As per Article 26(3) of Indo-US DTAA the AO cannot seek to invoke the provision of sec 40(a)

Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
The facts as stated in the order of Assessing Officer as well as CIT(A) are that the assessee is in the business of inbound tour operation and it provides services to foreign tourists visiting the Indian subcontinent. The assessee does not have any branches/offices abroad. In order to generate business and to find new clients it entered into agreement with Mr. Patrice Dedeyn, 22 rue Lahire 75013 Paris France, a resident of France who was appointed as a business development representative of the assessee for Europe. His task, as per the agreement, is to find new clients and generate incremental business and his marketing activity principally to be concentrated around Belgium, France and Switzerland. He was to provide all possible commercial assistance as and when required by the existing clients, a list of which was to be provided to him and besides he was also to make proposals, prepare quotations and follow up on payments. The amount referred to in grounds of appeal relate to the payment made to said person by the assessee. The disallowance was a subject matter of consideration by the ITAT who vide order dated 31st July, 2007 set aside the matter and restored it to the file of Assessing Officer for looking into the applicability of provisions of section 40a(i) of the Income Tax Act, 1961 and in pursuance of the said order of ITAT the impugned order has been passed by the Assessing Officer. The Assessing Officer referring to section 9(1)(i) & 9(1)(vii) held that the amount paid by the assessee was taxable under the provisions of section 9(1)(vii) read with explanation 2 thereof. Since no tax has been deducted by the assessee, the provisions of section 40a(i) were applicable and in this manner, the disallowance has been made in the impugned orders as mentioned above.

Citation :
Dy. CIT, Circle-11 (1), New Delhi. (Appellant) Vs. M/s Incent Tours Pvt. Ltd., 672-Kanwaljit Sandhu Block, Asiad Village, New Delhi. (Respondent)