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

Under the India–X treaty, a foreign company is charged to tax in India at 40% on its India-source business income, whereas domestic companies are taxed at 25%. The treaty has a non-discrimination clause stating that foreign enterprises shall not be subject to less favourable taxation. The company argues the higher rate breaches the clause. Under section 159, which statement is correct?

The higher rate is not treated as less favourable. Section 159(5) provides that the charge of tax on a foreign company at a rate higher than that for a domestic company is not regarded as a less favourable charge or levy. Hence the non-discrimination argument fails.

  1. AThe company's argument succeeds, because any higher rate is discrimination
  2. BThe higher rate is not regarded as a less favourable charge of tax under section 159(5)Correct
  3. CThe treaty clause overrides the rate only if the company holds Form No. 43
  4. DThe argument succeeds only if the rate difference is more than 10 percentage points

Explanation

Section 159(5)(a) says the charge of tax on a foreign company at a rate higher than the rate chargeable on a domestic company is not to be regarded as a less favourable charge or levy. So the higher rate does not breach the non-discrimination clause. The percentage-point threshold in option D appears nowhere in the section.

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