2019 (7) TMI 789 - AT - Income Tax

Depreciation on Set Top Boxes (STB) - @80% OR 15% - assessee has also raised an alternative contention that expenditure incurred on purchase of STB should be allowed as a revenue expenditure - STB s are energy saving devices OR electrical equipment - HELD THAT - In our opinion, it transpires that the expenditure incurred for acquisition of set top boxes and not for trading it. In other words, it was incurred for securing tangible asset on which the assessee collected annual maintenance charges. The acquisition brought into existence a new asset and the assessee obtained a new advantage. It is to be noted that not only advantage flowed from such acquisition and the investment is in the capital field but the expenditure has also effected the fixed capital of the assessee. In our opinion, expenditure was incurred in connection with the profit earning apparatus which generated permanent source of income for the assessee by way of annual service maintenance charges. Thus, we are of the opinion that the expenditure incurred by the assessee was capital in nature and it cannot be said that it is revenue expenditure. Accordingly, the assessee is entitled for depreciation on the same. As per TRAI regulations dated 01.04.2015, the depreciation on the price of customer premises equipment (which included Set Top Box and remote control for Set Top Box) shall be calculated using straight line method at the rate not exceeding 1.7% for every completed calendar month or part thereof. Therefore, the rate of depreciation at the rate of 15% allowed by the AO treating the same as Plant and Machinery is in tune with TRAI regulations. Set Top Box is a device connected to a TV and which allows a subscriber to receive in unencrypted and descrambled form subscribed channels through an addressable system and unless assessee proves that STB s comes within Rule 8(ix)(E)(k), it cannot claim higher depreciation of 80%. We uphold the order of the lower authorities and direct the AO to allow depreciation on STB at 15% only. - Decided in favour of revenue.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in granting depreciation on Set Top Boxes (STB) at the rate of 80% instead of 15% granted by the Assessing Officer.
2. Whether the expenditure incurred on the purchase of STB should be allowed as revenue expenditure.

Issue-wise Detailed Analysis:

1. Depreciation Rate on Set Top Boxes (STB):

The primary issue raised by the Revenue in the appeal was the justification of the CIT(A) in granting depreciation on Set Top Boxes (STB) at the rate of 80% instead of the 15% granted by the Assessing Officer. The assessee, a private limited company engaged in the business of distribution of signals and internet supply to cable networking, had claimed depreciation on STB at ?36,13,86,286 at the rate of 100%. The Assessing Officer restricted the claim to 15%, considering the STB as "Machinery and Plant" not covered under specific sub-items of the new Appendix I.

The CIT(A) concluded that the STB belonged to the assessee and was a capital asset, thus entitled to depreciation. The CIT(A) referenced the Customer Registration Form, which indicated that the STBs were the property of the appellant company, and directed the Assessing Officer to allow depreciation at the rate of 80% as per sub-item (8)(ix)(E)(k) of Part A item III of the Income Tax Rules, which covers energy-saving devices and electrical equipment.

However, the Tribunal noted that the CIT(A) had not provided an elaborate finding for granting depreciation at 80%. The Tribunal emphasized that for claiming a higher rate of depreciation of 80%, the assessee needed to prove that the STBs were energy-saving devices being electrical equipment. The Tribunal upheld the Assessing Officer's decision to grant depreciation at 15%, aligning with TRAI regulations, which prescribe a straight-line method of depreciation at a rate not exceeding 1.7% per month for customer premises equipment, including STBs.

2. Expenditure on Purchase of STB as Revenue Expenditure:

In the cross-objection filed by the assessee, an alternative contention was raised that the expenditure on the purchase of STB should be allowed as revenue expenditure. The assessee argued that the STBs were handed over to customers, and the cost was recouped in the name of installation charges, making the expenditure revenue in nature.

The CIT(A) observed that the STBs were the property of the appellant company and were treated as capital assets. The Tribunal, however, noted that the assessee collected installation charges, which included the cost of STBs, and also collected maintenance charges in advance as AMC for repairs. The Tribunal concluded that the expenditure incurred for acquiring STBs was for securing a tangible asset, generating a permanent source of income through annual service maintenance charges. Therefore, the expenditure was capital in nature, and the assessee was entitled to depreciation.

Conclusion:

The Tribunal allowed the appeal filed by the Revenue, confirming the depreciation rate of 15% on STBs as granted by the Assessing Officer, and dismissed the cross-objection filed by the assessee, denying the claim for treating the expenditure on STBs as revenue expenditure. The order was pronounced on April 30, 2019.