Mobisoft Telesolutions Private Limited, Chandigarh V. ACIT, Chandigarh

ITA 1217/CHANDI/2012

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9816 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 7 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 30-06-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 21-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO. 1217/CHD/2012 ASSESSMENT YEAR: 2009-10 MOBISOFT TELESOLUTIONS PRIVATE LIMITED, VS. THE AC IT, CIRCLE 4(1), CHANDIGARH CHANDIGARH PAN NO. AAACII3573P & ITA NO. 1274/CHD/2012 ASSESSMENT YEAR: 2009-10 THE ACIT, CIRCLE 4(1), VS. MOBISOFT TELESOLU TIONS PRIVATE LIMITED, CHANDIGARH CHANDIGARH PAN NO. AAACII3573P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ROHIT GOYAL RESPONDENT BY : SHRI MANJIT SINGH DATE OF HEARING : 30.06.2015 DATE OF PRONOUNCEMENT : 03/07/2015 ORDER PER T.R.SOOD, A.M. THE APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTE D AGAINST THE ORDER DATED 25.09.2012 OF CIT(A), CHANDIGARH. 2. FIRST WE SHALL DEAL WITH THE APPEAL OF ASSESSEE IN ITA NO. 1217/CHD/2012 WHEREIN FOLLOWING GROUNDS HAVE BEEN RAISED. 1. THAT THE LD. CIT(A) HAS ERRED IN LAW AND FACTS IN C ONFIRMING THE ADDITIONS OF RS. 17,97,785/- ON ACCOUNT OF ROYA LTY PAID TO DIRECTOR HOLDING THE SAME TO BE CAPITAL EXPENDITURE . 2 2. THAT LD. CIT(A) HAS ERRED IN LAW AND FACTS IN CONFI RMING THE DISALLOWANCE OF RS. 2,03,78,978/- TREATING THE USAG E CHARGES PAID TO COPY RIGHT HOLDERS AND DEBITED AS COPY RIGH T EXPENSES, AS CAPITAL EXPENSES. 3. THAT LD. CIT(A) HAS ERRED IN LAW AND FACTS IN MAKIN G AN ADHOC DISALLOWANCE OF 20% OUT OF GPRS/SMS TESTING EXPENSES. 3. AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAS PAI D AN AMOUNT OF RS. 17,97,858/- AS ROYALTY TO DIRECTOR SHRI TARON MOHAN. AFTER SOME ENQUIRIES FROM ASSESSEE THIS AMOUNT WAS DISALLOWED FOLLOWING THE ORDER FOR ASSES SMENT YEAR 2008-09. 4. ON APPEAL FOLLOWING THE EARLIER ORDER DISALLOWAN CE WAS CONFIRMED. 5. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN EARLIER YEARS THIS DISALLOWANCE WAS DELETED BY THE TRIBUNAL IN ASSESSE ES OWN CASE IN ITA NO. 684, 1206 & 1207/CHD/2011. 6. ON THE OTHER HAND LD. DR STRONGLY SUPPORTED THE IMPUGNED ORDER. