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2014 (9) TMI 45 - AT - Income TaxStamp Duty disallowed Whether stamp duty charges are included within the scope of the expenditure enumerated u/s 35D(2)(c) - Held that - The stamp duty charges claimed as deduction by the assessee included the charges pertaining to both the issue of bonus shares and the IPO - the expenditure related to the issue of bonus shares is revenue expenditure as held in Commissioner of Income-Tax Versus General Insurance Corporation 2006 (9) TMI 116 - SUPREME Court - the items of expenditure mentioned in section 35D(2)(c) of the Act is only illustrative and not restrictive following the decision in Commissioner Of Income-Tax Versus Shree Synthetics Limited 1985 (11) TMI 45 - MADHYA PRADESH High Court - thus, all expenditure incurred in connection with the issue of IPO, etc. including stamp duty to be allowable expenditure u/s 35D of the Act - stamp duty charges incurred by the assessee for the public issue of shares etc. is allowable as deduction u/s 35D of the Act Decided against Revenue. Deduction u/s.80JJA Held that - Section 80JJAA of the Act allows for deduction of additional wages paid to new workmen for an industrial undertaking - a company that is engaged in development, design and manufacture of software should be considered as being an industrial undertaking for the purposes of section 80JJAA of the Act - As the assessee is engaged in the development and manufacture of software, the assessee is covered within the definition of industrial undertaking - the assessee would be eligible for deduction u/s.80JJAA in respect of salary paid to the software engineers not employed in the supervisory role CIT(A) had taken note of the notification issued by the Government of Karnataka and concluded that as per the notification issued, the assessee company engaged in the development of software is covered by the Industrial Disputes Act, 1947 - the decision of the CIT (A) is upheld in allowing the assessee deduction u/s.80JJAA of the Act Decided against Revenue. Deduction u/s.10A Held that - The assessee is engaged in the business of mobile value added services, which involve 'content development' in its STP unit - the assessee has a dedicated studio in its STP unit where music related content is developed - The assessee also procures music and other content from third parties - The assessee also uses other advanced equipments which includes several hardware and systems like Sound Cards, Monitors, MIDI Controllers, Microphones, etc. which are used for development of content - These equipments, both hardware and software systems, are used for processing before it is made available for use by the customers - Once all the activities in the process are complete, the mobile compatible content is uploaded on the software platforms in the servers - the assessee's activity of developing content and conversion of the procured content into mobile readable format would qualify to be classified as Content Development or Data Processing specified in CBDT's Notification NO.11521 and therefore the assessee can be considered as rendering IT Enabled Services. The content developed by the assessee is uploaded on software platforms which are then transferred to the servers situated outside India from where it is accessed by mobile subscribers of that country it would qualify as exports for the purposes of section 10A of the Act - the assessee satisfies the twin conditions of export of computer software and repatriation of exports proceeds in convertible foreign exchange as prescribed in section 10A of the Act - the assessee is entitled for deduction u/s.10A of the Act Decided against Revenue. Legal & Professional Charges for conducting due diligence for acquisition - Held that - The expenditure has been incurred in conducting due diligence, in preparation of a feasibility report on Vox Mobili, France in which investments are being made leading to its acquisition- following the decision in Asstt. Commissioner of Income Tax Versus M/s Intercontinental Hotels Group India Pvt. Ltd. 2013 (12) TMI 1353 - ITAT DELHI - payments in relation to due diligence and risk analysis of potential targets would not be capital in nature and expenditure is incurred in the ordinary course of business of the assessee and accordingly is revenue in nature - the expenditure incurred by the assessee for conducting due diligence in report of Vox Mobili, France which was to be acquired by the assessee is revenue in nature and is accordingly allowed as a deductible expenditure u/s 37(1) of the Act Decided in favour of Assessee. Legal and Professional Charges for filing patent application Held that - Following the decision in Commissioner Of Income-Tax, Bombay Versus Finlay Mills Limited 1951 (10) TMI 1 - SUPREME Court Ltd. - in respect of trademarks, expenses incurred for the purpose of registration of trademarks goes to protect the trademark and not create the trademark per se, the same analogy would apply to expenses incurred for filing patent application; i.e. that expenditure would go to protect the patent and not create the patent per se - the expenditure incurred as legal charges for filing the patent application is revenue expenditure incurred in the course of the assessee's business and is to be allowed as a deduction Decided in favour of assessee. Adjustment in Depreciation Whether MRBs are to be classified as 'plant and machinery' or 'computers' for the purposes of depreciation - Held that - The function of MRBs is to support a combination of functions, performed in conjunction with the computer and servers - The MRBs are boards which are connected to computer servers which assist in receiving calls and would function only when attached to the computer - The MRBs increase the working capacity of the computers to the extent the computers receive calls and convert them into digital form - The MRBs work in conjunction with and as a part of the computer servers and cannot, in any way, be called as 'telecom equipment'- DCIT V Datacraft India Ltd. 2010 (7) TMI 642 - ITAT, MUMBAI - a distinction has been drawn between a computer component being a necessary accessory to be called a computer component and not being a necessary component - The MRBs operate along with the servers and computers and are a necessary component of the computer system - The MRB cannot function without the computers and the computers cannot perform the necessary functions required in the case on hand without the presence of the MRBs - the MRBs are to be classified as computers for the purposes of the claim of depreciation @ 60% - Decided in favour of Assessee.
