Non-resident certification services outside India were not taxable, so withholding and section 40(a)(i) disallowance failed.

Payments to non-resident certification and related service providers for services performed outside India were not chargeable to tax in India where the recipients had no permanent establishment in India and the services did not make available technical knowledge, experience, skill, know-how or a process to the assessee under the treaty. As the sums were not chargeable, section 195 withholding was not attracted and disallowance under section 40(a)(i) could not be sustained. The analysis also noted consistency, because similar expenses had been accepted in earlier and later years on the same factual basis. The expenditure was therefore deductible.

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Issues: Whether payments made to non-resident certification and related service providers for services rendered outside India were chargeable to tax in India so as to attract withholding tax and disallowance under section 40(a)(i).

Analysis: The payments were made for certification and allied services performed outside India. The recipients had no permanent establishment in India, and the services did not make available technical knowledge, experience, skill, know-how, or a process to the assessee within the meaning of the relevant treaty provision. On those facts, the payments were not chargeable to tax in India. Once the sums were not chargeable, section 195 was not attracted and disallowance under section 40(a)(i) could not be sustained. The conclusion was also reinforced by the principle of consistency, as similar expenses had been accepted in earlier and later years on the same factual setting.

Conclusion: The disallowance was unsustainable and the assessee was entitled to deduction of the expenditure.

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