Foreign commission payments not taxable in India where no technical services were rendered and TDS disallowance failed.

Commission paid to foreign agents for overseas business services was treated as not chargeable to tax in India where the agents did not render technical services or make available technical knowledge. The assessee relied on CBDT Circular No. 786 prevailing at the time of payment and acted under a bona fide belief that no tax was deductible at source; the later withdrawal circular was not applied to those payments, and promissory estoppel was noted. As the commission was earned outside India in the course of business carried on outside India, section 9(1)(vii) did not apply and the retrospective amendment in section 9(2) did not change the position. Accordingly, disallowance under section 40(a)(i) was not justified.

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Issues: Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 could be sustained for commission paid to foreign agents without deduction of tax at source, and whether the payments were chargeable to tax in India.

Analysis: The relevant payments were made in the previous year 2007-08, when the assessee acted on the then prevailing CBDT Circular No. 786 dated 07.02.2000. The later withdrawal circular did not govern those payments. The assessee was therefore entitled to rely on its bona fide belief that no tax was deductible at source, and the principle of promissory estoppel applied. The record also did not show that the foreign agents rendered technical services or made available technical knowledge to the assessee. The services were in the nature of overseas commission business, and section 9(1)(vii) of the Income-tax Act, 1961 did not bring such receipts within the charge of fees for technical services. The retrospective insertion in section 9(2) of the Income-tax Act, 1961 did not alter the position where the non-residents earned commission outside India in the course of business carried on outside India.

Conclusion: The disallowance under section 40(a)(i) of the Income-tax Act, 1961 was not justified and the deletion by the first appellate authority was upheld.

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