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CA Final · Direct Tax Laws & International Taxation · Tax Planning, Tax Avoidance and Tax Evasion

Nair Exports Pvt Ltd, an Indian company, has a subsidiary in a country with which India has a notified agreement. The agreement's tax rate on a payment is more favourable than the Act's, and Chapter XI of the Act (the anti-avoidance chapter) also applies to the transaction, with provisions less beneficial than the treaty. A foreign company is also taxed at a higher rate than a domestic company. Which statement is correct under section 159 of the Income-tax Act, 2025?

Chapter XI applies to the assessee even if its provisions are not beneficial, overriding the beneficial-provision rule, and charging a foreign company at a higher rate than a domestic company is not regarded as less favourable taxation. Both rules come from sub-sections (6) and (5) of section 159.

  1. AThe treaty overrides Chapter XI, because the treaty is always more beneficial
  2. BChapter XI applies even if not beneficial to the assessee, and the higher rate on a foreign company is not regarded as less favourable taxationCorrect
  3. CChapter XI applies only if the treaty is silent, and the higher rate on a foreign company is discriminatory
  4. DThe higher rate on the foreign company is discriminatory, but Chapter XI is overridden by the treaty

Explanation

Section 159(6) provides that, notwithstanding the beneficial-provision rule in sub-section (4), Chapter XI applies even if not beneficial to the assessee. Section 159(5) says a higher rate of tax on a foreign company than on a domestic company is not regarded as less favourable charge. Both parts of the second option match the text.

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