Withholding tax on non-resident royalties arises only when income becomes taxable; interest cannot run from earlier credit date.

Tax deduction at source on royalty or fees for technical services paid to a non-resident arises only when the sum is chargeable to tax in India at the relevant stage. Under the India-Italy DTAA, the income was taxable in India only on payment, so no withholding obligation arose on mere credit to the recipient's account. Once actual payment was made, tax became deductible, and the more beneficial domestic rate under section 115A, read with section 90(2), applied. Interest under section 201(1A) could therefore be levied only for any delay in remitting tax after payment, not from the earlier credit date.

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Issues: Whether interest under section 201(1A) of the Income-tax Act, 1961 could be levied from the date of credit of royalty/fees for technical services to a non-resident's account, or only from the date when the payment became taxable and tax was required to be deducted on actual remittance under the applicable treaty and domestic law.

Analysis: The liability to deduct tax at source under section 195 arises only where the sum paid to a non-resident is chargeable to tax in India. The obligation is therefore contingent on the taxability of the income in the hands of the recipient at the relevant point of time. On the facts, the amount credited to the Italian recipient was not taxable at the stage of mere credit because, under Article 13 of the India-Italy DTAA, royalty and fees for technical services were taxable in India only on payment. In that situation, no withholding obligation arose at the time of credit. When actual payment was made, tax became deductible, and the assessee correctly applied the more beneficial domestic rate under section 115A, read with section 90(2). Consequently, interest under section 201(1A) could be sustained only for the short delay in depositing tax after actual payment, and not from the earlier credit date adopted by the authorities below.

Conclusion: The interest demand was wrongly computed from the date of credit. Relief was granted to the assessee to that extent, and interest, if any, survived only for the limited delay in remittance after payment.

Ratio Decidendi: The obligation to deduct tax at source under section 195 arises only when the sum is chargeable to tax in India at the relevant stage, and interest under section 201(1A) cannot be computed from a date when no withholding liability had yet arisen.

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