Author: Himanshu Sharma, Advocate
Supreme Court upheld the applicability of the Double Tax avoidance agreement between India and Oman.
The case revolves around an Indian multi-State Co-operative Society engaged in
fertilizer manufacturing, holding a 25% share in a joint venture called OMIFCO,
registered in Oman. OMIFCO manufactures fertilizers procured by the Indian
government, and the assessee maintains a branch office in Oman, legally registered as a
separate company under Omani law, qualifying as a permanent establishment (PE).
The tax assessment for the relevant year was conducted under Section 143(3) of the
Indian Income Tax Act, 1961. The Assessing Officer granted a tax credit for the dividend
income received from the joint venture. Simultaneously, the Assessing Officer subjected
this income to Indian tax laws. Importantly, Oman had granted an exemption on
dividend income from taxation.
A significant turn occurred when the Principal Commissioner of Income Tax (PCIT)
issued a show-cause notice under Section 263 of the Act, challenging the tax credit
provided to the assessee. The PCIT’s argument rested on the assertion that Article
25(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Oman
didn’t apply, implying that no tax credit was due.
The assessee subsequently appealed the PCIT’s decision to the Income Tax Appellate
Tribunal (ITAT). The ITAT ruled in favor of the assessee, asserting that the PCIT’s order
under Section 263 was devoid of jurisdiction and legally unsustainable.
Unsatisfied with the ITAT’s judgment, the matter was escalated to the Delhi High Court.
Here, the primary argument hinged on the provisions of the DTAA between India and
Oman, which purportedly exempted the assessee from paying tax on dividend income
both in Oman and consequently in India. The High Court, after meticulous consideration
of the terms within the DTAA, upheld the tax credit claim.
Exemption of Dividends: The DTAA between India and Oman contains provisions
governing the taxation of dividends. Typically, it stipulates that the country where the
receiving company is a resident shall not impose taxes on dividends paid by the
company, except in specific circumstances.
Avoidance of Double Taxation: Article 25 of the DTAA deals with the avoidance of
double taxation. It establishes that the tax laws of each country shall apply to income
taxation unless specified differently within the agreement. Furthermore, it delineates
rules for permitting deductions from one country’s income tax for the income tax paid in
the other country.
Tax Incentives for Development: The text alludes to Oman’s tax incentives tailored to
foster economic development and attract investments. These incentives encompass
the exemption of certain dividend income from taxation.
Clarification from Omani Tax Authority: A crucial element is a letter issued by the
Secretary General for Taxation in Oman. This communication elucidates that dividend
income, even from tax-exempt companies, is exempt from income tax in the hands of
the recipients. This tax exemption is positioned as a mechanism to stimulate economic
development within Oman.
Permanent Establishment (PE): An important point of contention is whether the
appellant had a Permanent Establishment (PE) in Oman. Notably, there was a period
from 2002 to 2006 when a common order treated the appellant’s establishment in
Oman as a PE.
Validity of Omani Tax Law Interpretation: A secondary argument emerges regarding the
validity of interpreting Omani tax law based on the letter from the Omani tax authority.
The contention is that this interpretation may lack statutory force. However, the text
suggests that the letter primarily serves as a clarificatory communication, expounding
on existing provisions of Omani tax law.
Decision: The court seemingly deliberated on the presented arguments and ultimately
concluded that the provisions articulated in Article 25 of the DTAA and Article 8(bis) of
the Omani Tax Laws were indeed applicable. Consequently, the appeals were dismissed,
reaffirming the assessee’s entitlement to the tax credit.
Decided by the Supreme Court on September 15, 2023.