Treaty-based non-taxability of technical service fees barred withholding tax and disallowance for payments to Austrian enterprise.

Fees for technical services paid to an Austrian enterprise were treated as not taxable in India because the India-Austria treaty applied only to the extent the services were actually performed in India, and the services here were rendered wholly from Austria. As no income was chargeable to tax in India, no tax deduction obligation arose under section 195, the need for a certificate under section 195(2) did not survive, and disallowance under section 40(a)(i) could not be sustained. The resulting disallowance was deleted in favour of the assessee.

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Issues: Whether fees for technical services paid to the Austrian enterprise were chargeable to tax in India for the relevant assessment year, whether tax was deductible under section 195, and whether disallowance under section 40(a)(i) could be sustained.

Analysis: The relevant India-Austria treaty applicable to the assessment year provided that amounts paid for technical services furnished by one enterprise to the other were taxable in the first territory only to the extent attributable to activities actually performed there. On the facts, the services were rendered wholly from Austria and no part of the services was performed in India. Since the income of the Austrian enterprise was not taxable in India under the treaty, there was no sum chargeable under the Income-tax Act, 1961. In such circumstances, the obligation to deduct tax at source under section 195 did not arise, the requirement to seek a certificate under section 195(2) did not survive, and the expenditure could not be disallowed under section 40(a)(i).

Conclusion: The disallowance of fees for technical services was not sustainable and was deleted in favour of the assessee.

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