In a significant decision, the Mumbai Income Tax Tribunal has ruled that tax officials cannot use a powerful international anti-avoidance tool unless the government has officially implemented it into Indian law. This ruling provides crucial clarity for multinational companies, especially those in the aircraft leasing industry.
#### **What Was the Case About?**
A company based in Ireland, which leases aircraft, was involved in a dispute with Indian tax authorities. The tax office had denied the company benefits under the India-Ireland tax treaty, citing two main reasons:
1. **The "Principal Purpose Test" (PPT):** They argued that the main reason the company was set up in Ireland was to avoid taxes in India.
2. **Permanent Establishment (PE):** They claimed that the physical presence of the leased aircraft in India created a taxable business presence (a "PE") for the company.
The company appealed this decision, leading to the recent Tribunal ruling.
#### **The Key Ruling: Notification is Mandatory**
The Tribunal's most critical finding was on the use of the **Multilateral Instrument (MLI)**. The MLI is an international agreement that allows countries to quickly update their tax treaties with new rules, including the PPT, which is designed to prevent treaty shopping.
The Tribunal acknowledged that the India-Ireland tax treaty is covered by the MLI. However, it ruled that for Indian courts and tax authorities to use any MLI provision, the Indian government **must first issue a separate official notification** under Indian tax laws. Since this specific notification for the India-Ireland treaty had not been issued, the Tribunal stated that the tax department **could not use the PPT** to deny the company's treaty benefits.
#### **Why the Company's Setup in Ireland Was Valid**
Even if the PPT had been applicable, the Tribunal ruled that the company's structure was legitimate. It found that the choice to incorporate in Ireland was driven by strong commercial reasons, as Ireland is a global hub for aircraft leasing.
The company had real operations in Ireland: its directors, bankers, legal advisors, and management were based there, and all major business decisions were made there. The Tribunal stated that even if obtaining tax benefits was one of the reasons for choosing Ireland, it was not the *main* reason. Therefore, the company was entitled to the benefits promised by the India-Ireland tax treaty.
#### **Aircraft in India Do Not Create a Taxable Presence**
On the second issue, the Tribunal ruled that the leased aircraft sitting in India **did not create a permanent establishment** for the company. It reasoned that the aircraft were under the full control of the Indian lessee (the airline). The Irish company, as the owner, only retained basic rights like inspecting the aircraft or repossessing it if needed—this does not amount to conducting business from a fixed place in India.
#### **What This Means: Key Takeaways**
This ruling sets several important precedents:
* **Clarity on MLI Implementation:** The government must formally notify each treaty for MLI provisions to take effect in India.
* **Substance Overrides Suspicion:** Having a real business operation in a country (like Ireland) is a valid defense against accusations of treaty shopping.
* **Aircraft Leasing Clarity:** Simply having leased assets in India does not automatically create a taxable presence for the foreign lessor.
* **TRC is Powerful Evidence:** A valid Tax Residency Certificate is strong proof of residency unless proven to be a fraud.
In short, the Tribunal reinforced the importance of legal procedure and substance in business operations, offering protection to international companies engaging in legitimate cross-border trade.
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**Disclaimer:** *This article is for informational purposes only and does not constitute legal or tax advice.*
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