Recently, the division bench of the Supreme Court comprising, Justice B.V. Nagarathna and Justice Prashant Kumar Mishra, clarifies that when an Indian Entity's Establishment operates in Oman and qualifies as a 'Permanent Establishment' according to the Double Taxation Avoidance Agreement ("DTAA"), any dividend income received by the Indian Entity from this Establishment is exempt from taxation under Indian Taxation laws

Under the Oman laws, dividend distributions from all companies, including those that are tax-exempt, are exempt from income tax for the recipients. Originally, such income would have been subject to taxation according to Omani laws, but an exemption has been granted.

“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.” 

Case Brief -

M/S Krishak Bharti Cooperative Ltd. (referred to as the "Assessee") is a registered multi-State Co-operative Society, operating under the administrative jurisdiction of the Government of India. The Assessee engaged in a joint venture with Oman Oil Company, establishing the Oman Fertilizer Company SAOC (referred to as the "JV"). This joint venture is a registered company in Oman, operating in compliance with Omani laws, and its primary focus is the production of fertilizers, which are intended for procurement by the Central Government.

Article 8(bis) of Omani Tax Laws provides an exception to Article 8, specifying that tax shall not be levied on:
(i) Dividends received by a company in exchange for equity shares, portions, or stocks in the capital of another company.
(ii) Profits or gains earned by the company through the sale of securities listed on the Muscat Securities Market or their disposal.

Back in 2010, the joint venture (JV) sought clarification from Oman regarding the purpose of Article 8(bis). In response to this query, the Sultanate of Oman issued a letter confirming that dividends distributed by all companies, including those that are tax-exempt, would be exempt from income tax for the recipients.

This decision to extend the exemption was made with the intent of furthering the Government of Oman's objective of promoting development within Oman by attracting investments.

Further, Article 25(2) of the Double Taxation Avoidance Agreement ("DTAA") between India and Oman stipulates that when a resident of India earns income that, in accordance with this agreement, may be subject to taxation in the Sultanate of Oman, India shall grant a deduction from the tax imposed on the income of that resident. This deduction will be equal to the income tax amount paid in the Sultanate of Oman, whether paid directly or withheld as a deduction.

The Assessee holds a Permanent Establishment (PE) status in Oman, as defined in Article 25 of the Double Taxation Avoidance Agreement (DTAA). The branch office maintains its own financial records and submits income tax returns in accordance with Omani income tax regulations.

For the relevant assessment year, the assessment process was conducted under Section 143(3) of the Income Tax Act, 1961. During this assessment, the Assessing Officer of the Income Tax Department allowed a tax credit for the dividend income received by the Assessee from the JV. Simultaneously, the dividend income was included in the taxable income under Indian tax laws. However, it's worth noting that under Omani tax laws, an exemption had been granted for dividend income starting from the year 2000.

The Principal Commissioner of Income Tax (PCIT) has lodged an appeal before the Supreme Court challenging the decision of the High Court.

The Bench expressed the view that because the Assessee had made an investment in the project by establishing a Permanent Establishment in Oman, and since the JV was registered as a distinct entity under Omani laws, this action was contributing to the promotion of economic development within Oman, aligning with the objectives of Article 8(bis).

In the Clarificatory Letter issued by the Sultanate of Oman, it was clarified that tax would be applicable to the dividend income earned by the Permanent Establishment of the Indian Investors, as it would be considered a part of their gross income under Article 8, if not for the tax exemption provided under Article 8(bis).

“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.

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