Dec 22, 2023

Tax Sparing Principle Upheld by Supreme Court

In continuation of the recent decision of the Delhi High Court,[1] wherein the particular phrase “tax payable” was examined while determining the availability of foreign tax credit to an Indian resident by virtue of Article 23 of the India-Thailand Double Taxation Avoidance Agreement (“DTAA”) (as it existed prior to its amendment in 2015), which allows an Indian resident to claim credit of tax “payable” in Thailand, the Supreme Court in identical circumstances has upheld the claim of Tax Sparing Principle in the context of India – Oman DTAA. In brief, the dispute in the case before the Delhi High Court arose on account of the tax liability of an Indian company, who was a recipient of dividend from a Thai entity, and which had sought the applicability of the tax sparing clause under the unamended India-Thai DTAA while seeking the credit of tax which was payable in Thailand but not paid on account of exemption prevailing in Thailand.

Subsequently, in a separate case[2], the Supreme Court of India has held identically and allowed the Indian resident to invoke the tax sparing clause in the India – Oman DTAA in order to claim credit of tax which would have been payable in Oman but was not so paid owing to the exemption granted pursuant to a communication issued by the Sultanate of Oman, Ministry of Finance under the signatures of Secretary General for Taxation[3]. In terms of such communication, it has been clarified 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 (“PE”) in Oman, would be entitled to claim exemption from payment of income tax in Oman on such dividend income. The Supreme Court, whilst considering the history of tax assessments of such Indian entity in Oman, wherein the Indian entity has been considered to have a PE in Oman from the very inception of its presence in Oman, held that the Indian entity would be eligible not only for exemption under the income tax regime in Oman but also in India, in light of Article 25(4) of the India – Oman DTAA i.e., tax sparing clause.

Thus, the principles laid down by the Delhi High Court in the case of Polyplex Corporation Ltd.[4], seem to have been upheld by the Supreme Court in this decision, in spite of the fact that such tax sparing clauses, though meant to promote economic development in a contracting state, allow double non-taxation within the tax treaty framework.


[2] PCIT v. Krishak Bharti Cooperative Ltd., [2023] 154 318 (Order dated September 15, 2023) (Supreme Court).

[3] Article 8(bis) of Oman tax laws, read with the clarification letter dated December 11, 2000.

[4] PCIT v. Krishak Bharti Cooperative Ltd., [2017] 80 326 (Order dated April 21, 2017) (Delhi High Court).




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