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TMI Blog2020 (5) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 passed u/s 143(3) of the 1961 Act. There are common issues involved in these appeals and hence these two appeals were heard together and disposed of by this common order. These two appeals are filed late by 4 days and an petition is filed by assessee company explaining the reasons for delay in filing these appeal late by 4 days duly supported by an affidavit executed by Managing Director of the assessee company. The learned DR did not raise any serious opposition to the condonation of delay in filing this appeal late by 4 days. After considering the contentions made before us, we are condoning the delay of four days in filing this appeal late beyond time stipulated under the Income-tax Act, 1961 and admit both these appeals to be adjudicated on merits in accordance with law. 2. The grounds of appeal raised by assessee in memo of appeal(s) filed with the Income-Tax Appellate Tribunal, Chennai (hereinafter called "the Tribunal") for ay: 2007-08 in ITA no. 1406/Chny/2015 and for ay: 2009-10 in ITA No. 1407/chny/2015 respectively, read as under:- "For AY 2007-08: 1. The order of the Commissioner of Income Tax (Appeals) dated 23.03.2015, is arbitrary, erroneous, incorrect and co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nclusion. Likewise, the Commissioner of Income-tax (Appeals) prefers to rely upon the classification of software as intangible asset by the Institute of Chartered Accountants of India ignoring the judgment of the Supreme Court cited (supra). The judgment of the Supreme Court in the Appellants' own case also supports the case of the Appellant and has been distinguished for wholly unacceptable reasons. Interest 9. The Commissioner of Income Tax (Appeals) erred in confirming levying interest u/s 234B and 234D of the Act. The levies are arbitrary, high and liable to be cancelled. 10. Any other ground that may be raised at the time of personal hearing." For AY 2009-10: "General 1. The order of the Commissioner of Income Tax (Appeals) dated 23.03.2015, is arbitrary, erroneous, incorrect and contrary to law and facts. Depreciation on Digital Content 2. The Commissioner of Income-tax (Appeals) erred in confirming the order of the lower authority restricting the grant of depreciation to 25% instead of 60% as claimed by the Appellant. 3. The Commissioner of Income-tax (Appeals) ought to have noted that 'Digital Content' comprises of software that is a tangible a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been distinguished for wholly unacceptable reasons. Disallowance u/s 14A of the Income Tax Act 9. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of an amount of Rs. 57,49,365/- in terms of S.14A r.w.Rule 8D of the Income tax Rules. 10. The Commissioner of Income Tax (Appeals) ought to have noted that the provisions of Sec.14A would apply only in respect of exempt income in relation to which expenditure has been incurred and not to the present case where no expenditure has been incurred at all. 11. The Commissioner of Income Tax (Appeals) ought to have noted, the investments themselves have been occasioned pursuant to an order of the High Court sanctioning a scheme of merger. Hence, the disallowance of notional expenditure has no basis and is liable to be cancelled in full. Interest 12. The Commissioner of Income Tax (Appeals) erred in confirming levying interest u/s 234 B and 234 D of the Act. The levies are arbitrary, high and liable to be cancelled. 13. Any other ground that may be raised at the time of personal hearing." 3. First we will take up appeal filed by assessee for ay: 2007-08 in ITA no. 1406/Chny/2015. The only limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information storage device like hard disk. The software relates to various visual effects that are utilized for making of films and it was submitted that this animation software constitutes stock in trade of the assessee which is exploited by it in production of business of animation films. The assessee relied upon Explanation-2 to Sec.10B of the Act, which defined computer software as under: " 10B......... Explanation 2 - For the purpose of this Section - (i) '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; The assessee submitted that animation software developed by it satisfies the definition of computer software, being a programme, recorded and stored in an information storage device and utilized in the business of the assessee. The assessee also referred to the judgment in the case of Commissioner of Customs v. Pentamedia Graphics Ltd., wherein the Hon'ble Supreme Court concluded in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s). The cost of the physical substance containing the intangible assets is usually not significant. Accordingly, the physical substance containing an intangible asset, though tangible in nature, is commonly treated as a part of the intangible asset contained in or on it. In some cases, an asset may incorporate both intangible and tangible elements that are, in practice, inseparable. In determining whether such an asset should be treated under AS 10, accounting for fixed assets, or as an intangible asset under this standard, judgment is required to assess as to which element is predominant. For example, computer software for a computer controlled machine tool that cannot operate without that specific software is an integral part of the related hardware and it is treated as a fixed asset. The same applies to the operating system of a computer. Where the software is not an integral part of the related hardware, computer software is treated as an intangible asset." It was submitted by assessee before the AO in second round of litigation that the 'Digital Content'/ 'Animation Software' developed is in nature of application software which is used by the assessee in the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter software purchased by it: In the case of the first one, the company holds the rights of the said software and sells or gives a copy of the same to its clients, which are separately considered in the trading account. However, the issue is how the same is to be treated in the hands of the assessee company. It is undoubtedly its intellectual property right having enduring benefit, as claimed by itself that it is eligible to use the animation in sequels, etc. For example, the animation on characters like 'Ganesa', Buddha created by the company can be used again and again in various projects. Though these items are in the form of developed software they are intangible assets of the company in the first place. Therefore, it is clear that the software has longer and enduring life period, which has been demonstrated by assessee's own submissions. 