2015 (7) TMI 1293 - AT - Income Tax

Additions on account of royalty paid to Director - treatment as capital expenditure - Held that - Identical issue was adjudicated by the Tribunal in assessee s own case for assessment year 2006-07, 2007-08, 2008-09 2014 (10) TMI 988 - ITAT CHANDIGARH as held that the assessee-company has paid royalty for the particular invention which belonged to phoneytunes.com and therefore in our opinion, the claim for payment of royalty deserves to be allowed. Therefore we set aside the order of Ld. CIT(A) and direct the Assessing officer to allow claim for royalty. - Decided in favour of assessee. Disallowance of Copyright fees - nature of expenditure - revenue or capital - AO was of the opinion that these expenses were of capital nature because copyright come within the purview of intangible assets - Held that - The assessee has merely acquired right to use the copyright. The perusal of the agreement with M/s Phonographic Performance Ltd shows that license has been granted only for usage of the copyright. License was only for usage of copyright held by the licensor. The assessee has not become the owner of the license. Therefore, clearly the payment is of Revenue nature. Case of VRV. BREWERIES & BOTTLING INDUSTRIES LTD. 2011 (8) TMI 485 - DELHI HIGH COURT to be followed - once license is taken only for usage of copyright then such payments would constitute Revenue expenditure - decided in favour of assessee Disallowance of GRRS/SMS testing expenses @ 20% - Held that - After considering the rival submissions we find since no evidence was furnished before Assessing Officer or even before us, therefore, estimated 20% disallowance is justified. Depreciation @ 60% on computers - Held that - We find force in the submissions of Ld. Counsel for the assessee because computer Kiosks is an assembly of computer with touch screen, Bluetooth and other computer parts loaded with software. In this background Ld. CIT(A) has correctly held the same to be part of the computer, and therefore, we find nothing wrong with the order of Ld. CIT(A)a nd confirm the same. Depreciation on IVR card - @ 60% OR 15% - Held that - We find that once IVR card is loaded with software which allows the computer to interact with humans through the voice and DTMF, keypads inputs. This technical jargon has not been denied by the Revenue. Once IVR card is interacting with the humans through software obviously the same would form part of the computer and hence entitled for 60% depreciation. Therefore, we find nothing wrong with the order of Ld. CIT(A) and we confirm the same. - Revenue appeal dismissed.

Summary

Issues Involved:
1. Addition of Rs. 17,97,785/- on account of royalty paid to the Director as capital expenditure.
2. Disallowance of Rs. 2,03,78,978/- treating usage charges paid to copyright holders as capital expenses.
3. Adhoc disallowance of 20% out of GPRS/SMS testing expenses.
4. Depreciation rate on computer kiosks and IVR cards.

Detailed Analysis:

1. Addition of Rs. 17,97,785/- on Account of Royalty Paid to the Director as Capital Expenditure:
The assessee appealed against the confirmation of the addition of Rs. 17,97,785/- as capital expenditure. The Tribunal had previously adjudicated similar issues in the assessee's favor for earlier years. The Tribunal found that the royalty was paid for technology invented by Phoneytunes.com, a proprietary concern of the Director, which was later sold to the assessee company. The business transfer included all assets and liabilities, and the royalty was a legitimate business expense, not a capital expenditure. Thus, the Tribunal directed the Assessing Officer to allow the claim for royalty.

2. Disallowance of Rs. 2,03,78,978/- Treating Usage Charges Paid to Copyright Holders as Capital Expenses:
The Assessing Officer treated the copyright fees as capital expenditure, allowing only depreciation. The CIT(A) upheld this view. However, the Tribunal found that the assessee merely acquired the right to use the copyrights, not ownership. The license agreements indicated non-exclusive, non-transferable rights for specific usage, making the payments revenue in nature. Citing precedents, the Tribunal concluded that such payments are revenue expenses and set aside the CIT(A)'s order, allowing the assessee's claim.

3. Adhoc Disallowance of 20% out of GPRS/SMS Testing Expenses:
The Assessing Officer disallowed 20% of the GPRS/SMS testing expenses due to insufficient documentary evidence, a decision upheld by the CIT(A). The Tribunal found no evidence provided by the assessee to counter the disallowance and deemed the 20% disallowance justified.

4. Depreciation Rate on Computer Kiosks and IVR Cards:
The Revenue challenged the depreciation rate on computer kiosks and IVR cards. The Assessing Officer had restricted depreciation on kiosks to 10%, treating them as furniture, and on IVR cards to 15%, categorizing them as plant and machinery. The CIT(A) allowed 60% depreciation, treating them as part of the computer system. The Tribunal upheld the CIT(A)'s decision, noting that kiosks and IVR cards, integrated with computer systems and software, qualify for 60% depreciation as per the Income Tax rules.

Conclusion:
The Tribunal partly allowed the assessee's appeal, directing the Assessing Officer to allow the royalty payment and copyright usage charges as revenue expenses while upholding the 20% disallowance on GPRS/SMS testing expenses. The Tribunal dismissed the Revenue's appeal, confirming the 60% depreciation rate on computer kiosks and IVR cards. The judgment was pronounced in open court on 03/07/2015.