ITAT Mumbai Clarifies: MLI Provisions Require Separate Notification To Be Enforceable

Background of the Case

The Assessee, an Irish entity and part of a global aircraft leasing group, had entered into dry lease agreements with InterGlobe Aviation Ltd. (IndiGo). During AY 2022-23, the Assessee reported nil income in India on the grounds that lease payments did not qualify as "royalty" under Article 12(3)(a) of the India-Ireland DTAA and that the entity did not create a taxable presence in India in the form of a Permanent Establishment (PE). The Assessee also submitted that its income was not taxable in India in view of Article 8 of the India-Ireland DTAA.

The Assessing Officer (AO), however, proposed to deny DTAA benefits by invoking the PPT under Articles 6 and 7 of the MLI, arguing that the principal purpose of the leasing structure was to secure India-Ireland DTAA benefits and avoid Indian taxation. The DRP upheld the AO's order. It further held 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 DRP held that the arrangements qualified as finance leases rather than operating leases.

ITAT Findings

1. Applicability of Articles 6 and 7 of the MLI
   The ITAT emphasized that MLI provisions cannot be self-executing and require a specific notification under Section 90(1) of the Income-tax Act (ITA) to be enforceable. Referring to the constitutional and statutory mandate articulated by the Hon'ble Supreme Court in Nestle SA, the ITAT held that even if the MLI has been duly notified and the Double Taxation Avoidance Agreement (DTAA) between India and Ireland is a "Covered Tax Agreement", PPT provisions do not automatically apply.
2. Analysis on Principal Purpose Test
   For completeness, the Tribunal also examined the PPT on merits and held:
   • The Tax Residency Certificate (TRC) issued by Ireland was conclusive proof of residency absent fraud, consistent with Azadi Bachao Andolan and Vodafone International Holdings. The TRC remains valid grounds for DTAA benefits even after MLI notification.
   • The Tribunal referred to various examples given in the BEPS Action Plan 6 Report while assessing PPT applicability.
   • The structure was commercially rational, as Ireland is a leading global hub for aircraft leasing. The Irish entities were substantive and operational, not conduits. They were established and maintained to carry out genuine commercial functions, employed adequate personnel, incurred real business expenditure, and assumed actual economic risks.
   • The fact that an entity's parent company is resident in a low-tax jurisdiction does not automatically disqualify the entity from DTAA protection.
   • OECD's BEPS guidance clarifies that tax efficiency, by itself, does not trigger PPT.
3. Operating vs Financing Lease
   
   The Tribunal observed that the leases qualified as operating leases:
   • Under lease terms, title remained with the lessor and residual risks were borne by it. The ITAT distinguished between ownership risk and operational risk.
   • Rental payments were not akin to repayment of financing.
   • The economic ownership stayed with the assessee.
4. Presence of Aircraft in India - Fixed Place PE
   The Revenue argued that the physical presence of aircraft in India constituted a fixed place PE of the lessor. The Tribunal disagreed:
   • A PE requires control or disposal of business premises in India, which was absent.
   • The assessee's core business was the execution of lease agreements offshore. The subsequent location of the aircraft in India, under IndiGo's operational control, did not create a fixed establishment for the assessee.
   • The aircraft were operated entirely by the airline, not by the lessor. They were never placed at the disposal of the assessee in India but rather at the disposal of the lessee, which operated them for its own commercial purposes.
5. Application of Article 8 of the India-Ireland DTAA
   The ITAT also examined Article 8(1) of the India-Ireland DTAA:
   • Profits from the operation of aircraft in international traffic are taxable only in the residence country (Ireland).
   • As 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).

Our Comments

This decision has far-reaching implications. It affirms that MLI-based anti-abuse rules, such as the Principal Purpose Test, are not self-executing under Indian law and cannot be enforced in assessments unless formally adopted into domestic law through notification. The ruling is especially important in cases involving DTAA interpretation and reinforces the supremacy of domestic procedural requirements even when international instruments are ratified. The decision also provides a comprehensive discussion of the Principal Purpose Test and its application in tax-efficient structures. It will be important to observe how the MLI is implemented going forward and whether the government will notify each treaty to incorporate MLI provisions.

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