Case title:
PRINCIPAL COMMISSIONER OF INCOME TAX-10 v. M/S KRISHAK BHARTI COOPERATIVE LTD.
Date of Order:
SEPTEMBER 15, 2023
Bench:
HON’BLE JUSTICE B.V. NAGARATHNA & HON’BLE JUSTICE PRASHANT KUMAR MISHRA
Parties:
APPELLANT – PRINCIPAL COMMISSIONER OF INCOME TAX-10
RESPONDENT - M/S KRISHAK BHARTI COOPERATIVE LTD.
SUBJECT:
The case concerns the taxation of dividend income received by an Indian-registered multi-state cooperative society that has a joint venture with the Oman Oil Company and a branch office in Oman, in accordance with Omani tax laws and the terms of the Double Taxation Avoidance Agreement (DTAA) between India and Oman. Given the specific clauses of the DTAA and Omani Tax Laws, the case centres on whether the dividend income is subject to taxation in India or not.
IMPORTANT PROVISIONS:
Income Tax Act, 1961:
• Section 143(3): Relating to the completion of tax assessments.
Double Taxation Avoidance Agreement (DTAA) between India and Oman:
• Article 7: Pertaining to business profits.
• Article 11: Dealing with dividends and taxation thereof.
• Article 25: Addressing the avoidance of double taxation.
Omani Tax Laws:
• Article 8 (bis): Providing an exemption for certain dividend income.
OVERVIEW:
Regarding the taxation of dividend income from its investment in Oman Fertiliser Company SAOC (OMIFCO), a multi-State Co-operative Society in India that manufactures fertiliser filed a legal case. The Income Tax Act of 1961 was used to assess the tax, but Indian tax laws also applied to the tax. A legal dispute resulted from the Principal Commissioner of Income Tax challenging the tax credit. The Delhi High Court upheld the decision made by the Income Tax Appellate Tribunal, confirming the society's right to a tax credit under the DTAA and Omani Tax Laws.
FACTS:
1. The document talks about a court case involving a multi-State Co-operative Society that is registered in India and produces fertilizers. In order to establish the Oman Fertiliser Company SAOC (OMIFCO) in Oman, the society formed a joint venture with Oman Oil Company.
2. The joint venture that produces fertilisers for the Central Government has a 25% stake owned by the Multi-State Cooperative Society. The society also maintains an independent, legally recognised branch office with permanent establishment status in Oman.
3. The Income Tax Act of 1961 was used to assess taxes for a particular year, and tax credits were given for dividend income the society received from the joint venture. But unlike Omani tax laws, which exempt dividend income, Indian tax laws also taxed this income.
4. The society was denied a tax credit under Section 90 of the Act, according to the Principal Commissioner of Income Tax (PCIT), who also issued a show cause notice under Section 263 of the Act.
5. The PCIT rejected the society's claims, claiming that the society was not exempt from the exemption and that the Omani tax laws did not apply because dividends were subject to tax in Oman.
6. The society appealed the PCIT's ruling to the Income Tax Appellate Tribunal (ITAT), which ruled in the society's favour by declaring that the PCIT's order lacked jurisdiction and was not legally tenable.
7. The Delhi High Court upheld the ITAT's decision after it was challenged further, stating that the society was qualified to claim a tax credit under the terms of the Double Taxation Avoidance Agreement (DTAA) between India and Oman.
8. The document also lists the arguments put forth by both sides in the dispute. According to the society, Article 11(4) of the DTAA does not apply because its permanent establishment in Oman only performs auxiliary and preparatory work and incurs minimal costs. In order to bolster their argument, they also cite a letter from the Sultanate of Oman's Ministry of Finance.
9. The revenue authorities contend that because Article 11 of the DTAA permits taxation of dividends paid by a company based in one Contracting State to a resident of another Contracting State, the dividend that the society received is taxable in India.
10. In order to make its decision, the court considers all pertinent clauses of the DTAA and Omani Tax Laws, including Article 25, which addresses the avoidance of double taxation.
11. The court also cites a letter from the Omani Finance Ministry dated December 11, 2000, which explains the purpose of Article 8 (bis) of the Omani Tax Laws and says it was put in place to encourage economic growth within Oman by luring investments.
12. The court ultimately finds that because the society's Oman location has always been treated as a Permanent Establishment (PE), there is no longer a valid reason to withhold PE status.
13. The court also rejects the claim that the letter from the Omani Finance Ministry lacks legal authority, concluding instead that it is a clarification of the law.
