[2016] 67 taxmann.com 138 (Delhi – Trib.) Krishak Bharati Cooperative Ltd vs. ACIT A.Ys.: 2010-11 & 2011-12, Date of Order: 9th March, 2016

Facts
The Taxpayer an Indian co-operative society established a branch office (BO) in Oman. BO created a PE for the Taxpayer in Oman under the DTAA . Taxpayer also held shares in another company in Oman, from which the Taxpayer had received dividend income. Such dividend income was effectively connected with the BO. Such dividend income was exempt from tax in Oman. Vide its letter, Ministry of Finance of Oman clarified that dividend exemption was granted with the object of promoting economic development within Oman by attracting investments.

Taxpayer claimed tax credit for the Omani tax on dividend income which would have been payable in Oman but not paid by reason of exemption granted under the Omani tax Laws.

AO however contended that the dividend exemption exists across the board with no exceptions in Oman, thus it cannot be construed as an incentive granted for economic development and therefore denied such credit.

Held
Article 25(4) of India-Oman DTAA provides that tax payable for the purpose of computing the tax credit shall be deemed to include the tax which would have been payable but not paid by reason of for certain tax incentives granted under the laws of the source state for promoting economic development.

Ministry of Finance of Oman had clarified that the exemption on dividend income was introduced to promote economic development. Omani Tax Law can be clarified only by government of Oman and interpretation given by it must be adopted in India.

Therefore, by virtue of Article 25(4) of the DTAA Taxpayer is entitled to foreign tax credit in respect of tax that would have been payable in Oman but for the exemption.