Business expenditure: TDS: Disallowance: Non-resident: Sections 9 and 40(a)(i): A.Y. 2007-08: Income deemed to accrue or arise in India: Business connection not established: Mere entry in books of account of Indian payer does not mean that non-resident received payment in India: No income accrued in India: Tax need not be deducted at source: Expenditure not disallowable.

The assessee-company was engaged in the business of development and export of software. In the A.Y. 2007-08, the assessee paid commission to its parent company in the U.K. on the sales and amounts realised on export contracts procured by it for the assessee and the same was claimed as deduction. The Assessing Officer held that the U.K. company had a business connection in India and that commission income had accrued and arisen in India when credit entries were made in the books of the assessee in favour of the U.K. company and the income towards commission was received in India. He held that the assessee was liable to deduct tax at source and as there was failure to do so, disallowed the expenditure u/s.40(a)(i) of the Income-tax Act, 1961. The Commissioner (A) held that the ‘business connection’ was not established and allowed the assessee’s claim. The Tribunal upheld the decision of the Commissioner (A).

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

“(i) The Assessing Officer did not elaborate or had not discussed on what basis he had come to the conclusion that ‘business connection’ as envisaged u/s.9(1)(i) existed. The assessee had submitted that the U.K. company was a non-resident company and did not have any permanent establishment in India. The U.K. company was not rendering any service or performing any activity in India itself. These facts were not and could not be disputed.

(ii) The stand of the Revenue was contrary to the two Circulars issued by the CBDT in which it was clearly held that when a non-resident agent operates outside the country, no part of his income arises in India, and since payment was remitted directly abroad, merely because an entry in the books of account was made, it did not mean that the non-resident had received any payment in India.

(iii) The Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(i) of the Act. He had not made any foundation or basis for holding that there was business connection and, therefore, section 9(1)(i) of the Act was applicable.

 (iv) The Appellate Authorities, on the basis of material on record, had rightly held that ‘business connection’ was not established.”