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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 ..... 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 producti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT(A) confirmed the order of Assessing Officer. On the question whether expenditure on computer software is capital or revenue, the Special Bench, ITAT , Delhi in the case of M/s. Amway India Enterprises Vs. DCIT 2008 21SOT 1 (Delhi) (SB) (URO) has laid down the following principles:- The advantage 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the Hon ble Supreme Court in the case of TCS(Supra) supports the view that software contained in a disk is tangible property by itself. The use by the Assessee of such software in his business is enough to allow the claim for depreciation. The rights which an assessee acquires by purchasing the disk or magnetic 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly in the assessment year in consideration. 4. Disallowance of royalty claim made under section 40(a)(i) : 4.1 The Learned CIT(A) erred on facts and in law in confirming that the Assessing Officer was justified in allowing only 20% of the royalty paid to non-residents, which was claimed under section 40(a)(i) during the assessment year in consideration. 4.2 In doing so, he has erred in law and on facts by treating the said royalty as similar to royalty on OST. 4.3 In any case, the appellant prays that considering the nature of expenditure, the entire amount ought to have been allowed in the assessment year under consideration. 5. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank of India that the assessee had adopted market retail price of CD and music cassettes for payment of royalty of ₹ 1,29,62,493/- to Sony Corporation of America. It was also observed by the AO from the list of music cassettes and CDs furnished by the assessee with letter dated 13.1.2004 and invoice cum delivery challan that in respect of sales made to Viacom Electronics Pvt. Ltd., Baroda that most of the foreign music titles have been sold on a lump sum basis at a discount varying from 70% to 90% for example some of the CDs and cassettes have been sold for a net price as low as 11 and or 21. It was further observed by the AO that the assessee 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed as a deduction u/s. 40(a) in A.Y. 2001-02. The assessees claim for deduction of balance royalty of ₹ 16821652/- (Rs. 21027065 4205413) was rejected by the AO. The CIT(A) confirmed the order of the AO, giving raise to ground No.4 by the Assessee before the Tribunal. 13. We have heard the rival submissions. The Learned DR relied on the orders of revenue authorities. The Learned counsel for the assessee relied on certain judicial pronouncements with which we deal with at appropriate juncture. 14. As far as Ground No. 3 is concerned, the Hon'ble Mumbai Bench of the ITAT in the case of Tips Cassettes Records Co. Vs. ACIT, 82 ITD 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. ori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in respect of copyright owned and used by the assessee for the purpose of business, the assessee would be entitled to claim depreciation. One cannot loose sight of the fact that the nature of business carried on by the assessee was also important to decide the issue. As far as the assessee is concerned, they are engaged in the business of manufacturing CDs and cassettes. It was important to have assignment of copyright so that it can make a legal copy of the music and sell the same. In such line of business, acquisition of copy right has to be considered as on revenue account and not capital expenditure. We are therefore of the view that the claim of the 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 decl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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