[Opinion] Hon’ble Supreme Court Allows Tax Credit on Dividend Income Exempt Under Tax Laws of Oman

Arpit Gupta & Yuganshi Jain – [2023] 156 taxmann.com 356 (Article)

1. Introduction

The Assessee (‘M/s Krishak Bharti Cooperative Limited’) is a co-operative society registered in India and is engaged in the business of manufacturing fertilizers. In the course of its business, it had entered into a Joint Venture (JV) with Oman Oil Company to set up an independent Company in Oman named Oman Fertilizer Company SAOC (‘OMIFCO’ or ‘JV entity’) which was duly registered under the Omani laws.

During the course of assessment, the Assessing Officer taxed the dividend income received by the Assessee from the JV entity as per the Income Tax Act (‘the Act’) and allowed tax credit in respect of the tax payable by it in Oman on such dividend income in terms of Article 25(4) of the Indian-Oman DTAA (‘the DTAA’), although no tax was actually paid by the Assessee in Oman in view of the specific exemption provided under Article 28(bis) of the Oman Tax Laws read with Clarification letter dated 11 December 2000.

However, the Principal Commissioner of Income Tax (PCIT) passed an order under section 263 of the Act and denied the said foreign tax credit (‘FTC’) on the ground that the Assessee is not covered under such exemption and since there is tax payable on the dividend income which has not been paid by the Assessee, therefore the afore-mentioned Article 25 is not applicable in the instant case.

Aggrieved by the order of PCIT, the Assessee preferred an appeal before Income-tax Appellate Tribunal (ITAT) which allowed the appeal in favor of the Assessee by stating that the said order is without jurisdiction and not tenable in law. Further, the said order was subsequently upheld by the Hon’ble Delhi High Court as well holding that the Assessee is rightly allowed to claim such tax credit as per the provisions of India-Oman DTAA.

The Hon’ble Supreme Court, vide order dated 15 September 2023 in the case of Pr. CIT v. Krishak Bharti Cooperative Ltd1 upheld the order of Hon’ble Delhi HC and examined the issue as to whether the dividend income earned by the Assessee is taxable, although exempted under Omani tax laws to be entitled to the benefits of India-Oman DTAA.

2. Contentions of the Revenue

The Revenue contended that Article 11(4) of the DTAA, which talks on the taxability of dividend received in accordance with the provisions of Article 7 (Business profits), applies only when the Assessee carries on business through its Permanent Establishment (‘PE’) and the dividend income is effectively connected with such PE. However, in the instant case, since the PE of the Assessee is only doing preparatory and auxiliary work and is not having any tangible expenses, therefore the same will be taxable as dividend only.

Further, the revenue argued that the dividend received by the Assessee would be taxable in India as per the provisions of Article 11(1) of the DTAA and the same could not be exempt as per Article 25(4) of the DTAA since the tax exemption on dividend in Oman in the hands of recipients is not designed as a tax incentive to promote economic development in that country.

Further, the revenue also argued that the exemption letter dated 11.12.2000 issued by Secretary General of Taxation, Ministry of Finance (‘MOF’), Oman has no statutory force/ legislation as per Omani Tax Laws per-se and therefore, the same cannot be relied upon to claim exemption in the current scenario.

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