In a ruling that has widespread implications for cross-border taxation, the Mumbai Income Tax Appellate Tribunal (Mumbai ITAT) has held that the principal purpose test (PPT) in articles 6 and 7 of the OECD Multilateral Instrument (MLI) cannot be invoked automatically. A separate notification must first be issued by the Indian government incorporating the MLI provisions into domestic law. The Mumbai ITAT decision issued on 13 August 2025 is in line with a 2023 decision of the Indian Supreme Court (AO v. Nestle SA), in which the court concluded that a notification under section 90(1) of the Indian Income Tax Act, 1961 must be issued for a court or other authority to give effect to a tax treaty or protocol that revises the terms of the treaty and that, in turn, affects existing domestic law.
In reaching its own conclusion in the instant case, the Mumbai ITAT addressed other matters such as the triggering of the PPT and the creation of a permanent establishment (PE) in India in the context of the India-Ireland tax treaty.
The MLI was introduced as a swift and efficient mechanism for implementing the OECD/G20’s base erosion and profit shifting (BEPS) treaty-related measures across jurisdictions without requiring countries to renegotiate tax treaties. The MLI enables governments to incorporate the agreed upon minimum standards to counter tax treaty abuse while retaining flexibility to preserve related policy objectives. For a tax treaty to be modified by the MLI, both treaty partners must have signed and ratified the MLI and designated the relevant treaty as a treaty to be covered by the MLI (in other words, the treaty is a “covered tax agreement”). Both of those requirements were met in the case before the Mumbai ITAT, meaning that the MLI provisions apply to the India-Ireland tax treaty. However, the remaining issue is whether the MLI is automatically assimilated into the Indian legal framework.
The case before the Mumbai ITAT involved an Irish-resident company that was part of the TFDAC group, an international aircraft leasing conglomerate. The taxpayer (which held a valid tax residency certificate (TRC) issued by the Irish tax authorities) entered into dry operating lease agreements with various operators, including InterGlobe Aviation Ltd. (IndiGo) in 2019. For fiscal year (FY) 2021-22, the Irish company filed its tax return in India declaring nil taxable income by treating the lease rentals from the dry operating lease as not chargeable to tax in India under the India-Ireland treaty. The Indian tax authorities denied treaty benefits by invoking articles 6 and 7 of the MLI based on the premise that the principal purpose of the taxpayer’s incorporation was to obtain treaty benefits. The tax authorities also took the position that the presence of aircraft in India would give rise to a fixed place PE. The taxpayer appealed to the Mumbai ITAT, arguing that, based on the Supreme Court decision in Nestle, the provisions of the PPT as contained in the MLI could not be applied because the Indian government had not issued a separate notification that incorporated the MLI into the India–Ireland treaty.
The Mumbai ITAT rejected the tax authorities’ arguments and, while ruling in favour of the taxpayer, made following observations:
Applicability of Articles 6 and 7 of the MLI
Principal Purpose Test
Nature of the Lease
Existence of a PE in India
Applicability of Article 8(1) of the India-Ireland Tax Treaty
The Mumbai ITAT ruling reinforces the principle laid down by the Indian Supreme Court in Nestle that any changes in a tax treaty have to be notified. Thus, it confirms that any external developments, such as OECD membership or subsequent bilateral arrangements, will not automatically apply. Only a deliberate, notified act of incorporation can elevate such benefits into enforceable domestic law. Nevertheless, as the ITAT’s ruling is a tribunal ruling, the issue is likely to be litigated in higher forums.
The ITAT ruling places limits on the ability to invoke MLI-based provisions and emphasises that the MLI cannot be construed as a self-executing document. It also considers the taxpayer’s cross-border footprint and the industrial and economic advantages in Ireland’s ecosystem while analysing the PPT, emphasising the commercial nature of the transaction. The Mumbai ITAT acknowledged Ireland’s global role in aircraft leasing, validating the use of special purpose vehicles and the outsourcing of management as legitimate commercial practices and not indicators of tax avoidance. Although this ruling is in the context of aircraft leasing, its impact on the enforceability of MLI provisions will likely have far-reaching implications for all cross-border arrangements.
Jagat Mehta
Niranjan Govindekar
Shilpa Sethia
Tejashree Waje
BDO in India
In reaching its own conclusion in the instant case, the Mumbai ITAT addressed other matters such as the triggering of the PPT and the creation of a permanent establishment (PE) in India in the context of the India-Ireland tax treaty.
