TDS on non-resident payments fails where treaty tests are not met and income is not taxable in India.

The Tribunal considered whether tax was required to be deducted at source on remittances to a USA-based subsidiary and a non-resident sales consultant. It held that the subsidiary's services did not satisfy the treaty "make available" test for technical knowledge or know-how, so the payment was not taxable in India as fees for included services. It also held that the sales commission was not taxable in India as technical, consultancy or professional income because the recipient had no fixed base in India and had not stayed in India for the required period. As no tax liability arose in India, there was no TDS obligation and the assessee could not be treated as in default.

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Issues: Whether the assessee could be treated as an assessee in default for non-deduction of tax at source on payments made to the non-resident payees, and whether the demand raised under sections 201(1) and 201(1A) read with section 206AA of the Income-tax Act, 1961 was sustainable.

Analysis: The dispute turned on the taxability in India of the remittances made to the USA-based subsidiary and to the non-resident sales consultant. The Tribunal followed its own earlier decision in the assessee's case for the same assessment year, holding that the services rendered by the USA entity did not satisfy the treaty requirement of "make available" technical knowledge, experience, skill, know-how or processes, and therefore the amount was not taxable in India as fees for included services. It also held that the sales commission paid to the non-resident consultant was not chargeable to tax in India either as technical/consultancy income or under the treaty provisions dealing with professional services, since the recipient had no fixed base in India and had not stayed in India for the requisite period. On that basis, the obligation to deduct tax at source did not arise.

Conclusion: The assessee could not be treated as an assessee in default and the demand raised for TDS default was unsustainable.

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