TDS on non-resident professional fees arises only where the payment is taxable in India; retrospective amendment cannot create past withholding duty.

Tax deduction at source on professional fees paid to non-residents arose only if the sum was chargeable to tax in India; services rendered outside India that did not make available technical knowledge, skill or know-how were not taxable as fees for technical services under the treaty, and a retrospective amendment to section 9 could not retrospectively impose a withholding obligation for an earlier remittance. The article also notes that an AIR entry can trigger inquiry but cannot by itself justify an addition without verification of the underlying material, and foreign tax credit claims must be examined on supporting documents before credit is granted if admissible.

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Issues: (i) whether professional fees paid to non-resident entities for services rendered outside India were liable to tax deduction at source and disallowance under section 40(a)(i); (ii) whether the addition made on the basis of Annual Information Return required confirmation or fresh examination; (iii) whether credit for foreign taxes paid was to be granted on verification.

Issue (i): whether professional fees paid to non-resident entities for services rendered outside India were liable to tax deduction at source and disallowance under section 40(a)(i).

Analysis: The payments were for audit, taxation, advisory and related professional services rendered outside India to non-residents having no permanent establishment in India. The services did not make available technical knowledge, experience, skill, know-how or process, and therefore did not fall within fees for technical services under the relevant treaty provisions. In respect of the China payment, the services were of a professional character and fell within the treaty provision dealing with independent professional services, with no fixed base or stay in India shown. The retrospective amendment to section 9 could not create a withholding obligation for an earlier year when the remittances were made.

Conclusion: The disallowance under section 40(a)(i) was not sustainable, and the relief granted to the assessee was upheld.

Issue (ii): whether the addition made on the basis of Annual Information Return required confirmation or fresh examination.

Analysis: The material was not examined adequately by the lower authorities. An AIR entry could only trigger inquiry and could not by itself constitute conclusive evidence for addition without verification of the underlying details and supporting evidence.

Conclusion: The matter was remanded to the Assessing Officer for fresh adjudication, and the assessee received only statistical relief.

Issue (iii): whether credit for foreign taxes paid was to be granted on verification.

Analysis: The claim had been accepted in principle, but verification of the supporting documents was still required. The credit could not remain in a pending state and had to be decided after proper examination.

Conclusion: The matter was remanded to the Assessing Officer for verification and grant of credit if admissible, with statistical relief to the assessee.

Final Conclusion: The Tribunal sustained deletion of the transfer-pricing related disallowance for foreign professional fees, while remanding the AIR-based addition and the foreign tax credit claim for fresh consideration.

Ratio Decidendi: For payments to non-residents, tax deduction at source under section 195 arises only when the sum is chargeable to tax in India, and a retrospective amendment cannot retrospectively create a withholding obligation for a past remittance.

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