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT IDENTICAL ISSUE WAS ADJUDICATED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2006-07, 2007-08, 2008-09 VIDE PARAS 10 TO 13 WHICH ARE AS U NDER:- 10 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY IN THE LIGHT OF MATERIAL ON RECORD AND PAPER BOOK FILED BY THE ASSESSEE. WE FIND THAT SHRI TARUN MOHAN WAS RUNNING A PROPRIE TARY CONCERN KNOWN AS PHONEYTUNES.COM WHICH WAS ENGAGED IN THE B USINESS OF PROVIDING VALUE ADDED TELECOM SERVICES TO VARIOUS M OBILE COMPANIES FOR RING TONES/IMAGES/WALL PAPERS ETC. PHONEYTUNES.COM HAD ENTERED INTO AN AGREEMENT WITH VARIOUS MUSIC COMPANIES LIKE SOUND BUZZ INDIA, PHONE GRAPHI C, CUBER MUSIC LTD ETC. THROUGH THESE AGREEMENTS PHONEYTUNE S. COM HAD ACQUIRED RIGHTS OF VARIOUS MUSIC COMPANIES AND ALSO THE RIGHT TO MAKE A RING TONE ON THE BASIS OF SUCH SONGS WHICH C OULD BE 3 PROVIDED TO AN INDIVIDUAL MOBILE USER THROUGH CELLU LAR OPERATING COMPANIES. PHONEYTONES.COM WAS REQUIRED TO PAY SOM E ROYALTY TO SUCH MUSIC COMPANY AND IN TURN WAS CHARGING MONEY F ROM CELLULAR COMPANY. THIS SHOWS WHY PHONEYGUES.COM WAS PAYING C HARGES TO OUTSIDERS. WE FURTHER FIND THAT SAID MOBILE COMPANY I.E. CELLULAR COMPANY WOULD COLLECT FROM THE CUSTOMERS FOR DOWN L OADING RING TONE AND OUT OF ABOVE CHARGES SOME FEES WAS PAID TO THE PHONEYTUNES.COM. THEREFORE THE ASSESSING OFFICER AN D THE LD. CIT(A) ARE NOT RIGHT THAT PHONETUNES.COM HAS NOT I NVENTED ANYTHING. PHONEYTONES.COM HAD INVENTED THE TECHNOLO GY THROUGH WHICH RING TONES CAN BE CREATED OF VARIOUS FILMY SO NGS ON THE BASIS OF ABOVE RIGHTS OBTAINED FROM MUSIC COMPANIES AND SUCH RING TONES CAN BE DOWN LOADED BY THE INDIVIDUAL MOB ILE USER. THIS BUSINESS WAS BEING DONE BY PHONEYTUNES.COM AS A PRO PRIETARY CONCERN OF TARUN MOHAN. FOR THIS PHONEYTUNES.COM H AD OBTAINED COPY RIGHT FROM THE REGISTRAR OF COPY RIGHTS, NEW D ELHI AND COPY OF CERTIFICATE HAS BEEN PLACED AT PAGE 106 WHICH CL EARLY SHOWS THAT COPY RIGHTS /CERTIFICATE OF TRADE MARK WAS REG ISTERED IN THE NAME OF TARUN MOHAN. IT IS FURTHER SHOWN THAT THIS IS A CASE UNDER CLASS NO. 42 AND THE SERVICES HAVE BEEN DESCR IBED AS SOFTWARE SERVICES TOWARDS MOBILE APPLICATION, CONT ENT AND PLATFORMS INCLUDED IN CLASS 42. 11 IN 2003 IT WAS DECIDED TO SELL THE BUSINESS OF PHONETUNES.COM TO A COMPANY KNOWN AS ITIDA CAD SERV ICES PVT LTD. THIS COMPANY IS ALSO OWNED BY A FAMILY MEMBER OF TARUN MOHAN. THE ASSESSING OFFICER AS WELL AS THE LD. CI T(A) HAS REFUSED TO RECOGNIZE THE SALE AGREEMENT BECAUSE I HAS BEEN SIGNED BY TARUN MOHAN AS PROPRIETOR OF PHONEYTUNES. COM ON ONE SIDE AND ON THE OTHER SIDE AGAIN BY SHRI TARUN MOHA N AS DIRECTOR OF ITIDA CAD SERVICES PVT LTD. ACCORDING TO AUTHOR ITIES BELOW SAME PERSON CANNOT ENTER INTO AN