4 July, 2019
OVERVIEW
Conventions
To which major air law treaties is your state a party?
India has ratified the Chicago Convention, but has opted not to ratify article 3 (Civil and State Aircraft) and article 83 (Transfer of Certain Functions and Duties) thereunder. India has ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed in New York in 1958 (the New York Convention). An award made in a country that is a party to the New York Convention, and that has further been notified as a reciprocating territory by the government of India, is treated as a ‘foreign award’ under Indian law.
India acceded to the Cape Town Convention on International Interests in Mobile Equipment and the Protocol to the Cape Town Convention on International Interests in Mobile Equipment (Protocol) on 31 March 2008. However, only specific provisions of the Cape Town Convention and the Protocol have become effective from 1 July 2008. It is pertinent to note that although the Cape Town Convention has been ratified, the government of India has not yet enacted legislation implementing the opt-in declarations of the provisions of such in India.
India is a party to the Warsaw Convention (1929), the Hague Protocol (1955) and the Montreal Convention (1999), and the provisions provided therein, subject to the provisions of the Carriage by Air Act 1972 (Carriage Act), have the force of law in India in relation to any carriage by air irrespective of the nationality of the aircraft performing the carriage. India has not signed the Geneva Convention on the International Recognition of Rights in Aircraft (1948) or the Convention for the Unification of Certain Rules Relating to the Precautionary Arrest of Aircraft (1933).
Domestic legislation
What is the principal domestic legislation applicable to aviation finance and leasing?
There is no principal domestic legislation applicable to aviation finance and leasing. However, various aspects of an aircraft leasing and financing transaction are governed, inter alia, by the Indian contract laws, Indian company laws and Indian foreign exchange regulations. Also, the (Indian) Aircraft Act, 1934, read with the (Indian) Aircraft Rules, 1937 and the Civil Aviation Requirements, as prescribed by the Directorate General of Civil Aviation (DGCA) from time to time, governs certain aspects of aircraft leasing in India.
Governing law
Are there any restrictions on choice-of-law clauses in contracts to the transfer of interests in or creation of security over aircraft? If parties are not free to specify the applicable law, is the law of the place where the aircraft is located or where it is registered the relevant applicable law?
Indian law, in general, recognises the freedom of the parties from different jurisdictions to choose the proper law of contract. Therefore, Indian law will generally recognise a title transfer that is valid under the governing law of the contract, unless such recognition is against public policy in India, or unless the choice of law appears to have been made with a view to avoid any mandatory requirements under Indian law.
Transfer of aircraft
How is title in an aircraft transferred?
Title in an aircraft can be transferred by execution of a sale agreement or a bill of sale between the seller and the buyer of the aircraft. If such agreement is executed outside India and is then brought into India, whether by way of physical delivery or fax, email or any other electronic means for any purpose, the same will have to be stamped within the statutorily prescribed period in accordance with the stamp laws in force in the relevant state in which the transaction documents are brought.
Transfer document requirements
What are the formalities for creating an enforceable transfer document for an aircraft?
As mentioned in question 4, documents that are executed outside India, and are subsequently brought into India, must be stamped within the statutorily prescribed period in accordance with the stamp laws in force in the relevant state in which the transaction documents are brought. In addition to the stamp duty requirement, the transfer documents should be notarised and apostilled for submitting to government authorities, essentially the DGCA.
Aircraft registry
Identify and describe the aircraft registry.
The aircraft register in India is maintained by the DGCA. This register contains details in relation to the aircraft such as the following:
• the type of aircraft;
• the year of manufacture;
• the full name and address of the owner or lessor; and
• the full name and address of the operator or lessee.
This register is open for inspection by members of the public, both at the DGCA headquarters and on the DGCA website.
India has ratified article 83-bis of the Convention on International Civil Aviation and has also suitably amended the Aircraft Rules. There is no engine-specific register in India.
Registrability of ownership of aircraft and lease interests
Can an ownership or lease interest in, or lease agreement over, aircraft be registered with the aircraft registry? Are there limitations on who can be recorded as owner? Can an ownership interest be registered with any other registry? Can owners’, operators’ and lessees’ interests in aircraft engines be registered?
