Tax deduction on non-resident commission applies only when the remittance contains income chargeable to tax in India.

Commission paid to a USA-based non-resident for export representation services rendered outside India was not shown to contain income chargeable to tax in India. As no services were rendered in India and the recipient had no permanent establishment in India, its business profits were taxable only in the State of residence under Article 7 of the Indo-USA DTAA. Section 195 of the Income-tax Act applies only where the remittance includes taxable income in India, so no tax deduction obligation arose. On that basis, disallowance under section 40(a)(i) was unsustainable and the additions were deleted.

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Issues: Whether commission paid to a USA-based non-resident for export overseas representation charges was chargeable to tax in India so as to attract deduction of tax at source under section 195 of the Income-tax Act, 1961, and consequent disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The payment was made to a non-resident for services rendered outside India in connection with export promotion. No material was brought on record to show that the recipient had rendered services in India or had income accruing or arising in India within the meaning of sections 5 and 9 of the Income-tax Act, 1961. The recipient had no permanent establishment in India, and the business profits were therefore taxable only in the State of residence under Article 7 of the Indo-USA Double Taxation Avoidance Agreement. In such circumstances, section 195 applied only if the remittance contained income chargeable to tax in India, which was not shown here.

Conclusion: The disallowance under section 40(a)(i) was unsustainable, and the Revenue's challenge failed.

Final Conclusion: The additions were deleted and both Revenue appeals stood dismissed.

Ratio Decidendi: Tax is deductible at source under section 195 of the Income-tax Act, 1961 only when the payment contains income chargeable to tax in India, and where a non-resident's business profits are not taxable in India because there is no permanent establishment, section 40(a)(i) cannot be invoked for non-deduction.

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