AGREEMENT WITH HIM SELF. WE FIND THAT THIS IS NOT CORRECT. EVERY COMPANY UNDER COMPANIES ACT HAS SEPARATE LEGAL ENTITY KNOWN AS JURISTIC ENTITY. IN OTHER WORDS, THE COMPANY HAS A SEPARATE ENTITY CRATED BY THE LAW AND THE COMPANY CAN DEAL ON ITS BEHALF WITH ANY ONE. IT CA N PURCHASE OR SELL THE PROPERTY, REGISTER THE PROPERTY IN ITS OWN NAME AND CARRY ON ANY BUSINESS. EVEN U/S 2(31) OF THE INCOME-TAX ACT, 1961 WHICH DEFINES A PERSON THE COMPANY IS RECOGNIZED AS A SEPARATE PERSON DIFFERENT FROM INDIVIDUAL. IN FACT A PARTICU LAR PERSON CAN HAVE DIFFERENT CAPACITIES SAY AS AN INDIVIDUAL OR A S A PARTNER OR AS A DIRECTOR IN A COMPANY. IN THE CASE BEFORE US, SHRI TARUN MOHAN HAS CLEARLY ACTED INTO TWO CAPACITIES NAMELY AS INDIVIDUAL BEING PROPRIETOR OF PHONEYTUNES.COM AND AT THE SAME TIME HIS SECOND CAPACITY IS ON BEHALF OF ITIDA CAD SERVICES PVT LTD AS AN DIRECTOR OF THAT COMPANY. THERE IS NOTHING ILLEGAL ABOUT THIS. AS PER THE COPY OF BUSINESS AGREEMENT ALL THE FIXED AS SETS AND OTHER ASSETS WERE REQUIRED TO BE TAKEN OVER BY THE ASSESS EE-COMPANY FROM PHONEYTUNES.COM. AUTHORITIES BELOW HAVE OBSERV ED THAT NO 4 ASSET HAS BEEN TAKEN OVER WHICH IS NOT CORRECT. CO PIES OF BALANCE SHEET HAVE BEEN FILED FOR PHONEYTUNES.COM AS WELL A S ITIDA CAD SERVICES PVT LTD BEFORE US. BALANCE SHEET OF PHONE YTUNES.COM CLEARLY SHOW THAT TOTAL ASSETS WERE FOR RS. 27,50,5 83/- AS ON 31.3.2003. PERUSAL OF BALANCE SHEET OF ITIDA CAD S ERVICES PVT LTD CLEARLY SHOW THAT THESE ASSETS HAVE BEEN ADDED IN THE FIXED ASSETS SCHEDULE AS WELL AS CURRENT ASSETS HAVE BEEN ADDED IN THE RESPECTIVE HEADS. IN FACT NOTE NO. 2 TO THE ACCOUN TS READS AS UNDER: ACQUISITION OF RUNNING BUSINESS OF PHONEYTUNES.CO M DURING THE YEAR, THE COMPANY ENTERED INTO AN AGREEM ENT WITH ONE OF ITS DIRECTOR, TARUN MOHAN TO ACQUIRE TH E BUSINESS OF HIS SOLE PROPRIETARY CONCERN RUNNING IN THE NAME AND STYLE OF PHONEYTUNES.COM. ALL ASSETS AND LIABILITIES OF THE CONCERN WERE ACQUIRED AT THE BOO K VALUE AS ON IST APRIL, 2003. AS PER THE AGREEMENT FOR THE T AKEOVER OF THE FIRM, THE COMPANY HAS TO PAY ROYALTY AFTER 2 YE ARS OF TAKEOVER AT SCALING DOWN SLABS OF 5% TO 3% OF GROSS REVENUE RECEIPTS UNDER THE RELEVANT BUSINESS: THE BOOK VALUE AT WHICH THE ASSETS AND LIABILITIES WERE ACQUIRED, ARE AS FOLLOWS: ASSETS AMOUNT (RS.) FIXED ASSTS 530,788 CASH AND BANK BALANCE 372,014 SUNDRY DEBTORS 1542,533 OTHER CURRENT ASSTS 305,247 2750,582 LESS LIABILITIES ACCOUNT PAYABLE 328,945 SUNDRY CREDITORS & ADVANCES 1840,406 2169,351 BALANCE DUE TO PROPRIETOR 581,231 AS A RESULT, THERE DOES NOT ARISE ANY GOODWILL OR C APITAL RESERVE. ABOVE CLEARLY SHOW THAT THESE ASSETS AND LIABILITIE S HAVE BEEN TAKEN OVER BY THE ASSESSEE-COMPANY. 