As stated above, the DGCA’s aircraft register is an owner registry, although it also includes details of the operator, if different from the owner. There is no separate register for leases and aircraft engines maintained in India. Further, once registered with the DGCA, there is no requirement to have the aircraft ownership registered at any other registry in India. In case of a leased aircraft, in addition to the details mentioned above, details (names, nationalities and address) of the lessor and lessee, including the period of validity of the lease agreement, will also be required to be mentioned.
Registration of ownership interests
Summarise the process to register an ownership interest.
The owner of the aircraft is required to register his or her interests in the aircraft with the DGCA by filing a prescribed form, along with providing supporting documentary proof in relation to the details mentioned therein together with the prescribed fee (calculated on the basis of the maximum permissible take-off weight of the aircraft). The DGCA has prescribed a period of two working days from the receipt of the form, fees and necessary supporting documents for an aircraft to be registered and a certificate of registration to be issued to the owner.
As mentioned above, there is no separate registration of title to the engine of an aircraft.
Title and third parties
What is the effect of registration of an ownership interest as to proof of title and third parties?
The register of the DGCA is merely a ‘notation’ register; courts in India would accept the certificate of registration, issued by DGCA, as prima facie evidence of lessor, lender or owner interest in the aircraft. It would be difficult to defend a case in the courts against third parties if the owner has no or defective title as per the records of the DGCA.
Registration of lease interests
Summarise the process to register a lease interest.
See question 7.
Certificate of registration
What is the regime for certification of registered aviation interests in your jurisdiction?
The DGCA issues the certificate of registration for the aircraft. The following details are recorded in this certificate:
• the type of aircraft;
• the manufacturer’s serial number;
• the year of manufacture;
• the nationality and registration marks of the aircraft;the full name, nationality and address of the owner or lessor;
• the full name, nationality and address of the operator or lessee;
the usual station of the aircraft;
• the date of registration of the aircraft and the period of validity of such registration; and
• the name of the security interest holder, if any.
There is no separate engine certificate of registration in India.
Deregistration and export
Is an owner or mortgagee required to consent to any deregistration or export of the aircraft? Must the aviation authority give notice? Can the operator block any proposed deregistration or export by an owner or mortgagee?
Under Indian law, the registration and deregistration of an aircraft may only be done by the owner or the owner’s authorised representatives. Under the Aviation Rules, the holder of an irrevocable deregistration and export request authorisation (IDERA) may apply to the DGCA for cancellation of the registration of the aircraft prior to the expiry of the aircraft lease after:
• providing the original or notarised copy of the IDERA; and
• ensuring that either:
– all registered interests in respect of the aircraft have been discharged; or
– the holders of such registered interests have consented to the deregistration or export of the aircraft.
The government of India amended Rule 30(7) of the Aircraft Rules on 28 March 2017, which mandates the DGCA to deregister an aircraft within five working days post submission of an application as per the above-mentioned procedure. Rule 32A imposes an obligation upon the central government to take action within five working days to facilitate the export and physical transfer of deregistered aircraft, subject to applicable safety rules. Upon receipt of the deregistration application, the DGCA is also required to publish this fact on its website and notify the designated officers of the relevant airport operators registered with it, in this regard.
Based on the notice received from the DGCA, airport operators and other organisations having outstanding dues are required to calculate and notify their dues related to the aircraft for a period of three months immediately preceding the deregistration request date, to DGCA within five working days, which in turn will be notified by the DGCA to the IDERA holder. Without affecting the liability of the lessee, the party in whose favour the IDERA has been issued or its certified designee may opt to repay such outstanding dues of airport operators and other organisations immediately preceding the deregistration request date to DGCA in relation the aircraft in order to expedite the export and physical transfer of the aircraft, along with spare engine, if any. In the case of a repayment by the holder of the IDERA, within two working days such airport operators and other organisations have to issue a confirmation to the IDERA holder that the bills have been cleared. Upon receipt of such certification and after having received clearance from the customs authorities, the DGCA is required to promptly issue the permissions for export of the aircraft, which is required for any aircraft registered in India to leave India.