14.6 Further, it is to be clearly understood that it is not the case that the company has developed software for a client and sells to it. Here, only copy of software, which is not for a particular client, is sold or implemented for clients. The assessee still holds the rights of the software and also generates revenue. This is p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 254 of the 1961 Act, filed first appeal before Ld.CIT(A). The learned CIT(A) was pleased to dismiss appeal filed by assessee, vide appellate order dated 23.03.2015 by holding as under: "6. The Decision: 6.1 The appellant raised the following grounds: "The Assessing Authority ought to have noted that the claim of the Appellant of depreciation at the rate of 60% is in line with Appendix I of the IT Rules that prescribes the said rate in relation to 'computer software'. The Assessing Authority ought to have noted that the content developed by the Appellant satisfies the definition of "computer software" as set out in the appendix and the Appellant is thus entitled to the rate of depreciation prescribed there under. The judgement of the Supreme Court in thin context supports stand of the Appellant in this regard." The Appellant relies on Appendix I to the Income Tax Rules where under computers, including computer software are entitled to depreciation at the rate of 60%. 'Computer Software' is defined in the Appendix to mean a computer programme recorded on any disc, tape, perforated media or other information storage devise. It was claimed that the digital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sset. Computer software has not been defined in the Act, but in Note 7 to Appendix I to the IT Rules, it has been explained to include computer program recorded on any disk, tape, perforated media or other information storage device. Therefore computer software in canned form is goods and a tangible asset by itself. These are covered in Note 7 to Appendix I to the IT Rules and eligible for depreciation @ 60%.' 6.4 Canned software contained in a medium are bought and sold. It is an article of value. It is sold in various forms like floppies, disks, CD-ROMs, punch cards, magnetic tapes, etc. A program containing instructions in computer language is subject-matter of a licence. It has its value to the buyer. It is useful to the person who intends to use the hardware, viz., the computer in an effective manner so as to enable him to obtain the desired results. It indisputably becomes an object of trade and commerce. 'Canned software' means that is not specifically created for a particular consumer. The sale or lease of, or granting a license to use, canned software is not automatic data processing and computer services, but is the sale of tangible personal property. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 ITR 310 (AP) for the proposition that if the expenditure was incurred for initial outlay or acquiring or bringing into existence an asset of enduring nature: for the business of the assessee or for expansion of assessee's business or for substantial replacement, it will be treated capital expenditure. 6.9 Software: A computer software is a set of commands, on the basis of which the computer may be directed to perform the desired function. Software is a series of instructions. While it may be housed in a floppy disc or a CD-ROM or the hard disc of the computer, the item referred to as software is the series of commands that operates the computer. Though the floppy disc, the CD-ROM and the hard disc are each tangible commodities, that could be bought, sold and resold, the software embedded in these media are intangible and fall into a very different category. In the book "Software Engineering" by Roger S. Pressman, it has been stated that a software is an instruction that when executed provides desired function and performances. It is stated that a software is composed of programs, data and documents. Each of these items comprises a configuration that is created as part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich enabled the computer to function. The software was therefore in essence intangible property. In St Albans City and District Council v International Computers Ltd [1997 FSR 251] Sir lain Glidewell in deciding on whether programs were goods, commented on tangibility. He referred to the software or programs as "the intangible instructions or commands". 6.12 The courts have held that software is intrinsically incorporeal and that it is mere intangible "knowledge" which "rests in the machine. [District of Columbia v. Universal Computer Assoc., Inc., 465 F.2d 615,618 (D.C)]. This has been quoted or paraphrased with approval in other decisions [State v. Central Computer Servs., Inc., 349 So. 2d 1160, 1162 (Ala. 1977), Honeywell Information Sysa., Inc. v. Board of Assessment Appeals, [1980) 7 COMPUTER L. SERV. REP. (BIGELOW) 486, 491 (Colo. Dist Ct. 1975); Nova Computing Servs., Inc. v. Askew, [19801 6 COMPUTER L. SERV. REP. (BIGELOW) 18, 27 (Fla. Div. Admin. Hearings 1976); Commerce Union Bank v. Tidwell, 538 S.W.2d 405, 408 (Tenn. 1976).] Because the tape, disk, card, or other transferring medium may be stored, returned, or destroyed after being used by the vendee machine, the Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was also observed that in the case of Maruti Udyog Ltd. v. Dy. CIT (2005) 92 ITD 119, Radha Krishna Foodland Ltd. ; Escorts Ltd. v. Asstt. CIT (2006) 8 SOT 167 and Hero Honda Motors Ltd., the conclusion that the expenditure on purchase of computer software was capital proceeded on the footing that the purchase was an outright purchase and that Software was an intangible asset." 