Withholding tax on non-resident payments depends on chargeability in India; accreditation fees were not royalty or business profits.

Section 195 withholding arises only where the remittance is chargeable to tax in the hands of the non-resident recipient, so disallowance under section 40(a)(i) cannot stand merely because tax was not deducted. The recipient had no permanent establishment in India, making the receipt non-taxable as business profits under the treaty, and the accreditation fee did not constitute royalty because marketing approval did not involve use of, or right to use, any trademark, know-how, or other specified rights or information. The disallowance was therefore deleted and no withholding tax obligation arose.

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Issues: Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 was justified for remittance made without deduction of tax at source, and whether the payment for accreditation fees was taxable in India as business profits or royalty so as to attract withholding under section 195(1).

Analysis: Tax deduction at source under section 195(1) arises only where the sum remitted to a non-resident is chargeable to tax in India. The payer's withholding obligation is vicarious and depends on the primary tax liability of the recipient; in the absence of proof that the recipient had a taxable income in India, disallowance under section 40(a)(i) cannot be sustained merely because tax was not deducted on the remittance. On the facts, the recipient had no permanent establishment in India, so the receipt was not taxable as business profits under Article 7 of the treaty. The payment also did not fall within the treaty definition of royalty under Article 13(3), because accreditation and approval used for marketing did not amount to use of, or right to use, any trademark, know-how, or other specified right or information.

Conclusion: The disallowance was rightly deleted, and the assessee had no obligation to deduct tax at source from the payment.

Ratio Decidendi: Section 195 withholding applies only when the remittance is chargeable to tax in the hands of the non-resident recipient, and a payment for accreditation or approval used for marketing is not royalty unless it fits the treaty definition.

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