TDS disallowance on foreign commission and software-use payments fails where receipts are not chargeable to tax in India.

Disallowance under section 40(a)(i) was unsustainable where commission, inspection and testing charges, and software-use payments were remitted to non-residents for services performed outside India. The recipients had no income accruing or arising in India, the inspection and testing charges were not shown to be fees for technical services, and the software-use payment was not shown to be royalty. As the amounts were not chargeable to tax in India, no obligation to deduct tax at source arose, and the additions were deleted.

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Issues: Whether disallowance under section 40(a)(i) could be sustained on commission, inspection and testing charges, and software-use payments remitted to non-resident recipients where the services were rendered outside India and the recipients had no taxable income in India.

Analysis: The business model accepted on record showed that the remittances were made to foreign parties for activities carried out outside India in connection with international merchant trade. The commission recipient performed agency-related activities outside India, and the related income did not accrue or arise in India. The inspection and testing charges were not shown to constitute fees for technical services, and the software-use payment was not shown to be royalty. Since the recipients were not liable to tax in India on the amounts in question, the obligation to deduct tax at source did not arise for the impugned remittances.

Conclusion: The disallowance under section 40(a)(i) was not sustainable, and the additions were deleted.

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