Summary: The Multilateral Instrument (MLI), which had originated from the OECD’s BEPS project, was meant to fast-track adoption of anti-avoidance measures without lengthy bilateral negotiations between multiple countries. India ratified the MLI in 2019 and the Revenue argued vociferously before the Supreme Court in the case of Nestle that every change to the DTAA shall have to be notified separately to give effect to such change and succeeded. Following the aforesaid SC decision, a few recent ITAT judgments have thrown a curveball by holding that MLI provisions cannot apply automatically to the DTAAs unless a specific notification is issued. Through this blog, we analyse the impact of these ITAT decisions, which may reshape ongoing tax litigation strategies.
The litigation over applicability of Double Taxation Avoidance Agreements (“DTAA”) provisions continues to evolve. Three recent ITAT judgments concerning the applicability of Multilateral Instruments (“MLI”) to DTAAs serve as notable examples of it. ITAT Mumbai in Sky High LXXIX Leasing Co. Ltd[1] as well as in Sky High Appeal XLIII Leasing Company Ltd.[2] (together referred as “Sky High case”) has held that MLI provisions adopted in the DTAA are inapplicable in the absence of issuance of a specific notification under Section 90(1) of the Income-tax Act, 1961 (“IT Act”). ITAT Delhi in Kosi Aviation Leasing Ltd.[3] (“Kosi Aviation case”) has also concluded the same.
The MLI, being an outcome of the OECD Base Erosion and Profit Shifting (“BEPS”) Project, was designed to swiftly amend bilateral DTAAs with multiple countries to incorporate modern anti-avoidance measures without having to negotiate with every country. India ratified MLI in 2019 and listed several of its DTAAs, including the India-Ireland DTAA, as “Covered Tax Agreements”, leading to automatic amendments to the DTAAs without further negotiations between any two countries. However, the principles laid down by the Supreme Court (“SC”) in the Nestlé SA (“Nestle case”)[4] judgment have raised questions regarding the applicability of MLI amended DTAAs.
In the Sky High case, an Ireland-based lessor leased aircraft to an Indian company under dry operating leases and filed NIL return. The lessor argued that lease payments were not taxable in India because it did not have a Permanent Establishment (“PE”) in India. It further explained that (a) the payments it did not constitute “royalty” under Article 12 of the India-Ireland DTAA and (b) income from aircraft rental was specifically covered by Article 8(1) of the India-Ireland DTAA, which taxed profits from international traffic solely in the resident country, i.e. Ireland. The tax authorities, however, recharacterised the arrangement as finance lease, asserted the existence of a PE, and invoked the Principal Purpose Test (“PPT”) under MLI to deny the DTAA benefit. Mumbai ITAT rejected all three assertions. Relying on the Nestle case, it held that modifications to a DTAA by MLI requires a specific notification under Section 90(1) of the IT Act to become effective in India. Since no such notification incorporating PPT provisions into the India-Ireland DTAA had been issued, MLI could not be invoked.
The Delhi ITAT echoed these findings in the Kosi Aviation case, which involved a bunch of 75 appeals heard together wherein Irish lessors had leased aircraft to an Indian airline and claimed exemption under the India-Ireland DTAA. The tax authorities once again attempted to apply the MLI’s PPT, arguing that the structure lacked commercial substance and was designed to obtain DTAA benefits. Delhi ITAT, however, reaffirmed that MLI’s provisions were not self-executing and could not be applied automatically in the absence of a country-specific notification under Section 90(1) of the IT Act. The general notification of August 2019[5], which merely announced India’s ratification of MLI, was held insufficient to alter the terms of any specific DTAA. The Delhi ITAT relied on the same reasoning as the Mumbai ITAT and held that since the India-Ireland DTAA had not been formally amended through a domestic notification, the PPT provisions had no legal force.
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The judgments in Sky High case and Kosi Aviation case present an interesting tenet of Indian tax law, with respect to applicability of DTAA amendments. While the Nestle case judgment was against the taxpayer, mandating issuance of separate notification for applying the benefits of MFN clause in the DTAA, the same is now being used by the taxpayers for their own benefit by arguing against the applicability of MLI in the DTAA. While the tax authorities argued that a distinction can be made between the process of adoption of the MFN clause and that of MLI, it was rejected by ITAT, holding that both instruments have the effect of modifying existing DTAAs, and under the Nestle case, any modification to a DTAA requires a specific Section 90(1) notification. The ITAT emphasised that MLI too “operates to modify tax treaties”, just like MFN protocols and, therefore, the same constitutional and statutory requirements apply.
The ITAT judgments also suggest that tax authorities cannot rely on MLI-based provisions unless the relevant DTAA is formally amended and enforced through a domestic notification. Thus, until India issues country-wise notifications incorporating MLI provisions into its DTAAs, taxpayers can rely on unmodified DTAAs. This position is likely to influence ongoing litigations and structuring of transactions.
Due to the position upheld by the Supreme Court in the Nestle case, the ‘ghosts of the past’ have come to hound the tax authorities. It will be interesting to track further developments on the matter, as it unfolds in the High Court.
[1] Sky High LXXIX Leasing Co. Ltd. v. ACIT (IT)[2025] 179 taxmann.com 264 (Mumbai – Trib.)[06-10-2025].
[2] Sky High Appeal XLIII Leasing Co. Ltd. v. Asstt. CIT (Int. Tax) [2025] 177 taxmann.com 579 (Mumbai – Trib.).
[3] Kosi Aviation Leasing Ltd. & Others vs Assistant Commissioner of Income Tax IT Appeal No. 994 (Delhi) of 2025, dated 30-9-2025.
[4] Nestle SA v. Assessing Officer (International Taxation) [2024] 165 taxmann.com 334/300 Taxman 361 (SC).
[5] Central Board of Direct Taxes. (2019, August 9). Notification No. 57/2019: Multilateral Instrument and India’s Position. Ministry of Finance, Government of India.