Crystallised liability and non-taxable foreign remittances: section 195 TDS did not apply, and disallowance was unsustainable.
Expenditure relating to an earlier accounting period was allowable in the year in which the liability crystallised, where the amounts had become payable during the year and there was no finding that the same claims had already been taken in the prior year; the disallowance was deleted. Payments made by foreign branches to non-resident suppliers were not subject to deduction of tax at source under section 195 because the remittances were not chargeable to tax in India, including under the treaty position and the section 9(1)(vii)(b) exception for services used outside India; consequently, disallowance under section 40(a)(i) could not be sustained.
Issues: (i) Whether expenditure relating to an earlier accounting period was allowable in the year in which the liability crystallised. (ii) Whether payments made by the assessee's foreign branches to non-resident suppliers were subject to deduction of tax at source under section 195 and, on failure to deduct tax, disallowable under section 40(a)(i).
Issue (i): Whether expenditure relating to an earlier accounting period was allowable in the year in which the liability crystallised.
Analysis: The expenditure comprised items such as electricity, telephone, travel and other claims that were received or became payable during the relevant year, although some related to an earlier period. The liability was debited as expenditure of the earlier year and had crystallised during the year under consideration. There was no finding that the same expenditure had been claimed in the preceding year.
Conclusion: The deletion of the disallowance was upheld and the issue was decided in favour of the assessee.
Issue (ii): Whether payments made by the assessee's foreign branches to non-resident suppliers were subject to deduction of tax at source under section 195 and, on failure to deduct tax, disallowable under section 40(a)(i).
Analysis: Section 195 applies only where the remittance to a non-resident is chargeable to tax in India. The payments were made by branches in the United States, the United Kingdom and Japan to suppliers situated abroad for services rendered abroad. In the absence of a permanent establishment in India, the receipts were not chargeable to tax in India under the relevant treaty provisions, and the exception in section 9(1)(vii)(b) also covered services utilised in a business carried on outside India or for earning income from a source outside India. Since no tax was deductible at source, disallowance under section 40(a)(i) could not survive.
Conclusion: The deletion of the disallowance was upheld and the issue was decided in favour of the assessee.
Final Conclusion: The Department's appeals failed in entirety, and the orders deleting the disallowances were sustained.
Ratio Decidendi: Tax deduction at source under section 195 arises only where the payment to a non-resident is chargeable to tax in India, and no disallowance under section 40(a)(i) can be made for payments that are not so chargeable.
TaxTMI 
AI Drafter ✕
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