6.15 A recent ruling in the case of Makemytrip (India) Pvt Ltd vs DCIT Circle [2012] 19 taxmann.com 137 (Delhi), by the Income Tax Appellate Tribunal (ITAT), New Delhi, is pertinent. In this case, the tribunal held that the assessee had claimed website development expenses as capita! expenditure and depreciation at the rate of 60 per cent, treating the website as software. However, the Delhi ITAT held that a website cannot be considered as software. Rather, it should be classified as an intangible asset and only 25 per cent of its cost is allowable as depreciation. 6.16 One of the arguments by the assesse is that Supreme Court has considered the identical question of classification of the 'digital content' concluding that the software is liable to be classified as 'Information Technology Softw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computer software. It was submitted that in first round matter went upto tribunal at the behest of Revenue and the tribunal was pleased to set aside the matter to file of the AO for fresh adjudication of the issue. It was submitted that in second round of litigation both the AO as well learned CIT(A) has decided the issue against the assessee. It was submitted that the assessee developed animation software. Our attention was drawn to Explanation 2 to Section 10B of the 1961 Act and it was submitted that computer software is eligible for deprecation @ 60%. Our attention was drawn to assessment order passed by AO as well appellate order passed by learned CIT(A). It was submitted that in assessee's own case in context of Customs Law, Hon'ble Supreme Court has held in Commissioner of Customs v. Pentamedia Graphics Ltd., that the 'motion capture animation films' would qualify to be classified as information technology software, in Civil Appeal No. 2576 of 2001 vide judgment dated 09.05.2006. The learned counsel for the assesee also relied upon decision of ITAT, Chennai Benches in ITA no. 107/Mds/2012 in Laser Soft Infosystems Limited v. ITO, vide orders dated 31.01.2013. The assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of block of assets shall be calculated at percentages specified in Appendix 1 to Income-tax Rules, 1962 on written down value of such block of assets as are used for purposes of the business or profession of the assessee at any time during the previous year. In Appendix 1 to Income-tax Rules, 1962 at Part A under clause III- Machinery and Plant at sub-clause 5, it is specified that Computers including computer software shall be eligible for depreciation @ 60%. The said also refer to Note Number 7 which clarify that 'Computer Software' means any computer program recorded on any disc, tape, perforated media or other information storage device. While Part B specifies 'Intangible Assets' which include know-how, patents, copy rights, trade marks, licenses, franchise or any other business or commercial rights of similar nature which shall entitle assessee for depreciation @25%. The assessee has relied upon the decision of Hon'ble Supreme Court in its own case rendered in context of customs laws in Commissioner of Customs, Chennai v. Pentamedia Graphics Limited in Appeal(Civil) 2576 of 2001 dated 09.05.2006, wherein in context of customs notifications as were applicable any kind of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the meaning of Appendix 1 will be far fetched as it is not a computer program. If the language in the statute is clear and unambiguous then strict interpretation has to be done and it is well settled that there is no equity in taxing statute. Once the definition is given in the statute itself, then there is no need to refer to other statute and restrictive definition as is given in the 1961 Act read with 1962 Rules shall apply. In Wikipedia, Computer program is defined as collection of instructions that can be executed by a computer to perform a specific task. Most computer devices require programs to function properly. A computer program is usually written by a computer programmer in a programming language. From the program in its human-readable form of source code, a compiler or assembler can derive machine code-a form consisting of instructions that the computer can directly execute. Alternatively, a computer program may be executed with the aid of an interpreter. In Wikipedia, Computer Programming is defined as a collection of computer programs, libraries, and related data are referred to as software. Computer programs may be categorized along functional lines, such as applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee in various films etc.. Thus, we concur with the view of learned CIT(A) who has passed well reasoned order which we affirm and dismiss the appeal of the assessee on this issue. Thus, ground number 2 to 8 stand dismissed. The ground number 1 and 10 are general in nature and does not require separate adjudication while ground number 9 is consequential in nature. We order accordingly. 7. In the result appeal in ITA no. 1406/Chny/2015 for ay: 2007-08 stand dismissed as indicated above. We order accordingly. ITA No.1407/Chny/2015 for ay: 2009-10: 8. The first issue in this appeal filed by assessee for ay: 2009-10 concerns with the depreciation on 'Digital Content'. This issue is decided by us against assessee by us while adjudicating appeal for ay: 2007-08 in this common order. Our decision in ITA no. 1406/Chny/2015 for ay: 2007-08 shall apply mutatis mutandis to appeal in ITA no. 1407/Chny/2015 for ay: 2009-10 so far as depreciation on 'Digital Content' is concerned. Thus, the assessee fails on this issue. Thus, ground number 2-8 stand dismissed. We order accordingly. 9. The second effective issue raised by assessee in its appeal for ay: 2009-10 concerns with disallowance of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X
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