Section 159 Income-tax Act 2025: Agreements with Foreign Countries

Understand Agreements with Foreign Countries under Section 159

Key rules to remember

Power to enter agreements

Central Government + (any other country OR specified territory) → agreement + notification to implement

Section 159(1). The agreement is implemented by notification.

Four purposes of an agreement

Relief [(i) and (ii)] | Avoidance of double taxation | Exchange of information | Recovery of tax

Section 159(3)(a) to (d). Relief has two limbs, (a)(i) and (a)(ii); the trade and investment wording attaches to (a)(ii). The avoidance purpose must not create non-taxation or reduced taxation through evasion or avoidance, including treaty-shopping.

Beneficial-provision rule

Agreement applies to assessee → provisions of the Act apply to the extent more beneficial to him

Section 159(4). Applies to an agreement under 159(1), or a notified agreement under 159(2).

Exception to the beneficial rule

Chapter XI applies even if not beneficial

Section 159(6) overrides 159(4).

Non-resident claiming relief

Residency certificate from foreign Government + other prescribed documents and information

Section 159(8). Both conditions are needed to claim relief under the agreement.

Higher rate on foreign company

Higher rate on foreign company than domestic company ≠ less favourable charge

Section 159(5).

How to solve Agreements with Foreign Countries under Section 159 questions

1. 1Identify who is acting: the Central Government under section 159(1), or specified associations under 159(2).
2. 2Identify the counterparty: a country or a notified specified territory.
3. 3Match the purpose to section 159(3): relief (limbs (i) and (ii)), avoidance of double taxation, information exchange or recovery.
4. 4State that the agreement is implemented by notification.
5. 5Apply section 159(4): where the agreement applies, the Act's provisions apply to the extent they are more beneficial to the assessee.
6. 6Check the exceptions: Chapter XI applies even if not beneficial (159(6)), but only if its provisions are actually attracted on the facts; a non-resident needs a residency certificate and documents to claim relief under the agreement (159(8)).
7. 7Conclude with a clear answer, giving the section number for each point.

Quickest way: Four-point recall for section 159

Common mistakes in Agreements with Foreign Countries under Section 159

• Saying the agreement alone changes Indian tax law without notification.

  Students focus on signing the treaty and skip the implementation step.

  Fix: Write that the Central Government may, by notification, make provisions necessary to implement the agreement (159(1)).

• Stating that the treaty always overrides the Act.

  Memorised as 'treaty prevails'.

  Fix: Where an agreement applies, the provisions of the Act apply to the extent they are more beneficial to the assessee (159(4)). Also remember Chapter XI applies even if not beneficial (159(6)).

• Listing only double taxation relief as the purpose.

  The word DTAA suggests only relief.

  Fix: Add information exchange and recovery of tax. Mention the bar on creating non-taxation through evasion or avoidance, including treaty-shopping.

• Confusing section 159 with section 160.

  Both deal with foreign tax relief and are adjacent.

  Fix: Section 159 applies where an agreement exists. Section 160 gives relief for residents where no agreement exists with that country.

• Treating a higher tax rate on a foreign company as discrimination under the agreement.

  The idea of equal treatment is taken too literally.

  Fix: Section 159(5) says a higher rate on a foreign company than on a domestic company is not regarded as less favourable charge.

• Forgetting the residency certificate for non-residents.

  Students think treaty rates apply automatically.

  Fix: Under 159(8) a non-resident can claim relief under the agreement only if it obtains a residency certificate from the foreign Government and provides prescribed documents and information.

Worked examples