Mumbai Tribunal rules separate notification to be mandatory for implementing MLI provisions

This Tax Alert summarizes the recent Mumbai Tribunal decision in a batch of appeals^[1]  (Taxpayer). The key issues before the Tribunal was whether India-Ireland tax treaty benefits could be denied by invoking the Principal Purpose Test (PPT) as implemented by Multilateral Instrument (MLI) and whether the presence of aircraft in India constitute a Permanent Establishment (PE) of the Taxpayer in India, who was engaged in the business of leasing of aircrafts.

The Tribunal acknowledged that India-Ireland Double Taxation Avoidance Agreement (DTAA or tax treaty) is a Covered Tax Agreement (CTA) under MLI, however in absence of a Notification under the Indian Tax Laws (ITL) to implement the MLI provisions, PPT is not applicable and cannot be read into the India-Ireland DTAA. The Tribunal placed reliance on the Supreme Court (SC) ruling^[2]  which ruled that issuance of notification under the ITL is a mandatory requirement for any court, authority or tribunal in India to give effect to a DTAA or any protocol/amendment.

On merits on application of PPT, the Tribunal held that the Taxpayer’s incorporation in Ireland was commercially driven, given Ireland’s jurisdiction as a global hub for aircraft leasing. It further noted the fact that the Taxpayer had Irish directors, bankers, secretary, legal advisors and was managed by a licensed service provider in Ireland. The agreements were executed and substantive commercial functions were held in Ireland. Even if one of the principal purposes was to obtain DTAA benefits, these benefits will still be available since the object and purpose of the India–Ireland DTAA is to promote the aircraft leasing industry exempting taxation in India.

Under the current facts, on an overall analysis, choice of Ireland was not for dominant purpose of treaty benefit rather it was for multiple commercial considerations and, hence, treaty benefits were consistent with the object and purpose so as to be beyond the limitation of PPT. The Tribunal also concluded:

• A valid Tax Residency Certificate (TRC) is conclusive evidence of Irish residency for DTAA purposes, barring cases of fraud or treaty shopping.
• Treaty benefits cannot be denied merely because the parent is located in a third- country jurisdiction or business operations are outsourced.
• The burden of proof lies with the tax authority to establish sham or conduit structures, which was not discharged in this case.

The Tribunal further held that leased aircrafts in India do not constitute a fixed place PE as aircraft was under lessee’s control, with the Taxpayer retaining only ownership safeguards such as inspection and repossession rights. It also observed that the Taxpayer conducted business operations from Ireland and had no place at its disposal in India, to conclude that mere presence of aircraft in India will not amount to carrying on business in India.

The Tribunal concluded that even if a PE in India is to be assumed, Article 8 of the DTAA will override Article 7^[3] , provided the aircraft was operated by lessee also in international traffic and, hence, even on that count income is not taxable in India.

^[1] Lead case being that of ITA No.1198/Mum/2025 dated 13 August 2025
^[2] (2023) 458 ITR 756 (SC)
^[3] Article dealing with business income taxation if a PE exists