No TDS on foreign service payments not chargeable to tax in India; section 40(a)(i) disallowance fails.

Tax was not required to be deducted at source on payments to foreign branches and foreign suppliers where the remittances were not chargeable to tax in India. Section 195 applies only to sums taxable in India, and the services were utilised outside India while the recipients had no permanent establishment in India. Fees for technical services paid by a resident for use in a business carried on outside India fell within the section 9(1)(vii)(b) exception and were not deemed to accrue or arise in India. Treaty protection under section 90 also applied, so disallowance under section 40(a)(i) was not sustainable.

---

---

Issues: Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 was warranted for payments made to foreign branches and foreign suppliers without deduction of tax at source.

Analysis: Tax was deductible under section 195 only if the remittance was chargeable to tax in India. The payments were made for services utilised outside India and, on the facts, the recipients had no permanent establishment in India. By virtue of section 9(1)(vii)(b), fees for technical services paid by a resident for use in a business carried on outside India fall within the statutory exception and are not deemed to accrue or arise in India. The treaty provisions also prevailed under section 90, and the Supreme Court principle that no deduction is required where the payment is not taxable in India applied.

Conclusion: The disallowance under section 40(a)(i) was not sustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: No tax is required to be deducted at source under section 195 on a payment that is not chargeable to tax in India, and consequently no disallowance under section 40(a)(i) can be made.

---