Pure reimbursement of verified project costs to non-residents does not trigger withholding tax absent a profit element.

Pure reimbursement of verified pre-development expenses paid to non-resident shareholders, without any profit element, is not treated as consideration for technical services and does not attract withholding tax under section 195(2). The analysis notes that the payments were limited to actual costs, supported by audit certification, and paid under the shareholders' arrangement for project feasibility and development work. Because the underlying expenditure was incurred outside India and the later reimbursement was not itself a taxable fee for services, no tax was deductible at source on these facts.

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Issues: Whether reimbursement of pre-development expenses paid to non-resident shareholders for project-related consultations attracted withholding tax under section 195(2) of the Income-tax Act, 1961.

Analysis: The payments were made only as reimbursement of actual expenses incurred by the non-resident promoters in connection with the feasibility and development of the project. The reimbursement was limited to 50 per cent of the verified costs and was supported by audit certification under the shareholders' arrangement. Such reimbursement was not shown to contain any profit element. The underlying expenditure incurred by the non-residents outside India was not itself a payment by an resident to a non-resident when incurred, and the later reimbursement could not be equated with consideration for technical services so as to bring the amount within the charging or withholding provisions.

Conclusion: Section 195(2) was not attracted to the reimbursement in the circumstances of the case, and no tax was deductible at source.

Ratio Decidendi: Pure reimbursement of verified actual without profit element does not constitute consideration for technical services and does not, by itself, trigger withholding tax liability under section 195(2).

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