DTAA impact on disallowance for non-resident technical fees restored for fresh examination under income-tax law

Disallowance under section 40(a)(ia) for professional or technical fees paid to non-residents without tax deduction was required to be re-examined because the applicability of the relevant Double Taxation Avoidance Agreement and sections 9 and 195 had not been examined. The Tribunal noted that the recipients had provided consultancy or technical services, but the effect of treaty provisions on taxability and the resulting disallowance remained unconsidered at the assessment stage. The matter was restored to the Assessing Officer for fresh consideration and recomputation in accordance with law after examining the treaty position.

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Issues: Whether disallowance under section 40(a)(ia) in respect of professional/technical fees paid to non-residents without deduction of tax at source required reconsideration in the light of the Double Taxation Avoidance Agreement and the applicability of sections 9 and 195 of the Income-tax Act, 1961.

Analysis: The payments were treated by the lower authorities as fees for technical services and disallowed under section 40(a)(ia) on the footing that tax was not deducted at source. In appeal, the assessee sought consideration of the applicable Double Taxation Avoidance Agreement, contending that it could materially affect the taxability and consequential disallowance. The material before the Tribunal showed that the non-resident recipients had provided consultancy/technical services, but the question whether treaty provisions altered the incidence of disallowance had not been examined by the Assessing Officer.

Conclusion: The matter was restored to the Assessing Officer for fresh consideration with directions to examine the Double Taxation Avoidance Agreement and recompute the disallowance in accordance with law.

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