It mean that his explanation doesn't agree with or make sense compared to what I saw.
For example, he was driving a car and he was in a collision with a bicycle. He says the the bicycle hit his car, but I saw his car hit the bicycle. So his explanation doesn't fit (in) with what I saw.
Personally, I don't use that expression in that way. I would say, "His explanation doesn't match with what I saw." or "His explanation doesn't agree with what I saw."