12 AS SEEN ABOVE PHONEYTUNES.COM HAD INVENTED TECHN OLOGY OF CREATING RING TONES AND IT CAN BE DOWN LOADED BY IN DIVIDUAL 5 MOBILE USER AND FOR THIS INVENTION THE COMPANY HAS AGREED TO PAY A ROYALTY @ 2%. THE REVENUE HAS REJECTED THIS CONT ENTION IN THE ABSENCE OF ANY DOCUMENTARY EVIDENCE. IT HAS TO BE APPRECIATED THAT IN CASE OF INTELLECTUAL PROPERTY, IT IS NOT NE CESSARY THAT THERE WOULD BE A DOCUMENTARY EVIDENCE BECAUSE INVENTION I S A TECHNOLOGY AND STORED IN THE COMPUTER. THE LAST AL LEGATION OF REVENUE IS THAT THIS IS A COLOURABLE DEVICE USED BY THE ASSESSEE TO REDUCE THE PROFITS. WE HAVE ALREADY SEEN THAT THIS IS NOT A COLORABLE DEVICE BUT A PURE AND SIMPLE TRANSACTION THROUGH WHICH THE BUSINESS OF PHONEYTUNES.COM HAVE BEEN SOLD TO T HE ASSESSEE- COMPANY AND THE ASSESSEE-COMPANY HAS AGREED FURTHER TO GIVE ROYALTY @ 2%. SECONDLY IT IS VERY IMPORTANT THAT T HE ASSESSEE- COMPANY AND TARUN MOHAN HAVE DULY PAID THE TAXES ON FULL AMTS RECEIVED AGAINST ROYALTY AND HAVE NOT BEEN SET OFF AGAINST ANY LOSSES ETC. PAGE 108 OF PAPER BOOK GIVES CHART OF COMPARATIVE TAX PAID BY THE ASSESSEE-COMPANY AND TARUN MOHAN: AY GROSS RECEIPTS NET PROFIT BEFORE TAX NET TAXABLE INCOME TAX LIABILIT Y EFFECTIV E RATE OF TAX ROYALT Y @ 2% TO TARUN MOHAN SALARY TO TARUN MOHAN TARUN MOHANS TAXABLE INCOME TAX LIABILIT Y EFFECTIV E RATE OF TAX 2006 -07 10193325 2 19161981 1603531 0 550219 6 34.31 203177 4 240000 0 3149877 0 100414 6 31.88 2007 -08 10161741 2 17999359 8 2016967 0 683739 7 33.90 192007 7 300000 0 5828500 INCLUDIN G ROYALTY) 190577 3 32.70 2008 -09 14597891 3 18774204 1662541 0 565097 7 33.99 222155 3 480000 0 1038799 0 (-DO) 349791 4 33.67 ABOVE CLEARLY SHOW THAT TARUN MOHAN WAS PAYING TAXE S AT THE HIGHEST SLAB WHICH IS CHARGEABLE TO TAX PAID BY THE ASSESSEE- COMPANY AND THERE IS NO REVENUE LOSS AT ALL. 13 IN VIEW OF ABOVE DISCUSSION IT IS ABSOLUTELY CLE AR THAT THE ASSESSEE-COMPANY HAS PAID ROYALTY FOR THE PARTICULA R INVENTION WHICH BELONGED TO PHONEYTUNES.COM AND THEREFORE IN OUR OPINION, THE CLAIM FOR PAYMENT OF ROYALTY DESERVES TO BE ALL OWED. THEREFORE WE SET ASIDE THE ORDER OF LD. CIT(A) AND DIRECT THE ASSESSING OFFICER TO ALLOW CLAIM FOR ROYALTY. FOLLOWING THE ABOVE, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. 