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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 ..... on @ 25% as these copyrighted material developed by assessee being Digital Content which is used by the assessee in various films etc. - Decided against assessee. Disallowance u/s14A r.w.r. 8D(2)(iii) - expenses incurred by assessee in relation to earning of an exempt income - AO disallowed the expenses by invoking Rule 8D(2)(iii) by applying 0.5% of the average investments - HELD THAT:- We find merit in contentions of the assessee that the investments in Indian companies which did not yielded exempt income during the year cannot be included for computing disallowance of expenditure u/s 14A read with Rule 8D of the 1962 Rules and we are restoring the matter back to the file of the AO for verification of the contentions of the assessee and to re-adjudicate the matter on merits in accordance with law. Thus, all those investments in indian companies which did not yielded exempt dividend income during the year shall be excluded while computing disallowance of expenditure u/s 14A read with rule 8D(2)(iii) of the 1962 Rules. Case of ACIT v. Vireet Investment Private Limited [2017 (6) TMI 1124 - ITAT DELHI] is relevant. This ground partly allowed for statistical purposes - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tricting 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 asset. 4. The Commissioner of Income-tax (Appeals) erred in making a distinction between 'canned' software and 'customized' software which is irrelevant to decide the issue of grant of depreciation. 5. The Commissioner of Income-tax (Appeals) incorporates the concepts of 'canned' and 'customized' software without noting that there is no such distinction in Appendix I to the Income Tax Rules relating to the grant of depreciation. 6. The reliance of the Commissioner of Income-tax (Appeals) on various technical literature is of no relevance in deciding the present issue. In so far as the issue at hand relates to grant of depreciation on software, nothing turns on whether the software is canned or customized. In fact, the distinction between canned and customized software proceeds from the admitted position that the Digital Content is, prima facie , software, eligible for depreciation at 60% as claimed. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax (Appeals) erred in making a distinction between 'canned' software and 'customized' software which is irrelevant to decide the issue of grant of depreciation. 5. The Commissioner of Income-tax (Appeals) incorporates the concepts of 'canned' and 'customized' software without noting that there is no such distinction in Appendix I to the Income Tax Rules relating to the grant of depreciation. 6. The reliance of the Commissioner of Income-tax (Appeals) on various technical literature is of no relevance in deciding the present issue. In so far as the issue at hand relates to grant of depreciation on software, nothing turns on whether the software is canned or customized. In fact, the distinction between canned and customized software proceeds from the admitted position that the Digital Content is, prima facie , software, eligible for depreciation at 60% as claimed. 7. The Commissioner of Income-tax (Appeals) erred in not noting that intangible assets have been specifically defined under Part D of the Appendix to the Income Tax Rules as being knowhow , patent, copyright, trade mark, license or commercial rights of similar nature. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -08 in ITA no. 1406/Chny/2015. The only limited issue in appeal filed by assessee for ay: 2007-08 to be adjudicated by us is as to rate of depreciation allowable to assessee on Digital Content i.e. whether assessee is entitled for a depreciation @ of 25% or 60%. This is second round of litigation before tribunal and in the first round of litigation before tribunal, the Revenue had filed an appeal with tribunal and the tribunal was pleased to set aside the matter back to the file of the AO in ITA no. 144/Mds/2011, vide order dated 09.09.2011 for re-adjudication of the issue by AO afresh after considering contentions of the assessee, provision of law, case laws etc. by passing an speaking order. In the second round of litigation, the AO vide assessment order dated 31.03.2013 passed u/s 143(3) read with Section 254 of the 1961 Act held that the assessee is entitled for depreciation @ 25% on Digital Content developed by it as the same is intangible asset and the assessee is not entitled for depreciation @ 60% as the said digital content is not computer software. The assessee on its part had contended before the AO in second round of litigation that the assessee is an animation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., wherein the Hon ble Supreme Court concluded in context of laws applicable to customs that the motion capture animation films would qualify to be classified as information technology software. Thus, the assessee submitted before the AO that the Digital Content/Animation Software developed by it is of the nature of Application Software used by it in the business of movie production, eligible to depreciation @ 60%. The assessee also submitted that as per the Accounting Standard-26, the intangible asset is identifiable as under: An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. Monetary assets are money held and assets to be received in fixed or determinable amounts of money. Non-monetary assets are assets other than monetary assets. Enterprises frequently expend resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual propert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is in nature of application software which is used by the assessee in the business of movie production and is eligible for depreciation @ 60%. 