Treaty override and accrual principles upheld deductions for non-resident fees and later-estimated expenses.

The Delhi HC held that an administrative fee paid to a US payee was deductible because Article 26(3) of the Indo-US DTAA treated the payment as an "other disbursement" and the domestic disallowance under section 40(a)(i), as then framed, imposed a more onerous condition on non-resident payments than on resident payments; the treaty therefore prevailed under section 90(2). It further held that expenditure for 1 January 2000 to 31 March 2000 accrued only when the liability crystallised after RBI approval and the first debit note was raised. Expenditure for 1 January 2001 to 31 March 2001 was also allowable, as FEMA had removed the prior approval requirement and the liability was reasonably estimable despite later billing.

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Issues: (i) whether administrative fee paid to the US payee was allowable as a deduction in view of section 40(a)(i) and Article 26(3) of the Indo-US DTAA; (ii) whether the expenditure relating to 1 January 2000 to 31 March 2000 had accrued during the relevant previous year; (iii) whether the expenditure relating to 1 January 2001 to 31 March 2001 was allowable though no bill had been raised.

Issue (i): whether administrative fee paid to the US payee was allowable as a deduction in view of section 40(a)(i) and Article 26(3) of the Indo-US DTAA

Analysis: The payment was accepted to fall within the broad expression "other disbursements" in Article 26(3). Section 40(a)(i), as it then stood, denied deduction for payments to non-residents if tax was not deducted at source, while no disallowance applied to comparable payments to residents. That difference in deductibility conditions brought about discrimination in the treaty sense. By virtue of section 90(2), the DTAA prevailed to the extent more beneficial to the assessee.

Conclusion: The disallowance under section 40(a)(i) was inapplicable, and the deduction of the administrative fee was upheld in favour of the assessee.

Issue (ii): whether the expenditure relating to 1 January 2000 to 31 March 2000 had accrued during the relevant previous year

Analysis: The liability could not be said to have crystallised earlier, because remittance required RBI approval under the then prevailing foreign exchange regime and the first debit note was raised only after such approval was obtained. In the absence of any earlier basis for estimation, the expense accrued only during the relevant year on mercantile principles.

Conclusion: The expense for the period 1 January 2000 to 31 March 2000 was held to have accrued during the year and was allowable in favour of the assessee.

Issue (iii): whether the expenditure relating to 1 January 2001 to 31 March 2001 was allowable though no bill had been raised

Analysis: After the repeal of FERA and the coming into force of FEMA, the remittance fell within current account transactions and did not require prior RBI approval. The liability was capable of reasonable estimation on the basis of earlier invoices, and a definite business liability is deductible even if quantification occurs later.

Conclusion: The expense for the period 1 January 2001 to 31 March 2001 was rightly allowed in favour of the assessee.

Final Conclusion: The appeal failed in full, and the assessee's deductions were sustained on all adjudicated issues.

Ratio Decidendi: Where a treaty provision requires equal deductibility conditions for resident and non-resident payments, a domestic rule that denies deduction only because TDS was not deducted from a non-resident payment is discriminatory and yields to the treaty to the extent more beneficial to the taxpayer; further, a liability is deductible when it has crystallised and can be reasonably estimated, even if quantification or payment occurs later.

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