The Supreme Court has held that dividend income from Indian entities in Oman is treated as a Permanent Establishment (PE) under Omani tax laws and is not taxable in India.
M/s Krishak Bharti Cooperative Ltd, the assessee is a multi-state Co-operative Society registered in India, under the administrative control of the Department of Fertilizers, Ministry of Agriculture and Co-operation, Government of India. In the course of its business of manufacturing fertilizers, it entered into a joint venture with Oman Oil Company to form the Oman Fertilizer Company SAOC ( ’OMIFCO’ or JV ), a registered company in Oman under the Omani laws.
The assessee has a 25% share in the JV. The JV manufactures fertilizers, which are purchased by the Central Government. The assessee has a branch office in Oman which is independently registered as a company under the Omani laws having permanent establishment status in Oman in terms of Article 25 of the DTAA. The branch office maintains its books of account and submits returns of income under the Omani income tax laws.
The Assessing Officer(AO) allowed a 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 the amendments made in the Omani tax laws w.e.f the year 2000.
The AO allowed credit for the said tax, which would have been payable in Oman, but the exemption was granted. The appellant, the Principal Commissioner of Income Tax (PCIT) issued a show cause notice under Section 263 of the Act on the ground that the reliance placed on Article 25(4) of DTAA was erroneous in this case and no tax credit was due to the assessee under Section 90 of the Act.
The PCIT held that Article 25 of Omani tax laws is not applicable in the instant case because there is a tax payable on dividends in Oman and, accordingly, no tax has been paid and that assessee is not covered under the exemption. On appeal, the Income Tax Appellate Tribunal (f‘ITAT’) allowed the appeal holding that the order passed by the PCIT under Section 263 of the Act is without jurisdiction and is not sustainable in law.
Shri Arijit Prasad submitted that Article 11(4) would only apply in a case where the Permanent Establishment (PE) of the assessee was carrying on business in Oman, whereas, in the case in hand, the PE is only doing preparatory and auxiliary work and is not having any tangible expenses. Further argued that the exemption letter dated 11.12.2000 issued by the Sultanate of Oman, Ministry of Finance under the signatures of the Secretary General for Taxation, has no statutory force as per Omani Tax Laws, therefore, the same cannot be relied upon to claim exemption.
Per contra, Mr. Arvind P. Dattar, senior counsel appearing for the assessee contended that the provisions of DTAA fully exempt the assessee from payment of tax on dividends in Oman which, in turn, would exempt the assessee from taxation in India.
It was found from the clarifactory letter of the Omani Finance Ministry 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 intends to achieve its objective of promoting development within Oman by attracting investments.
A two-judge bench of Justice B.V. Nagarathna and Justice Prashant Kumar Mishra held 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 based upon the provisions contained in Article 25 read with Article 8 (bis) of the Omani Tax Laws.”
The Court viewed that “the appellant has not been able to demonstrate as to why the provisions contained in Article 25 of DTAA and Article 8 (bis) of the Omani Tax Laws would not be applicable and, consequently, we hold that the appeals have no substance and deserve to be dismissed which are hereby dismissed.”
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