Non-resident commission and partner insurance premium treated as deductible where payments were not chargeable in India and policy was keyman-type.

Commission paid to non-resident agents for services rendered outside India was held not to attract tax deduction at source where the amount was not shown to be chargeable in India, the services were not technical, consultancy or managerial, and the later CBDT withdrawal operated prospectively. The disallowance under section 40(a)(i) was therefore not warranted. Premium paid on insurance policies taken by a firm in the names of its partners was treated as deductible revenue expenditure because the policies were, in substance, a keyman-type arrangement intended to protect the business against loss on a partner's death. The allowance under section 37(1) was upheld subject to the assessee's undertaking regarding taxability of maturity proceeds.

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Issues: (i) Whether commission paid to foreign agents for services rendered outside India was liable to tax deduction at source and disallowance under section 40(a)(i) was warranted; (ii) Whether premium paid on insurance policies taken in the names of partners was allowable as business expenditure as a keyman-type policy.

Issue (i): Whether commission paid to foreign agents for services rendered outside India was liable to tax deduction at source and disallowance under section 40(a)(i) was warranted.

Analysis: The payment was made to non-resident agents for services rendered outside India. The relevant CBDT circulars in force during the assessment year permitted the assessee's position, and the later circular withdrawing them operated prospectively. The Tribunal also noted that mere book entries in India did not establish receipt of income in India by the non-resident, and the payment was not shown to be chargeable in India. The services were also not shown to be technical, consultancy, or managerial services so as to attract section 9(1)(vii).

Conclusion: The assessee was not required to deduct tax at source on the commission payment, and the deletion of the disallowance was upheld.

Issue (ii): Whether premium paid on insurance policies taken in the names of partners was allowable as business expenditure as a keyman-type policy.

Analysis: The policies were taken by the firm, the firm was the proposer, and the partners were the assured persons. The Tribunal found that the commercial object of the policies was to protect the business against loss arising from the death of a partner, which was the substance of a keyman insurance arrangement. The premium was treated as revenue expenditure, and the benefit on maturity was regarded as taxable in the hands of the recipient, subject to the assessee furnishing an undertaking to treat the receipt as income.

Conclusion: The premium was allowable under section 37(1), and the disallowance was set aside subject to the undertaking directed by the Tribunal.

Final Conclusion: The Revenue's challenge failed, while the assessees succeeded on the disputed claims, resulting in allowance of the assessees' appeals and dismissal of the Revenue's appeals.

Ratio Decidendi: A non-resident commission paid for services rendered outside India is not subject to deduction of tax at source unless the payment is chargeable to tax in India, and insurance premium paid by a firm on policies taken on the lives of partners is deductible where the policy is in substance intended to protect the business and functions as a keyman-type policy.

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