DTAA protection for non-resident consultancy fees denied Indian tax withholding where no fixed base or treaty threshold was met

A non-resident Portuguese consultant's legal consultancy fees were treated as not chargeable to tax in India under the applicable DTAA because there was no fixed base or permanent establishment in India and the consultant stayed only 22 days, below the treaty threshold. As the treaty was more beneficial than section 9(1)(vii), section 195 withholding was not attracted, and the consequential demands under sections 201(1) and 201(1A) could not be sustained.

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Issues: Whether the payments made to the non-resident Portuguese consultant were chargeable to tax in India so as to attract deduction of tax at source under section 195 and consequent demand under sections 201(1) and 201(1A) of the Income-tax Act, 1961.

Analysis: The payments were made for legal consultancy services rendered by a non-resident resident of Portugal. The applicable DTAA provided that such professional income is taxable only in the State of residence unless the recipient has a fixed base regularly available in the source State or stays there for the prescribed period. On the material on record, the recipient had no fixed base or permanent establishment in India and stayed in India only for 22 days, far below the treaty thresholds. Even if the domestic charging provision in section 9(1)(vii) were to be considered, the treaty being more beneficial to the assessee would prevail, and the income would not be chargeable to tax in India.

Conclusion: The assessee had no obligation to deduct tax at source under section 195, and the demands raised under sections 201(1) and 201(1A) could not be sustained.

Final Conclusion: The addition and interest demand arising from alleged failure to deduct tax at source were deleted, and the assessee succeeded in appeal.

Ratio Decidendi: Where a non-resident's professional income is not taxable in India under the applicable DTAA because no fixed base or treaty-specified period of presence exists, section 195 is not attracted and no demand under sections 201(1) and 201(1A) can survive.

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