Dividend Income From Indian Entity's Establishment In Oman Having ‘Permanent Establishment’ Status Under DTAA Not Taxable In India: Supreme Court

The Supreme Court has held that if an Indian Entity’s Establishment is operating in Oman and has a ‘Permanent Establishment’ status under Double Taxation Avoidance Agreement (“DTAA”), then the dividend income received by the Indian Entity from such Establishment would not be taxable under Indian Taxation laws.

As per the laws in Oman, the dividend distributed by all companies, including the tax-exempt companies would be exempt from payment of income tax in the hands of the recipients. Ideally such income was taxable under laws of Oman, but an exemption was given.

The Bench comprising Justice B.V. Nagarathna and Justice Prashant Kumar Mishra, observed, “It is, thus, apparent that the assessee’s establishment in Oman has been treated as PE from the very inception up to the year 2011. There is no reason as to why all of a sudden, the assessee’s establishment in Oman would not be treated as PE when for about 10 years it was so treated, and tax exemption was granted basing upon the provisions contained in Article 25 read with Article 8 (bis) of the Omani Tax Laws.”

BACKGROUND FACTS

M/S Krishak Bharti Cooperative Ltd. (“Assessee”) is a registered multi-State Co-operative Society under the administrative control of Government of India. The Assessee entered into a joint venture with Oman Oil Company to form the Oman Fertilizer Company SAOC (“JV”). The JV is a registered company in Oman under the Omani laws and it manufactures fertilizers to be purchased by the Central Government.

Article 8(bis) of Omani Tax Laws states that in exception to Article 8, tax shall not apply on (i) Dividends received by the company against equity shares, portions or stocks in the capital of any other company; or (ii) Profits or gains realized by the company from the sale of securities listed in Muscat Securities Market or from their disposal.

In 2000, the JV had sought a clarification from Oman regarding purpose of Article 8(bis). In response, the Sultanate of Oman issued a letter stating that the dividend distributed by all companies, including the tax-exempt companies would be exempt from payment of income tax in the hands of the recipients. By extending the facility of exemption, the Government of Oman intend to achieve its object of promoting development within Oman by attracting investments.

Further, Article 25(2) of the Double Taxation Avoidance Agreement (“DTAA”) between India and Oman, provides that where a resident of India derives income, which in accordance with this agreement, may be taxed in the Sultanate of Oman, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax paid in the Sultanate of Oman, whether directly or by deduction.

The Assessee has a Permanent Establishment (PE) status in Oman in terms of Article 25 of the DTAA. The branch office maintains its own books of account and submits returns of income under the Omani income tax laws.

The assessment for the relevant year was completed under Section 143(3) of the Income Tax Act, 1961. The Assessing Officer of Income Tax Department allowed tax credit in respect of the dividend income received by the Assessee from the JV. The dividend income was simultaneously brought to the charge of tax in the assessment as per the Indian tax laws. However, under the Omani tax laws, exemption was granted to the dividend income by virtue of the amendments made in the Omani tax laws w.e.f. the year 2000.

The Assessing Officer allowed credit for the said tax, which would have been payable in Oman, but exemption was granted under Oman laws.

However, the Principal Commissioner of Income Tax (“PCIT”) took a different view and held that Article 25 was inapplicable since there is tax payable on dividend in Oman. Since no tax has been paid in Oman, the Assessee is not exempted from paying tax in India over such income.

In appeal, the Income Tax Appellate Tribunal (“ITAT”) set aside the order of PCIT. Subsequently, the Delhi High Court in appeal upheld the ITAT order and observed that as per the DTAA between India and Oman, the Assessee is entitled to claim the tax credit.

The PCIT filed an appeal before the Supreme Court against the High Court’s decision.

SUPREME COURT VERDICT

The issue before the Court was whether the dividend income earned by the Assessee is taxable, although exempted under Omani Tax Laws to entitle the Assessee to the benefits of DTAA.

The Bench opined that since the Assessee invested in the project by setting up a Permanent Establishment in Oman, as the JV is registered as a separate company under the Omani laws, it is aiding to promote economic development within Oman to achieve object of Article 8 (bis). In the Clarificatory Letter of Sultanate of Oman, it was stated that tax would be payable on dividend income earned by the PE of the Indian Investors, as it would form part of their gross income under Article 8, if not for the tax exemption provided under Article 8(bis).

It was observed that Article 8 and Article 8 (bis) of the Omani Tax Laws depict that under Article 8, dividend is taxable, whereas, Article 8(bis) exempts dividend received by a company from its ownership of shares, portions, or shareholding in the share capital in any other company. Thus, Article 8(bis) exempts dividend tax received by the Assessee from its PE in Oman and by virtue of Article 25, the assessee is entitled to the same tax treatment in India as it received in Oman.

“It is, thus, apparent that the assessee’s establishment in Oman has been treated as PE from the very inception up to the year 2011. There is no reason as to why all of a sudden, the assessee’s establishment in Oman would not be treated as PE when for about 10 years it was so treated, and tax exemption was granted basing upon the provisions contained in Article 25 read with Article 8 (bis) of the Omani Tax Laws.”

It was held that the Assessing Officer has rightfully permitted the credit of tax payable on dividend income received by the Assessee.

The Court dismissed the appeal while holding that Article 25 of DTAA and Article 8 (bis) of the Omani Tax Laws are applicable to the Assessee.

Case Title: Principal Commissioner Of Income Tax-10 v M/S Krishak Bharti Cooperative Ltd.

Citation: 2023 LiveLaw (SC) 802

Counsel for Appellant: Shri Arijit Prasad (Sr. Adv.)

Counsel for Respondent: Mr. Arvind P. Dattar (Sr. Adv.)

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