IT expense reimbursements must be proved as pure pass-throughs; absent evidence, withholding tax and disallowance apply.

IT expense payments were treated as taxable consideration where the assessee failed to prove a pure reimbursement without markup. The record did not establish a direct one-to-one pass-through of actual costs, as the relevant agreement and supporting ledger evidence were not produced, the monthly charges were not shown to match actual outgoings, and the accounting policy indicated recognition on an agreed markup over net costs. On that basis, the reimbursement claim was rejected, withholding tax was held applicable in the hands of the non-resident recipient, and failure to deduct tax at source triggered disallowance.

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Issues: Whether the payments for IT expenses claimed by the assessee were reimbursement of actual without markup, so as to escape tax deduction at source and consequential disallowance, or whether they constituted taxable fees for technical services.

Analysis: The dispute arose in the second round of litigation after the matter had earlier been remanded for examination of the true nature of the IT expenses. The agreement and surrounding material showed that the services were provided under an information technology services arrangement between the foreign group entities, and the assessee could not produce the relevant agreement and supporting ledger evidence to establish a direct one-to-one reimbursement without any profit element. The record also showed that the monthly charges were not demonstrated to be identical to actual outgoings, and the accounting policy indicated revenue recognition on an agreed markup on net costs. On these facts, the claim of reimbursement was not proved. Once the payment was held not to be reimbursement, the Tribunal upheld the view that the amount was chargeable in the hands of the non-resident recipient and that the obligation to deduct tax at source under the withholding provisions was attracted, with failure to deduct resulting in disallowance.

Conclusion: The assessee's claim that the IT expense payments were mere reimbursement failed, and the payments were treated as taxable consideration attracting withholding tax and disallowance. The issue was decided against the assessee.

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