In the normal course of things, it is not possible for the operator to block any proposed deregistration or export by an owner or mortgagee. However, there have been instances in the past where the operator has delayed deregistration or export of the aircraft by raising disputes regarding the termination of the underlying lease agreement before the Indian courts.
It is important to note that notwithstanding the above, the Aircraft Rules provide that any entity of the government of India, any intergovernmental organisation or any other private provider of public services in India shall have the right to arrest, detain, attach or sell an aircraft object for payment of amounts owed to the government of India (or any such entity directly providing services or performing the functions of the government of India) in respect of that object.
Powers of attorney
What are the principal characteristics of deregistration and export powers of attorney?
A valid deregistration power of attorney (DPOA) executed by the lessee or operator in favour of the owner or lessor enables such owner or lessor to deregister the aircraft without the need for judicial intervention. Further, Indian law provides for both revocable and irrevocable powers of attorney, the distinction being that for a power of attorney to be irrevocable it must be coupled with an interest of the attorney being appointed in exercising the power under the power of attorney. Based on our experience, it is advisable that a duly stamped and notarised copy of a DPOA (executed by the operator in favour of the owner) be filed with the DGCA in addition to the IDERA (discussed in more detail below), as this expedites procedures at the time of enforcement.
Cape Town Convention and IDERA
If the Cape Town Convention is in effect in the jurisdiction, describe any notable features of the irrevocable deregistration and export request authorisation (IDERA) process.
An IDERA can be filed with the DGCA and the acknowledgement of the DGCA can be obtained. While there is no requirement that an IDERA be countersigned by the aviation authority (ie, the DGCA) it is advisable that the acknowledgement of the DGCA be obtained as this ensures that the DGCA will note the fact of issuance of the IDERA by the operator and that the owner or lessor is entitled to exercise its rights under the IDERA. While the DGCA does not have any preferred way to deal with a financier as the beneficiary’s ‘certified designee’, they may at the time of making any filing ask for any further supporting documents relating to such financing arrangements.
The IDERA process exists in parallel with the DPOA, and the courts have recognised the IDERA as an instrument similar to the DPOA.
Security documentary requirements and costs
What are the documentary formalities for creation of an enforceable security over an aircraft? What are the documentary costs?
The documentary formalities for creation of an enforceable security are similar to the formalities in relation to the title transfer documents. In this regard, see questions 4 and 5. If the owner of an aircraft is an Indian company or a company with a registered place of business in India, then additional requirements to perfect the security will apply, such as filing of charges (discussed in more detail below).
Security registration requirements
Must the security document be filed with the aviation authority or any other registry as a condition to its effective creation or perfection against the debtor and third parties? Summarise the process to register a mortgagee interest.
There is no separate register of aircraft mortgages in India. However, the Civil Aviation Requirements require the owner of an aircraft to file a notarised and apostilled copy of the mortgage documents evidencing the creation of the charge with the DGCA, which will endorse the name of the mortgagor on the certificate of registration.
As per law, if the mortgagor is an Indian company or a company with a registered place of business in India, the mortgagor must, within a prescribed period, register any charge (which includes a mortgage) created with the relevant Registrar of Companies (ROC) in the prescribed form. The Indian company laws require such filing to be made within 30 days of the creation of the charge, in the prescribed form, along with the complete particulars of the charge, including the instrument creating such charge.
Registration of security
How is registration of a security interest certified?
The registration of a security interest is certified by an acknowledgement given by the ROC at the time such registration is done by filing the prescribed forms along with the supporting documents. The ROC maintains a register of charges, which evidences the existence of the charge over the aircraft, and records the nature and details of the instrument creating the charge. The register of charges is a public document and constitutes notice to third parties of the existence of such charge. Only charges created by Indian owners of aircraft are required to be registered with the ROC. There is no requirement to do so for a foreign owner of an aircraft operated in India.
In respect of filings made with the DGCA, an acknowledgement of the same may be obtained at the time of making the filing.
Effect of registration of a security interest
What is the effect of registration as to third parties?
