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TMI Blog2014 (9) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 deve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment for Assessment Year 2008-09 dt.30.12.2010, the assessee preferred an appeal before the CIT (Appeals) - III, Bangalore. The learned CIT (Appeals) disposed the assessee's appeal by order dt.27.6.2012 granting the assessee partial relief. 3. Aggrieved by the order of the CIT (Appeals) - III, Bangalore dt.27.6.2012 for Assessment Year 2008-09, both the assessee and revenue are in appeal before this Tribunal raising various grounds. 3.1 In its appeal, revenue has raised the following grounds: 1. The order of the learned CIT (Appeals) is opposed to law and facts of the case. 2. On the facts and in the circumstances of the case the learned CIT (Appeals), even while accepting the expenditure of stamp duty amounting to ₹ 6,87,770 as capital expenditure, erred in directing the Assessing Officer to allow the same under section 35D of the Act. The Hon'ble Supreme Court decision in the case of GIV Vs. CIT, 286 ITR 232 (SC) on this issue is very clear that expenses incurred for issue of fresh share capital is capital expenditure. 3. The CIT (Appeals) erred in granting deduction under section 80JJAA ignoring the fact that the business of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in not appreciating our alternative ground, for allowing deduction under section 35D of the Income Tax Act, 1961. d. The learned CIT (Appeals) erred in holding out that deduction under section 35D will not be available for techno-financial analysis made upon acquiring an existing business. 1.B. Legal and professional charges for filing patent application - ₹ 24,08,000. a. The learned CIT (Appeals) erred in holding that an amount of ₹ 24,08,000 paid towards legal and professional charges for filing patent application is capital in nature. b. The learned CIT (Appeals) erred in not appreciating that legal charges paid for reviewing and filing patent application were expenses incurred in the regular course of business of the appellant and therefore, were not capital in nature. 2. Adjustment in depreciation - ₹ 9,06,45,983. a. The learned CIT (Appeals) erred in holding out that media resource boards would form part of plant machinery and not computers for the purposes of computing depreciation under the Act. b. The learned CIT (Appeals) erred in considering the media resource boards as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany through issue of bonus shares and the IPO as capital in nature. With regard to the assessee's alternate clause for deduction of the said expenses under section 35D of the Act, the learned CIT (Appeals) allowed amortisation of the same under section 35D of the Act observing that:- i) It is a settled principle that IPO expenses are in the nature of capital expenses and the bonus issue if linked to the same also partake the character of the same; ii) When several other expenses on issue of shares are allowed, including advertisement of the prospectus, brokerage, etc., it is not conclusively arguable that a statutory levy on such issue of shares shall be automatically excluded; iii) Statutory levies, except income tax, are allowed as business deduction under all sections of the Act and also towards cost of capital gains computation. Therefore, there is no reason why stamp duty should be denied amortization merely because of a lack of specific mention in section 35D(2)(c) of the Act. 5.4 In support of the grounds raised, the learned Departmental Representative submitted that the decision of the learned CIT (Appeals) is erroneous on legal principles. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d out by the learned Departmental Representative, the decision of the learned CIT (Appeals) in disallowing the entire stamp duty charges by holding it to be capital in nature, is not in tune with the decision of the Hon'ble Apex Court in General Insurance Corpn. (supra). Since the assessee has not raised any ground challenging this decision of the learned CIT (Appeals), we refrain from rendering any decision on the same. This mistake, is itself, cannot be a ground for setting aside the issue, as requested by the learned Departmental Representative, as the issue involved is a legal principle and there is no verification required to be made. 5.6.3 Section 35D(3)(c) of the Act reads as under: 35D(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely:- (a) . (b) (c) where the assessee is a company, also expenditure- (i) by way of legal charges for drafting the Memorandum and Articles of Association of the company; (ii) on printing of the Memorandum and Articles of Association; (iii) by way of fees for registe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Following the decision of the Hon'ble Madhya Pradesh High Court in Shree Synthetics Ltd. (supra), the ITAT, Ahmedabad Bench in the case of Amtrex Appliances Ltd. V DCIT reported in 94 TTJ 369 held that all expenditure incurred in connection with the issue of IPO, etc inter alia including stamp duty to be allowable expenditure u/s.35D of the Act. Following the aforesaid decisions (supra), we hold that stamp duty charges incurred by the assessee for the public issue of shares etc. is allowable as deduction under section 35D of the Act. In this view of the matter, the ground No.2 raised by revenue is dismissed. 