Technical know-how fees remained deductible where the payment route did not trigger disallowance for non-deduction of tax at source.

Technical know-how fees claimed under section 35AB were held deductible because the payment structure did not make the amount payable by the assessee to the foreign contractor outside India in the manner required for disallowance under section 40(a). Although the Revenue treated the fees as fees for technical services chargeable under the deeming rule in section 9(1)(vii) and alleged failure to deduct tax at source under Chapter XVII-B, the actual settlement was routed through the Government of India and the Crown Agents under the project arrangement. On those facts, section 40(a) was not attracted and the deduction under section 35AB remained available.

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Issues: Whether the disallowance under section 40(a) of the Income-tax Act, 1961, was justified in respect of the assessee's claim under section 35AB for technical know-how fees on the ground that tax was not deducted at source.

Analysis: The claim under section 35AB was otherwise undisputed, but the Revenue invoked section 40(a) on the premise that the amount represented fees for technical services chargeable to tax and payable outside India without deduction of tax under Chapter XVII-B. The relevant provisions were considered with reference to the scope of total income under sections 4 and 5 and the deeming provision in section 9(1)(vii). On the contractual terms and the payment mechanism, the fees were held to have accrued under the agreement with the technical contractor, but the actual settlement was routed through the Government of India and the Crown Agents under the project funding arrangement. On those facts, the amount was held not to have been payable by the assessee to the foreign contractor outside India in the manner contemplated by section 40(a).

Conclusion: The disallowance under section 40(a) was not sustainable, and the assessee was entitled to the deduction claimed under section 35AB.

Ratio Decidendi: Where technical know-how fees are contractually due but, on the actual payment structure and surrounding arrangement, are not payable outside India by the assessee in the manner contemplated by section 40(a), disallowance for failure to deduct tax at source is not attracted.

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