Section 40(a)(i)

Section 40(a)(i) — the law in short

What the courts have decided on section 40(a)(i), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• GE India Technology Centre P Ltd v CIT Supreme CourtHelps taxpayer
  Must you deduct tax on every payment to a non-resident, just to be safe?
  No. The obligation under s.195 arises only where the sum paid is chargeable to tax under the Act. Mere remittance to a non-resident does not attract it, and you need not apply under s.195(2) where nothing is chargeable.
• CIT (International Taxation) v Nidra Hospitality Gujarat Pvt Ltd High CourtHelps taxpayerNo later treatment found
  The officer says I am in default under s.201 for not deducting under s.195 on payments abroad, although I have a Form 15CB from my chartered accountant for every remittance. Is that enough?
  On these facts, yes. The Gujarat High Court declined to admit the Revenue's appeal, holding that once the assessee had filed its TDS returns and submitted Form 15CB — the accountant's certificate on liability to deduct under Chapter XVII-B prescribed by Rule 37BB — for each remittance, and the Assessing Officer had not disputed those, the assessee could not be treated as an assessee in default under s.201. The Court also held that commission paid to travel agents and on hotel bookings made through websites and subsidiaries was not a sum covered by s.195.
• CIT v Herbalife International India Pvt Ltd High CourtHelps taxpayer
  I paid administrative fees to my US group company without deducting TDS and the officer has disallowed the whole amount under section 40(a)(i). Can I use the treaty's non-discrimination article?
  Yes, for years before the 2005 amendment. The Delhi High Court held that section 40(a)(i), as it stood for assessment year 2001-02, disallowed a payment to a non-resident for failure to deduct tax while an identical payment to a resident carried no such consequence. That lack of parity in deductibility is discrimination under Article 26(3) of the India-US treaty. Section 90(2) makes the treaty prevail, and the Court rejected the argument that a comparison needs a matching provision in the treaty. The Rs.5.83 crore administrative fee was allowed and the Revenue's appeal dismissed.
• CIT v V.S. Dempo & Co. Pvt. Ltd. (Bombay High Court, Full Bench) — section 172 is referable to section 44B, and where it applies there is no warrant for Chapter XVII or section 195 High CourtHelps taxpayer
  We are an Indian exporter. We paid demurrage to a foreign shipping company without deducting tax and the Assessing Officer has disallowed the whole payment under section 40(a)(i), saying section 172 is for non-residents and we are a resident. Does the payer have to be a non-resident before section 172 can be invoked?
  No. A Full Bench of the Bombay High Court answered the referred question and held that s.172 and s.44B are to be read together — s.44B enacting the special provisions for computing the profits and gains of a non-resident's shipping business and s.172 enacting the scheme for the levy and recovery of tax on the ship — and that where s.172 governs, there is no warrant for applying the provisions in Chapter XVII for collection and recovery of tax and its deduction at source under s.195. The Court overruled the view in CIT v. Orient (Goa) Private Limited to the extent contrary to that, and directed the appeals to be listed before an appropriate Division Bench.
• Van Oord ACZ India P Ltd v CIT High CourtHelps taxpayerPartly overruled — read this first
  The remittance to my foreign parent bore no tax. Can s.40(a)(i) still hit me for non-deduction?
  No. Section 195(1) fastens the duty to deduct on a sum chargeable under the Act, so chargeability is a jurisdictional condition and not a question of quantum. Where the authorities have found in the non-resident's own assessment that no tax is payable, there is nothing to deduct and no disallowance can follow.
• Samsung R&D Institute India Bangalore P Ltd v JCIT ITATHelps taxpayer
  My foreign group companies ship me handsets, network equipment and other test gear free of cost so that I can test the software I write for them, and I send it back or scrap it when the testing is done. The AO has added the value under s.28(iv) as a benefit arising from my business. Can he?
