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TMI Blog2010 (9) TMI 1184X X X X Extracts X X X X X X X X Extracts X X X X ..... 7(1) of the Act. 3. The assessee is a company. It is engaged in the manufacturing and trading of pre-recorded music and other entertainment software in cassette, compact disc and other formats. The assessee claimed as a deduction a sum of ₹ 21,95,028/- being expenditure incurred for development of website. As already stated the assessee in the business of manufacturing and trading of pre-recorded music cassette, compact discs etc. In respect of music cassette, CDs to be released for public broadcast/telecast/viewing, the assessee creates separate website for each film or music album. For doing so, the assessee utilizes technical services and also pays for website development charges and expenses for concept of creation. The details of such website development expenses are at page No. 1 of the assessee's paper book and it reads as follows :- Name of the party Particulars Amount (Rs.) Idealake Information Technology Technical services 1,30,00,000 Planet Asia.Com Ltd. Website development charges 450,000 Bon a Luna production Concept and creation expenses 70,000 Others 375,028 Total 2,195,028 At page No. 2 to 11, the assessee has enclosed various bills in s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which an Assessee derives has to be seen. The nature of advantage has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the Assessee's trading operations or enabling the management and conduct of Assessee's business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account. The following factors would be relevant to determine whether the advantage operates in the capital field or revenue field. i. Nature of Business of the Assessee: It is necessary to obtain an understanding of the business function or effect of a concern's software. Software normally functions as a tool enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment. ii. As a general rule it may be stated that the more expensive the computer software the more it is likely to be a central tool of the business and the more enduring is likely to be its effect adding to the profit earning apparatus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... medium containing the computer software with limited or absolute right to use the same by itself would satisfy the requirements of the Plant. The assessee's ownership of limited right over the tangible asset is sufficient to conclude that the assessee is the owner of the Plant. There is therefore no difficulty in allowing depreciation claim at 25% under Sec.32(1)(i) read with Appendix-I, Part-A division III (1) to the IT Rules, 1962. With effect from 1-4-2003, Computer Software has been classified as a tangible asset under the heading "Plant" in Appendix-I to the IT rules entitled to depreciation at 60%. The Assessee would be entitled to depreciation 60% from 1.4.03." 8. The details of the expenditure incurred on computer software is given at page-12 of the Assessee's paper book. The same are as follows: i) Purchase of Anti Virus Solution Rs.1,79,400 ii) Purchase of Utility Software Rs. 59,500 iii) JDE Installation and Training Expenses Rs.6,89,175 iv) Purchase of Router CISCO 803 Rs.1,74,000 v) Realpoint Ethernet Card Rs. 15,000 vi) Expenses for updating the software like acrobat, Anti virus software Rs.1,35,071 The contention of the Assessee before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Disallowance of royalty expenses for studio album recordings, albums licensing and concert recording etc. 5.1 the learned CIT(A) erred on the facts and in law in arbitrarily confirming that the Assessing Officer was justified adopting a view that the royalty expenses for studio album recordings, albums licensing etc. was on the higher side and allowing only 20% of the expenses. He has also erred in confirming that the Assessing Officer was justified in invoking section 92. 5.2 In doing so, learned CIT(A) has not fully appreciated the facts submitted on the nature of expenditure and basis of royalty calculation for studio album recordings, albums licensing and concert recording and grounds raised before him. Learned CIT(A) erred in not considering the fact these royalties are payable only on the actual price of the albums sold. 5.3 The appellant prays that the entire royalty expenses being revenue in nature should be allowed as deduction u/s. 37(1) of the Act in the A.Y. under consideration. 10. The AO noticed that the assessee had incurred royalty expenses of ₹ 16,38,69,171/- out of which ₹ 6,83,27,000/- was in respect of purchase of OST rights i.e. right in rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company was forced to offer heavy discount running from 70% to 90% on its market retail price because the products especially foreign music cassettes did not sell in the market and that being the case, the question of paying such high amount of royalty ₹ 12962493/- to Sony Corporation of America in the 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 ₹ 197468169/- in which royalty payments of ₹ 163869171/- are embedded. According to the AO the royalty payment of ₹ 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 resulted 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 ₹ 9,55,42,171/- to various foreign companies in the opinion of the AO was high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TD 641 (Mum) had an occasion to deal with an identical issue of an Assessee engaged in similar line of business as that of the Assessee viz., manufacture and sale of prerecorded cassessets. The Tribunal held as follows :- "Assessee being a manufacturer of pre-recorded cassettes, purchased sound tracks from producers who owned them 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 inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for deduction deserves to be accepted. 18. As far as issue raised in Ground No. 4&5 is concerned, we find that the Assessing Officer has made the impugned addition basically on the premise that the assessee made payments of royalty on the basis of MRP to M/S.Sony Corporation of America. The Learned counsel for the assessee has brought to our notice that this fundamental assumption of the Assessing Officer is erroneous. In this regard, our attention was drawn to page No. 24 of the assessee's paper book, which is a declaration to be completed by Indian reproducer for remittance of royalty of copy right music reproduced in India. This has to be given to the RBI before making remittance abroad. Perusal of this form shows that the remittance is permitted at 20% of the actual sale price of cassettes or the royalty due as per the agreement whichever is less. In the case of the assessee, in respect of the royalty payable for the month of July 2000 to December 2000, royalty due as per agreement was less than royalty payable on the retail price or MRP. Thus, allegation of the Assessing Officer that the assessee made payment on MRP is not justified. Since, the assessee had made paym ..... X X X X Extracts X X X X X X X X Extracts X X X X
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