Background
The MLI was introduced as a swift and efficient mechanism for implementing the OECD/G20’s base erosion and profit shifting (BEPS) treaty-related measures across jurisdictions without requiring countries to renegotiate tax treaties. The MLI enables governments to incorporate the agreed upon minimum standards to counter tax treaty abuse while retaining flexibility to preserve related policy objectives. For a tax treaty to be modified by the MLI, both treaty partners must have signed and ratified the MLI and designated the relevant treaty as a treaty to be covered by the MLI (in other words, the treaty is a “covered tax agreement”). Both of those requirements were met in the case before the Mumbai ITAT, meaning that the MLI provisions apply to the India-Ireland tax treaty. However, the remaining issue is whether the MLI is automatically assimilated into the Indian legal framework.
Facts of the Case
The case before the Mumbai ITAT involved an Irish-resident company that was part of the TFDAC group, an international aircraft leasing conglomerate. The taxpayer (which held a valid tax residency certificate (TRC) issued by the Irish tax authorities) entered into dry operating lease agreements with various operators, including InterGlobe Aviation Ltd. (IndiGo) in 2019. For fiscal year (FY) 2021-22, the Irish company filed its tax return in India declaring nil taxable income by treating the lease rentals from the dry operating lease as not chargeable to tax in India under the India-Ireland treaty. The Indian tax authorities denied treaty benefits by invoking articles 6 and 7 of the MLI based on the premise that the principal purpose of the taxpayer’s incorporation was to obtain treaty benefits. The tax authorities also took the position that the presence of aircraft in India would give rise to a fixed place PE. The taxpayer appealed to the Mumbai ITAT, arguing that, based on the Supreme Court decision in Nestle, the provisions of the PPT as contained in the MLI could not be applied because the Indian government had not issued a separate notification that incorporated the MLI into the India–Ireland treaty.
ITAT Decision
The Mumbai ITAT rejected the tax authorities’ arguments and, while ruling in favour of the taxpayer, made following observations:Applicability of Articles 6 and 7 of the MLI
- As noted above, the taxpayer relied on the Supreme Court’s decision in Nestle, which held that a separate notification under Indian tax law is required to give effect to the impact of a subsequent tax treaty on an earlier tax treaty.
- The synthesised treaty text, which incorporates the MLI provisions into the covered tax agreement, is merely an expository compilation intended to facilitate understanding. It is not a binding legal instrument.
- The OECD Commentary also acknowledges that a “synthesised text” is a non-binding explanatory aid; it does not, and cannot, substitute for the need for a legally valid act of incorporation in each jurisdiction.
- The MLI cannot override the domestic legal requirement that modifications must be formally integrated into domestic law through a statutorily prescribed process.
- The MLI provisions lack legal force unless the modifications are expressly notified, so the tax authorities cannot rely on it to invoke the PPT.
Principal Purpose Test
- A TRC is sufficient to claim benefits under the India-Ireland treaty even after the MLI has been notified. It can be presumed that the Irish tax authorities issued the TRC after taking the PPT into account.
- As per Action 6 of the BEPS initiative, the PPT is not triggered simply because a taxpayer derives treaty benefits or has, in the course of its decision-making, considered the existence of a favourable tax treaty. The key test is whether obtaining such benefits was a principal purpose, independent of any genuine commercial considerations.
- The PPT in articles 6 and 7 of the MLI cannot be read so broadly as to imply that tax treaty benefits must automatically be denied in every case where a taxpayer’s ultimate parent entity is resident in a third country.
- Ireland’s established aviation ecosystem and robust treaty network provide valid commercial grounds for choosing Ireland as a base. Leveraging such advantages does not, by itself, amount to treaty abuse. The taxpayer’s preference for Ireland is credibly explained by non-tax advantages such as an unparalleled ecosystem where 60% of the world’s leased aircraft are managed, hosting over 50 leasing companies, including 19 of the top 20 global lessors. In short, the centre of gravity is commercial: Ireland’s regulatory predictability, specialist talent and deep market infrastructure, not a solitary fiscal preference.
- The group’s leasing activities extended beyond India, underscoring that Ireland was chosen for its global leasing infrastructure, not merely to secure benefits under the treaty.
