Withholding tax on pure reimbursement and ad hoc expense disallowance fail without income element or factual foundation.

Tax was not required to be withheld on reimbursement of repair charges paid to a foreign associated enterprise where the remittance was only actual cost on a cost-to-cost basis, carried no markup, and no income element in the non-resident's hands was shown. An ad hoc disallowance of personnel and other expenses was also unsustainable because the assessee's transfer pricing disclosure was not disturbed, no permanent establishment of the foreign enterprise through the assessee was established, and the disallowance rested only on a broad presumption rather than specific facts. The Revenue's additions were therefore deleted.

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Issues: (i) Whether tax was deductible at source on reimbursement of repair charges paid to the foreign associated enterprise; (ii) whether the ad hoc disallowance of a part of personnel and other expenses was justified on the footing that the assessee was effectively carrying on the foreign enterprise's business in India.

Issue (i): Whether tax was deductible at source on reimbursement of repair charges paid to the foreign associated enterprise.

Analysis: The payment was found to be only the actual cost of spare parts procured on a cost-to-cost basis for carrying out maintenance and repair services to customers in India. There was no markup, and the Revenue did not establish any income element in the hands of the non-resident. Where the remittance is not chargeable to tax in the hands of the recipient, withholding obligation does not arise.

Conclusion: The disallowance on account of non-deduction of tax at source was unsustainable and was deleted.

Issue (ii): Whether the ad hoc disallowance of a part of personnel and other expenses was justified on the footing that the assessee was effectively carrying on the foreign enterprise's business in India.

Analysis: The assessee had disclosed its transactions in transfer pricing documentation, and the Revenue had not disturbed the arm's length treatment or shown that the foreign enterprise had a permanent establishment in India through the assessee. The disallowance rested on a broad presumption from losses and was not supported by specific facts identifying expenses incurred wholly and exclusively for the foreign enterprise. An ad hoc percentage-based disallowance without factual foundation could not stand.

Conclusion: The ad hoc disallowance of expenses was rightly deleted.

Final Conclusion: The Revenue failed on both issues, and the common order deleting the additions was sustained.

Ratio Decidendi: No withholding tax can be disallowed on a remittance that is only a reimbursement of actual cost and is not chargeable to tax in the hands of the non-resident, and an ad hoc disallowance of business expenditure cannot be made without a specific factual basis linking the expenditure to the alleged non-business purpose.

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