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CA Final · Direct Tax Laws & International Taxation · Double Taxation Relief

India has an agreement with Country Y under which the agreed tax on a certain royalty is 20%, while the domestic provisions of the Income-tax Act, 2025 would tax the same royalty of a Y-resident, who holds the required residence certificate, at 10%. For the relevant tax year, how is the assessee taxed on this royalty, and does Chapter XI affect the position?

The royalty is taxed at 10% because the Act's provisions apply to the extent they are more beneficial than the agreement. However, Chapter XI applies to the assessee regardless, even where its provisions are not beneficial, so the beneficial-provision rule does not override it.

  1. AAt 20%, since the agreement always overrides the Act
  2. BAt 10%, since the Act applies to the extent more beneficial, but Chapter XI applies even if not beneficial to the assesseeCorrect
  3. CAt 15%, being the average of the two
  4. DAt 10%, and Chapter XI is switched off whenever the Act is applied

Explanation

Section 159(4) applies the Act's provisions to the extent more beneficial to the assessee, so 10% prevails over 20%. Section 159(6) provides that, irrespective of sub-section (4), Chapter XI applies even if not beneficial. Option A ignores the beneficial rule. Option D wrongly switches off Chapter XI.

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