Issues Involved:
1. Disallowance of Stamp Duty 2. Deduction under Section 80JJAA of the Income Tax Act 3. Deduction under Section 10A of the Income Tax Act 4. Disallowance of Legal and Professional Charges 5. Adjustment in Depreciation for Media Resource Boards (MRBs) Issue-wise Detailed Analysis: 1. Disallowance of Stamp Duty: The Revenue contested the CIT (Appeals)'s decision to allow the stamp duty expenditure under Section 35D of the Income Tax Act. The CIT (Appeals) had allowed the amortization of stamp duty charges incurred for the issue of shares, including IPO and bonus shares. The Tribunal upheld the CIT (Appeals)'s decision, referencing the Madhya Pradesh High Court ruling in CIT v. Shree Synthetics Ltd., which held that Section 35D(2)(c) is illustrative and not restrictive. Therefore, the Tribunal dismissed Revenue's ground, affirming that stamp duty charges are allowable under Section 35D. 2. Deduction under Section 80JJAA: The Revenue argued that the assessee's business of providing telecom services does not qualify for deduction under Section 80JJAA. The Tribunal, referencing the case of ACIT v. Texas Instruments India (P) Ltd., held that the assessee, engaged in software development, qualifies as an industrial undertaking. The Tribunal found that the employees in question qualify as "workmen" under the Industrial Disputes Act, 1947. Thus, the Tribunal upheld the CIT (Appeals)'s decision to grant the deduction under Section 80JJAA. 3. Deduction under Section 10A: The Revenue challenged the CIT (Appeals)'s decision to allow the deduction under Section 10A, arguing that the assessee's services do not constitute the manufacture of an article or thing. The Tribunal examined the assessee's activities, which involved content development and conversion of procured content into mobile-readable formats. The Tribunal found that these activities qualify as "content development" under the CBDT Notification No. 11521. The Tribunal concluded that the assessee meets the criteria for deduction under Section 10A, including the receipt of proceeds in convertible foreign exchange. Therefore, the Tribunal dismissed Revenue's ground and upheld the CIT (Appeals)'s decision. 4. Disallowance of Legal and Professional Charges: The assessee contested the disallowance of charges incurred for due diligence in acquiring Vox Mobili and for filing patent applications. The Tribunal, referencing the ITAT Delhi Bench decision in Intercontinental Hotels Group India P. Ltd., held that due diligence expenses are revenue in nature and deductible under Section 37(1). The Tribunal also allowed the deduction for legal charges related to patent applications, citing the Supreme Court's decision in CIT v. Finlay Mills Ltd., which held that such expenses protect the patent and are revenue in nature. Thus, the Tribunal allowed the assessee's grounds. 5. Adjustment in Depreciation for Media Resource Boards (MRBs): The assessee contested the classification of MRBs as "plant and machinery" rather than "computers" for depreciation purposes. The Tribunal examined the function of MRBs, which work in conjunction with computer servers. Citing the ITAT Special Bench decision in DCIT v. Datacraft India Ltd., the Tribunal held that MRBs are integral to the computer system and should be classified as "computers" for depreciation purposes. Thus, the Tribunal allowed the assessee's grounds and granted depreciation at 60%. Conclusion: The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal, affirming the CIT (Appeals)'s decisions on all contested issues. The Tribunal's order was pronounced in the open court on 21.2.2014.
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