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

Section: ISSUES CASE DETAILS PRINCIPAL COMMISSIONER OF INCOME TAX-10 M/S KRISHAK BHARTI COOPERATIVE LTD. (Civil Appeal No. 836 of 2018) SEPTEMBER 15, 2023 [B. V. NAGARATHNA AND PRASHANT KUMAR MISHRA, JJ.] HEADNOTES Issue for consideration: Whether the dividend income earned by the assessee is 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. Income Tax – DTAA and Omani Tax Laws – Benefit to the assessee under: Held: A clarification letter dated 11.12.2000 (interpreting the provisions contained in Article 8 and Article 8 (bis) of the Omani Tax Laws) addressed by the Secretary General for Taxation, Sultanate of Oman, Ministry of Finance was issued which stated 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 intended 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) – 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 – Insofar as the argument concerning the assessee not having PE in Oman is concerned, it is 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 – Thus, 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. [Paras 15, 16, 17, 18 and 20] OTHER CASE DETAILS INCLUDING IMPUGNED ORDER AND APPEARANCES CIVIL APPELLATE JURISDICTION: Civil Appeal No. 836 of 2018. From the Judgment and Order dated 21.04.2017 of the High Court of Delhi at New Delhi in ITA No.578 of 2016. With Civil Appeal Nos.3369 of 2019, 2256 of 2018 and 5900, 5902, 5901 of 2023. Appearances: Balbir Singh, ASG, Arijit Prasad, Arvind P Datar, Ajay Vohra, Sr. Advs., Rupesh Kumar, Ms. Rukhmini Bobde, Anirudh Sharma-II, Indarjit Prasad, Vijaynand Tripathi, Raj Bahadur Yadav, M/s. K J John and Co, Pratap Venugopal, Ms. Surekha Raman, Prashant Kumar Nair, Abhishek Anand, Shreyash Kumar, Ms. Kavita Jha, Vaibhav Kulkarni, Udit Naresh, Advs. for the appearing parties. SUPREME COURT REPORTS JUDGMENT / ORDER OF THE SUPREME COURT JUDGMENT PRASHANT KUMAR MISHRA, J. Delay condoned in SLP (C) Diary No. 4647 of 2018 and SLP (C) Diary No. 15333 of 2023. 2. Leave granted in SLP (C) No. _____ @ Diary No. 4647 of 2018, SLP(C) No. 11204 of 2023 and SLP (C) No. _____ @ Diary No. 15333 of 2023. 3. This judgment governs the disposal of Civil Appeal No. 836 of 2018, C.A. No. 3369 of 2019, Civil Appeal No. 2256 of 2018 and the appeals arising out of SLP (C) Diary No. 4647 of 2018, SLP(C) No. 11204 of 2023 and SLP (C) @ Diary No. 15333 of 2023. BACKGROUND FACTS: 590 4. 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 (for short ’OMIFCO’ or ‘the JV’), a registered company in Oman under the Omani laws. The assessee has 25% share in the JV. The JV manufactures fertilizers, which are purchased by the Central Government. The assessee has a branch offi ce in Oman which is independently registered as company under the Omani laws having permanent establishment status in Oman in terms of Article 25 of the DTAA. The branch offi ce maintains its own books of account and submits returns of income under the Omani income tax laws. 5. The assessment for the relevant year was completed under Section 143 (3) of the Income Tax Act, 1961 (for short, ‘the Act’). The Assessing Offi cer 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. 6. The Assessing Offi cer allowed credit for the said tax, which would have been payable in Oman, but exemption was granted. Thereafter, the Principal Commissioner of Income Tax (for short, ‘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. This notice was duly replied to by the assessee. However, the PCIT rejected all the contentions raised by the assessee inter alia holding that Article 25 of Omani tax laws is not applicable in the instant case because there is tax payable on dividend in Oman and, accordingly, no tax has been paid and that assessee is not covered under the exemption. 7. Questioning the order of PCIT, the assessee preferred an appeal before the Income Tax Appellate Tribunal (for short, ‘ITAT’), which 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. 8. The order passed by the ITAT was challenged before the Delhi High Court by preferring an Income Tax Appeal, which has been dismissed by the High Court by the impugned judgment holding that as per the relevant terms of the DTAA between India and Oman, the assessee is entitled to claim the tax credit, which has been rightly allowed by the Assessing Offi cer. CONTENTIONS RAISED BY THE PARTIES: 9. Shri Arijit Prasad, learned senior counsel would submit that Article 11(4) would only apply in a case where the Permanent Establishment (for short, ‘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. Therefore, the dividend income of the assessee is not related to its PE. It is also argued that the exemption letter dated 11.12.2000 issued by the Sultanate of Oman, Ministry of Finance under the signatures of Secretary General for Taxation, has no statutory force as per Omani Tax Laws, therefore, the same cannot be relied upon to claim exemption. 