TDS on non-resident purchase payments applies only to taxable sums in India; section 40(a)(i) disallowance was unsustainable.

Tax deduction at source under section 195 applies only where the payment is chargeable to tax in India, so purchase payments to non-resident foreign sellers without an income element do not attract deduction. On that basis, disallowance under section 40(a)(i) is not justified merely because the recipient is a non-resident, and the related addition was deleted. The Indo-USA DTAA non-discrimination clause, read with section 90(2), was treated as supporting the position that payments to non-residents should not face a more burdensome tax consequence than comparable resident payments.

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Issues: Whether disallowance under section 40(a)(i) was justified for purchase payments made to non-resident foreign companies without deduction of tax at source under section 195, and whether the Indo-USA DTAA non-discrimination clause prevented such disallowance.

Analysis: The payment in question was for purchase of goods from foreign sellers. The governing principle applied was that tax deduction at source under section 195 arises only where the sum paid is chargeable to tax in India. The finding relied on the Supreme Court's interpretation that a payer is not obliged to deduct tax on the whole remittance unless the remittance contains an income element chargeable under the Act. It was also held that where the amount is not taxable in the hands of the recipient, section 195 is not attracted, and consequently section 40(a)(i) cannot be invoked merely because the payment was made to a non-resident. In addition, the non-discrimination provision of the Indo-USA DTAA, read with section 90(2), was treated as reinforcing the assessee's case by preventing a more burdensome tax consequence for payments to non-residents than for similar payments to residents.

Conclusion: The disallowance under section 40(a)(i) was not sustainable. The assessee was not required to deduct tax at source under section 195 on the impugned purchase payments, and the addition was correctly deleted.

Final Conclusion: The revenue's challenge failed, and the deletion of the disallowance was sustained.

Ratio Decidendi: Tax deduction at source under section 195 applies only to sums chargeable to tax in India, and where no such taxability exists, disallowance under section 40(a)(i) cannot be made; the DTAA non-discrimination clause may further prevent a more onerous deduction condition for non-resident payments.

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