Treaty protection and compensatory interest rules saved deductions: no TDS on non-resident professional fees, and service tax interest was allowable.

Treaty protection for professional fees paid to non-resident LLPs prevailed over the domestic deeming rule where the relevant DTAA covered professional services and the record did not show that technical knowledge, experience or skill was made available to the payer. On that basis, the sums were not chargeable to tax in India, no withholding tax obligation arose, and disallowance under section 40(a)(i) was deleted. Interest paid for delayed deposit of service tax was treated as compensatory rather than penal, and in the absence of a specific statutory bar comparable to income-tax interest, the expenditure was held not disallowable under section 37(1).

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Issues: (i) Whether professional fees paid to non-resident LLPs were chargeable to tax in India under the relevant DTAAs so as to require deduction of tax at source and attract disallowance under section 40(a)(i) of the Income-tax Act, 1961; (ii) Whether interest paid for delayed deposit of service tax was disallowable under section 37(1) of the Income-tax Act, 1961.

Issue (i): Whether professional fees paid to non-resident LLPs were chargeable to tax in India under the relevant DTAAs so as to require deduction of tax at source and attract disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: The relevant treaty articles covering independent personal services were construed to include professional services rendered by a firm or partnership entity, not merely an individual in the narrow sense suggested by the Revenue. The services rendered were professional advisory and accountancy services, and the record did not show that any technical knowledge, experience, or skill was made available to the assessee in the manner required by the treaty definition of technical services. The treaty provisions, being more favourable, prevailed over the domestic deeming provision, and the sums were not chargeable to tax in India in the hands of the non-resident recipients.

Conclusion: The disallowance under section 40(a)(i) was not sustainable and was rightly deleted, in favour of the assessee.

Issue (ii): Whether interest paid for delayed deposit of service tax was disallowable under section 37(1) of the Income-tax Act, 1961.

Analysis: The interest was treated as compensatory rather than penal in character. The statute contains a specific disallowance for interest on income-tax, but no corresponding specific disallowance for interest paid on service tax. In these circumstances, the expenditure could not be disallowed as a barred outlay under section 37(1).

Conclusion: The addition on account of interest paid for delayed deposit of service tax was rightly deleted, in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on both disputed additions, and the assessment relief granted by the first appellate authority was affirmed in full.

Ratio Decidendi: Where treaty protection applies and the non-resident's services do not satisfy the make available requirement, the payment is not chargeable to tax in India and no withholding obligation arises; further, compensatory interest on service tax is not disallowable absent a specific statutory bar.

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