No, you don't need a DNS record for the proxy subdomain (as long as it is only accessed by clients on the same server, which is usually the case). However you do need DNS for proxy65_address (which I assume you have) and that address *and port 5000* must be accessible to both the sending and receiving clients.
My guess is that port 5000 is firewalled, it's easily overlooked.
I don't know what triggers the file sending UI in Pidgin to enable. Some versions may require you to manually enter the proxy address in the account settings (it defaults to an old jabber.org
address that is no longer active). You could also try another desktop client more up-to-date with XMPP such as Gajim or Dino.
Final suggestion: ensure the proxy component domain is a subdomain of the domain that your users are logging into. For example:
Hope this helps!