Dependent agent PE rejection defeats withholding tax disallowance under section 40(a)(i) in connected litigation.

Disallowance under section 40(a)(i) could not be sustained where it rested on the assumption that the Indian company was a dependent agent PE of the non-resident enterprise. The earlier connected proceedings had already rejected that treaty-based PE contention, and without a valid dependent agent PE there was no basis to attribute profits to India or require withholding tax on the payments. The first appellate authority's deletion of the disallowance was therefore consistent with the settled position in the assessee's own litigation and was upheld in favour of the assessee.

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Issues: Whether the disallowance under section 40(a)(i) of the Income-tax Act, 1961 could be sustained on the premise that the Indian entity constituted a dependent agent permanent establishment of the non-resident enterprise and, on that basis, tax was deductible on the payments made to it.

Analysis: The disallowance was founded on the attribution of income to India on the assumption that the Indian company was a dependent agent PE of the Japanese enterprise. That foundational assumption had already been negatived in the earlier proceedings relied upon by the assessee, where the activities of the Indian entity were held not to satisfy the treaty conditions for a dependent agent PE. Once the existence of a dependent agent PE was not sustainable, there was no basis to attribute profits to the Indian entity for the purpose of withholding tax disallowance. The order of the first appellate authority was therefore consistent with the settled position in the assessee's own connected litigation.

Conclusion: The disallowance under section 40(a)(i) was not justified and was rightly deleted; the issue is decided in favour of the assessee.

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