PRINCIPAL COMMISSIONER OF INCOME TAX-10versusM/S KRISHAK BHARTI COOPERATIVE LTD.

                [2023] 12 S.C.R. 590 : 2023 INSC 834



                          CASE DETAILS

       PRINCIPAL COMMISSIONER OF INCOME TAX-10
                                   v.
          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
                                  590
        PRINCIPAL COMMISSION ER OF INCOME TAX-10 v.                591
           M/S KRISHAK BHARTI COOPERATIVE LTD.


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.
592          SUPREME COURT REPORTS                        [2023] 12 S.C.R.



       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:
       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 office 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 office 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
Officer 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.
  PRINCIPAL COMMISSION ER OF INCOME TAX-10 v. M/S KRISHAK                 593
   BHARTI COOPERATIVE LTD. [PRASHANT KUMAR MISHRA, J.]


      6. The Assessing Officer 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 Officer.
     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,
594           SUPREME COURT REPORTS                         [2023] 12 S.C.R.


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 clarification
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 benefits 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 profitable
to extract them for ready reference. Article 7 speaks about business profits
which reads as follows:
      “ARTICLE 7.
      The profits 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 profits 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.
PRINCIPAL COMMISSION ER OF INCOME TAX-10 v. M/S KRISHAK               595
 BHARTI COOPERATIVE LTD. [PRASHANT KUMAR MISHRA, J.]


  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 beneficial owner of
  the dividends, the tax so charged shall not exceed:
       (a) 10 per cent of the gross amount of the dividends if the
       beneficial 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 affect the taxation of the company
       in respect of the profits 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 profits
  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 beneficial
  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 fixed base situated therein, and the holding in respect
  of which the dividends are paid is effectively connected with such
  permanent establishment or fixed 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 profits 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 effectively connected with a permanent
  establishment or a fixed base situated in that other Contracting
  State, nor subject the company’s undistributed profits to a tax on the
  company’s undistributed profits, even if the dividends paid or the
596           SUPREME COURT REPORTS                         [2023] 12 S.C.R.


      undistributed profits consist wholly or partly of profits or income
      arising in such other Contracting State.”
         The significant 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.”
  PRINCIPAL COMMISSION ER OF INCOME TAX-10 v. M/S KRISHAK                 597
   BHARTI COOPERATIVE LTD. [PRASHANT KUMAR MISHRA, J.]


     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. Profits 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)
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.
      14. The revenue relied upon Article 11 which provides that dividends
paid by a company which is a resident of a Contracting State to a resident
of the other Contracting State may be taxed in that other Contracting State.
Thus, according to the revenue, dividend received by the assessee is taxable
in India and is not exempt because the same is not designed as tax incentive
in Oman to promote development in that country. In the same manner, it is
argued that the letter issued by the Secretary General for Taxation, Ministry
of Finance, Oman was not issued by the competent Omani authority and
has no statutory force.
      15. The term ‘incentive’ is neither defined in the Omani Tax Laws nor in
the Income Tax Act, 1961. Faced with this situation, the JV addressed a letter
in November, 2000 to Oman Oil Company seeking clarification regarding
the purpose of Article 8 (bis) of the Omani Tax Laws. The clarification
letter dated 11.12.2000 addressed by the Secretary General for Taxation,
Sultanate of Oman, Ministry of Finance, Muscat to Oman Oil Company
SAOC is significant, and reads as follows:
598           SUPREME COURT REPORTS                         [2023] 12 S.C.R.