See question 18. Priority of charges is based on the date of creation of charges, not on the basis of date of registration of charges, provided the charges are in fact registered within the statutorily prescribed period.
Security structure and alteration
How is security over aircraft and leases typically structured? What are the consequences of changes to the security or its beneficiaries?
The concept of trust and security trustee is recognised in India. Typically, in financing transactions involving one or more lenders, the security over aircraft and leases is structured through a security trustee who holds and enforces the security interests on behalf of the lenders.
As per law, a mortgagee’s right in an aircraft is a right in personam. Indian law also facilitates arrangements whereby a security trustee may hold the security for a changing group of beneficiaries. When the underlying loan is transferred or if the lenders change, although there is no security register in India it is advisable to inform the DGCA about such changes.
Security over spare engines
What form does security over spare engines typically take and how does it operate?
There is no requirement or regime in India for registration of a lease or mortgage of an engine, separate from that of the aircraft. In relation to leased aircraft, typically the engines are not considered as separate items.
In our experience, provisions in relation to title, security and obligations or restrictions in relation to spare parts are set out in the lease agreement, which also records evidence of owner’s title and beneficial interest in relation to the parts (present and future) and also on the spare parts (present and future), whether such spare parts are repaired or replaced.
Repossession following lease termination
Outline the basic repossession procedures following lease termination. How may the lessee lawfully impede the owner’s rights to exercise default remedies?
An aircraft may be repossessed through the DGCA (DGCA process) or by initiating legal action (court process).
DGCA process
Under Indian law, the validity of the certificate of registration is co-terminus with the validity of the lease deed. Hence, after termination of the lease, all parties with an interest in the aircraft are required to submit to the DGCA separate plain-paper applications along with the necessary documents seeking the deregistration of the aircraft. Thereafter, an approval from the Bureau of Civil Aviation Security is required to obtain physical custody of the aircraft.
In the case of a hostile repossession, the owner, lessor or security trustee may repossess the aircraft on the basis of a duly stamped and notarised DPOA, an IDERA or both, if such instruments have been issued by the lessee in their favour. See question 12 for further information in this regard.
Court process
In the event that the lessor chooses not to follow the DGCA process or the DGCA fails or refuses to deregister the aircraft, the lessor may initiate legal action to repossess the aircraft. As the DGCA is a government body, the lessor can file a writ petition in the High Court, within whose jurisdiction the DGCA’s order was passed, seeking to quash the DGCA’s order and asking for a direction to be issued to the DGCA to rehear the application for deregistration and repossession.
Enforcement of security
Outline the basic measures to enforce a security interest. How may the owner lawfully impede the mortgagee’s right to enforce?
The manner of enforcement of a security interest largely depends upon the type of interest to be enforced.
Immovable property
Creditors in India can take security over immovable property by way of mortgage. In India, mortgages are commonly in the form of an equitable mortgage or English mortgage. A mortgagee’s right depends on the type of mortgage in question.
Equitable mortgage
In an equitable mortgage, the mortgagee may enforce his or her security by filing a civil suit for either sale of the mortgaged property, or to sue the mortgagor personally for the mortgage money subject to the fulfilment of certain conditions. A mortgagee may also request the court to appoint a receiver for the mortgaged property in certain circumstances.
English mortgage
In an English mortgage, the mortgagee may enforce his or her security by filing a civil suit for either sale of the mortgaged property, or to sue the mortgagor personally for the mortgage money subject to the fulfilment of certain conditions. In addition, in an English mortgage, a mortgagee may also have the power to sell the mortgaged property without the intervention of the court if certain conditions are satisfied.
Movable property
Movable properties are most commonly charged by way of execution of a ‘deed of hypothecation’. A deed of hypothecation usually contains provisions entitling the creditor (beneficiary of the hypothecation) to appoint a private receiver (to take possession of the hypothecated properties) and sell the hypothecated properties without requiring the intervention of a court. Courts in India have, by and large, been consistent in upholding the lender’s right to thus take possession of hypothecated properties and sell the same, provided the deed of hypothecation so empowers the lender.