3.2 The AO rejected the contentions of the assessee and held that the assesse is entitled for deprecation 25% on Digital Content as the same is intangible asset and not computer software, by holding as under, vide assessment order dated 31.03.2013 passed u/s 143(3) read with Section 254 of the 1961 Act: 14.1 The issue is whether the Digital Content' acquired by the assessee is eligible depredation @60% as applicable for computer software or @25% as applicable to intangible assets. 14.2. The issue considered by the Hon'ble Supreme Court is whether the Motion capture Animation Files' is computer software and is eligible for exemption from custom duty or not. The Supreme Court has held that the same are computer software after verifying the contents and with relevance to the Customs Act. The Customs Act deals with the goods at the point of entry and the subsequent state of the goods is not relevant to the grant of exemption under the Act. Further, the issue herein is whether the asset is a tangible asset or int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar client, is sold or implemented for clients. The assessee still holds the rights of the software and also generates revenue. This is precisely the intellectual rights of the assessee . The Income-tax Rules clearly provide for depreciation at the rate of 25% on intangible/ assets which includes Intellectual property rights. 14.7 The fact that software has component of intellectual property rights is relevant from the provisions of Section 72A, which is discussed hereunder: A restriction was placed under section 72A on set off of losses for an amalgamated company on amalgamation or a resultant company on demerger in respect of an industrial undertaking. Computer software, telecommunication services, electricity are specifically included in the definition of industrial undertaking . This specific inclusion provided in the case of software, electricity or in the matter of provision of certain telecommunication services is not for the reason that they are not Industrial Undertaking but since intellectual property rights are involved in them to avoid any ambiguity. 14.8 Therefore, the computer software which have been developed or acquired on acquisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 content developed by the appellant is essential 'Computer software in so far as it related to the computer programme that has been recorded on a storage device such as a disc. Further, it was stated that the content developed utilized in the multimedia and entertainment industry and, by its very nature, is a series of software programmes recorded on storage devices. 6.2 Rule 5 permits the percentages specified in the second column of the Table in Appendix I (IT Rules 1962), on the written down value of such block of assets as are used for the purposes of the business or profession of the assessee at any time during the previous year. Part A of the Appendix I deal with the rates for tangible assets. This table (III. Machinery and Plant (5)) prescribes depreciation @ 60% for computers including computer software. 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, pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. When the software marketed is canned software being a tangible property would be exigible to sales-tax. These are eligible for depreciation @ 60%. 6.5 But in the present case, the software is not acquired off the shelf. These are highly customized software and are developed by the appellant company. These can't be clubbed with the kind of software purchased to run the hardware. Basically, there are two types of software programs. The first is an operational program which controls the hardware and actually makes the machine run; it is fundamental and necessary to the functioning of the computer hardware itself. Secondly, there is an applicational program which is a type of program designed to perform specific functions, such as preparation of the employee payroll, preparation of a loan amortization schedule, or any other specific job which the computer is capable of performing. Applicational programs instruct the central processing unit of the computer to perform the fundamental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 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 the software engineering process. The definitions of computer programme in the Copyright Act, 1957 read as follows: Computer programme means a set of instructions expressed in words, codes, schemes or in any other form, including a machine readable medium, capable of causing a computer to perform a particular task or achieve a particular result. Majority of the US Courts have held that software is an intangible property. 6.10 The Apex Court referred to the judgments of the American Courts in the cases of Commerce Union Bank v. Tidwell 538 S.W.2d 405; State of Alabama v. Central Computer Services, Inc.349 So.2d 1156; First National Bank of Fort Worth v. Bob Bullock, 584 S.W.2d 548; First National Bank of Springfield v. Deptt. of Revenue, 421 NE2d 175; CompuServe, Inc. v. Lindley 535 N.E. 2D 360 and Northeast Datacom, Inc. v. City of Wallingford, 563 A2d 688 holding that computer software is intangible personal property. [Infotech Software Dealers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Universal court reasoned that the visible manifestation of software-the medium-is inconsequential to the transaction. Therefore, the court assumed, the object of the transaction must be intangible knowledge because the medium is inconsequential. 