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Issues: Whether disallowance under section 40(a)(ia) was justified where, in view of the applicable double taxation avoidance agreement, the payment was not chargeable to tax in India and no technical knowledge was made available.
Analysis: Section 90(2) gives effect to the treaty to the extent it is more beneficial to the assessee, and the treaty provisions override the Act where they apply. On the facts found, the relevant treaty article taxed fees for included services only when technical knowledge was made available. As the finding was that no such make available of technical knowledge occurred, the payment did not attract taxation under the Act. The issue was also covered by the principle that a duly notified double taxation avoidance agreement prevails in case of inconsistency with the Income-tax Act.
Conclusion: The disallowance was not sustainable and the question was answered in the negative, in favour of the assessee.
Ratio Decidendi: Where a notified double taxation avoidance agreement is more beneficial, its provisions prevail over the Income-tax Act, and if treaty-based fees for included services are taxable only upon a make available of technical knowledge, the absence of that condition prevents taxability and the related disallowance cannot stand.
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