Cash or bank accounts
Cash and bank accounts are charged in the same manner as movable properties, namely by way of execution of a deed of hypothecation. Upon default, if the bank accounts being charged are maintained with the lending bank itself, the lending bank shall have the right to appropriate monies lying credited in the account towards its dues. A charge by way of hypothecation may be created over account balances and bank accounts maintained with banks other than the lending bank as well. The manner of enforcement of a hypothecation created over bank accounts maintained with banks other than the lending bank will depend upon the process and procedure that had been followed at the time of creation of the hypothecation.
Securities
There are two separate regimes under which securities are pledged under Indian law, depending on the form of securities (ie, whether the securities are evidenced by physical certificates, or whether the securities are electronic or dematerialised). In the event that physical securities have been pledged, the lender has the right to sell the pledged securities and adjust the consideration received against its dues. In the event that dematerialised securities have been pledged, then the lender must first acquire the securities in its own name and thereafter transfer the securities to a buyer and appropriate the consideration for the sale towards its dues.
Effect of insolvency
Under the Insolvency and Bankruptcy Code, 2016 (IBC), if an order has been passed by the National Company Law Tribunal (NCLT) to commence a corporate insolvency resolution process (CIRP) against a corporate debtor (insolvency commencement date), a moratorium becomes applicable for a period of 180 days (extendable by up to a maximum of 90 days) (CIRP period). During the CIRP period, no suit or legal proceeding can be commenced (including any action to enforce security interest) against the corporate debtor and no pending proceeding can be proceeded with against the corporate debtor. Additionally, recovery of any property by a lessor where such property is in the possession of the corporate debtor is also prohibited during the moratorium.
However, in liquidation proceedings, a lessor is permitted to repossess its property. Section 36(4) of the IBC specifically lays down that assets owned by a third party, which are in the possession of the corporate debtor, shall be excluded from the liquidation estate. In liquidation proceedings, a secured creditor may either:
• relinquish its security, in which case its entire debt ranks second in the waterfall of payments made for liquidation of the general assets of the corporate debtor (after liquidation-related costs); or
• opt to stay out of the liquidation and enforce its security outside the IBC liquidation process. To the extent that the secured debt is not discharged by the enforcement proceeds, the remaining debt of the secured creditor will rank much lower in the waterfall of payments (ranking after liquidation costs, secured creditors who have relinquished their security, employee or workmen’s dues and unsecured financial debts).
The IBC also provides for clawback of transactions in certain instances. Under sections 43 and 45 of the IBC, the NCLT may reverse any transaction that is deemed to be a preferential transaction or an undervalued transaction, respectively, in the period leading up to the commencement of the CIRP. The relevant look-back period for scrutinising suspect transactions is two years in the case of a related party and one year with any other person. Under section 50 of the IBC, the NCLT may reverse any transaction that is deemed to be an extortionate credit transaction, in the two-year period leading up to the commencement of the CIRP.
Priority liens and rights
Which liens and rights will have priority over aircraft ownership or an aircraft security interest? If an aircraft can be taken, seized or detained, is any form of compensation available to an owner or mortgagee?
The laws of India recognise the following liens in favour of third parties:
• airline employees for unpaid wages;
• repairers for repairs of aircraft in the repairers’ possession, to the extent of service or services performed; and
• governmental or other unpaid statutory dues.
In the event that an aircraft has been detained by any authority for the non-payment of dues by the operator, the owner of the aircraft may be required to seek relief from the courts. There have been numerous instances where the courts have held that the aforementioned liens are to be borne by the operator and their failure to pay cannot result in the detention of the aircraft.
In addition, Indian laws permit the central government to empower any authority to detain an aircraft if such detention is necessary to secure compliance with a domestic legislation or when such detention is necessary to prevent a contravention of any such legislation or to implement any order made by any court. For instance, the Airport Authority of India has been authorised to detain an aircraft until all fees owed to it by the operator have been paid.
