Treaty interpretation under Indo-Mauritius DTAA bars importing domestic TDS restrictions into permanent establishment expense deductions.

Article 7(3) of the Indo-Mauritius DTAA permits deduction of expenses of a permanent establishment for business purposes without importing restrictions from section 40(a)(i) of the Income Tax Act. Applying that treaty interpretation, the ITAT Delhi upheld deletion of disallowances for non-deduction of TDS on salary paid to employees and on operating contract expenses, as the treaty did not permit domestic TDS-based restriction to be read into the expense claim. The Tribunal also sustained deletion of additions for travel and entertainment expenses because the assessee had furnished supporting reimbursement records and the revenue identified no specific defect. The Rule 46A objection was rejected because the record showed relevant details were already before the AO.

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Issues: (i) whether salary paid to employees and operating contract expenses incurred for the permanent establishment in India could be disallowed under section 40(a)(i) of the Income-tax Act, 1961 in view of Article 7(3) of the India-Mauritius DTAA; (ii) whether travel and entertainment expenditure was wrongly disallowed for want of proof; and (iii) whether deletion of the addition on travel and entertainment expenditure was vitiated by admission of additional evidence in breach of Rule 46A.

Issue (i): whether salary paid to employees and operating contract expenses incurred for the permanent establishment in India could be disallowed under section 40(a)(i) of the Income-tax Act, 1961 in view of Article 7(3) of the India-Mauritius DTAA.

Analysis: Article 7(3) governs computation of profits of a permanent establishment by allowing deduction of expenses incurred for the purposes of its business, including executive and general administrative expenses. The treaty text does not incorporate the domestic-law limitation relied upon by the Revenue. The employees' stay details and salary particulars were found to have been furnished before the Assessing Officer, and the operating contract payments were also not shown to be hit by the disallowance provision in the manner suggested.

Conclusion: The disallowance under section 40(a)(i) was not sustainable, and the deletion of the salary and operating contract expense additions was upheld in favour of the assessee.

Issue (ii): whether travel and entertainment expenditure was wrongly disallowed for want of proof.

Analysis: Ledger extracts, vouchers, bills, project-wise breakup and reimbursement supporting documents had been filed before the Assessing Officer. No specific defect, falsity or omission in those materials was established, and the expenditure was consistent with the assessee's project-related activities in India.

Conclusion: The travel and entertainment expenditure was allowable and the deletion of the addition was sustained in favour of the assessee.

Issue (iii): whether deletion of the addition on travel and entertainment expenditure was vitiated by admission of additional evidence in breach of Rule 46A.

Analysis: The record showed that the relevant documents were already before the Assessing Officer. No material was shown to establish that new evidence had been improperly entertained at the appellate stage.

Conclusion: No breach of Rule 46A was made out, and the Revenue's objection failed.

Final Conclusion: The Revenue's challenge to the deletion of all three additions failed, and the assessment relief granted to the assessee was affirmed in full.

Ratio Decidendi: Where a tax treaty permits deduction of expenses incurred for the business of a permanent establishment without a domestic-law limitation clause, section 40(a)(i) cannot be imported to deny such deductions.

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