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TMI Blog2013 (9) TMI 1X X X X Extracts X X X X X X X X Extracts X X X X ..... n the business of manufacturing and trading of pre-recorded music and other entertainment software in cassette, compact disc and other formats. From the perusal of the statement of income, the Assessing Officer observed that assessee has claimed a deduction of Rs. 69,02,460/- being provision for stock obsolescence written back. The said claim was accompanied with a note to the statement of income, stating that provision for stock obsolescence written back has been claimed as deduction, as the same has been disallowed on provision basis. The Assessing Officer required the assessee as to why on the background that the identical claim made in Assessment Year 2003-04 was disallowed, the same may not be rejected in this year also as there is no scientific basis for calculation of the same, since the stock-in-trade was always valued either on cost or on market price whichever is less. In response, the assessee submitted that the stock of cassettes, CDs, VCDs, etc, has a very short span of life, if held by the company for a period more than the potential sale period then the provision is made for the possible future fall of market price and it was not claimed as deduction in the computati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed accounting principles. The deduction for obsolescence in stock is to be given only in the year in which stock became obsolete and this deduction is interest in valuing the closing stock of at market price. In other words, if the stock is actually obsolete, its market price will reflect accordingly and the same will be taken into account in valuation of closing stock and accordingly the A.O. held that the assessee had merely created a provision and there is no scientific basis for calculation of obsolescence and hence the A.O. after disallowing Rs. 3,73,80,639/- added the same to the total income of the assessee. On appeal, the Ld. CIT(A) while agreeing with the views of the A.O. upheld the disallowance made by the A.O. At the time of hearing the Ld. Counsel for the assessee submits that the assessee is consistently making similar provision in the books of accounts in earlier years and in the return of income the assessee suo motu after disallowing the same is claiming actual amount of provision for stock obsolescence written back in the current year and in support he refers the relevant extracts of financial statements for the assessment years 1999-2000, 2000-01, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hile observing that no relevant information is available on record in support of the claim, rejected the claim of the assessee. In the absence of any material before the A.O. or such material was examined by the A.O. during the course of assessment proceeding or the Ld. CIT(A) has called for the remand report from the A.O. on the impugned issue, we are of the view that in the interest of justice the matter should go back to the file of the A.O. and accordingly we set aside the orders passed by the Revenue Authorities on this account and send back the matter to the file of the A.O. to decide the same afresh and in accordance with law after providing a reasonable opportunity of being heard to the assessee. The ground taken by the assessee is, therefore, party allowed for statistical purpose." Respectfully following the above decision and in the interest of justice we consider it fair and reasonable that the matter should go back to the file of the A.O. and accordingly we set aside the order passed by the Ld. CIT(A) and send back the matter to the file of the A.O. to decide the same afresh in the light of the observations of the Tribunal in the case cited (supra) and acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of usage annually. It was in the nature of revenue payment without any enduring benefits. It was further explained that the said package was Enterprise Resource Planning software and used by the company for accounting purposes. No initial payment was made by the company. However, the A.O. did not accept the assessee's submission and held that the same is not allowable in view of the decision of the ITAT in the case of Maruti Udog Ltd. (2005) 92 ITD 119(Del). However, the A.O. has allowed depreciation @ 60% thereon. On appeal, it was inter alia contended by the assessee that the A.O. should have allowed depreciation under similar head for assessment years 2001-02 and 2002- 03 . The ld. CIT(A) while agreeing with the views of the A.O., directed the A.O. to allow depreciation on verification. At the time of hearing the ld. counsel for the assessee submits that now this issue stands covered in favour of the assessee by the decision of the Hon'ble Delhi High Court in CIT vs. Amway India Enterprises (2012) 65 DTR (Del) 313 wherein their Lordships after following the decision in CIT vs. Asahi India Safety Glass Ltd. (2011) 64 DTR (Del) 63 held that the expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee also made a alternative claim in the statement of income of royalty payment of Rs. 16,55,761 u/s 40(a). The same was also allowed at the rate of 20% by the Assessing Officer subject to amortization and restricted the allowable deduction at Rs. 33,11,52/-. 