Facts of the Case

A search and seizure operation under Section 132 of the Income Tax Act, 1961 was conducted by the Investigation Wing on 22.03.2012.

Pursuant to the search, the Assessing Officer issued notice under Section 153A to the assessee. The assessee submitted that the original return filed earlier should be treated as the return in response to the notice.

The assessee company was engaged as a 100% Export Oriented Unit providing remote data entry services to overseas clients.

During the assessment proceedings, the Assessing Officer observed that the assessee had made foreign remittance of ₹1,16,47,166 to Singtel Communication Ltd without deducting tax at source.

The assessee contended that no tax was deductible because the income was not chargeable to tax in India in the hands of the recipient.

However, the Assessing Officer disallowed the amount under Section 40(a)(ia) for non-deduction of TDS and added the amount to the income of the assessee.

The CIT(A) deleted the addition relying on the decision of the Delhi High Court in CIT vs Estel Communications Ltd, holding that bandwidth connectivity charges do not require deduction of tax at source under Section 195.

Aggrieved by the order, the Revenue filed an appeal before the ITAT, and the assessee filed a cross objection challenging the jurisdiction of the addition under Section 153A. 

Issues Involved

  1. Whether the Assessing Officer can make additions under Section 153A in absence of incriminating material found during the search.
  2. Whether bandwidth connectivity charges paid to a foreign entity require deduction of tax at source under Section 195.
  3. Whether disallowance under Section 40(a)(ia) can be made for such payments. 

Petitioner’s Arguments (Revenue)

  • The Assessing Officer was justified in making the addition under Section 40(a)(ia) due to non-deduction of tax at source on foreign remittance.
  • The CIT(A) erred in deleting the addition and failed to appreciate the findings of the Assessing Officer.
  • The order of CIT(A) was erroneous both in law and on facts.

Respondent’s Arguments (Assessee)

  • The assessment for the relevant year had already been completed and was not pending at the time of search.
  • As per the judgment of the Delhi High Court in CIT vs Kabul Chawla, no addition can be made in completed assessments under Section 153A unless incriminating material is found during search.
  • No incriminating material relating to the impugned disallowance was discovered during the search.
  • Even on merits, the issue is covered by Delhi High Court decision in CIT vs Estel Communications Ltd, where it was held that bandwidth connectivity charges are not liable for TDS under Section 195. 

Court Findings

The ITAT observed that the assessment for the relevant year had already attained finality, as the time limit for issuing notice under Section 143(2) had expired.

Therefore, the assessment was not pending at the time of the search.

Relying on the decision of the Delhi High Court in CIT vs Kabul Chawla (380 ITR 573), the Tribunal held that:

  • Completed assessments can be interfered with under Section 153A only if incriminating material is found during the search.

The Tribunal noted that:

  • The Revenue could not point out any incriminating material found during the search relating to the disallowance.

Thus, the addition made by the Assessing Officer was not sustainable in law.

Further, even on merits, the Tribunal held that the issue was covered by the Delhi High Court judgment in CIT vs Estel Communications Ltd, which held that bandwidth connectivity charges are not liable for TDS under Section 195.

Court Order

  • Cross objection filed by the assessee was allowed.
  • Appeal filed by the Revenue was dismissed. 

Important Clarification

The Tribunal reiterated the legal principle that:

In completed assessments, additions under Section 153A can only be made on the basis of incriminating material found during search.

If no such material is discovered, the Assessing Officer cannot disturb the concluded assessment.

Link to download the order -  https://itat.gov.in/public/files/upload/1703829639-3129,%203130,%205397%20&%20CO%20386,%20387%20&%20389%20iservices%20Investments%20Ltd..pdf 

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