8. GROUND NO.2: AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT ASSE SSEE HAS DEBITED A SUM OF RS. 2,71,71,970/- ON ACCOUNT OF COPYRIGHT FEES. THE ASS ESSING OFFICER WAS OF THE OPINION THAT THESE EXPENSES WERE OF CAPITAL NATURE BECAUSE COPYRIGHT COME WITHIN 6 THE PURVIEW OF INTANGIBLE ASSETS. THE ASSESSEE WAS ASKED TO JUSTIFY THE CLAIM. IN RESPONSE, IT WAS STATED AS UNDER:- 'MASTER COPYRIGHTS AND 'INTELLECTUAL PROPERTY RI GHTS' AND SOFTWARE' OF THE PRODUCTS LIKE SONGS, IMAGES . VIDEO CLIPS, GAMES, ETC. ARE HELD BY THE OWNERS LIKE MUSI C COMPANIES, FILM PRODUCERS, AND GAME DEVELOPERS, ETC . COMPANY TAKES RIGHTS- ON PAYMENT BASIS- TO USE THES E 'MASTER COPYRIGHTS' AND 'INTELLECTUAL PROPERTY RIGH TS' FOR DEVELOPMENT OF VALUE ADDED SERVICES (VAS) FOR THE T ELCOS. AFTER TAKING RIGHTS FOR SONGS, IMAGES, VIDEO CLIPS , GAMES, ETC. FROM THE ORIGINAL COPYRIGHT OWNERS LIKE MUSIC COMPANIES, FILM PRODUCERS, AND GAME DEVELOPERS, ETC. THE COMPANY FORMATS AND CONVERTS THESE IN TO THE FORM AS PER TH E SIZE AND TYPE OF VARIOUS MOBILE INSTRUMENTS IN USE &. REQUIR EMENTS OF THE TELCOS. THESE SERVICES FOR WHICH THE COMPANY TAKES 'COPYRIGHTS' AND 'INTELLECTUAL PROPERTY RIGHTS' ARE NOT USABLE ON THE MOBILE TELEPHONES AS IT IS. THESE AR E FORMATTED AND CONVERTED INTO VALUE ADDED DOWNLOADED SERVICES (VAS) LIKE RING TONES, TRUE TONES, VIDEO, MP3, THEMES, GAMES, COLORED LOGO, WALLPAPER, PICTURE MESSAGE, ANIMATED WALLPAPER, FULL SONGS, MUSIC MESSAGING, DI AL A SONG AND CALLER RING BACK TUNES (CRBT)/ HELLO TUNES BY THE COMPANY FOR USE IN MOBILE TELEPHONE SERVICES. W E PROVIDE ALL THESE VALUE ADDED SERVICES TO CELLULAR SERVICE PROVIDERS TELCOS LIKE AIRTEL, IDEA, VODAFONE, BSNL, TATA, AND RELIANCE, ETC., ON PAYMENT BASIS, WHO IN TURN P ROVIDE THESE TO THEIR MOBILE SUBSCRIBERS. 'MASTER COPYRIGH TS' AND 'INTELLECTUAL RIGHTS' HOLDERS GET COPYRIGHTS FEE FR OM THE COMPANY BASED ON SUCCESSFUL DOWNLOAD HITS AS REPORT ED & CONFIRMED BY VARIOUS TELCOS. THESE MOBILE SUBSCRIBERS MADE THE PAYMENTS TO THE T ELCOS, WHICH IS SHARED BY THEM WITH US BASED ON OUR CONTEN T SERVICE AND THE REVENUE SHARE PLAN. WE PAY COPYRIGH TS FEE TO THE ORIGINAL COPYRIGHT OWNERS FOR UTILIZING THEI R 7 CONTENTS. SO THE PAYMENT FOR SOFTWARE AND COPYRIGHT S DEPENDS ON USE OF THESE BY TELCOS. SO IT IS NOT ON E TIME PAYMENT BUT IS- LINKED TO REVENUE BEING GENERATED AND ACCORDINGLY CHARGED TO PROFIT & LOSS ACCOUNT.' 9. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE ABOVE REPLY AND TREATED THE ABOVE EXPENSES AS CAPITAL EXPENDITURE AND ALLOWED D EPRECIATION @ 25%. IN THIS BACKGROUND THE BALANCE SUM OF RS. 2,03,78,978/- WAS DISALLOWED 10. ON APPEAL, SUBMISSIONS MADE BEFORE THE ASSESSIN G OFFICER WERE REITERATED AND SOME CASE LAWS WERE ALSO RELIED. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS DECIDED THE ISSUE AGAINST THE ASSESSEE VIDE PARA 5.3 WHICH IS AS UNDER:- 5.3 I HAVE CONSIDERED THE SUBMISSION OF THE LD. COUNSEL. THE EXPLANATION OF THE APPELLANT IS THAT A FTER TAKING RIGHTS FOR SONGS, IMAGES, VIDEO CLIPS, GAMES , ETC. FROM, THE ORIGINAL COPYRIGHTS OWNERS LIKE MUSIC COMPANIES, FILM PRODUCERS AND GAME DEVELOPERS ETC. THE COMPANY FORMATS AND CONVERTS THESE INTO THE FORMAT TO MAKE IT COMPATIBLE WITH THE SIZE AND TYPE OF VARIOU S MOBILE INSTRUMENTS IN USE AND REQUIREMENTS OF THE T ELECOS AND SO THE SERVICES, FOR WHICH THE COMPANY TAKES 'COPYRIGHTS' AND 'INTELLECTUAL PROPERTY RIGHTS' AS THE MUSIC, IMAGES ETC, ARE NOT USABLE ON THE MOBILE PHO NES IN THE ORIGINAL FORMAT. THIS EXPLANATION OF THE APPELL ANT THAT SINCE THE MATERIAL FOR WHICH THE COPYRIGHTS IS TAKEN CANNOT BE USED IN THE ORIGINAL FORMAT AND THAT THE COPYRIGHTS HOLDERS GET THE FEE BASED ON SUCCESSFUL DOWNLOAD HITS AND SO THE AMOUNT PAID FOR COPYRIGHTS SHOULD BE ALLOWED AS REVENUE EXPENDITURE IS NOT ACCEPTABLE BECAUSE ONCE THE APPELLANT HAS TAKEN THE COPYRIGHTS FOR THE SONGS, IMAGES, VIDEO CLIPS, GAME S ETC, NO OTHER PERSON IS ENTITLED TO USE THEM. THE APPELL ANT HAS ACQUIRED AN ASSET, THE BENEFIT OF WHICH IS AVAILABL E TO THE 8 APPELLANT FOR ALL TIMES TO COME. WHERE THE EXPENDIT URE RESULTS IN A BENEFIT OF ENDURING NATURE, THE EXPEND ITURE HAS TO BE TREATED AS CAPITAL EXPENDITURE. THE VARIO US DECISIONS QUOTED BY THE LD. COUNSEL PERTAIN TO THE ASSESSMENT YEARS PRIOR TO INSERTION OF NEW APPENDIX -1 ACCORDING TO WHICH THE COPYRIGHTS ARE ALLOWED DEPRECIATION @ 25%. IN FACT, BY PRESCRIBING A PARTI CULAR RATE OF DEPRECIATION FOR THE ASSET IN QUESTION, THE LEGISLATURE HAS MADE IT EXPLICITLY CLEAR THAT THE EXPENDITURE ON ACQUIRING SUCH AN ASSET IS OF CAPITA L NATURE. GROUND OF APPEAL NO. 4 TAKEN BY THE APPELLA NT IS ACCORDINGLY DISMISSED AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS UPHELD. 