Cross-border professional fees for services used in the USA were outside Indian tax withholding, so section 40(a)(i) disallowance failed.

Professional fees paid by an assessee's US branch to US entities for services used wholly in the USA were not chargeable to tax in India because the payments fell outside the deeming fiction in section 9(1)(vii). As only sums chargeable under the Act attract withholding under section 195, no tax was deductible at source on those payments. Article 7 of the Indo-US DTAA also supported this result, since the relevant business profits were attributable to activities in the USA and not to any permanent establishment in India. On that basis, disallowance under section 40(a)(i) was unsustainable and was deleted.

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Issues: Whether professional fees paid by the assessee's US branch to US entities for services utilised in the USA were chargeable to tax in India so as to attract deduction of tax at source under section 195 and disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The payments were incurred and borne by the assessee's US branch in connection with business carried on in the USA, and the services were utilised outside India for earning income from a foreign source. On these facts, the amounts did not fall within the deeming fiction of section 9(1)(vii) of the Income-tax Act, 1961. Since only sums chargeable under the Act are subject to withholding under section 195, no tax was deductible at source on such payments. The conclusion was reinforced by Article 7 of the Indo-US Double Taxation Avoidance Agreement, under which business profits of a US enterprise are taxable in the other State only to the extent attributable to a permanent establishment there; the services here were rendered in the USA and not through any permanent establishment in India.

Conclusion: The disallowance under section 40(a)(i) was not sustainable and was rightly deleted.

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