13. The Ld CIT(A) confirmed the action of the AO, following the earlier year CIT(A) order. 14. After going through facts and the Tribunal order for the Assessment Years 2001-02, 2002-03 & 2003-04 we find that this issue has come up for consideration before the Tribunal in the earlier years also. The relevant facts and finding recorded by the Tribunal in the Assessment Year 2001-02 are reproduced herein below, for the sake of ready reference:- "The AO noticed that the assessee had incurred royalty expenses of Rs. 16,38,69,l7I/- out of which Rs. 6,83,27.000/. was an respect of purchase of OST' rights i.e. right in recording from film companies and Rs. 9,55,42,171/-. was in respect of studio album recordings, album licensing and concert recording. The Assessing Officer thereafter has referred to the agreement between the assessee and M/s Dcvgan Films. FKR Productions, Dharma Productions for purchase of right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e opinion of the AO appeared to be on a high side. Similarly royalty payments made to other foreign companies also appeared to be on a very high side especially when assessee has incurred commercial loss of Rs. 197468169/- in which royalty payments of Rs. 16389171/- are embedded. According to the AO the royalty payment of Rs. 163869171/-is one of the biggest component of the expenses claimed as a deduction even though assessee has entered into agreement with foreign companies for the payment of royalty and Reserve Bank of India has approved the same, ultimately it has result in heavy losses to the assessee company and if the royalty component is taken into account, there was even a trading loss in respect of foreign music albums. Therefore, payment of such a high sum of royalty of Rs. 9,55,42,171/- to various foreign companies in the opinion of the AO was highly exaggerated. In his opinion it was only 20% of royalty payment viz. Rs. 95542171/- was reasonable vis-à-vis the net selling price, profits made by the assessee and other expenses incurred in sale of music cassettes and CDs. Therefore, the AO allowed a deduction of Rs. 19108435/- @ 20% of Rs. 95542171/- and assessee's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s from producers who owned then and for consideration copyright owned by film producers was assigned to assessee. After entering into agreement and making payment as per stipulation of agreements, assessee purchased master plate, i.e. original sound track of film songs and music, which was commonly known as 'audio rights' also. After acquiring master plate, songs and music recorded therein were transmitted/recorded in unrecorded cassettes and CDs and marketed by the assessee. Assessee claimed expenditure on acquisition of such rights from producers as revenue expenditure. Assessing Officer held that audio rights could not be equated to raw material/stock material but were right in perpetuity on global right basis and that master plate did not become useless after recording of series of cassette. He held that acquiring of audio right was of enduring nature and therefore expenditure incurred thereon by assessee had to be treated as capital in nature applying provision of section 35A. Whether since revenue had treated-in-house expenses of production of similar item as revenue in nature, assessee was correct in claiming expenses for acquiring 'audio rights' as revenue expenditure. Held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty expenditure in this case, should be treated as revenue expenditure to the extent of 80% as the AO has himself allowed 20% of such expenses. In the result, Ground No. 3 is treated as allowed. 16. In ground No. 4, the assessee has challenged the disallowance of royalty paid to nonresidents, which was claimed u/s 40(a) (i) of Rs. 16,55,761. Ld Senior Counsel submitted that the assesee has already paid the TDS on such royalty payment, therefore, same should be allowed. Accordingly we direct that after necessary verification of this fact that assessee has paid the TDS on such payments the AO will allow this expense. Thus, Ground No. 4 is treated as partly allowed for statistical purposes. 17. In ground No. 5, the assessee has challenged the disallowance of Rs. 10,00,000/- on account of Distributor's Settlement expenditure. The Assessing Officer noted that assessee has debited a sum of Rs. 10,00,000/- paid towards Distributor's Settlement. In response to the show cause notice, the assessee submitted as under. "On removing from the distributorship, M/s. R.K. Traders one of the distributors of the company in Patna has filed a criminal complaint and filed a suit agains ..... 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