1 11.2 11 7 Ortus Aircraft 1106/Mum/20 25 2 3 to 3.4 4 to 6.8 8 to N.A. 10 to 10.2 9 to 9.10 11.1 11.2 11 7 Printed from counselvise.com ITA No.1198/Mum/2025 and others 122 Name of Appellan t Income Tax Appeal No. Issue-wise Grounds of Appeal No. in the Appeals Limitati on w.r.t. Section 153 of the Income- tax Act, 1961 (“Act”) Direction s issued by Ld. DRP are beyond jurisdicti on Applicabili ty of Article 6 & 7 of MLI – principal purpose test Nature of lease rental & supplementary lease rental and their taxability Applicabili ty Article 8 of the India – Ireland DTAA Existen ce of PE Interes t under sectio ns 234A and/ or 234B of the Act Penalt y under sectio n 270A r.w.s. 274 of the Act Levy of incorre ct rate of tax Not taxabl e as both, royalt y u/s 9(1)(v i) of the Act and, also interes t as per India - Irelan d DTA A Lease 6 (Dublin) Ltd 8.1 3 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// Printed from counselvise.com "