The Supreme Court (SC), in the case of Krishak Bharti Cooperative, a multi-state co-operative society, which had entered into a joint venture with an Oman-company for manufacturing fertilizers was held eligible to claim credit of tax in India which would have been payable in Oman, but was exempted.
The issue related to the claim of foreign tax credit in India on dividends received from its permanent establishment in Oman – no tax had been paid on such dividends in Oman. The SC ruled that foreign tax credit can be claimed by the taxpayer in India for the taxes ‘spared’ in Oman.
The Indian entity had obtained a clarification from the Oman authorities that in accordance with the provisions of the domestic income tax law in Oman, an Indian entity that received dividend income from its permanent establishment in Oman, would be entitled to claim income tax exemption in Oman.
A newsletter issued by EY-India explains: With respect to the fact that the exemption under Article 25 (tax sparing clause) of the India-Oman tax 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.
It is in this backdrop that the Indian entity had sough a clarification from the Oman authorities. Taking note of the clarifications issued by the letter issued by the authorities, 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. Thus it upheld the statutory force of the letter.