Pure reimbursement and retrospective tax amendments did not create withholding liability for overseas group payments.

Pure reimbursement of expenses paid to overseas group entities, without any mark-up or profit element, was treated as not constituting fees for technical services. On that basis, section 195 withholding was held inapplicable, and the retrospective amendment to section 9(1)(vii) could not create a past withholding obligation. As the payments were not subject to tax deduction at source, disallowance under section 40(a)(ia) was unsustainable and was deleted in favour of the assessee.

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Issues: Whether reimbursement of expenses paid to overseas group companies was liable to tax deduction at source as fees for technical services, and whether disallowance under section 40(a)(ia) of the Income-tax Act, 1961 was sustainable.

Analysis: The payments were found to be reimbursement at cost without any mark-up or profit element. The major component related to recruitment charges incurred by the foreign entities on the assessee's behalf, and the remaining items were also mere reimbursements. The material placed before the lower authorities was accepted, and the transfer pricing order had not disturbed the nature of the transactions. On these facts, the payments were held not to constitute fees for technical services. The retrospective amendment to section 9(1)(vii) could not fasten a withholding obligation with retrospective effect, and section 195(1) was therefore not attracted. Consequently, disallowance under section 40(a)(ia) was held unsustainable.

Conclusion: The disallowance was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appellate challenge by the Revenue failed, and the assessee's cross-objection did not alter the substantive outcome.

Ratio Decidendi: Pure reimbursement of s without any income or profit element is not fees for technical services, and a retrospective amendment cannot retrospectively create a withholding-tax obligation for past payments.

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