6. Deduction u/s.80JJA of the Act. 6.1 In the ground at S. No.3, revenue contends that the learned CIT (Appeals) erred in granting the assessee deduction under section 80JJAA ignoring the fact that the assessee's business is providing telecom services and that such services cannot be termed as IT Enabled Services. It is contended that, on the other hand, the learned CIT (Appeals) has rejected the assessee's contention that Media Resources Boards (NMS CG cards) are computers, holding that the assessee is engaged in providing telecom services and not in the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndustrial 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. 6.5.3 Another condition stipulated under the Act is that the assessee should be engaged in the manufacture or production of article or thing. The definition of industrial undertaking as stipulated in section 10(15) and section 72A of the Act extends to undertakings that are engaged, inter alia, in the manufacture of computer software or recording of programme on any disc, tape, perforated media or other information devices. 6.5.4 Section 80JJAA refers to workmen as defined in section 2(5) of the Industrial Disputes Act, 1947, wherein a 'workmen' is defined as: Workmen means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Assessing Officer during assessment proceedings. These facts were not properly considered by the Assessing Officer. Further, from the order of the CIT(A), it is seen that he 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. Further it is not the case of the revenue that the assessee did not fulfill the conditions extracted elsewhere in this order. Considering all those factual matters we do not find any infirmity in the order of CIT(A) according relief to the assessee. In fact he had clarified the relevant portions related to Industrial Disputes Act, 1947 and Income-tax Act while granting relief to the assessee which are extracted at pp. 5 and 6 of this order. After carefully considering the same, we are inclined to accept the reasons shown by the learned CIT(A). The learned CIT-Departmental Representative could not assail the finding reached by the learned CIT(A) by bringing in any valid materials. The order of the CIT(A) is confirmed. It is ordered accordingly. As the facts of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT (A) rendered the following reasons/observations: i) The assessee is engaged in the manufacture of article or thing; ii) The A.O. has not established that the assessee is not producing any content and in view of CBDT Notification No.11521 dt.26.9.2000, the assessee can be considered as an IT Enabled Services undertaking; iii) It is a fact that the IT Enabled Services is provided from India and used outside India and the payment for the same is received in convertible foreign exchange and as such the requirement of export is found to be met; iv) The A.O. has referred to a single agreement to interpret that licensing of software and content procured or developed by the assessee implies only an access and not an export, whereas the assessee has explained the process of uploading onto servers abroad and providing international access for a fee and that its services are also covered under the Export of Services Rules, 2005; v) It is content management which is the USP of the assessee and what actually makes its particular offering acceptable or preferable over whatever else is available in the market. If there was no unique value additio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange within the stipulated time period. 7.4.2 Explanation 2 to section 10A defines 'Computer Software' as under: Computer Software means - a) Any computer programme recorded on any disc, tape, perforated media or other information storage device; OR b) Any customized electronic data or any product or service of similar nature as may be notified by the Board, which is transmitted or exported from India to any place outside India by any means... 7.4.3 The CBDT has issued Notification No.11521 [SO 890(E) (F.No.142/49/2000-TPL)] dt.26.9.2000 specifying the information technology enabled products/services eligible to claim deduction u/s.10A, 10B and 80HHE of the Act, which inter alia includes content development or animation. Thus, in addition to the undertakings engaged in the manufacture or production, the aforesaid Notification also extends the benefit of deduction u/s.10A of the Act to data processing and content development undertakings. 7.4.4 In the light of the provisions of law and the CBDT Notification above, we shall examine the activities of the assessee. It is seen that the assessee is engaged in the business of mobile value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the result, revenue's appeal is dismissed. ITA No.1163/Bang/2012 - Assessee's appeal for Assessment Year 2008-09. 9. Disallowance of Legal Professional Charges: ₹ 2,20,40,131. 9.1 Disallowance of Professional Charges for conducting due diligence for acquisition of Vox Mobili: ₹ 1,96,32,131. In grounds raised at 1.A(a) to (d), the assessee challenges, as erroneous, the order of the learned CIT (Appeals) in holding that the amount of ₹ 1,96,32,131 paid towards legal and professional charges for acquisition of Vox Mobili, France is capital nature and not revenue expenditure as claimed by the assessee. It is also contended that the learned CIT (Appeals)'s order in rejecting the assessee's alternate ground/claim for allowing deduction of these expenses under section 35D of the Act by holding that this deduction is not available for techno-financial analysis made for acquiring an existing business. 