The obligation to deduct tax at source arises only from payments that are chargeable to tax under the Income Tax Act; non-chargeable payments to non-residents do not require TDS.

JUDGMENT :

V. KAMESWAR RAO, J.

CM APPL. 54672/2025, CM APPL. 54673/2025

1. For the reasons stated in the applications, the delay of 29 days in filing and 914 days in re-filing the appeal, is condoned.

2. Accordingly, the applications are disposed of.

ITA 370/2025

3. This appeal is filed under Section 260A of The Income Tax Act, 1961 (the Act) lays a challenge to the order dated 12.08.2022 in ITA No. 9364/DEL/2019 passed by Income Tax Appellate Tribunal (the Tribunal).

The issue is relatable to Section 40A(i) of the Act for the Assessment Years (AY) 2016-17. The Tribunal in paragraph 8 has stated as under :

“8. We have carefully perused the order of this Tribunal. This Tribunal has also considered this issue in ITA No.5184/Del/2017 for A.Y.2013-14. The relevant findings read as under:-

“16. Following the decision rendered by coordinate Bench of the Tribunal in assessee’s own case in AY 2010/11 and the decision rendered by Hon’ble High Court in CIT vs. Herbalife International India (P.) Ltd., wherein the assessee was an intervener, we are of the considered view that AO/DRP have erred in disallowing of Rs.30,41,71,07,047 regarding purchases made by the assessee from its AEs u/s 40(A)(i) as section 40A(i) is not applicable to the assessee due to non-discrimination clause under DTAA and due to the fact that AEs do not have a permanent PE in Indian. So, the issue is determined in favour of the assessee. Consequently, the appeal filed by the assessee is hereby allowed.”

4. The appellant/ Revenue has proposed the following substantial questions of law:

“A. Whether on facts and in the circumstances of the case and also prevailing law, the Hon'ble Tribunal has erred in deleting the disallowance made u/s 40(a)(i) of Rs. 11,85,35,823/- and holding that the provisions of Section 40(a)(i) of the Act cannot be applied in view of the provisions of the DTAA?

B. Whether on facts and in the circumstances of the case and also prevailing law, the Hon'ble Tribunal has erred in not appreciating the mandate of Section 195 of the Act especially in view of the law laid down by the Hon'ble Supreme Court in the case of Transmission Corporation Of A.P. Ltd. And Am-. Versus Commissioner Of Income Tax, A.P. reported in [AIR 1999 SUPREME COURT 3036]?

C. Whether on facts and in the circumstances of the case and also prevailing law, the Hon'ble Tribunal has gravely erred in reversing the findings of the Assessing Officer/DRP that the assessee's foreign AEs have a PE in India?

D. Whether on facts and in the circumstances of the case and also prevailing law, the Hon'ble Tribunal has failed to appreciate that the decision in Herbalife International India Pvt. Ltd. Versus Commissioner of Income Tax dated 13.05.2026 in ITA No 7/2007 was rendered by this Hon'ble Court in the context of the Un-amended Section 40(A)(i) of the Act and hence not applicable for the relevant period?”

5. Learned counsel for appellant states that the issue in hand is covered by the majority view in the case of The Commissioner of Income Tax II vs. Mitsubishi Corporation (India) Pvt. Ltd. i.e. in respect of the assessee herein for the Assessment Year 2006-07 being ITA 180/2014. In this regard we may refer to paragraph 13.1 onwards of the judgement of the third Judge to whom reference was made, in the following manner :

“13.1 The AO had ordered disallowances qua payments made by the respondent/assessee concerning purchases from its seven (07) group companies. The disallowance of the expenditure incurred for purchases made was triggered as TAS had not been deducted by the respondent/assessee. The AO took recourse to the provisions of Section 40(a)(i) of the Act.

13.2 Insofar as the income received by the respondent/assessee against services rendered by