No tax deduction at source on overseas service payments not chargeable to tax in India; disallowance deleted.

Payments to non-resident entities for services rendered outside India were not chargeable to tax in India because the recipients had no permanent establishment or business connection in India and the income neither accrued nor arose in India. As section 195 applies only to sums chargeable under the Act, no tax was deductible at source on such remittances. The resulting disallowance under section 40(a)(i) could not be sustained, and the disallowance was deleted.

---

---

Issues: Whether disallowance under section 40(a)(i) for payments made to non-resident entities could be sustained when the payments were for services rendered outside India and the sums were not chargeable to tax in India, so that no obligation to deduct tax at source arose under section 195.

Analysis: The payments were made to entities situated outside India for services rendered abroad. The recipients had no permanent establishment or business connection in India, and the record showed that the income was earned outside India and did not accrue or arise in India within the meaning of section 9. Section 195 applies only to sums chargeable under the Act; therefore, where the remittance is not chargeable to tax in India, the payer is under no obligation to deduct tax at source. On these facts, the disallowance under section 40(a)(i) could not be justified.

Conclusion: The disallowance under section 40(a)(i) was rightly deleted and the payments were held not to attract deduction of tax at source under section 195.

---