9.2 Disallowance of Legal and Professional Charges for filing patent application: ₹ 24,08,000. In grounds raised at S. No.1B(a) and (b), the assessee contends that the order of the learned CIT (Appeals) is erroneous in holding that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure on acquisition should be treated as capital expenditure and that a new acquisition could be considered of revenue nature, only if it did not increase the volume of productive capacity of the undertaking. 9.4.3 The learned CIT (Appeals) also held that, the same ratio of enduring benefit hits the assessee's claim for patent application to be allowed as revenue expenditure and in this regard placed reliance on the judgment of the ITAT, Delhi in Modi Revlon Pvt. Ltd. (2 ITR (Trib) 632 (Del) which followed the decision of the Hon'ble Apex Court in the case of CIT V Ciba of India Ltd. (69 ITR 692) to hold that where the benefit from a patent acquisition resulted in enduring benefit, the said expenditure cannot be claimed as revenue. 9.5.1 Supporting the grounds raised at 1A(a) to (d), the learned Authorised Representative assailed the impugned order of the learned CIT (Appeals) submitting that the expenditures in question were not incurred for acquiring a capital asset or any enduring benefit but only for the purpose of conducting due diligence on Vox Mobili, France before acquisition. The learned Authorised Representative submitted that the acquisition was for st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y is revenue in nature. Following this decision of the ITAT, Delhi Bench, we hold that 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 under section 37(1) of the Act. Accordingly the assessee's grounds raised at 1A(a) to (d) are allowed. Since the assessee's grievance has been addressed by our order (supra), there is no requirement for us to adjudicate on the alternate grounds raised at 1A(c) and (d) in respect of the claim of deduction under section 35D of the Act at this stage. 9.8.1. Regarding the grounds raised at 1B (a) (b) in respect of legal and professional charges of ₹ 24,08,000 incurred for filing patent application, the learned A.R. in support of the grounds raised submitted that these legal charges paid for reviewing and filing of the patent application were expenses incurred in the regular course of business of the assessee, and are not capital in nature. It was also submitted that the purpose of incurring these charges was not to acquire any enduring benefit but was only a prelimin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the improvement of a fixed capital asset it is attributable to capital, but if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital asset of the company. In our opinion, the advantage derived by the owner of the trade mark by registration falls within this class of expenditure. The fact that a trade mark after registration could be separately assigned, and not as a part of the goodwill of the business only, does not also make the expenditure for registration a capital expenditure. That is only an additional and incidental facility given to the owner of the trade mark. It adds nothing to the trade mark itself. It is the contention of the learned Authorised Representative of the assessee that the principles laid down by the Hon'ble Apex Court in respect of 'Trade Marks' in that case are equally applicable to the issue of 'patents' in the case on hand and prayed that in view of this, the expenditure of ₹ 24,08,000 incurred by the assessee be allowed as revenue expenditure. 9.8.2 Per contra, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to 'plant and machinery.' 10.3 The learned CIT (A) in his order, upheld the order of the Assessing Officer observing as under: (i) It may not always be proper to label all technical systems which use computers as their basic interface to function as 'computers'; (ii) All kinds of business today modify or tweak basic computer processes with additional hardware or software to gain delivery of their unique products; (iii) It may not do for the description of these processes to be over simplified and taken up in a casual manner. The Chennai Bench of the ITAT in the case of ITO V Accurum India (P) Ltd. In 128 TTJ 249 dt.27.11.2009 raised this very apprehension, involving the deduction under section 10A of the Act, and warned against the danger of viewing the complex process of software development for export in an over simplified way. (iv) In the assessee's case the MRB's have a specific function and it is not only to store, process and retrieve data for general purposes. They do not lead themselves to the usage except for a very specific function of facilitating specialized telecommunications which is a part of the business str ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the Tribunal apprehended in the case of Accumen India P. Ltd. (supra), is very clearly invited in; (xi) It is seen from the submissions that on the one hand the assessee is certifying the specialized functional nature of the gadget and on the other hand, ignores that very functional classification while holding it to be nothing