Aircraft Leasing Income Exempt in India: ITAT Mumbai Rules in Favour of Irish SPVs Under Article 8 of India-Ireland DTAA

Background and Overview of the Dispute

The Income Tax Appellate Tribunal (ITAT), Mumbai, recently delivered a significant ruling in a batch of appeals filed by multiple assessees — all special purpose vehicles (SPVs) belonging to the ICBC Leasing group and incorporated as tax residents of Ireland. The appeals challenged final assessment orders passed under Section 143(3) read with Section 144C(13) of the Income Tax Act, 1961 for Assessment Year 2022-23.

The central controversy across all appeals was identical: whether income earned by these Irish-resident entities from leasing aircraft to Indian airline operators on a dry lease basis was taxable in India. The Tribunal took up ITA No. 1546/Mum/2025 — filed by Sky High Lxxix Leasing Co. Ltd. — as the lead case and disposed of all connected appeals through a common order.

Profile of the Lead Assessee

Sky High Lxxix Leasing Co. Ltd. is a subsidiary/SPV of ICBCIL Aviation Company Limited and forms part of the larger ICBC Leasing group. The company is engaged in aircraft leasing operations, managed and administered out of Ireland, and holds the status of an Irish tax resident.

During the relevant assessment year, the assessee leased aircraft to Indian airlines on a dry lease basis and received rental income in connection therewith. In its return of income filed on 07.11.2022, the assessee declared nil income, claiming that lease rentals received by it were not taxable in India by virtue of Article 8 of the Double Taxation Avoidance Agreement between India and Ireland (India-Ireland DTAA).

Assessment and DRP Proceedings

Assessing Officer's Position

The Assessing Officer (AO) refused to accept the assessee's Article 8 exemption claim and held the lease rentals taxable in India on the following grounds:

  • The assessee had failed the Principal Purpose Test (PPT) as mandated under Articles 6 and 7 of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).
  • As a consequence, the lease income was characterised as royalty and brought to tax under Section 9(1)(vi) of the Income Tax Act, 1961.

Dispute Resolution Panel's Findings

Aggrieved by the assessment, the assessee filed objections before the Dispute Resolution Panel (DRP). The DRP, however, upheld the AO's findings and introduced additional grounds for taxability:

On the PPT Issue:

  • The burden on the Revenue to demonstrate non-satisfaction of the PPT was held to be based on reasonableness rather than strict evidentiary standards.
  • The India-Ireland DTAA was noted to lack a Limitation of Benefits (LOB) clause, rendering precedents like Tiger Global International III Holdings v. AAR [2024] 468 ITR 405 (Delhi) inapplicable.
  • Decisions in UOI v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC), Tiger Global International III Holdings v. AAR [2024] 468 ITR 405 (Delhi), and Vodafone International Holdings BV v. UOI [2012] 341 ITR 1 (SC) were held to have been superseded by the incorporation of the PPT in various tax treaties.
  • Benefits under Articles 8, 12, and 7 of the India-Ireland DTAA could be extended only upon prior satisfaction of the PPT.

On the Nature of the Lease:

The DRP classified the leasing arrangements as finance leases rather than operating leases, characterising the entire lease payment as interest income. Key reasons included:

  • Lessees exercised a dominant role — taking delivery, inspecting the aircraft, bearing obligations to pay monthly rentals without cancellation rights, receiving assignment of manufacturer warranties, and indemnifying lessors against all claims including total loss.
  • Lessor rights pertaining to termination, repossession, maintenance, and inspection were viewed as standard safeguards incapable of supporting an operating lease classification.
  • The effective lease period (6–10 years, covering approximately 50,000 of the aircraft's 60,000 flying hours) was considered equivalent to the aircraft's economic life.
  • Accounting treatment by the lessor was not considered conclusive for tax characterisation.
  • Absence of residual risk in the lessor was held to be indicative of a finance lease.

**On Permanent Establishment (PE)😗*

The DRP further held that the leased aircraft operating in India constituted a Permanent Establishment of the assessee in India, after applying ownership, location, permanence, situs, disposal, control, and quiet enjoyment tests.

ITAT Mumbai's Analysis and Ruling

Reliance on Co-ordinate Bench Decision

Before the Tribunal, the assessee's authorised representative brought to the Tribunal's attention that an identical set of issues involving another entity from the same ICBC Leasing group had already been adjudicated by a co-ordinate bench in Sky High Appeal XLIII Leasing Company Limited & Ors. vs. ACIT, ITA No. 1122/Mum/2025, dated 13.08.2025. The Tribunal proceeded to summarise and adopt the findings of that decision across all the issues raised.

Issue 1: Applicability of MLI and the PPT Under Articles 6 and 7

Whether MLI Requires Separate Domestic Notification

The co-ordinate bench had examined this question with reference to two aspects — first, whether the MLI could be read into the India-Ireland DTAA without a fresh notification, and second, whether the PPT was independently satisfied on the facts.

On the first question, the Tribunal returned the following findings: