Revenue's Appeals Dismissed: Payments to Non-Resident Not Taxable; Indo-French DTAA Non-Discrimination Clause Applies

The Tribunal dismissed the revenue's appeals, affirming that the disallowance under Section 40(a)(i) did not apply to payments made to a non-resident, as they were not taxable under Section 9(1)(i) or Section 9(1)(vii). The Tribunal also held that the non-discrimination clause in the Indo-French DTAA prevented the invocation of Section 40(a)(i) even if the sum was chargeable to tax in India.

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Issues: Whether disallowance under section 40(a)(i) could be made for payments to a non-resident where, in view of the applicable DTAA, the payment was governed by the non-discrimination clause and tax was not required to be deducted at source.

Analysis: The assessee's payments to the non-resident business development representative were examined against the domestic charging provisions and the treaty framework. The Court noted that the relevant assessment years were prior to the amendment of section 40(a)(i), and that Article 26(4) of the India-France DTAA was in substance pari materia with the non-discrimination provision considered in the earlier coordinate Bench decision. Applying section 90(2) of the Income-tax Act, 1961, the more beneficial treaty provision prevailed. On that reasoning, the rigour of section 40(a)(i) could not be invoked merely because tax had not been deducted from payments to the non-resident.

Conclusion: The disallowance under section 40(a)(i) was not sustainable, and the deletion of the addition was upheld in favour of the assessee.

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