Business expenditure: Disallowance u/s. 40(a)(iii) A.Y. 2002-03: Salary paid to nonresidents outside India in Netharlands: Not chargeable to tax in India: Not liable for TDS: Disallowance u/s.40(a)(iii) not justified.

The assessee-company has a marketing office in Rotterdam in the Netherlands to support its export business in India. It remits funds in foreign currency to its Netherlands office to meet the expenses of that office. During the previous year relevant to the A.Y. 2002-03, the aggregate of the amount of salaries paid to the employees of that office was Rs.19,29,632. The employees were non-residents and were subject to tax in the Netherlands as per DTAA between India and the Netherlands. As such tax was not deducted at source on such salary payment. The Assessing Officer disallowed the claim for deduction of the said amount of Rs. 19,29,632 relying on the provisions of section 40(a)(iii) on the ground that tax was not deducted at source on such salary payment. The CIT(A) allowed the assessee’s appeal and deleted the addition. The Tribunal reversed the decision of the CIT(A) and restored that of the Assessing Officer.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:

“Salary to non-resident employees of the assessee paid in the Netherlands was not chargeable to tax in India as per section 5(2) and section 9(1)(ii) as also as per Article 15 of DTAA between India and the Netherlands and therefore, provisions of section 40(a)(iii) were not applicable for non-deduction of tax at source.”