Withholding tax on foreign consortium payments turns on chargeability, treaty treatment, and proper computation of deduction.

Section 195 requires the payer to determine whether remittances are chargeable in the recipient's hands, and section 248 allows an appeal by a person who has deducted and paid tax while denying liability to deduct. The appellate authorities can examine chargeability for this limited purpose. On the treaty issue, receipts paid to a foreign consortium leader for coordination, supervision, technical advice, management and performance assurance were treated as taxable in India, not as industrial or commercial profits, particularly in the absence of a permanent establishment. Grossing up at the deduction stage was rejected, and the applicable withholding rate was left for fresh determination.

---

---

Issues: (i) Whether the assessee could invoke section 248 of the Income-tax Act, 1961 to challenge deduction of tax at source on remittances to the non-resident and whether the appellate authorities could determine the chargeability of the sum in the hands of the non-resident; (ii) Whether the amounts payable to the foreign consortium leader were chargeable to tax in India under the double taxation avoidance agreement or fell within the exclusion for industrial or commercial profits; (iii) Whether tax was required to be deducted on grossed-up amounts and at what rate.

Issue (i): Whether the assessee could invoke section 248 of the Income-tax Act, 1961 to challenge deduction of tax at source on remittances to the non-resident and whether the appellate authorities could determine the chargeability of the sum in the hands of the non-resident.

Analysis: Section 195 makes deduction dependent on chargeability under the Act, and section 248 permits an appeal by a person who has deducted and paid tax and denies liability to make such deduction. The chargeability question is not confined to the non-resident's regular assessment. The payer must itself consider whether the remittance is chargeable, and the appellate authorities are competent to decide that issue for the purpose of deduction at source.

Conclusion: The appeal was maintainable under section 248, and the assessee was entitled to contest the liability to deduct tax at source.

Issue (ii): Whether the amounts payable to the foreign consortium leader were chargeable to tax in India under the double taxation avoidance agreement or fell within the exclusion for industrial or commercial profits.

Analysis: The agreement showed that the foreign entity was engaged in co-ordination, supervision, technical advice, management, and performance assurance in relation to the project. Such receipts did not amount to industrial or commercial profits, especially in the absence of a permanent establishment in India, because the treaty excluded management charges and remuneration for labour or personal services from that category.

Conclusion: The receipts were chargeable to tax in India and the assessee was liable to deduct tax at source on those remittances.

Issue (iii): Whether tax was required to be deducted on grossed-up amounts and at what rate.

Analysis: Tax deduction at source under section 195 operates on the actual sum paid. Grossing up at the stage of deduction was not justified on the facts. The exact rate applicable under the Finance Act depended on the nature of the payment and required fresh examination on the material already on record.

Conclusion: Deduction on grossed-up amounts was rejected, and the rate issue was remitted for reconsideration.

Final Conclusion: The assessee succeeded only in part: the receipts were held taxable and subject to deduction at source, but the demand based on grossed-up computation was set aside and the applicable rate was left for fresh determination.

Ratio Decidendi: For deduction of tax at source under section 195, the payer must determine chargeability in the recipient's hands by applying the Act together with the applicable double taxation avoidance agreement, and treaty receipts characterized as management or personal services are not industrial or commercial profits.

---