In Civil Appeal No. 836 of 2018 -SC- Supreme Court allows M/s. Krishak Bharti Cooperative Ltd. to claim tax credit for dividend income received from Oman Joint Venture
Justice B.V. Nagarathna & Justice Prashant Kumar Mishra [15-09-2023]

Read Order: Principal Commission Er of Income Tax-10 V. M/s Krishak Bharti Cooperative Ltd.

Chahat Varma

New Delhi, September 20, 2023: In a significant ruling, the Supreme Court has upheld the Delhi High Court's decision, affirming that M/s. Krishak Bharti Cooperative Ltd. (assessee) was entitled to claim a tax credit for dividend income received from a joint venture in Oman.

The brief facts of the case were that the assessee, was a multi-State Co-operative Society registered in India and operating under the administrative control of the Department of Fertilizers, Ministry of Agriculture and Co-operation, Government of India. As part of its business activities related to fertilizer manufacturing, the assessee entered into a joint venture with the Oman Oil Company, resulting in the formation of the Oman Fertilizer Company SAOC (JV). This JV was registered as a company in Oman, operating in accordance with Omani laws, and the assessee held a 25% share in it. Furthermore, the assessee had a branch office in Oman which was independently registered as a company under the Omani laws having permanent establishment (PE) status in Oman in terms of Article 25 of the Double Taxation Avoidance Agreement (DTAA) between India and Oman.

The Assessing Officer (AO) initially granted tax credit to the assessee for the dividend income received from the JV. Simultaneously, the dividend income was included in the assessment and subjected to tax under Indian tax laws. However, under Omani tax laws, the dividend income was exempted from taxation due to legislative amendments made in the year 2000. The AO allowed a tax credit for the tax amount that would have been payable in Oman but was exempted under Omani tax laws. However, the Principal Commissioner of Income Tax (PCIT) took a different stance. The PCIT held that Article 25 of Omani tax laws, which pertained to the exemption of dividend income, was not applicable in the present case, because there was tax payable on dividend in Oman and, accordingly, no tax had been paid and that assessee was not covered under the exemption.

Questioning the order of the PCIT, the assessee preferred an appeal before the Income Tax Appellate Tribunal (ITAT), which allowed the appeal holding that the order passed by the PCIT under Section 263 of the Income Tax Act was without jurisdiction and was not sustainable in law.

Aggrieved with the decision of the ITAT, the case was further appealed to the Delhi High Court. However, the Delhi High Court upheld the decision of the ITAT. The High Court's ruling emphasized that according to the terms outlined in the DTAA between India and Oman, the assessee was indeed entitled to claim tax credit, and this action had been appropriately permitted by the AO.

The revenue argued that the dividend received by the assessee should be taxable in India and not exempt. The revenue's position was that the dividend was not designed as a tax incentive in Oman to promote development in that country.

The division bench of Justice B.V. Nagarathna and Justice Prashant Kumar Mishra acknowledged that the term ‘incentive’ had not been explicitly defined in either the Omani Tax Laws or the Income Tax Act. To address this ambiguity, the JV wrote a letter in November 2000 to Oman Oil Company, seeking clarification regarding the purpose of Article 8 (bis) of the Omani Tax Laws.

The bench referred to the clarification letter dated December 11, 2000, which was issued by the Secretary General for Taxation of the Sultanate of Oman, Ministry of Finance, Muscat, which clearly stated that dividends distributed by all companies, including tax-exempt companies, would be exempt from income tax in the hands of the recipients.

The bench noted that the Government of Oman had extended the exemption facility with the intent of promoting economic development within Oman by attracting investments. Considering that the assessee had made significant investments in the project by establishing a PE in Oman, where the JV was registered as a separate company under Omani laws, the assessee's actions aligned with the goal of promoting economic development within Oman and furthered the objective of Article 8 (bis).

Thus, the bench concluded that a straightforward interpretation of Article 8 and Article 8 (bis) of the Omani Tax Laws revealed that while Article 8 subjected dividends to taxation, Article 8 (bis) provided an exemption for dividends received by a company from its ownership of shares, portions, or shareholding in the share capital of another company. Therefore, Article 8 (bis) exempted the dividend tax received by the assessee from its PE in Oman, and by virtue of Article 25 of the DTAA between India and Oman, the assessee was entitled to the same tax treatment in India as it received in Oman.

The bench further noted that the assessee's establishment in Oman had been consistently treated as a PE from its inception up to the year 2011.

In light of the above observations, the bench concluded that the Principal Commissioner of Income Tax had not been able to demonstrate why the provisions contained in Article 25 of the DTAA and Article 8 (bis) of the Omani Tax Laws would not be applicable. Therefore, the appeals were found to be without merit and were dismissed.