Tax treatment of non-resident service fees, bad debts, and delayed PF/ESI contributions turns on chargeability and statutory due dates.

Payments to non-resident service providers for installation and testing work were treated as outside Indian tax chargeability because the services were used for offshore business and income from a source outside India, and the India-USA treaty make available condition was not met; accordingly, no withholding obligation arose and section 40(a)(i) disallowance was not attracted. Bad debts were allowed where the amounts had been written off in the books and had been taken into account in earlier income computation. A provision for professional charges was disallowed because the liability had not crystallised and remained unascertained. Employees' contributions to PF and ESI paid after the statutory due date were held not deductible merely because they were paid before filing the return.

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Issues: (i) Whether payments made to non-resident service providers for installation and testing services were chargeable to tax in India so as to attract deduction of tax at source and disallowance under section 40(a)(i); (ii) Whether the claim for bad debts written off was allowable; (iii) Whether provision for professional charges was deductible; (iv) Whether belated employees' contribution to PF and ESI was allowable.

Issue (i): Whether payments made to non-resident service providers for installation and testing services were chargeable to tax in India so as to attract deduction of tax at source and disallowance under section 40(a)(i).

Analysis: The services were rendered for offshore customers and were found to be utilised in a business carried on outside India and for earning income from a source outside India. On that basis, the payments fell within the statutory exception in section 9(1)(vii)(b) of the Income-tax Act, 1961. The make available condition under the India-USA treaty was also not satisfied on the facts found. Since the non-resident income was not chargeable to tax in India, section 195 was not attracted and the disallowance under section 40(a)(i) could not stand.

Conclusion: The issue was decided in favour of the assessee.

Issue (ii): Whether the claim for bad debts written off was allowable.

Analysis: The bad debts were actually written off in the books, and the amounts had been offered to tax in earlier years. The relevant test was whether the debt had been taken into account in computing income earlier, not whether tax had ultimately been paid under a particular exemption regime. The conditions for allowance of bad debts were therefore treated as satisfied.

Conclusion: The issue was decided in favour of the assessee.

Issue (iii): Whether provision for professional charges was deductible.

Analysis: The assessee did not establish that the liability had crystallised in the relevant year or furnish evidence to quantify the provision. In the absence of supporting material, the amount was treated as an unascertained and contingent liability, not an allowable deduction.

Conclusion: The issue was decided against the assessee.

Issue (iv): Whether belated employees' contribution to PF and ESI was allowable.

Analysis: Employees' contributions were paid after the statutory due dates under the respective welfare laws. Following the settled position that such contributions must be deposited within the prescribed due dates under the relevant enactments, the deduction was not available merely because payment was made before filing the return.

Conclusion: The issue was decided against the assessee.

Final Conclusion: The appeals on the non-resident payment issue and bad-debt claim succeeded for the assessee, while the assessee failed on the provision-for-expenses issue and the revenue succeeded on the PF and ESI issue, resulting in a mixed outcome across the connected appeals.

Ratio Decidendi: Where non-resident services are covered by the statutory exception for income utilised outside India, and treaty "make available" requirements are not met, the payment is not chargeable to tax in India and no withholding obligation arises; separately, employees' contribution to welfare funds must be deposited within the statutory due date under the relevant labour law to qualify for deduction.

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