11. BEFORE US, LD. COUNSEL FOR THE ASSESSEE REITERA TED THE SUBMISSIONS MADE BEFORE ASSESSING OFFICER AND CIT(A). HE FURTHER AR GUED VEHEMENTLY THAT ASSESSEE WAS MERELY USING THE COPYRIGHT AND HAS NOT BECOME T HE OWNER OF THE COPYRIGHT AND IN THIS REGARD HE REFERRED TO THE COPY OF AGREEMENT FILED AT PAGES 27 TO 41 OF THE PAPER BOOK. HE ALSO RELIED ON THE DECISION OF HON' BLE SUPREME COURT IN THE CASE OF CIT VS. IAEC (PUMPS) LTD. 232 ITR 316 (SC) AND HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. V.R.V. BREWERIES AND BOTTLING I NDUSTRIES LTD. 347 ITR 249 (DELHI) 12. ON THE OTHER HAND LD. DR STRONGLY RELIED ON THE ORDER OF ASSESSING OFFICER AND CIT(A). 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND WE FIND FORCE IN THE SUBMISSIONS OF LD. COUNSEL FOR THE ASSESSEE. THE AS SESSEE HAS MERELY ACQUIRED RIGHT TO USE THE COPYRIGHT. THE PERUSAL OF THE AGRE EMENT WITH M/S PHONOGRAPHIC PERFORMANCE LTD SHOWS THAT LICENSE HAS BEEN GRANTED ONLY FOR USAGE OF THE COPYRIGHT. PART OF THIS AGREEMENT READS AS UNDER:- 9 GRANT OF LICENSE 2.1 THE LICENSOR GRANTS TO THE LICENSEE AND ITS AUT HORIZED REPRESENTATIVE AND/OR AGENTS DURING THE TERM, THROUGHOUT THE TERRI TORY, A NON-EXCLUSIVE, NON TRANSFERABLE LICENSE FOR THE USE OF LICENSED WORKS FOR THE SOLE PURPOSE OF PROVIDING THE SERVICES AS MENTIONED IN THIS AGREEME NT: 2.1.1 TO USE, REPRODUCE, MODIFY, EDIT, COMPILE, AND/OR AD APT THE LICENSED WORKS SO AS, AND ONLY TO THE EXTENT NECESS ARY, TO CREATE RING TONES; THIS RIGHT HAS BEEN TEMPORARILY GRANTED UNTIL SUCH TIME THAT THE COPYRIGHT OWNERS ARE NOT M AKING AVAILABLE THE LICENSED WORKS FOR USE AS RINGTONES. 2.1.2 TO COPY THE RING TONES TO LICENSEES WHOLLY OWNED O R CONTROLLED SECURE SERVERS LOCATED AT THE NAMED PREM ISES WITHIN THE TERRITORY AND/OR IN THE US AND / OR COMPUTER SE RVERS OF THE SUB-LICENSEES / PARTNERS (COMPUTER SERVERS); 2.1.3 TO DOWNLOAD OR TRANSMIT THE RING TONES TO LICENSEE S OR THE SUB-LICENSEES END-USERS WHO HAVE SUBSCRIBED TO AND PAID OR AGREED TO PAY FOR SUCH SERVICES (SUBSCRIBERS); 2.1.4 TO PREPARE AND PUBLICLY PERFORM EXCERPTS AND SAMPLE S OF THE LICENSED WORKS OF DURATION NOT EXCEEDING FIFTEEN(15 ) SECONDS FOR MONOPHONIC FORMAT AND THIRTY(30) SECONDS FOR PO LYPHONIC FORMAT, SOLELY FOR PROMOTIONAL PURPOSES ON THE LICE NSEES AND THE SUB-LICENCES WEBSITE/IVR/WAP OR SUCH OTHER ME THOD OR SAMPLING. 