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CS Professional · Advanced Direct Tax Laws and Practice · Double Taxation Avoidance Agreement (DTAA)

Zenith Ltd, a foreign company, is taxed in India at a higher rate than a domestic company. Its treaty has a non-discrimination clause barring less favourable taxation. Under section 159 of the Income-tax Act, 2025, how is the higher rate on the foreign company regarded?

A higher tax rate on a foreign company than on a domestic company is deemed not to be a less favourable charge. So it cannot be challenged as discriminatory under the treaty's non-discrimination clause, regardless of which model convention the treaty follows.

  1. AIt is not regarded as a less favourable charge or levy of taxCorrect
  2. BIt is treated as discriminatory, so the treaty rate must be applied
  3. CIt is regarded as less favourable only if the treaty is based on the UN Model
  4. DIt is regarded as less favourable unless the foreign company has a permanent establishment

Explanation

Section 159(5) states that a charge on a foreign company at a rate higher than for a domestic company shall not be regarded as a less favourable charge or levy of tax. Hence the higher rate does not breach non-discrimination.

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