- The PPT requires a clear demonstration supported by objective facts that the dominant purpose of the arrangement was to secure treaty benefits and that such benefits are contrary to the object and purpose of the convention. In the present case, no such factual foundation has been laid and the Indian tax authorities did not discharge this burden.
- Even if the PPT can be invoked on the ground that one of the principal purposes was to obtain tax benefits, a specific exemption for aircraft leasing income under the treaty would suggest that such a benefit was within the object and purpose of the treaty.
Nature of the Lease
- In an operating lease, the lessee naturally bears operational risks, such as fuel costs, crew, maintenance and daily usage while ownership risks, such as residual value fluctuation, impairment or inability to repossess in the event of a geopolitical crisis remain with the lessor.
- The lease is not “non-cancellable” in an absolute sense as the lease agreement permits termination in the case of default, a standard feature of operating leases.
- Sub-letting is possible only with the lessor’s prior written consent, which reinforces that ownership remains with the lessor.
- Irish depreciation rules allowing eight-year depreciation are purely fiscal provisions; they neither define an aircraft’s economic life nor alter ownership.
- The lease in question meets all the essential attributes of an operating lease, and nothing in the facts or the law justifies its recharacterisation as a finance lease.
Existence of a PE in India
- Two key tests for determining whether a foreign enterprise has a fixed place PE in India under article 5(1) of the India-Ireland tax treaty is whether there is a fixed place of business and whether the place of business is at the disposal of the foreign enterprise. Mere ownership of an asset or the exercise of protective rights as an incidence of ownership does not automatically meet this requirement.
- Although the leased aircraft were present in India, the taxpayer’s leasing business was conducted entirely from Ireland, i.e., the contracts, negotiations and management were all offshore. Operational control (deployment, routing, crew, scheduling) rested solely with IndiGo.
- The rights retained by the taxpayer, such as periodic inspection, ensuring compliance with maintenance standards and repossession in the case of default are standard lessor protections safeguarding the value of the asset. They are not indicative of the asset being at the lessor’s disposal for carrying on business in the source state.
- The aircraft, though valuable business assets, did not serve as a “place” through which the taxpayer’s leasing business was carried on in India.
- Access by the taxpayer was limited, conditional and ancillary to ownership.
Applicability of Article 8(1) of the India-Ireland Tax Treaty
- Article 8(1) provides that profits from the operation or rental of ships or aircraft in international traffic are taxable only in the state of residence of the enterprise.
- The taxpayer’s leased aircraft formed part of IndiGo’s integrated fleet and were deployed interchangeably on domestic and international routes so such integration necessarily brought the aircraft within the scope of “international traffic” as defined in treaty article 3(1)(g).
- Article 8(1) is a specific allocation rule that overrides the general business profits rule in article 7. Thus, even if a PE were assumed in India, the taxation of rental income would remain exclusively with Ireland.
- A combined reading of articles 8 and 12 shows that the treaty specifically excludes aircraft leasing income from source-based taxation. A taxpayer claiming such treaty relief is not seeking to subvert the treaty but merely availing of a benefit the treaty is designed to confer.
BDO Insights
The Mumbai ITAT ruling reinforces the principle laid down by the Indian Supreme Court in Nestle that any changes in a tax treaty have to be notified. Thus, it confirms that any external developments, such as OECD membership or subsequent bilateral arrangements, will not automatically apply. Only a deliberate, notified act of incorporation can elevate such benefits into enforceable domestic law. Nevertheless, as the ITAT’s ruling is a tribunal ruling, the issue is likely to be litigated in higher forums.The ITAT ruling places limits on the ability to invoke MLI-based provisions and emphasises that the MLI cannot be construed as a self-executing document. It also considers the taxpayer’s cross-border footprint and the industrial and economic advantages in Ireland’s ecosystem while analysing the PPT, emphasising the commercial nature of the transaction. The Mumbai ITAT acknowledged Ireland’s global role in aircraft leasing, validating the use of special purpose vehicles and the outsourcing of management as legitimate commercial practices and not indicators of tax avoidance. Although this ruling is in the context of aircraft leasing, its impact on the enforceability of MLI provisions will likely have far-reaching implications for all cross-border arrangements.
Jagat Mehta
Niranjan Govindekar
Shilpa Sethia
Tejashree Waje
BDO in India