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

Kaveri Ltd, a foreign company, is taxed in India at 40%, whereas domestic companies are taxed at 25%. The treaty with its home country bars less favourable taxation of its enterprises. Under section 159 of the Income-tax Act, 2025, what is the position?

The higher rate on a foreign company is not treated as less favourable taxation. Section 159(5) expressly says that charging a foreign company at a rate above the domestic company rate does not amount to a less favourable charge, so the non-discrimination clause gives no relief against it.

  1. ATaxing a foreign company at a higher rate than a domestic company is not regarded as less favourable taxationCorrect
  2. BThe higher rate breaches the non-discrimination clause, so the rate must be reduced to 25%
  3. CThe treaty rate overrides any rate chargeable under the Act
  4. DThe company can ignore the Act and pay tax only at the home-country rate

Explanation

Section 159(5) states that charging a foreign company at a higher rate than a domestic company is not to be regarded as a less favourable charge or levy of tax. Hence the non-discrimination argument fails and the higher rate stands.

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