2017 (1) TMI 440 - AT - Income Tax

Revision u/s 263 - assessee has not deducted tax at source on payment of bandwidth charges/leaseline charges and computer maintenance charges TDS 194J - AO failed to apply the provisions of section 40(a)(ia) - Held that - Respectfully following the decision in case of Estel Communications P. Ltd. (2008 (3) TMI 327 - DELHI HIGH COURT) we hold that payment made towards bandwidth/leaseline charges not being in the nature of royalty, provisions of section 194J would not be applicable. Therefore, no disallowance u/s 40(a)(ia) can be made. As can be seen, view expressed by different high courts as well as ITAT on the issue are divergent. While, in majority of the decisions a view favourable to assessee has been taken, in the decision of Hon ble Madras High Court a view against assessee has been taken. Thus, it is apparent that, more than one view is possible on the issue. That being the case, the view taken by AO while allowing expenditure claimed being one of the possible view supported by judicial pronoucements, provisions of section 263 cannot be invoked on the pretext that assessment order is erroneous and prejudicial to the interests of revenue. The impugned assessment year proceedings u/s 201 were also initiated against assessee for non-deduction of TDS u/s 194J on payment of bandwidth charges and ultimately orders were passed by raising demand u/s 201(1) and 201(1A). When assessee preferred appeal against the said order, ld. CIT(A) decided the issue in favour of assessee by holding that assessee is engaged in trading of bandwidth, hence, the provisions of section 194J are not applicable. It was brought to our notice by ld. AR, this order of ld. CIT(A) has been accepted by the department as no further appeal was filed. This contention of ld. AR remained uncontroverted. Thus, as can be seen from the aforesaid facts, opinion of the departmental authorities on applicability of section 194J to payment of bandwidth charges are also different. Therefore, the assessment order cannot be held to be erroneous and prejudicial to the interests of revenue on such a debatable issue - Decided in favour of assessee

Summary

Issues Involved:
1. Validity of CIT's power under Section 263.
2. Treatment of bandwidth and lease line charges as royalty.
3. Applicability of Section 194J and disallowance under Section 40(a)(ia).
4. Verification of service tax payable and FBT payable under Section 43B.

Issue-wise Detailed Analysis:

1. Validity of CIT's Power under Section 263:
The assessee challenged the CIT's invocation of Section 263, questioning the validity of the power exercised. The CIT had revised the assessment order on the grounds that it was erroneous and prejudicial to the interests of revenue. The Tribunal noted that the CIT's revision was based on the non-deduction of TDS on bandwidth and lease line charges, and the lack of evidence for service tax and FBT payable. The Tribunal found that the CIT's action was not justified as the AO had taken one of the possible views supported by judicial pronouncements.

2. Treatment of Bandwidth and Lease Line Charges as Royalty:
The CIT held that payments for bandwidth and lease line charges were in the nature of royalty, thus attracting Section 194J. The assessee argued that these payments were not for royalty but for services, and hence, Section 194J was not applicable. The Tribunal referred to the Delhi High Court decision in CIT Vs. Estel Communications Pvt. Ltd., which held that payments for bandwidth are not royalty. The Tribunal also cited ITAT decisions in Infosys Technologies Ltd. Vs. DCIT and others, supporting the assessee's view. The Tribunal concluded that bandwidth charges are not royalty, and Section 194J does not apply.

3. Applicability of Section 194J and Disallowance under Section 40(a)(ia):
The CIT had disallowed the bandwidth and lease line charges under Section 40(a)(ia) due to non-deduction of TDS. The Tribunal, following the Delhi High Court and ITAT decisions, held that since the payments were not royalty, Section 194J was not applicable, and thus, no disallowance under Section 40(a)(ia) could be made. The Tribunal also noted that there were conflicting views from different High Courts, and in the absence of a jurisdictional High Court decision, the view favorable to the assessee should be adopted.

4. Verification of Service Tax Payable and FBT Payable under Section 43B:
The CIT directed the AO to verify the service tax payable and FBT payable as shown in the balance sheet. The assessee claimed that these amounts were either brought forward or added back to the total income. The Tribunal did not find substantial evidence to counter the CIT's direction and upheld the need for verification by the AO.

Conclusion:
The Tribunal partly allowed the assessee's appeal in ITA No. 470/Vizag/2013, setting aside the CIT's directions regarding the applicability of Section 40(a)(ia) to bandwidth and lease line charges. The Tribunal allowed the appeal in ITA No. 509/Vizag/2014, setting aside the CIT(A)'s order, which dismissed the appeal against the AO's consequential order. The Tribunal emphasized that the AO's view was one of the possible views supported by judicial decisions, and on such a debatable issue, the assessment order could not be deemed erroneous and prejudicial to the interests of revenue.