I-T Slaps Rs 1,500 Cr Tax Notice on Airlines Incl IndiGo, 15 Lessors for Rearranging Leases

Airlines, including IndiGo, and their lessors have come under Indian income tax authorities' radar for allegedly taking advantage of tax benefits in Ireland. The tax authorities have issued multiple notices amounting to Rs 1,500 crore to three airlines and around 15 lessors for rearranging leases via special vehicles registered in Ireland between 2021 and 23, Moneycontrol reported. 

“The Indian tax authorities have challenged the credibility of the Ireland based SPCs/SPVs (Special Purpose Companies/Vehicles) owned by international lessors and their agreements with Indian airlines,” Moneycontrol reported, citing a senior executive from a domestic airline. 

The notices were reportedly sent in October last year and then in March this year. The Indian tax officials reportedly want the operating leases signed between Indian airlines and Ireland-based lessors in 2021-2022 to be reclassified as finance leases, which are taxed in the country.

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IndiGo, in an exchange filing on March 30 had mentioned the penalty order received by it of around Rs 944.20 crore from the Income Tax Department for 2021-22 assessment year. The Indian airline giant argued that the order is “erroneous” and it has planned to take a legal route to challenge it. 

“The order has been passed on the basis of erraneous understanding that appeal filed by the company before the Commissioner of Income Tax (Appeals) against the assessment order has been dismissed, whereas the same is still alive and pending adjudication,” IndiGo said in the statement. 

Presently, the cases are before an alternative mechanism comprising multiple I-T commissioners, the Dispute Resolution Panel (DRP). The authorities contested that the airlines have rearranged older lease agreements with lessors via Ireland-based SPVs to benefit from the tax scheme of Ireland. 

Under the finance lease, the airline (lessee) is responsible for most risks and rewards of ownership, and the tenure of the deal is ideally for a long period somewhere between 10 and 15 years. The airline in these deals most likely has an option to purchase the asset. In the case of operational leases, the lessor (leasing company) holds ownership and bears the risk or rewards of the aircraft asset, and the airline uses the asset for a comparatively short time period between 2 and 5 years and returns the asset to the lessor after the contract ends.