  No, on these facts. The Bangalore Bench deleted an addition of Rs 7,37,33,056 under s.28(iv) on equipment supplied free of cost by the assessee's associated enterprises for testing software the assessee had developed for them. Two things carried it: the equipment was either returned or destroyed after testing, so nothing irretrievable or of enduring nature was made available to the assessee, and the price for the software development services had already been settled under a Mutual Agreement Procedure resolution between the competent authorities of India and Korea, in which the cost of indirect benefits should have been embedded - so if there were a nexus at all it belongs in a transfer pricing adjustment and not in a second addition under s.28(iv). The same order also deleted a s.40(a)(i) disallowance of depreciation on capitalised software, following the coordinate bench in the assessee's own case. Note what the order does not do: it decides nothing under s.194R.
• M/s Divya Creation v Pr. CIT — AMT under s.115JC is not attracted where the deduction claimed is under s.10A ITATHelps taxpayerNo later treatment found
  The Commissioner has revised my assessment under s.263 saying the Assessing Officer never examined AMT. My only deduction is under s.10A. Does s.115JC even apply to me?
  It does not. Section 115JC(2) is a closed list: adjusted total income is the total income increased only by deductions under Chapter VI-A heading C other than s.80P, by a deduction under s.10AA, and by a deduction under s.35AD net of the notional depreciation. A deduction under s.10A is not in that list, so where that is the only claim the provisions of s.115JC are clearly not applicable and the Assessing Officer was under no duty to enquire into them.
• ITO v Right Florists P Ltd ITATHelps taxpayer
  I pay Google Ireland and Yahoo for online search advertising. Must I deduct tax at source, or will the expense be disallowed?
  No tax was deductible, so no disallowance. The Kolkata Tribunal held that payments for online search advertising to Google Ireland and Yahoo USA were not taxable in India. Neither had a permanent establishment here, and a website by itself is not a PE. The service is fully automated with no human intervention, so it is not fees for technical services under section 9(1)(vii) or under the India-Ireland treaty; and under the India-USA treaty nothing was made available. With no primary liability on the recipient there was no withholding obligation under section 195 and no disallowance under section 40(a)(i).
• Herbalife International India (P) Ltd v ACIT ITATCuts both ways
  I did not withhold tax on an administrative fee paid to my US parent. Can the Assessing Officer disallow the whole expense under section 40(a)(i) when a payment to an Indian party would not be disallowed?
  No, where the India-USA treaty applies. The Delhi Tribunal held that Article 26(3) of that treaty forbids exactly this discrimination: a disbursement to a resident of the other State must be deductible on the same conditions as a payment to a resident. As section 40(a)(i) then stood, non-deduction of tax led to disallowance only for payments to non-residents, so an Indian payer would prefer a resident supplier. Article 26(3) neutralises that, and by section 90(2) the more beneficial treaty provision prevails. The Tribunal therefore held section 40(a)(i) could not be invoked, even assuming the sum was chargeable in India, and left the chargeability question open.
• Statutory position — s.201: who is deemed an assessee in default, the Form 26A escape that covers non-deduction only, one per cent and one and one-half per cent for two different periods, and the six-year limit from 1 April 2025 CBDT Circulars & InstructionsCuts both waysSuperseded by amendment
  The TDS officer has passed an order under section 201 treating me as an assessee in default and has added interest under section 201(1A). Who exactly is in default, what gets me out of it, which interest rate runs for which period, and how far back can he go?