but a computer system. Yet, in the same breath, it also draws reference on the House of Lords case, Barclay, Curle and Co. (76 ITR 62)which sanctifies functionality as the only effective test; (xii) The patent contradiction of over-simplification and generalization in assessee's arguments are thus apparent. By its very narrative nature, a computer system is a data storage, processing and retrieval device and but for the media resource boards, its capability to render these particular telecommunication services would not exist; (xiii) By insisting that there are dedicated servers for such communication purposes only, the assessee is in danger of exposing itself to the entirely plausible argument that by incorporation of the MRBs, the entire server itself undergoes a functional transformation and becomes a piece of telecommunicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be classified as 'plant and machinery' or 'computers' for the purposes of depreciation. In this regard, it would be relevant to understand the term 'computer'. While 'computer' has not been defined in the Income Tax Act, 1961, the term 'Computer System' has been defined under Explanation (a) to section 36(1)(xi) of the Act as under: (a) computer system means a device or collection of devices including input and output support devices and excluding calculators which are not programmable and capable of being used in conjunction with external files, or more of which contain computer programmes, electronic instructions, input data and output data, that performs functions including, but not limited to, logic, arithmetic, data storage and retrieval, communication and control; From the above definition, it follows that a computer system would encompass a collection of devices including input and output support devices that perform functions including, but not limited to, logic, arithmetic, data storage and retrieval communication and control. 10.6.2 In the light of the above definition of 'Computer System', the functions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , hardware in question can be considered as a part of a computer and hence a 'computer'. Per contra, when the machine is not used as a necessary assessory or in combination with a Computer, it cannot be called a 'Computer component.' 31.3. Coming to the Routers, it is seen that these can also be used with a Television and in such use, no computer is required. These are also called T.V. routers. Similarly, Internet Service Providers , give connectivity, by installing a router in the premises of the persons/institutions availing the internet connection. In these cases the router is not used along with a computer. In such a situation, it would be a Stand alone equipment. In such cases this cannot be considered a component of a computer or computer Hardware. Giving another example, a computer software can be used in many devices including washing machine, televisions, telephone equipment etc. When such software is used in those devices, it integrates with that particular devices. The predominant function of the device determines its classification. Only if the Computer software, resides in a computer, then it become a part and parcel of a computer and, as long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich performs such functions that can be called as computer; All the input and output devices, as discussed above, which support in the receipt of input and outflow of the output are also part of computer. CPU alone, in our opinion, cannot be considered as synonymous to the expression 'Computer'. The function of CPU is akin to the brain playing a pivotal role in the conduct of the body. As we do not call the brain alone as the body, similarly the CPU alone cannot be described as computer. Thus the computer has to necessarily include the input and output devices within its scope, subject to their exclusive user with the computer, as discussed above. If we constrict the definition of computer only to processing unit, as has been held in the case of Router mania (supra), then even the keyboard and mouse etc. will not qualify to be called as computer because these equipments also do not perform logical, arithmetical or memory functions. In the light of the meaning of 'computer' discussed in earlier paras, we are inclined to agree with the view taken by the Kolkata Bench in Samiran Majumdar (supra). 34. We therefore answer the question referred to this Special Ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the dispensation of cash or deposit of cash is done. Its functions are not limited to the location at which it is placed but it also records the increase or decrease of the balance in the assessee's account in the bank consequent to such deposit or withdrawal and all this is done instantly. Thus it involves the use of internet facilities also to discharge the above functions. 10.6.5 In the above cases, 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. In this view of the matter, we are of the opinion that MRBs fit into the definition of a computer component as explained above and therefore the decision of the ITAT Special Bench of Mumbai in the case of Datacraft India Ltd. (supra) rendered in respect of routers is equally applicable to the MRBs used by the assessee. Following the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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