SC rejects IT authorities' claim against tax exemption to a joint venture of Krishak Bharti Cooperative Ltd & Oman Oil Company

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Oman Fertilizer Company is a joint venture between the central government's Krishak Bharti Cooperative Ltd and an Oman Oil Company

The Supreme Court has rejected a plea by the Income Tax authorities against the tax exemption granted to dividends earned by Oman Fertilizer Company, a joint venture between the central government's Krishak Bharti Cooperative Ltd and an Oman firm, under the Double Tax Avoidance Agreement.

A bench of Justices B V Nagarathna and Prashant Kumar Mishra pointed out that the assessee’s establishment in Oman had been treated as a permanent establishment from the very inception up to the year 2011 so there was no reason as to why all of a sudden, its establishment in Oman would not be treated as such 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.

Dealing with a question of law as to whether the dividend income earned by the assessee was taxable, although exempted under Omani Tax Laws to entitle the assessee to the benefits of the Double Taxation Avoidance Agreement (DTAA) between India and Oman, the bench said that the appellant had 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.

Referring to Article 25 (2) of the DTAA, the court said that it provided 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. 

"Article 25 (4) clarifies that the tax payable in a Contracting State mentioned in clause 2 and clause 3 of the said Article shall be deemed to include the tax which would have been payable but for the tax incentive granted under the laws of the Contracting State and which are designed to promote development," the top court said.

The IT authorities claimed that the dividend received by the assessee was taxable in India and was not exempt because the same was not designed as a tax incentive in Oman to promote development in that country. It also argued that a letter issued by the Secretary General for Taxation, Ministry of Finance, Oman in this regard was not issued by the competent Omani authority and had no statutory force.

The court, however, referring to the letter, said that it had clarified 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. Since the assessee has 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 and achieve the object of Article 8 (bis)," the bench said.

The Oman Ministry had concluded that tax would be payable on dividend income earned by the permanent establishments 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), the court pointed out.

"A plain reading of Article 8 and Article 8 (bis) would manifest 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," the bench said.

With regard to a contention by the IT department that the letter of December 11, 2000 issued by the Secretary General for Taxation, Ministry of Finance, Sultanate of Oman had no statutory force as per Omani Tax Laws, hence, it could not be relied upon to claim tax exemption, the bench said that it was only a clarificatory communication interpreting the provisions contained in Article 8 and Article 8 (bis) and the letter itself had not introduced any new provision in the Omani Tax Laws. 

The top court held that the appeals against the Delhi High Court's orders were without substance and hence dismissed the same.

Krishak Bharti Cooperative Ltd, 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. 

It has entered into a joint venture with Oman Oil Company to form the Oman Fertilizer Company SAOC, 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. It has a branch office in Oman, 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 maintained its own books of account and submitted returns of income under the Omani income tax laws.