6.13 Thus, the software developed by the appellant is therefore in essence intangible property. Thus it will not fall in the categories of 'computer and softwares' indicated in Appendix-1 (Part-A) which deals only with tangible assets. Since the softwares developed by the assessee company is its intangible assets, these are entitled for depreciation as mentioned in Part-B of Appendix-1 which for the relevant AY is 25%. 6.14 Some of the judicial pronouncements are also relevant to mention here. i. Licence acquired by assessee to use a particular computer software amounted to acquisition of technical know-how and the AO was justified in treating the same as intang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Software'. This judgement was in assessee's own case relating to issue of customs duty. The Assessing Officer has dealt this argument in his assessment order. The issue considered by the Hon'ble Supreme Court is whether the 'Motion capture Animation Files' is computer software and is eligible for exemption from custom duty or not. The Supreme Court has held that the same are computer software after verifying the contents and with relevance to the Customs Act. The Customs Act deals with the goods at the point of entry and the subsequent state of the goods is not relevant to the grant of exemption under the Act. Further, the issue herein is whether the asset is a tangible asset or intangible asset under the Income Tax Act. As the decision of the Supreme Court is on different context and the Supreme Court has not examined with relevance to the Income Tax Act, relying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s counsel also brought to our notice, order passed by ITAT, Chennai in assessee s own case in first round in ITA no. 144/Mds/2011, dated 09.09.2011. The learned DR on the other hand submitted that animation software is tangible/intangible asset. Our attention was drawn to assessment order para 14.3 /page 15. Our attention was drawn to appellate order passed by learned CIT(A). It was submitted that Digital Content developed by assessee is intangible asset. It was submitted that Hon ble Supreme Court decision is in context of Customs Laws and has no applicability so far as income tax laws are concerned. The learned DR relied upon appellate order passed by learned CIT(A). 6. We have considered rival contentions and perused the material on record included cited case laws. We have observed that limited issue for our adjudication is as to eligibility of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 data which is capable of being manipulated by means of automatic data processing machine would be covered by the term information technology software . Presently, we are concerned with the 1961 Act and the relevant entry in Appendix I reads as under : PART A TANGIBLE ASSTS ** ** III Machinery and Plant *** *** (5) Computers including Computer Software (see note 7 below this table) (60) Note 7 stipulates Computer Software means any computer program recorded in any disc, tape, perforated media or other information storage device. Thus, as per note 7, computer software has been given restricted coverage to computer program vis- -vis customs notifications referred to by Hon ble Supreme Court in the aforestated case in assessee s own case, wherein the said custom notifications referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 application software and system software. The underlying method used for some calculation or manipulation is known as an algorithm.Computer programming is the process of designing and building an executable computer program to accomplish a specific computing result. Programming involves tasks such as: analysis, generating algorithms, profiling algorithms' accuracy and resource consumption, and the implementation of algorithms in a chosen programming language (commonly referred to as coding). The source code of a program is written in one or more languages that are intelligible to programmers, rather than machine code, which is directly executed by the central processing unit. The purpose of programming is to find a sequence of instructions that will automate the performance of a task (which can be as complex as an operating system) on a computer, often for solving a given problem. The process of programming thus often requires expertise in several different subjects, including knowledge of the applicatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expenses incurred by assessee in relation to earning of an exempt income by the AO by invoking provisions of Section 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules. The AO has disallowed the expenses by invoking Rule 8D(2)(iii) of the 1962 Rules by applying 0.5% of the average investments. The learned CIT(A) has affirmed the decision of the AO. It is no more res-integra that Rule 8D of the 1962 Rule shall be applicable for the impugned assessment year. The only grievance raised by assessee before us is that the assessee has made investments in foreign companies from which dividend income was received during the year under consideration on which the assessee has paid due taxes to the government as the said dividend income was not exempt from tax and was infact chargeable to tax. It is prayed that the said investments in foreign companies be excluded while applying Section 14A of the 1961 Act read with Rule 8D of the 1962 Rules. We find merit in the contention o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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