ITAT Mumbai held that the Irish lessors’ aircraft lease rentals were not taxable in India, and it rejected the Revenue’s attempts to treat the receipts as royalty, interest, or business income. It also held that the MLI’s Principal Purpose Test could not be used to deny India–Ireland DTAA benefits in the absence of a specific Section 90(1) notification incorporating those MLI changes into Indian law.

The appeals concerned Irish tax resident aircraft lessors engaged for years in the business of acquiring aircraft and leasing them under dry operating lease arrangements to Indian airlines, with valid TRCs and the aircraft legally owned by the lessors throughout the lease term. The Tribunal accepted that the lease documents showed classic lessor ownership rights, including repossession, mandatory redelivery, restricted sub-leasing, and no transfer of title, and it applied the principle that a genuine commercial structure cannot be disregarded unless there is evidence of sham.

On characterization, the Tribunal rejected the Revenue’s attempt to reclassify the arrangement as a finance lease. It held that operational control and routine airline risks borne by the lessee do not amount to ownership risks, and that the contractual rights retained by the lessor were consistent with an operating lease, not a financing transaction.

On taxability, the Tribunal rejected royalty treatment under section 9(1)(vi) and Article 12 of the India–Ireland DTAA, noting that Article 12(3) expressly excludes aircraft from the treaty definition of royalty. It also rejected the alternative plea that the rentals were interest under Article 11, because there was no transfer of ownership or financing of acquisition in substance.

The Tribunal further rejected the Revenue’s PE argument. It held that the mere presence of aircraft in India under lease did not, by itself, create a fixed place PE of the foreign lessor, since the lessor’s leasing business was carried on offshore and the aircraft was under the operational control of the Indian airline.

A major part of the ruling deals with the MLI and the Principal Purpose Test. Relying on the Supreme Court’s ruling in Nestle SA, the Tribunal held that treaty modifications through the MLI do not automatically become enforceable in India merely because the MLI and the treaty are separately notified; a specific notification under section 90(1) is required to give domestic effect to the changed treaty position. Since no such notification existed for the India–Ireland DTAA, the Revenue could not invoke Articles 6 and 7 of the MLI to deny treaty benefits.

The appellants, Sky High XXXIV Leasing Company Limited and Lunar Aircraft Trading Company Limited, were represented by Sachit Jolly, Senior Advocate, along with DMD Advocates, led by Sherry Goyal, Associate Partner.