TDS applies only to sums chargeable in India; treaty-protected airfreight receipts escape deduction, while resident-agent payments remain taxable.

Tax deduction at source applies only to sums chargeable to tax in India. Payments routed through agents were treated as payments to the foreign carrier where the airway bills named the carrier's agents and the agents acted for a disclosed principal, so the airfreight component fell within treaty protection for profits from operation of aircraft in international traffic and no TDS was required on that amount. By contrast, amounts paid to resident agents for non-airfreight components were not covered by that protection and remained subject to TDS. The matter was remitted for reassessment of allowable expenditure accordingly.

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Issues: (i) Whether payments made to the four agents were in substance payments to the foreign carrier. (ii) Whether the airfreight component paid to the foreign carrier was chargeable to tax in India and therefore attracted deduction of tax at source. (iii) Whether tax was deductible at source on payments made to resident agents for amounts other than airfreight.

Issue (i): Whether payments made to the four agents were in substance payments to the foreign carrier.

Analysis: The airway bills named the issuing carrier's agents, and the payments made by the assessee corresponded to those agents. The agents were found to be acting for a disclosed principal and functioned only as the collecting hand for the airfreight component.

Conclusion: Yes. The payments to the agents were in fact payments to the foreign carrier.

Issue (ii): Whether the airfreight component paid to the foreign carrier was chargeable to tax in India and therefore attracted deduction of tax at source.

Analysis: Tax deduction at source is required only when the sum paid is chargeable to tax in India. The airfreight payment to the foreign carrier fell within the treaty protection applicable to profits from operation of aircraft in international traffic, and therefore was not chargeable in India.

Conclusion: No. The airfreight component was not chargeable to tax in India and no deduction of tax at source was required on that amount.

Issue (iii): Whether tax was deductible at source on payments made to resident agents for amounts other than airfreight.

Analysis: The remaining components of the payments were made to resident agents and were not covered by the exclusion applicable to the foreign carrier's airfreight receipts. Those amounts remained subject to deduction at source under the relevant provision.

Conclusion: Yes. Tax was deductible at source on the resident-agent component of the payments.

Final Conclusion: The assessee succeeded only in relation to the airfreight paid to the foreign carrier, while the balance payments retained their liability to tax deduction at source. The matter was sent back for reassessment of the allowable expenditure accordingly.

Ratio Decidendi: A payer is required to deduct tax at source only from sums chargeable to tax in India, and treaty-protected airfreight receipts of a non-resident carrier are not subject to such deduction; resident-agent payments remain deductible where the statutory conditions are met.

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