Reimbursement payments without profit element are not taxable income, so no TDS under section 195 or disallowance follows.

Reimbursement of salary costs and other expenditure paid to a foreign group entity, where no profit element is embedded, is not income chargeable to tax in the recipient's hands and therefore does not attract tax deduction at source under section 195. On that footing, the consequential disallowance under section 40(a)(i) cannot be sustained. The Court treated the legal questions as already concluded by an earlier judgment in favour of the assessee and, applying that principle, held that Article 13 of the India-UK Treaty did not change the result.

---

---

Issues: Whether the amounts paid by way of reimbursement of salary costs and other expenditure to the foreign group entity were liable to tax deduction at source under section 195 and, on failure to deduct tax, to disallowance under section 40(a)(i), particularly in the light of Article 13 of the India-UK Treaty.

Analysis: The questions of law were treated as already concluded by an earlier judgment in favour of the assessee. On that basis, the Court accepted that the reimbursement payments, having no profit element, did not constitute income chargeable in the hands of the foreign recipient so as to trigger section 195. Once section 195 was inapplicable, the consequential disallowance under section 40(a)(i) could not be sustained.

Conclusion: The issue was decided in favour of the assessee and against the revenue.

Ratio Decidendi: Reimbursement payments without any profit element are not income chargeable to tax in the hands of the recipient and therefore do not attract tax deduction at source under section 195 or consequential disallowance under section 40(a)(i).

---