10. Per contra, Mr. Arvind P. Dattar, learned senior counsel appearing for the assessee would contend that the provisions of DTAA fully exempt the assessee from payment of tax on dividend in Oman which, in turn, would exempt the assessee from taxation in India. It is further argued that the letter issued by the Sultanate of Oman, Ministry of Finance emanates from the highest authority of the Omani regime, therefore, the clarifi cation set out in the said letter is valid for interpretation of the relevant clauses of DTAA, to exempt the assessee from payment of dividend tax in Oman and, in turn, in India. ISSUE TO BE CONSIDERED BY THIS COURT: 11. All the matters involve a similar question of law as to whether the dividend income earned by the assessee is taxable, although exempted under Omani Tax Laws to entitle the assessee to the benefi ts of the Double Taxation Avoidance Agreement (for short, ‘DTAA’) between India and Oman. ANALYSIS AND FINDINGS: 12. The decision in these appeals revolves around the relevant provisions of the DTAA and Omani Tax Laws, therefore, it is profi table to extract them for ready reference. Article 7 speaks about business profi ts which reads as follows: “ARTICLE 7. The profi ts of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carried on business in the other Contracting State through a Permanent Establishment situated therein. If the enterprise carries on business as aforesaid, the profi ts of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable directly or indirectly to that Permanent Establishment.” Article 11 deals with dividends, which reads as follows: “ARTICLE 11 DIVIDENDS 1. Dividends paid by a company which is resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. 2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of the State, but if the recipient is the benefi cial owner of the dividends, the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the dividends if the benefi cial owner is a company which owns at least 10 per cent of the shares of the company paying the dividends; (b) 12½ per cent of the gross amount of the dividends in all other cases. This paragraph shall not aff ect the taxation of the company in respect of the profi ts out of which the dividends are paid. 3. The term “dividends” as used in this Article means income from shares or other rights, not being debt-claims, participating in profi ts as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the Contracting State of which the company making the distribution is a resident. 4. The provisions of paragraphs 1 and 2 shall not apply if the benefi cial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other Contracting State independent personal services from a fi xed base situated therein, and the holding in respect of which the dividends are paid is eff ectively connected with such permanent establishment or fi xed base. In such case, the provisions of Article 7 or Article 16, as the case may be, shall apply. 5. Where a company which is a resident of a Contracting State derives profi ts or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company except insofar as such dividends are paid to a resident of that other Contracting State or insofar as the holding in respect of which the dividends are paid is eff ectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company’s undistributed profi ts to a tax on the company’s undistributed profi ts, even if the dividends paid or the undistributed profi ts consist wholly or partly of profi ts or income arising in such other Contracting State.” The signifi cant provision concerning avoidance of double taxation is contained in Article 25, which is re-produced hereinunder: “25. AVOIDANCE OF DOUBLE TAXATION. (1) The law in force in either of the Contracting States will continue to govern the taxation of the income in the respective Contracting States except where provisions to the contrary are made in this Agreement. (2) Where a resident of India derives income which, in accordance with the provisions of 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. Such deduction shall not, however, exceed that part of the income tax(as computed before the deduction is given) which is attributable to the income which may be taxed in the Sultanate of Oman. (3) Where a resident of the Sultanate of Oman derives income which, in accordance with the provisio0ns of this Agreement, may be taxed in India, the Sultanate of Oman shall allow as a deduction from the tax on the Income of the resident an amount equal to the income tax paid in India, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income tax (as computed before the deduction is given) which is attributable to the income which may be taxed in India. (4) The tax payable in a Contracting State mentioned in paragraph 2 and Paragraph 3 of this 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. (5) Income which, in accordance with the provisions of this Agreement, is not to be subjected to tax in a Contracting State, may be taken into account for calculating the rate of tax to be imposed in that Contracting State.” The provisions contained in Omani Tax Laws, relied upon by the assessee read as follows: “Article 8 (bis) – In exception to the provisions of Article 8 of this law, tax shall not apply on the following: 1. Dividends received by the company against equity shares, portions or stocks in the capital of any other company. 2. Profi ts or gains realized by the company from the sale of securities listed in Muscat Securities Market or from their disposal.” 13. Article 25 (2) of the DTAA 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. Article 25 (4) clarifi es 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. 592 593