In addition, the central government has the power to give directions to detain or requisition either foreign-owned or locally owned aircraft in the interest of public safety and security. There is no statutory requirement for the central government to compensate the affected parties. However, as India has entered to bilateral investment agreements with several countries, a foreign investor could resort to legal protection accorded under such agreements, against the government of India for any discriminatory treatment and claim adequate compensation for any such detention or expropriation.
Enforcement of foreign judgments and arbitral awards
How are judgments of foreign courts enforced? Is your jurisdiction party to the 1958 New York Convention?
Foreign awards
The provisions relating to recognition and enforcement of foreign arbitration awards are contained in the (Indian) Arbitration and Conciliation Act, 1996 (the Arbitration Act). India has ratified the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, signed at New York in 1958 (the New York Convention). An award made in a country which is a party to the New York Convention, and which has further been notified as a reciprocating territory by the government of India is treated as a ‘Foreign Award’ under section 44 of the Arbitration Act. Where the place of arbitration is outside India, and held in a New York Convention country or a Geneva Convention country notified as a ‘reciprocating territory’ by the Indian government, the award is enforceable as a ‘foreign award’ under Part II of the Arbitration Act.
The enforcement of a foreign award in India is a two-stage process that is initiated by filing an execution petition. Initially, a court would determine whether the award adhered to the requirements of the Arbitration Act. Once an award is found to be enforceable it may be enforced like a decree of that court. The grounds of challenge of a foreign award are exhaustive and courts are not entitled to expand the grounds for refusal of enforcement. As a result, courts in India are generally reluctant in re-examining the award on merits.
However, enforcement of a foreign award may be resisted by counterparty on any of the following grounds:
• the parties to the arbitration agreement were under some incapacity, or the agreement is not valid under the law to which it was subjected or under the law where the award was made;
• the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitral proceedings or was otherwise unable to present its case;
• the award deals with a difference not contemplated by or not falling within the terms of the submission to arbitration, or it contains decisions on matters beyond the scope of the submission to arbitration; or
• the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties or failing such agreement, was not in accordance with the law of the country where the arbitration took place;
• the award has not yet become binding on the parties or has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made;
• the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or
• the enforcement of the award would be contrary to the public policy of India.
Where the court is satisfied that the foreign award is enforceable, the award shall be deemed to be and can be executed as a decree of an Indian court. While a decree holder is ordinarily entitled to choose the particular mode of execution, this is subject to the discretion of the court.
Foreign judgments
Enforcement of a judgment issued by a foreign court is subject to Sections 13 and 44A of the CPC. Section 44A of the CPC provides that where a decree or a judgment of a court has been rendered for the payment of a sum of money (other than being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty) by a ‘superior court’ in a territory which the government of India has by notification recognised to be a ‘reciprocating territory’, it may be enforced in India by proceedings in execution as if the judgment had been rendered by a relevant court in India without any examination of issues.
However, it is open for the Indian court to refuse the execution of such a decree, if it is shown to the satisfaction of the Indian court that the decree falls within any of the below exceptions, set out in section 13 of the CPC:
• if it has not been pronounced by a court of competent jurisdiction;
• if it has not been given on the merits of the case;
• if it appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise the law of India in cases in which such law is applicable;
• if the proceedings in which judgment was obtained are opposed to natural justice;
• if it has been obtained by fraud; and
• if it sustains a claim founded on a breach of any law in force in India.
• If the judgment is not passed by one of the superior courts of a reciprocating territory or where the decree or judgment sought to be enforced does not qualify as a money decree, then a fresh suit will have to be filed on the basis of the judgment or decree for seeking enforcement in India and the decree in such a suit will have to be executed, subject to the exceptions contained in section 13 of the CPC.
The United Kingdom has been declared to be a reciprocating territory, and the Supreme Court, the Court of Appeal, High Court in England, Court of Sessions in Scotland, High Court in Northern Ireland, Court of Chancery of India Palatine of Lancaster and Court of Chancery of the Court Palatine of Durham have been declared to be superior courts of the United Kingdom of Great Britain, under section 44A of the CPC. However, the State of New York or other states in the United States of America are not recognised as a ‘reciprocating territory’.
Taxes
What taxes may apply to aviation-related lease payments, loan repayments and transfers of aircraft? How may tax liability be lawfully minimised?
