A recent order of the Delhi Bench of the Income Tax Appellate Tribunal (“Tax Tribunal”) on July 25, 2025, has provided important guidance on the tax treatment of aircraft lease arrangements in the context of cross border leasing between Indian airlines and overseas aircraft lessors.

In Celestial Aviation Trading 15 Ltd. v. ACIT [TS 980 ITAT 2025 (Delhi)], the Tax Tribunal examined the Indian Revenue department’s attempt to re-characterize lease rent received by the assessee as interest income under a financial lease, rather than as rental income under an aircraft operating lease.

The assessees, aircraft lessors, incorporated in and tax residents of Ireland (“Assessees”), had claimed that the lease rent received by them from InterGlobe Aviation Limited (the “Lessee”) was in respect of operating leases, covered under Article 8 of the India-Ireland Double Taxation Avoidance Agreement, and, therefore, not taxable in India.

The Assessing Officer of the Revenue department had examined the aircraft specific lease agreement, the contract with the aircraft original equipment manufacturer (“OEM”), and the aircraft bill of sale, and passed orders that the leases were not operating leases, but finance leases, and therefore taxable at 10% as interest income. Aggrieved, the Assessee filed objections before the Dispute Resolution Panel, however, such panel upheld the view of the Assessing Officer.
The Assessing Officer’s position was based on the following arguments:

• The Lessee had initially entered into a purchase agreement with the OEM to purchase aircraft, and had, subsequently, assigned such rights to the Assessee. The Assessee had then purchased aircraft and leased it to the Lessee.
• The ‘circuitous transaction’ was, in substance, a financial lease, where the aircraft were ‘purchased’ by the Lessee and purchase consideration was paid by the Assessee. The transaction must therefore be examined considering substance over form.
• The lease period covered a substantial portion of the aircraft’s economic life, with the Lessee having an option to extend the period of the lease.

The Tax Tribunal, after a detailed analysis of the aircraft lease agreements, circulars issued by the Reserve Bank of India (“RBI”), and relevant definitions under law and contract, rejected the Revenue department’s attempt to re-characterize the nature of the aircraft lease agreement. The Tax Tribunal noted the following:

• Under the aircraft lease agreements, the Lessee neither acquired ownership rights nor had any option to purchase the aircraft. Ownership always remained with the Assessee, with no provision for transfer to the Lessee either during the lease term or at the end. The provisions of the lease agreement stated, unambiguously, that at the end of the lease period, the Lessee was under obligation to return the aircraft to the Assessee.
• Since the terms ‘financial lease’ and ‘operating lease’ are not defined in the Indian Income-tax Act, 1961, the Tax Tribunal referred to such definitions under other Indian statutes such as the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and the Recovery of Debts and Bankruptcy Act, 1993. Such statutes require ownership of the leased asset to be transferred to the lessee at the end of the lease term. The Tax Tribunal noted that this condition was clearly not met in the case at hand.
• The lease did not require approval of the RBI as would have been necessary at the relevant time for a financial lease.
• The Revenue department’s argument that the lease agreement covered the ‘substantial’ commercial life of the aircraft, and that was sufficient to re-characterize the nature of lease was erroneous.

The Tax Tribunal’s decision comes as a welcome relief for the Indian aviation sector. It underscores the need for aircraft lease agreements to clearly reflect the intent of parties, particularly in relation to ownership and end-of-term provisions, so that in no event can an argument for re-characterization be raised. The observations of the Tax Tribunal will also need to be borne in mind as Indian airlines and overseas lessors explore various structures for leasing and financing aircraft transactions through GIFT City.