DTAA protection for non-resident commission payments prevents Indian tax withholding when services are rendered abroad and no PE exists.

Commission paid to non-resident agents for procuring export orders outside India was held not chargeable to tax in India where the agents rendered services entirely outside India and no business activity in India was established under Explanation 2 to section 9(1)(i). The applicable DTAA treated the agents' business profits as taxable only in their State of residence unless they carried on business in India through a permanent establishment, and no such permanent establishment was found. Because section 90(2) gives effect to the more beneficial treaty position, the treaty prevailed over domestic law, so tax deduction at source under section 195 did not arise.

---

---

Issues: Whether commission paid to non-resident agents outside India for procuring export orders was chargeable to tax in India so as to attract tax deduction at source under section 195, and whether the applicable DTAA provisions prevailed over the domestic law.

Analysis: The non-resident agents acted outside India and the case did not involve business activity carried on in India on behalf of the assessee within the meaning of Explanation 2 to section 9(1)(i) of the Income-tax Act, 1961. The treaty provisions relied on were materially similar and provided that business profits of a resident of the other contracting State were taxable only in that State unless the enterprise carried on business in India through a permanent establishment. In the absence of any finding that the agents had a permanent establishment in India, their commission income was not taxable in India. Since section 90(2) gives effect to the more beneficial treaty position, the DTAA prevailed over the domestic charging provisions.

Conclusion: The commission paid to the non-resident agents was not chargeable to tax in India and no tax was deductible at source under section 195.

Ratio Decidendi: Where a non-resident agent renders services outside India and has no permanent establishment in India, the commission earned is not taxable in India under the DTAA, and section 195 is not attracted if the treaty is more beneficial than the domestic law.

---