14. In its final ruling, the court dismisses the appeals made by the appellant, upholds the DTAA and Omani Tax Laws, and grants the society a tax exemption.
ISSUES RAISED:
Whether the dividend income earned by the multi-State Co-operative Society from its joint venture in Oman should be subject to taxation in India or granted an exemption from taxation in India, as per the provisions outlined in the Double Taxation Avoidance Agreement (DTAA) between India and Oman, and the Omani Tax Laws, was the central question of law raised in the case?
ARGUMENTS ADVANCED BY THE APPELLANT:
1. According to the appellant, the Permanent Establishment (PE) in Oman should only be subject to the provisions of Article 11(4) of the Double Taxation Avoidance Agreement (DTAA) if it is actively conducting business. They argued that the dividend income was unrelated to the PE because their Oman-based PE was only engaged in preparatory and auxiliary work that did not incur significant costs.
2. The appellant questioned whether the letter from the Sultanate of Oman's Secretary General for Taxation, dated December 11, 2000, had legal standing. They claimed that because this letter didn't comply with Omani tax laws, it couldn't be relied upon to support a tax exemption claim.
3. The appellant claimed that Article 8(bis) of the Omani Tax Laws excluded dividend income received by businesses, including tax-exempt entities, and that this exemption was given to encourage economic development in Oman by luring investments.
ARGUMENTS ADVANCED BY THE RESPONDENT:
1. 1. The respondent argued that dividends paid by a company based in one Contracting State to a resident of another Contracting State may be subject to taxation in that other Contracting State under Article 11 of the Double Taxation Avoidance Agreement (DTAA). The revenue authorities contend that the appellant's dividend income should be subject to Indian taxation as a result.
2. 2. The respondent disputed the accuracy and applicability of the letter dated December 11, 2000, sent by the Sultanate of Oman's Secretary General for Taxation. They claimed that because this letter did not have statutory authority under Omani tax laws, it could not be used to support a tax exemption claim.
3. 3. The respondent disputed the appellant's claim that it has a Permanent Establishment (PE) in Oman and that tax incentives are applicable under Omani tax laws. They argued that the PE should be involved in legitimate business operations and that the dividend income was insufficiently related to such a PE.
4. 4. The revenue authorities claimed that in this instance, it was incorrect to rely on the Permanent Establishment (PE) status under Article 11(4) of the Double Taxation Avoidance Agreement (DTAA). They argued that because Oman had a tax on dividend income, the appellant's establishment there did not meet the requirements for exemption because the tax was not paid there.
JUDGEMENT ANALYSIS:
1. The court noted that from the beginning until the year 2011, the multi-State Co-operative Society's establishment in Oman had consistently been regarded as a Permanent Establishment (PE) for tax purposes. The court questioned why this PE status, which had been acknowledged as such for roughly ten years, would suddenly change. This supported the claim that the society's Oman-based establishment should still be regarded as a PE.
2. The Sultanate of Oman's Secretary General for Taxation's letter dated December 11, 2000 was the subject of a dispute that the court addressed. The defence was that because this letter lacked statutory authority, it could not be used to support a tax exemption claim. The letter did not introduce new provisions, the court ruled, but rather served as a clarificatory communication that interpreted already-existing Omani Tax Laws. It thus supported the letter's applicability in interpreting tax exemptions.
3. 3. The court emphasised that dividends received by businesses, including tax-exempt entities, were not subject to income tax under Article 8 (bis) of the Omani Tax Laws. By luring investments, this exemption aimed to advance economic growth in Oman. The court found that the society was entitled to the same tax treatment in India as it did in Oman under Article 25 of the DTAA and that this exemption applied to the dividend income the society received from its joint venture.
4. 4. In its final ruling, the court dismissed the appeals made by the appellant because it determined that the DTAA's terms and Article 8 of the Omani Tax Laws applied to this particular situation. The society consequently received tax exemption for its dividend income.
CONCLUSION:
The multi-State Co-operative Society in India won the legal battle over the taxation of dividend income derived from its joint venture in Oman, the court concluded. The Double Taxation Avoidance Agreement (DTAA) between India and Oman and the Omani Tax Laws were upheld by the court as giving the society the right to claim tax credits and exemptions. The court's ruling confirmed the society's long-standing permanent establishment (PE) status in Oman and emphasised the value of a letter from the Omani Ministry of Finance that clarified how tax laws should be interpreted. Due to the dismissal of the appellant's appeals, the society's eligibility for a tax exemption on its dividend income was established.
