TDS on foreign commission applies only when income is chargeable to tax in India; retrospective circular change rejected

Commission paid to non-resident foreign agents for services rendered outside India was not chargeable to tax in India in the absence of a permanent establishment, so section 195 was not attracted. On that basis, disallowance under section 40(a)(ia) was unsustainable. The earlier circular governing the assessment year continued to apply, and the later circular could not operate retrospectively to alter the tax position for prior payments. The objection based on business expediency did not raise a substantial issue warranting interference.

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Issues: Whether commission paid to non-resident foreign agents for services rendered outside India attracted deduction of tax at source under section 195 of the Income-tax Act, 1961 and disallowance under section 40(a)(ia) of the Income-tax Act, 1961, and whether Circular No. 7 dated 22/10/2009 could override Circular No. 786 dated 07/02/2000 for the relevant assessment year.

Analysis: Section 40(a)(ia) applies where tax deductible under Chapter XVII-B has not been deducted, but the payments in question were commission to non-resident agents operating outside India. The Court noted that such payments were not chargeable to tax in India in the absence of any permanent establishment in India, and that section 195 is attracted only when the sum is chargeable to tax in India. Circular No. 786 dated 07/02/2000 governed the assessment year in question and the later Circular No. 7 dated 22/10/2009 was held not to operate retrospectively so as to alter the position for earlier payments. The objection regarding business expediency was also not found to raise any substantial question warranting interference.

Conclusion: The disallowance under section 40(a)(ia) was not sustainable and the Revenue's appeal failed.

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