Withholding tax on technical services payments applies when non-resident services are taxable in India and make available technical know-how.

Payments to a non-resident for technical, start-up and turnkey services connected with a power project were treated as fees for technical services under section 9(1)(vii) and as fees for included services under Article 12(4) of the India-USA DTAA because the services made available technical knowledge, experience, skill, know-how or processes. Article 12(5) did not apply, as the services were not merely ancillary to a sale of property or inextricably linked only to equipment supply. The sum was therefore chargeable to tax in India, section 195 withholding was mandatory, and the payer could not avoid deduction on the basis of the payee's view or lack of unilateral deduction application; section 201 default consequences followed.

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Issues: Whether the amounts paid to the non-resident for technical services, start-up services and turnkey responsibility were chargeable to tax in India, whether the payer was required to deduct tax at source under section 195, and whether the assessee could avoid deduction by invoking the India-USA DTAA, including the exception in Article 12(5).

Analysis: The payment was held to be for technical and consultancy services in connection with setting up the power project and therefore fell within the scope of fees for technical services under section 9(1)(vii) read with Explanation 2. The Tribunal further held that the services made available technical knowledge, experience, skill, know-how or processes and thus constituted fees for included services under Article 12(4) of the DTAA. Article 12(5) was found inapplicable because the services were not merely ancillary and subsidiary to the sale of property nor inextricably and essentially linked only to equipment supplied by the non-resident. Since the sum was chargeable to tax in India, section 195 was attracted, and the payer could not rely on the payee's view or on the absence of a unilateral deduction application to avoid withholding.

Conclusion: The withholding obligation under section 195 existed, and the assessee was rightly treated as an assessee in default under section 201.

Final Conclusion: The appeals failed because the impugned payments were taxable in India and the assessee was bound to deduct tax at source.

Ratio Decidendi: Where a resident pays a non-resident for technical services that are chargeable to tax in India under section 9(1)(vii) and also fall within the DTAA definition of fees for included services, tax must be deducted under section 195; the payer cannot avoid withholding by treating part of the composite consideration as outside taxability without statutory determination.

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