Withholding tax on foreign service payments fails where the non-resident receipt is not chargeable to tax in India.

No withholding tax obligation arises under section 195 where payments to foreign associated enterprises are revenue-sharing for jointly rendered services and the sums are not chargeable to tax in India in the recipients' hands. On that basis, the demand under section 201(1), the related interest under section 201(1A), and the treatment of the payer as an assessee in default were unsustainable. The issue was treated as covered by the assessee's earlier years before the ITAT Delhi.

---

---

Issues: Whether the assessee was liable to deduct tax at source on payments made to foreign associated enterprises or group companies, and consequently whether the demand under section 201(1) and interest under section 201(1A) could be sustained.

Analysis: The issue was held to be covered by the co-ordinate bench in the assessee's own case for earlier assessment years. The payments were found to be in the nature of revenue sharing for jointly rendered services, and the recipient foreign entities' receipts were held not chargeable to tax in India. Once the underlying remittance was not taxable in India in the hands of the recipient, no withholding obligation arose on the payer under section 195. The resultant treatment of the assessee as an assessee in default, along with consequential interest, was therefore unsustainable.

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

Ratio Decidendi: No obligation to deduct tax at source arises under section 195 where the sum paid to a non-resident is not chargeable to tax in India.

---