What lessons can be learned by global aircraft lessors conducting business in India from the recently concluded tax case between Irish leasing entity Celestial Aviation Trading and India’s tax authorities?
Contributor: Angela Fleming, Partner & Head of Financial Services Tax, BDO
In Celestial Aviation Trading 15 Ltd’s decision, one of the key issues was the characterisation of the lease – operating versus finance lease. The Indian tax authorities attempted to characterise the lease as a finance lease and consequently, lease amounts received to be interest income, rather than as rental income under an aircraft operating lease. The Tax Tribunal found that the lease was an operating lease and in doing so, significant reliance was placed on the fact that at the end of the lease term the lessee was obliged to return the aircraft to Celestial. Thus this case underscores the need for aircraft lease agreements to be clear on ownership and end of lease provisions.
There is another Indian tax case which will also be of interest to Irish based aircraft lessors - the more recent case of Sky High Leasing (Mumbai Tribunal), wherein following key issues are involved:
- Treaty eligibility including principal purpose test
- Characterisation of lease – operation versus finance
- Applicability of multi-lateral instrument
- Leased aircraft constituting a PE for Irish company
- Article 8 versus PE
Detailed analysis of this case can be found here: Mumbai Tax Tribunal Rules MLI Provisions Not Enforceable Without Separate Notification – BDO
The case was decided in favour of taxpayer on all grounds and the following observation is of particular note:
“In light of the foregoing analysis, we hold that relief from source-country taxation of aircraft-leasing activity constitutes a stated and substantive object of the India–Ireland DTAA.”
Content published in Finance Dublin Irish Tax Monitor.