Lease Airrafts and Their Taxability in India : Sunflower Aircraft Leasing Limited v. Assistant Commissioner of Income Tax 

Brief Background: 

The decision of the Mumbai Bench of the Income Tax Appellate Tribunal (“ITAT”) in Sunflower Aircraft Leasing Limited v. Assistant Commissioner of Income Tax addresses an important issue concerning the taxation of cross-border aircraft leasing arrangements and the scope of India’s taxing rights under the India–Ireland Double Taxation Avoidance Agreement (“India- Ireland DTAA”). The Appellant, Sunflower Aircraft Leasing Limited (“Sunflower”), is a company incorporated in Ireland and forms part of the AerCap Group, one of the world’s largest aircraft leasing enterprises. Sunflower is engaged in the business of leasing aircraft globally.   

Sunflower entered into aircraft lease agreements with InterGlobe Aviation Limited (“IndiGo”), India’s largest airline. Under the Aircraft lease agreements (dry operating leases), Sunflower leased two aircraft to IndiGo for use in India. While Sunflower retained legal ownership of the aircraft, the possession, operational control, commercial wisdom and maintenance of the aircrafts were contractually transferred to IndiGo. The aircraft were integrated into IndiGo’s fleet and used interchangeably on domestic and international routes.  

Indian tax authorities contended that the continuous physical presence of the leased aircraft in India constituted a fixed place permanent establishment (“PE”) of Sunflower in India. On this basis, they sought to tax the lease rentals in India. The Dispute Resolution Panel (“DRP”), while relying on the Formula One World Championship Ltd. case, applied the ‘at the disposal of’ test and held that since such high-value, income-earning assets were continuously present in India, with Sunflower having the right to inspect and repossess the aircrafts, it would constitute fixed place PE. The authorities attributed 25% of the gross lease rentals to India. The DRP also rejected Sunflower’s reliance on the Article 8 (1) of the India-Ireland DTAA, which exempted profits from the operation of ships and aircrafts in international traffic from being taxed in the country to which the enterprise is not a resident. The rejection was made stating that the leased aircrafts were primarly utilised for domestic use and that the occasional usage of the leased aircrafts in international sectors did not qualify it as operating in “international traffic.”  

Issue for Consideration:  

The principal issue was on the taxability of profits derived from aircraft leasing arrangements in India i.e. whether the mere presence of leased aircraft in India, without personnel or operational infrastructure of the lessor, could constitute a fixed place PE of Sunflower under Article 5(1)¹ of the India–Ireland DTAA.  

Judgement: 

The ITAT ruled decisively in favour of Sunflower. On the issue of permanent establishment, the Tribunal reiterated that Article 5(1) of the DTAA requires not merely a fixed place of business, but that such place must be at the disposal of the foreign enterprise and used for carrying on its business. Applying the “disposal test” laid down by the Supreme Court in the Formula One case, the Tribunal examined the terms of the aircraft lease agreements in detail. It noted that IndiGo had exclusive possession and commercial control over the aircraft, bore responsibility for maintenance and all airworthiness directives in India, and deployed the aircraft entirely at its own discretion.  

The Tribunal held that Sunflower’s limited rights of inspection (once a year) and repossession were merely protective rights incidental to ownership and did not amount to operational control. There was no presence of Sunflower’s personnel or business infrastructure in India, nor any involvement in the day-to-day operations of the aircraft. The Tribunal also relied on the decision in the Hyatt case, which emphasised that mere ownership of assets does not give rise to a PE unless accompanied by effective strategic or day to day operational control. Accordingly, it concluded that no fixed place PE existed in India.  

On Article 8(1) of the DTAA, the Tribunal rejected the Indian tax authority’s narrow interpretation. It observed that the treaty expressly covers profits derived from the “operation or rental” of aircraft in international traffic. Referring to the definition of “international traffic” under Article 3(1)(f) of the DTAA, the Tribunal found that the definition of international traffic excludes only those operations where the ship or aircraft is operated solely in the other Contracting State. This means that the moment the operation is not exclusively domestic, it satisfies the definition. Since IndiGo is an international carrier and the leased aircraft formed part of its integrated fleet operating on both domestic and limited international routes, the requirement of international traffic was satisfied.   

Our Thoughts:  

This ruling reinforces the consistent judicial position that the existence of a permanent establishment cannot be inferred merely from the physical presence of high-value assets in India. The Tribunal’s analysis appropriately focuses on the concept of “disposal” and effective control, thereby aligning Indian jurisprudence with internationally accepted principles on permanent establishment. The decision provides clarity to the aircraft leasing industry, where dry lease arrangements typically involve transfer of possession and operational control to airlines, with the lessor retaining only ownership and protective rights. Further, the rejection of an overly restrictive reading of “international traffic” is significant for the Indian aviation industry and understanding specific treaty definitions.

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1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on ↩︎