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Issues: Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 was sustainable in respect of payments made to non-resident agents, in light of the chargeability of such payments under section 9 and the applicable treaty provisions.
Analysis: The payments were made for services rendered outside India, and the material on record showed that the income was not deemed to accrue or arise in India. In the absence of operations in India and in view of the prior orders under section 195, no obligation to deduct tax at source arose. The services were also not shown to constitute fees for technical services within section 9(1)(vii), and the treaty provisions, including the protocol and the non-discrimination clause, supported the assessee's claim. The Tribunal followed the settled principle that where the underlying sum is not chargeable to tax in India, disallowance for failure to deduct tax at source cannot be made.
Conclusion: The disallowance under section 40(a)(i) was held to be unsustainable and the deletion made by the Commissioner of Income-tax (Appeals) was affirmed in favour of the assessee.
Ratio Decidendi: Section 40(a)(i) cannot be invoked where the non-resident payment is not chargeable to tax in India and, consequently, no obligation to deduct tax at source arises.
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