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Issues: Whether disallowance under section 40(a)(i) of the Income-tax Act, 1961 is sustainable in respect of commission payments to foreign agents where no TDS was deducted, i.e., whether tax was deductible under section 195 because the payments were chargeable to tax in India.
Analysis: Section 40(a)(i) permits disallowance only where tax is deductible at source on a payment chargeable under the Act and such tax has not been deducted. The legal precondition for a TDS obligation under section 195 is that the remittance be a sum chargeable to tax in India as determined by sections 4, 5 or 9. The Assessing Officer made the disallowance without examining or recording a finding that the commission payments to foreign agents were chargeable to tax in India. Earlier decisions of this Tribunal and higher courts establish that commission paid to non-resident agents for services rendered and utilised outside India is not chargeable to tax in India, and therefore section 195 and section 40(a)(i) do not apply. The Revenue did not controvert the assessee's primary contention that the commission was not chargeable to tax in India, nor was there any finding that services were rendered in India or income arose in India.
Conclusion: Disallowance under section 40(a)(i) cannot be sustained because the prerequisite that the payments were chargeable to tax in India (and thus liable to deduction under section 195) was not established; appeal dismissed and result is in favour of the assessee.
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