Treaty taxability on royalty depends on actual payment, so mere credit to a non-resident did not trigger withholding or disallowance.

For royalty and development fee credited as outstanding to a non-resident, mere year-end accrual did not trigger disallowance under section 40(a)(i) where Article 13 of the India-Korea DTAA used the word "paid" in its ordinary sense of actual remittance. The treaty language was treated as distinct from domestic charging and withholding provisions, and taxability was held to arise only when payment was actually made, not when the amount was merely payable. Following the coordinate bench view that both accrual and actual payment conditions must be satisfied, the disallowance was deleted and withholding was not attracted at the credit stage.

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Issues: Whether disallowance under section 40(a)(i) was justified in respect of royalty and development fee credited as outstanding to a non-resident without actual payment during the relevant previous year, having regard to section 195 and Article 13 of the India-Korea DTAA.

Analysis: The amounts were not paid during the relevant year and remained outstanding on the year-end. The question was whether the expression "paid" in Article 13 of the DTAA could be treated as including "payable" so as to trigger taxability and withholding at the stage of credit itself. The interpretation of treaty language was held to be distinct from the construction of domestic charging or disallowance provisions, and the word "paid" was construed in its ordinary sense as referring to an actual remittance. The view of a coordinate bench that both accrual and actual payment conditions must be satisfied for the treaty article to apply was followed, and it was noted that tax was remitted when payment was made in the subsequent year.

Conclusion: The disallowance under section 40(a)(i) was rightly deleted and the Revenue's challenge failed.

Ratio Decidendi: For royalty or fees for technical services covered by the relevant treaty, mere credit of the amount as payable does not by itself attract withholding or disallowance where the treaty makes taxability contingent on actual payment.

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