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

Zenith Corp, a foreign company with an Indian branch, is chargeable to tax in India at a rate higher than that for a domestic company. It argues that this breaches the non-discrimination clause of the treaty, and that Chapter XI (general anti-avoidance rules) should not apply to it because the treaty is more beneficial. Which view is correct under section 159?

Neither argument succeeds. Section 159(5) provides that charging a foreign company at a higher rate than a domestic company is not treated as less favourable taxation. Section 159(6) provides that Chapter XI applies even when it is not beneficial to the assessee, overriding the more-beneficial rule in section 159(4).

  1. ABoth arguments succeed, since treaty terms override the Act in all cases
  2. BNeither succeeds: a higher rate for a foreign company is not regarded as less favourable charge of tax under section 159(5), and Chapter XI applies even if not beneficial under section 159(6)Correct
  3. CThe first succeeds and the second fails, because the higher rate is discriminatory
  4. DThe first fails but the second succeeds, because Chapter XI is subject to section 159(4)

Explanation

Section 159(5)(a) says a higher rate of tax on a foreign company than that on a domestic company is not regarded as less favourable charge or levy of tax. This defeats the discrimination argument. Section 159(6) says that irrespective of subsection (4), Chapter XI applies even if its provisions are not beneficial to the assessee. This defeats the second argument, so both fail.

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