Section 263 revision fails where non-resident service payments are excluded from tax and treaty make-available test is unmet.

A revisional order under section 263 was analysed in the context of payments to a non-resident for market development services. The key question was whether the payment was taxable in India as fees for technical services; the discussion noted the domestic exclusion where services are used for business carried on outside India, and the treaty requirement that technical knowledge or skill be made available was not satisfied. On those facts, no taxable income in India was shown, so the basic condition for invoking section 263, namely an order that is both erroneous and prejudicial to the Revenue, was not established. The revisional order was therefore unsustainable.

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Issues: Whether the revisional order under section 263 was sustainable on the ground that payments made to a non-resident for market development services were taxable in India as fees for technical services, attracting tax deduction at source and disallowance.

Analysis: The decisive question was whether, even assuming the payment to the non-resident to be fees for technical services, it fell within the exclusion in section 9(1)(vii)(b) because the services were utilised for business carried on outside India. The expression used in that clause refers to the recipient of the income, and where the non-resident rendered services in the course of its overseas business, the payment did not fall within the deeming provision. The order also relied on the treaty provision, but the services described did not make available technical knowledge, experience, skill, know-how, processes, or a technical plan or design to the assessee. In the absence of taxable income in India on these facts, the foundation for invoking section 263, namely an error causing prejudice to the Revenue, was not established.

Conclusion: The revisional order was unsustainable and was quashed; the issue was answered in favour of the assessee.

Final Conclusion: The assessment could not be revised under section 263 because the payment to the non-resident was not shown to be taxable in India under the domestic deeming provision or the applicable treaty, so the appeal succeeded.

Ratio Decidendi: Where a payment to a non-resident falls within the statutory exclusion in section 9(1)(vii)(b), and the applicable treaty does not make the services taxable in India on a make-available basis, the assessment order cannot be treated as erroneous and prejudicial to the Revenue for purposes of section 263.

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