Non-resident support services not taxable in India, so no withholding tax and no disallowance under section 40(a)(i).

Payment to a non-resident service provider for correspondence handling, client database maintenance, communication processing and payment follow-up was not managerial in nature because the work did not involve formulating or implementing managerial policy. As the services were rendered outside India and the consideration was not chargeable to tax in India, no withholding obligation arose under section 195. Consequently, disallowance under section 40(a)(i) could not be sustained. Authorities cited below were distinguished on facts, and the assessee's challenge succeeded.

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Issues: Whether the payment made to the non-resident service provider was for managerial services chargeable to tax in India so as to attract disallowance under section 40(a)(i) and the obligation to deduct tax at source under section 195.

Analysis: The services were described as correspondence handling, client database maintenance, communication processing, payment follow-up, and related support functions. These activities did not involve discovering, developing, defining, or implementing managerial policies, and therefore did not fall within the ambit of managerial services. The services were also rendered outside India, and the compensation paid for those services was not chargeable to tax in India. Once the receipt was not chargeable to tax in India, the withholding obligation under section 195 did not arise, and the disallowance under section 40(a)(i) could not survive. The authorities relied upon below were treated as distinguishable on facts.

Conclusion: The disallowance under section 40(a)(i) was not sustainable, and the assessee's challenge succeeded.

Ratio Decidendi: Where the non-resident's services are merely clerical or support-oriented and are rendered outside India without making available managerial expertise or creating chargeability in India, tax is not deductible under section 195 and disallowance under section 40(a)(i) cannot be made.

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