Foreign commission paid for services rendered abroad not taxable in India; no TDS obligation and no section 40(a)(i) disallowance.

Commission paid to non-resident agents for services rendered outside India was not chargeable to tax in India because no finding showed that the services were performed in India or that the income accrued or arose in India under sections 4, 5 and 9 of the Income-tax Act, 1961. As tax was not deductible at source under section 195, disallowance under section 40(a)(i) could not be made merely because no tax was withheld. The Tribunal applied the settled principle that such foreign commission is outside Indian tax net when the services are rendered abroad, and upheld the assessee's position.

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Issues: Whether commission paid to foreign agents for services rendered outside India was chargeable to tax in India so as to attract deduction of tax at source under section 195 of the Income-tax Act, 1961 and consequential disallowance under section 40(a)(i) of the Income-tax Act, 1961.

Analysis: Disallowance under section 40(a)(i) applies only where the sum payable outside India or to a non-resident is one on which tax is deductible at source and such tax has not been deducted. The decisive question was therefore whether the commission paid to foreign agents was a sum chargeable to tax under the Act. The assessment order did not record any finding that the foreign agents rendered services in India or that the commission income accrued or arose in India. In the absence of chargeability under sections 4, 5 and 9 of the Income-tax Act, 1961, no withholding obligation arose under section 195. The Tribunal also followed the settled principle that commission to non-resident agents for services rendered outside India is not taxable in India and that section 40(a)(i) cannot be invoked merely because no tax was deducted.

Conclusion: The commission payment was not chargeable to tax in India, no obligation to deduct tax at source arose, and disallowance under section 40(a)(i) was not sustainable. The issue is decided in favour of the assessee.

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