Supreme Court allows tax sparing credit on dividend income

The Taxpayer[1] , a multi-state co-operative society registered in India, entered into a joint venture (JV) with a company registered in Oman, for conducting its business of manufacturing fertilizers. During the relevant year, the Taxpayer received dividend income from the JV registered in Oman. The said dividend income was exempt from tax under the domestic laws of Oman.

Tax sparing clause available under various Double Taxation Avoidance Agreements (DTAA or treaties) provide relief to taxpayers in the resident country in respect of taxes which the source country was entitled to collect under the treaty but sacrificed it with the object of achieving economic development in the source country.

In the present case, the tax authority held that dividend income is taxable in India and granted foreign tax credit (FTC) of taxes spared in Oman by virtue of Article 25(2) r.w. Article 25(4) of the India-Oman DTAA[2]. Principal Commissioner of Income Tax (PCIT) challenged the same, by arguing that no FTC shall be available to the Taxpayer under Article 25, as the tax was payable on the dividend income in Oman but was not actually paid. The decision of PCIT was overruled in subsequent appeals filed before the Tribunal and High Court. 

On further appeal to the Supreme Court (SC), the tax authority argued that the dividend received by the Taxpayer is taxable in India and no exemption thereon is available under Article 25 as dividend is not designed as a tax incentive in Oman to promote development in Oman. Further, the tax authority argued that a letter  issued by the Ministry of Finance (MoF) Oman to the Taxpayer, specifying the rationale for granting exemption to dividend income, did not have a statutory force as per the Omani Tax Laws and, hence, cannot be relied upon. 

The SC ruled that FTC can be claimed by the Taxpayer in India for the taxes spared in Oman. With respect to the fact that the exemption under Article 25 of the treaty is contingent upon whether the tax on dividend income is not paid in Oman due to a tax “incentive” (granted for promotion of economic development in Oman), the SC observed that the term “incentive” is neither defined in the Omani Tax Laws nor in the Indian Income Tax Laws, and it is in such circumstances that the Taxpayer sought clarification by way of a letter from the MoF, Oman. Taking note of the clarifications issued by the letter of the MoF Oman, the SC observed that the exemption was introduced in the Omani Tax Laws for the dividend income to encourage investment in sectors which are essential for economic development of Oman. The SC noted that the said letter is only a clarificatory communication, interpreting the provisions contained under the Omani Tax Laws and the letter itself has not introduced any new provision. The SC upheld the statutory force of the letter.

^{[1]  PCIT v. Krishak Bharti Cooperative Ltd (Civil Appeal No. 836 of 2018)
[2] Article 25(2) of the India-Oman treaty provides that where a resident of India derives income which, in accordance with the provisions of treaty, may be taxed in Oman, then India shall allow FTC equal to the income tax paid in Oman. Further, Article 25(4) provides that for the purpose of Article 25(2), tax payable in Oman shall be deemed to include the tax which would have been payable and not paid due to tax incentives granted under the Omani laws to promote economic development.}