Brief Overview:

The Delhi Bench of Income-tax Appellate Tribunal (ITAT) in the case of Kosi Aviation Leasing Ltd. (Taxpayer)^[1] v. ACIT, has held that single omnibus notification under section 90(1) of the Income-tax Act, 1961 (IT Act) already issued would not legislate the amendments/modifications in existing tax treaties. A specific notification for each country is required under section 90(1) of the IT Act where the multilateral instrument (MLI) has the effect of amending/altering bilateral treaties.

The Delhi ITAT has ruled in favour of the Taxpayer relying on the Mumbai ITAT’s decision in the case of Sky High Appeal XLIII Leasing Company Ltd. v. ACIT^[2]. The Taxpayer has also raised certain other issues as a part of its appeal before the ITAT. However, this Alert focuses on the ITAT’s ruling on applicability of MLI being one of the key issues.

Facts of the Case:

• The Taxpayer is a company incorporated in Ireland in 2017 and is a tax resident of Ireland.
• The principal activity of the Taxpayer is leasing of commercial aircrafts. The Taxpayer has entered into an Aircraft Specific Lease Agreement on October 19, 2017, with M/s. Inter Globe Aviation Ltd. (Indigo), an Indian company for leasing of aircraft.
• The Taxpayer claimed the lease agreement entered between itself and Indigo as an operating lease and hence, claimed the lease rentals received by the Taxpayer as not taxable in India under Article 8 of the India-Ireland Tax Treaty.
• Amongst other things, the Assessing Officer (AO) invoked the applicability of MLI since India-Ireland Tax Treaty is a Covered Tax Agreement under the MLI and therefore, held that Taxpayer must comply with Principal Purpose Test.
• Aggrieved, the Taxpayer filed an appeal before the ITAT against the assessment order passed under section 143(3) read with section 144C(13) of the IT Act for AY 2022-23.

Taxpayer’s Contention:

Reliance on Mumbai ITAT’s decision - MLI does not become a binding force under domestic law and is not legally enforceable in the absence of specific notification under section 90(1) of the IT Act.

India-Ireland Tax Treaty is a Covered Tax Agreement but the modifications resulting from the MLI would not be validated automatically solely for this reason.

Domestic legislation - Article 6 and 7 of MLI cannot be applied unless they are backed by domestic legislation in the form of notification under section 90(1) of the IT Act.

Mumbai ITAT ruling is quite comprehensive and covers all possible facets on the issue arising on applicability of MLI.

Tax Authority’s Contention:

The Special Counsel representing the Tax Authority submitted that the Mumbai ITAT ruling is distinguishable as certain vital aspects have not been considered by the Mumbai bench while dealing with the issue of applicability of MLI.

Historic MLIs implemented through a single notification - Agreement amongst the Governments of SAARC Member States, the Multilateral Convention on Mutual Administrative Assistance in Tax Matter (MAAC) and Multilateral Competent Authority Agreement (CBCR) were all notified through a single notification under section 90(1) of the IT Act.

Global practice followed by dualist and monist countries - Countries like Ireland, South Africa etc. also notified MLI under delegated legislative provisions, i.e., MLI was assimilated in domestic law by a single omnibus notification.

Working of MLI framework - MLI is a multilateral treaty, to be applied alongside existing bilateral tax treaties modifying their applications. The bilateral treaties can be modified in a synchronized and consistent way in order to swiftly implement the tax treaties related BEPS measures.

Memorandum of Finance Act, 2020 - Provisions of section 90 of the IT Act were amended which recognizes that MLI is in force with effect from AY 2021-22.

Reference to SC Lowy P.I. (LUX) S.A.R.L. v. ACIT^[3] - Reference was made for interpretation of MLI provisions in the context of modification of existing tax treaty between India-Luxembourg.

Delhi ITAT’s Ruling:

Section 90(1) of the IT Act  Mandates for a notification whenever the Central Government enters into an agreement with the Government of any country outside India or when any amendment/alteration to existing tax treaty is made through a subsequent protocol, agreement, etc.

MLI operates on matching principles - MLI would come into force with the other country only when both countries notify MLI in their respective countries.

Supreme Court’s decision in the case of AO (IT) v. Nestle SA^[4] - Any amendment to the tax treaty would come into force only after notification under section 90(1) of the Act. The same analogy has to be applied in the case of MLI which has the effect of amending existing DTAAs.

Historic MLIs –

• SAARC agreement has been signed by all the member countries on the same day accepting all the terms and conditions of the agreement.
• MAAC is an administrative pact to cooperate and share information and does not amend or override existing bilateral tax treaties. Hence, it does not modify/alter substantive rights and obligations under Treaty.
• Agreement relating to CBCR does not override existing tax treaties. It is an administrative arrangement for information exchange. This was in fact notified under section 286 of the IT Act.

Global practice - The OECD clarifies that when MLI modifies tax treaty, the domestic legislation which transposes the modification made by MLI to the bilateral treaty must be followed for domestic implementation of the MLI.

Working of MLI framework - MLI has the effect of altering/modifying bilateral treaty provisions. Hence, notification under section 90(1) of the IT Act is mandatory as it has effect of amending the bilateral tax treaties to the extent of the consensus of both contracting states.

Memorandum of Finance Act, 2020 - The provisions of section 90(1) of the IT Act have been amended to align tax treaty with MLI, i.e., prior to said amendment there was no substantive provision for assimilating MLI into domestic legislation.

Reference to SC Lowy (supra) - The issue of applicability of MLI was never raised before the Tribunal in the said case.

Conclusion: The above findings reiterate that the MLI lacks legal binding force in the absence of a specific notification.

Sources 

[1] ITA No.994/DEL/2025. There are 75 different assesses whose facts and issues are common and identical to the Taxpayer’s case. Hence, they have been clubbed together for adjudication.

[2] [177 taxmann.com 579]

[3] 170 taxmann.com 475

[4] [458 ITR 756]