The Double Taxation Avoidance Agreement (“DTAA”) between India and Ireland is significant for the aircraft leasing industry, especially as Ireland is a well-known hub for aircraft leasing and India is one of the world’s fastest-growing aviation markets. When compared to direct aircraft purchases, aircraft leasing is a more appealing financing option for Indian airlines because of the lower leasing payment expenses brought about by the reduced withholding tax under the DTAA.
In the recent past, Irish lessors have approached the courts in India to address significant issues concerning the taxability of lease rental payments made by Indian airlines to an Irish company under the Income Tax Act, 1961 (“Act”), particularly regarding the application of the DTAA.
One such case is The Milestone Aviation Asset Holding Group No. 25 Ltd (“Milestone Aviation”) v. Assistant Commissioner of Income Tax Circle 3(1)(1) International Taxation New Delhi & Ors.
In this case, the primary issue and dispute revolved around whether lease rental payments made by M/s Global Vectra Helicorp Ltd to Milestone Aviation, an Irish company without a Permanent Establishment (“PE”) in India, should be taxed in India. The Income Tax Department contended that lease rental payments should be considered as “royalty” which would be taxable in terms of Section 9(1)(vi) of the Act as well as the DTAA. Section 9(1)(vi) of the Act reads as follows:
“9. Income deemed to accrue or arise in India.
(1) The following incomes shall be deemed to accrue or arise in India:-
(vi) income by way of royalty payable by-
(a) the Government; or
(b) a person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or
(c) a person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:”
However, the Hon’ble Delhi High Court vide its judgment dated 29th August 2024, has held that Article 12(3)(a) of the DTAA clearly exempts revenue receipts from aircraft leasing from the purview of taxation altogether. Article 12(3)(a) reads as follows:
“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;”
As a result, the Court held that it would be wholly impermissible for the Assessing Officer to invoke Section 9(1)(vi) of the Act in light of the express exemption under the DTAA.
The Hon’ble Court further reaffirmed the Commissioner of Income Tax-International Taxation -3 Vs. Telstra case, in which it was previously held that, in the event of a conflict between provisions in domestic legislation and a DTAA, the latter would take precedence because it was more advantageous to the assessee.
A copy of the judgment dated 29th August 2024 can be found here.
Milestone Aviation vs Asst Commissioner of Income Tax