Lease rentals payable to a non-resident for use of aircraft for the purpose of a business carried on in India by the payer (whether by resident or non-resident) is taxable in India as royalty under the domestic tax law, and is subject to withholding tax at the rate of 10 per cent (plus applicable surcharge and cess) on a gross basis.
Loan repayments to non-residents may comprise two components: principal and interest. The principal amount of the loan would not be taxable in India and would not be subject to tax withholding in India. However, the interest element would be taxable in India under the domestic tax law if the loan is borrowed for the purpose of a business carried on in India by the payer (whether by resident or non-resident) and would be subject to withholding tax in India at the applicable rates, which may vary from 5 per cent (plus applicable surcharge and cess) to 40 per cent (plus applicable surcharge and cess), depending on the nature of debt instrument. Further, the gain, if any, arising to a non-resident from a transfer of an aircraft registered and operated in India may be subject to capital gains tax in India under the domestic tax law. The rate of tax would depend upon the period of holding of the aircraft. If the aircraft is held for a period exceeding three years, then the capital gains, if any, would be taxed at the rate of 20 per cent (plus applicable surcharge and cess); otherwise the same would be taxed at the rate of 40 per cent (plus applicable surcharge and cess). The same would be subject to tax withholding accordingly. However, all three above-mentioned tax liabilities may be subject to any benefits available under the applicable tax treaty.
There may not be any way to minimise the aforesaid tax liabilities. The capital gains tax, if any, applicable on sale of an aircraft registered and operated in India, would not be impacted by whether the aircraft is on the ground or in the airspace.
Further, grossing-up provisions are recognised under Indian income tax laws. However, in case of gross-up, for the purposes of deduction of tax, the amount on which tax is required to be deducted and deposited to the account of the central government shall be increased to an amount such that after the deduction of tax thereon, the net income is equal to the actual amount paid to the recipient of payments. Lease payments would be subject to goods and services tax. Further, transfer of aircraft in certain circumstances may be subject to goods and services tax.
Exchange control
Are there any restrictions on international payments and exchange controls in effect in your jurisdiction?
India is an exchange-controlled jurisdiction, and matters relating to remittance or repatriation of foreign exchange are governed by the provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder.
Under law, Indian operators do not require any approval of the Reserve Bank of India (RBI) for any remittance of operating lease rentals, opening of letters of credit towards security deposit etc, in respect of import of aircraft, aircraft engines or helicopters on an operating lease basis. However, for other payments (eg, rentals in financial lease transactions, indemnity payments and payments towards insurance premia), the prior approval of the RBI might be required.
Default interest
Are there any limitations on the amount of default interest that can be charged on lease or loan payments?
While there are no express limitations on the amount of default interest that can be charged on lease or loan payments, the courts have been active to ensure that such interest is not usurious or excessive. In determining if the rate of interest charged is excessive, the courts may consider the market rate, inflation and also a fall in the bank rate. In the absence of any agreement or statutory provision or mercantile usage, the courts may also defer to the market rate upon establishment of a totality of circumstances justifying the exercise of such equitable jurisdiction.
Customs, import and export
Are there any costs to bring the aircraft into the jurisdiction or take it out of the jurisdiction? Does the liability attach to the owner or mortgagee?
Import
To import an aircraft into India, the owner of the aircraft must apply for a temporary certificate of registration.
The fee payable in respect of a temporary certificate of registration for an aircraft is 25 per cent of the fee payable for applying for a certificate of registration (which varies depending on the maximum permissible take-off weight of the aircraft). If the aircraft has been imported into India for private use, in addition to the temporary certificate of registration, the owner of the aircraft will also need to apply to the Director General of Foreign Trade (DGFT) for an import licence. The custom duty payable for an import licence is waived for import of aircraft by operators who have been approved by the Ministry of Civil Aviation to provide scheduled (passenger) and non-scheduled (charter) services. However, in certain cases a ‘no objection certificate’ may be required from the DGCA for import of the aircraft prior to availing such exemption.
