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

Under Section 159 of the Income-tax Act, 2025, India has an agreement with country X. Kiran Ltd, a company resident in a third country Y, routes investment through an entity in X only to obtain treaty relief indirectly. Which statement is correct about the agreement's purposes and the Act's override?

Section 159(3)(b) requires that double taxation avoidance must not open the door to non-taxation or reduced taxation through evasion or avoidance, including treaty shopping. Section 159(6) adds that Chapter XI applies even when it is not beneficial to the assessee, overriding the more-beneficial rule of sub-section (4).

  1. AAgreements may aim to avoid double taxation without creating opportunities for non-taxation or reduced taxation, including through treaty shopping; and Chapter XI applies even if not beneficial to the assesseeCorrect
  2. BAgreements must grant relief in every case; treaty shopping is expressly permitted under Section 159(3)
  3. CThe Act's provisions can never apply if less beneficial; Chapter XI is subordinate to the treaty
  4. DThe treaty applies only if the foreign company pays a higher rate than a domestic company

Explanation

Section 159(3)(b) states that avoidance of double taxation must not create opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty-shopping arrangements. Section 159(6) says that despite sub-section (4), Chapter XI applies even if not beneficial to the assessee. The other options contradict these provisions.

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