      “We refer to your letter dated 2nd December, 2000 and our previous
      letter dated 8 August, 2000 on the above subject.
      Under Article 8 of the Company Income Tax Law of Oman, dividend
      forms part of the gross income chargeable to tax. The tax law of Oman
      provides income tax exemption to companies undertaking certain
      identified economic activities considered essential for the country’s
      economic development with a view to encouraging investments in
      such sectors.
      Before the recent amendments to the Profit Tax Law on Commercial and
      Industrial Establishments, Article 5 of this law provided for exemption
      of dividend income in the hands of the recipients if such dividends were
      received out of the profits on which Omani income tax was paid by
      distributing companies. It meant that Omani income tax was payable
      by the recipients on any dividend income received out of the exempt
      profits from tax exempt companies. As a result, investors in tax exempt
      companies that undertake those activities considered essential for the
      country’s economic development suffered a tax cost on their return on
      investments the tax treatment under the above-mentioned Article 5 had
      the negative impact on investments in tax exempt project.
      The company Income Tax Law of 1981 was, therefore, recently amended
      by Royal Decree No. 68/2000 by the insertion of a new Article 8 (bis)
      which is effective as from the tax year 2000. As per the newly introduced
      Article 8 (bis) of the Company Income Tax Law, dividend distributed by
      all companies, including the tax-exempt companies would be exempt
      from payment of income tax in the hands of the recipients. In this manner,
      the Government of Oman would achieve its aim objective of promoting
      economic development within Oman by attracting investments.
      We presume from our recent discussions with you that the Indian
      investors in the above Project would be setting up Permanent
      Establishment in Oman and that their equity investments in the
      Project would be effectively connected with such Permanent
      Establishments.
      On the above presumption, we confirm that tax would be payable on
      dividend income earned by the Permanent Establishments of the Indian
  PRINCIPAL COMMISSION ER OF INCOME TAX-10 v. M/S KRISHAK                   599
   BHARTI COOPERATIVE LTD. [PRASHANT KUMAR MISHRA, J.]


     Investors, as it would form part of their gross income under Article 8, if
     not for the tax exemption provided under Article 8 (bis).
     As the introduction of Article 8 (bis) is to promote economic development
     in Oman, the Indian Investors should be able to obtain relief in India ITA
     Nos. 6785 & 6786/DEL/2015 (AYRS. 2010-11 & 2011-12) KRISHAK
     BHARATI CO-OPERATIVE LIMITED VS. ACIT under Article 25
     (4) of the Agreement for Avoidance of Double Taxation in India. All
     other matters covered in our letter No. FT/13/92 dated 6th August, 2000
     remained unchanged.”
      16. It is, thus, clear from the above letter of the Omani Finance Ministry
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 Omani Finance
Ministry concluded by saying 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).
       17. 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.
     18. Insofar as the argument concerning the assessee not having PE in
Oman, it is significant to note that from the year 2002 to 2006, a common
order was made under Article 26 (2) of the Income Tax Law of Oman. The
High Court has extracted the opening portion of the above order, which reads
as under:
600            SUPREME COURT REPORTS                        [2023] 12 S.C.R.


      “We refer to the returns of income and determine the taxable income
      as under:
      Kribhco Muscat is a permanent establishment supported by M/s. Krishak
      Bharati Cooperative Limited, a multi-state cooperative society registered
      in India. As per the accounts, Kribhco-Muscat is in receipt of dividend
      income from Omifco, a joint stock company registered in Oman, and that
      dividend income is connected with the investment of Kribhco-Muscat.
      The dividend income is, however, exempt from tax in accordance with
      Article 8(bis) (1) of the Company Income Tax Law.
      The tax exemption on dividend is granted with the objective of promoting
      economic development within Oman by attracting investments.”
      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.
       19. Learned senior counsel for the appellant has also raised an issue to
the effect that the letter dated 11.12.2000 issued by the Secretary General for
Taxation, Ministry of Finance, Sultanate of Oman has no statutory force as per
Omani Tax Laws, hence, the same cannot be relied upon to claim exemption. In
our view, the above letter, as has been reproduced in the preceding paragraph of
this judgment, is only a clarificatory communication interpreting the provisions
contained in Article 8 and Article 8 (bis) of the Omani Tax Laws. The letter
itself has not introduced any new provision in the Omani Tax Laws. In this
view of the matter, the argument raised by the learned senior counsel would
not convince us to deny exemption to the assessee.
      20. In our considered view, the 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 and, consequently, we hold
that the appeals have no substance and deserve to be dismissed which are
hereby dismissed.


Headnotes prepared by:                                          Appeals dismissed.
Ankit Gyan