Export
Except when an exemption has been granted by the DGCA and DGFT (in case of private aircraft), no owner can export an Indian-registered aircraft from India without obtaining an export licence. The costs for obtaining this licence vary from case to case. In addition to obtaining the export licence, the owner of the aircraft will need to obtain a ‘ferry flight permit’, for flying the aircraft outside India. An application for a ferry flight permit can be made along with the request for deregistration. There are no costs involved in obtaining a ferry flight permit.
Captive insurance
Summarise any captive insurance regime in your jurisdiction as applicable to aviation.
As per law, an operator of aircraft in India has an obligation to maintain adequate insurance to cover its liability towards passengers and their baggage, crew, cargo, hull loss and third-party risks in compliance with the requirements of the Carriage Act, or any other applicable law. In aircraft lease financing transactions, the lessee is required to obtain such insurance from an Indian insurer that is generally reinsured with an offshore reinsurer subject to satisfying certain requirements, including that such reinsurer shall maintain a prescribed credit rating of an international credit rating agency.
However, an Indian insurer must also reinsure a minimum of 5 per cent of the sum assured on each policy (which shall be capped at a sum of 30 per cent (or such other sum prescribed by the regulatory authority) of the sum assured on each policy) with an Indian reinsurer.
Cut-through clauses
Are cut-through clauses under the insurance and reinsurance documentation legally effective?
In our view, the prior approval of the RBI is likely to be required to be obtained by the Indian insurer in order to include a cut-through clause. However, several insurers in India take the view that the approval of the RBI is not required for including a cut-through clause. In any event, this is a compliance item for the Indian insurer and not for any other party.
Reinsurance
Are assignments of reinsurance (by domestic or captive insurers) legally effective? Are assignments of reinsurance typically provided on aviation leasing and finance transactions?
In our view, a prior approval from the RBI is likely to be required in connection with assignment of reinsurances. However, several Indian insurers tend to take the view that no prior approval from the RBI is required.
That said, we have seen that the assignment of reinsurances in favour of lenders is an Indian industry standard in aircraft financing transactions.
Liability
Can an owner, lessor or financier be liable for the operation of the aircraft or the activities of the operator?
No. Under Indian law, the liability for damages is imposed only on the carrier and the owner is not liable for the operator’s actions as long as ownership is clearly distinct from operation of the aircraft and the owner is not involved in the actual operation of the aircraft.
Strict liability
Does the jurisdiction adopt a regime of strict liability for owners, lessors, financiers or others with no operational interest in the aircraft?
While the common law principle of strict liability exists in India, its application is limited to matters not covered by a specific statute. Since an aircraft or carrier’s liability in India is codified in the Carriage Act, the common law principle of strict liability finds no application to instances covered by the Carriage Act.
Third-party liability insurance
Are there minimum requirements for the amount of third-party liability cover that must be in place?
Yes. As per the Carriage Act, the operator of an aircraft has an obligation to maintain insurance for an amount that is adequate to cover its liability towards passengers and their baggage, crew, cargo, hull loss and third-party risks.
Recent developments
The Ministry of Civil Aviation published the Cape Town Convention Bill, 2018 (the Bill) on 8 October 2018 to implement the Convention/Protocol in India with a view to discharging the treaty obligations and to avail benefits of the Indian accession to the treaty. The main feature of the Bill is that the Cape Town Convention and Protocol have been given the force of law in India and have been appended to the Bill as first and second schedule respectively. The declarations made by India have also been made a part of the Bill as the third schedule. The Bill also contains a provision that will accord primacy to the provisions of the Convention/Protocol in the case of conflict with any other law. It also empowers the government to make rules, if necessary, for implementing the Convention and the Protocol in India. The Bill was open for public consultations for a period of 30 days from publication. Since the public consultation period has expired, the Bill will now need to be passed by both houses of Parliament when they are in session. The Indian (national level) elections are due to be held between April and May 2019), and in this environment, it is difficult to ascertain or predict when the Bill may be promulgated as legislation by Parliament.
For further information, please contact:
Anand Shah, Partner, AZB & Partners
anand.shah@azbpartners.com