  Section 201(1) deems a person who does not deduct, does not pay, or after deducting fails to pay the whole or any part of the tax to be an assessee in default in respect of that tax. Its first proviso takes him out of that deeming, but only for a failure to deduct, and only if the payee has furnished his return under section 139, has taken the sum into account in computing income in that return and has paid the tax due on the income declared — and the deductor furnishes a certificate to that effect from an accountant, which rule 31ACB requires in Form 26A. Interest under section 201(1A) runs at two rates for two different periods: one per cent for every month or part of a month from the date the tax was deductible to the date it was deducted, and one and one-half per cent for every month or part of a month from the date it was deducted to the date it was actually paid. Where the first proviso to section 201(1) rescues the deductor from the tax, the proviso to section 201(1A) still charges the one per cent, from the date the tax was deductible to the date the payee furnished his return. Since 1 April 2025 an order under section 201(1) for a failure to deduct cannot be made after six years from the end of the financial year in which payment is made or credit is given, or two years from the end of the financial year in which a correction statement is delivered under the first proviso to section 200(3), whichever is later; until 31 March 2025 the figure was seven years and the limit protected only a failure to deduct from a person resident in India. Section 201 governs a default on a sum paid or credited up to 31 March 2026; where the earlier of credit or payment falls on or after 1 April 2026, the consequences provision is section 398 of the Income-tax Act, 2025.
• Statutory position — s.195: tax is deducted only on a sum “chargeable under the provisions of this Act”, and Explanation 2 fixes who owes the duty, not what is taxable CBDT Circulars & InstructionsCuts both waysSuperseded by amendment
  In March 2026 I remitted a fee to a company outside India without deducting anything, because I did not think any part of it was taxable here. The Assessing Officer now says section 195 obliged me to deduct on the whole remittance, or at least to apply to him before paying. Does section 195 say that — and since the new Act has come in, which Act governs my payment at all?
  Which Act governs is settled by one date: on the CBDT's transition FAQ, where the earlier of credit or payment falls on or before 31 March 2026 the Income-tax Act, 1961 applies, and where it falls on or after 1 April 2026 the Income-tax Act, 2025 applies instead — there, the deduction duty sits in section 393(2), Table, Serial No. 17. So a March 2026 remittance is a section 195 question. Section 195(1) does not tax a remittance; it attaches a deduction duty to “any interest … or any other sum chargeable under the provisions of this Act” paid to a non-resident or a foreign company, at the time of credit or of payment, whichever is earlier. Those five words are the gateway, and in GE India Technology Centre the Supreme Court held on 9 September 2010 that they cannot be read out of the sub-section: a payer who is fairly certain that no part of the sum is chargeable in India may make that determination himself and is not obliged to apply under section 195(2) first. Section 195(2) is the payer's application where a composite payment is partly chargeable; section 197 is a different route, taken by the recipient. Sub-section (6) requires information about every sum, whether or not chargeable, in the form prescribed by rule 37BB — which is why the bank asks for a 15CA even where nothing is deductible.
• CBDT Circular No. 723 dated 19 September 1995 — where section 172 applies, sections 194C and 195 do not, and the shipping agent steps into the shoes of his non-resident principal CBDT Circulars & InstructionsHelps taxpayer
  We pay ocean freight and demurrage to a foreign shipping line, usually through its Indian agent, and we do not deduct tax. The Assessing Officer is disallowing the whole payment under section 40(a)(i). Is there anything from the Board on this?
  Yes, and it is directly in point. Circular No. 723 dated 19 September 1995 states that s.172 is a self-contained code for the levy and recovery of tax, ship-wise and journey-wise, that its provisions apply notwithstanding anything contained in other provisions of the Act, and that "Therefore, in such cases, the provisions of sections 194C and 195 relating to tax deduction at source are not applicable." Paragraph 5 extends that to payments routed through agents: since the agent acts on behalf of the non-resident owner or charterer, he steps into the shoes of the principal, and accordingly s.172 applies and ss.194C and 195 do not.
• Sesa Goa Ltd v JCIT High CourtHelps taxpayerOverruled
  The Tribunal disallowed my education cess. Does s.40(a)(ii) actually cover cess?
  The High Court said no — s.40(a)(ii) as enacted contains no reference to 'cess' and there is no scope to read one in, so education and secondary cess were deductible, and the claim could be entertained even though it was not made in the original return. The Supreme Court reversed that order.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.