Withholding tax on management fee failed where treaty protection meant the payment was not taxable in India.

Management fee paid under a master support services arrangement to an overseas associated enterprise was not chargeable to tax in India because the corresponding receipts had been held not to constitute fees for included services under article 12(4) of the India-USA DTAA. As the sum was not taxable in India, no obligation to withhold tax arose under section 195 of the Income-tax Act, 1961. The consequential disallowance under section 40(a)(i) therefore lacked foundation and was deleted.

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Issues: Whether the assessee was required to deduct tax at source under section 195 of the Income-tax Act, 1961 on management fee paid to its overseas associated enterprise, and whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 was justified.

Analysis: The payment was made under a master support services arrangement for managerial and support functions. The question of withholding depended on whether the sum was chargeable to tax in India. The corresponding receipts in the hands of the payee had already been examined by the Tribunal and held not to constitute fees for included services under article 12(4) of the India-USA Double Taxation Avoidance Agreement. Since the payment was not chargeable to tax in India under the treaty, the statutory obligation to withhold tax under section 195 did not arise. Consequently, the foundation for disallowance under section 40(a)(i) failed.

Conclusion: The assessee was not required to deduct tax at source on the management fee, and the disallowance under section 40(a)(i) was unsustainable and deleted.

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