Grossing up of non-resident payments applies when the payer bears tax under a treaty-based TDS arrangement.

Where an India-UK tax treaty fixes only the rate of tax on fees for technical services and does not provide a separate computation mechanism, the taxable income must be determined under the Income-tax Act. If the payer assumes the non-resident's tax liability, Section 195A requires the contractual payment to be grossed up so that tax deduction yields the agreed net amount. In the absence of an exemption comparable to Section 10(6A), the tax borne by the payer forms part of the recipient's income. The grossing-up principle therefore applies to tax deduction at source on the non-resident payment.

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Issues: Whether, for deduction of tax at source on payments made to a non-resident under the India-UK Double Taxation Avoidance Agreement, the tax liability borne by the payer had to be added to the contractual payment and grossed up under the Income-tax Act.

Analysis: The treaty prescribed the rate of tax on fees for technical services but did not provide any mechanism for computing the income on which tax was to be deducted. In the absence of a treaty definition of "gross amount" and "income", the computation had to be made under the Income-tax Act. Section 195A of the Income-tax Act, 1961 applies where tax chargeable on income is borne by the payer and requires the income to be increased so that deduction of tax yields the net amount payable under the agreement. The Court held that, since there was no exemption comparable to Section 10(6A), the tax borne by the assessee formed part of the recipient's income and the principle of grossing up was attracted.

Conclusion: The grossing up mechanism applied, and the assessee's challenge failed.

Final Conclusion: The contractual payment to the non-resident had to be computed on a grossed-up basis for tax deduction purposes, and the appeals were dismissed.

Ratio Decidendi: Where a tax treaty fixes only the rate of tax and does not provide a computation mechanism, the income must be determined under the Income-tax Act, and if the payer has undertaken the tax liability, Section 195A requires grossing up of the payment for tax deduction at source.

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