Taxability of non-resident commission payments governs TDS default under section 40(a)(ia), requiring fresh examination before disallowance.

Tax deduction at source on commission payments to non-resident sales agents depends on whether the income embedded in the remittance is chargeable to tax under the Act. A disallowance under section 40(a)(ia) cannot be sustained merely because payment was made to a non-resident; the threshold issue of taxability must first be examined. As that question had not been properly considered, the disallowance and finding of default were set aside and the matter was remitted for fresh consideration on taxability after hearing the parties.

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Issues: Whether disallowance under section 40(a)(ia) could be sustained for non-deduction of tax at source on commission payments to non-resident sales agents when the chargeability of the remitted amounts to tax under the Income-tax Act was in dispute.

Analysis: The decision under challenge proceeded on the footing that tax had to be deducted at source merely because the payment was made to a non-resident. The Court noted that, before fastening default for failure to deduct tax at source, the relevant enquiry is whether the income embedded in the payment is chargeable to tax under the Act. That aspect had not been considered by the Tribunal while affirming the disallowance. In view of the later Division Bench decision, the Tribunal's conclusion on default could not be sustained without a fresh examination of taxability. The matter was therefore required to be reconsidered by the Tribunal on that limited aspect after hearing the parties.

Conclusion: The disallowance and the finding of default under section 40(a)(ia) were set aside for fresh consideration on the limited question of taxability, in favour of the assessee to that extent.

Ratio Decidendi: Deduction of tax at source on payments to a non-resident depends on whether the underlying income is chargeable to tax under the Act, and a finding of default under section 40(a)(ia) cannot stand without determining that threshold issue.

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