2.1.5 TO USE THE TRACK TITLE/TITLE OF THE LICENSED WORKS, NAMES OF THE LICENSORS MEMBERS REPRESENTED ON THE LICENSED WORK S AND ANY OTHER RELATED MATERIAL, FOR THE PURPOSE OF IDEN TIFYING THE LICENSED WORKS ON THE SERVICE. PROVIDED THAT:- 2.1.6.1 EACH RING TONE CAN BE CREATED FROM ONLY ONE LICENSE D WORK; 2.1.6.2 EACH RING TONE CANNOT EXCEED THIRTY(30) SECONDS IN MONOPHONIC FORMAT AND FORTY FIVE (45) SECONDS IN PO LYPHONIC FORMAT; 2.1.6.3 THE RING TONES SHALL NOT BE COPIED OR STORED BY ANY OTHER THIRD PARTY ONTO WHATEVER MEDIA EXCEPT ONTO THE A. LICENSEES/SUB LICENSEE COMPUTER SERVERS B. END USERS CELLULAR PHONE, HAND HELD DEVICES OR SUCH WIRELESS DEVICES 10 2.1.6.4 THE LICENSEE SHALL NOT ITSELF OR INDIRECTLY THROUGH ANY OTHER PERSON IN RESPECT OF ANY COPYING PURSUANT TO THIS A GREEMENT SEGUE, MIX OR RE-MIX OR OVERLAP, EDIT, CHANGE OR OT HERWISE MANIPULATE THE SOUNDS OF ANY LICENSED WORKS, OTHER THAN AS OTHERWISE AUTHORIZED HEREIN; 2.1.6.5 THE SUBSTANTIAL IDENTITY OF ANY LICENSED WORK OR RE LEVANT PART THEREOF SHALL NOT BE CHANGED IN THE CORRESPONDING R ING TONE; 2.1.6.6 LICENSEE SHALL NOT INCORPORATE ANY VOICE-OVER OF AN Y KIND OR INTERVIEW OR OTHER COMMENTARY DURING THE PLAYING OF ANY LICENSED WORKS; 2.1.6.7 ANY USE BY LICENSEE OF THE RING TONES FOR A PURPOSE OTHER THAN IN FURTHERANCE OF THE LICENSEES SERVICE(S) SHALL B E SUBJECT TO SEPARATE NEGOTIATION AND AGREEMENT BETWEEN THE PART IES. 2.2 NOTWITHSTANDING THE RIGHTS GRANTED UNDER 2.1.1, 2.1.2 & 2.1.3 THE LICENSOR RESERVES THE RIGHT TO STORE THE LICENSED W ORKS(AS RING TONES)AT ITS WHOLLY OWNED AND FULLY CONTROLLED COMPUTER SERVERS AND MAKE IT AVAILABLE TO THE LICENSEE TO BE DISTRIBUTED TO ITS END-USERS. 14. THE ABOVE CLEARLY SHOWS THAT LICENSE WAS ONLY FOR USAGE OF COPYRIGHT HELD BY THE LICENSOR. THE ASSESSEE HAS NOT BECOME THE OWNER OF THE LICENSE. THEREFORE, CLEARLY THE PAYMENT IS OF REVENUE NATURE. THE HON'B LE DELHI HIGH COURT IN THE CASE OF CIT VS. V.R.V. BREWERIES AND BOTTLING INDUS TRIES LTD (SUPRA) AFTER EXAMINING THE REASONABLENESS OF EXPENDITURE ON ACQU ISITION OF COPYRIGHT HAS HELD AS UNDER:- HELD, DISMISSING THE APPEAL, THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS NEITHER FOR ACQUISITION OF ANY PAT ENTS OR COPYRIGHTS. UNDER THE AGREEMENT WHAT THE ASSESSEE A CQUIRED WAS THE USE OF THE BRAND NAMES AND THE TRADEMARKS O F SWCL. THE ASSESSEE ACQUIRED NO RIGHT TO ANY SECRET PROCES S OR FORMULA OR EVEN ANY RIGHT, TITLE AND INTEREST IN TH E TRADE MARKS AND BRANDS UNDER WHICH THE IMFL PRODUCTS WERE SOLD. AS A MATTER OF FACT THE ASSESSEES RIGHTS WERE CO-TERMIN US WITH THE 11 SUBSISTENCE OF THE AGREEMENT. THERE WAS NO FINDING RECORDED BY THE ASSESSING OFFICER THAT SWCL HAD ACQUIRED SUB STANTIAL INTERESTS, I.E., 20 PER CENT. OR MORE OF THE SHARE CAPITAL WITH ATTENDING VOTING RIGHTS, WHETHER DIRECTLY OR BENEFI CIALLY. HENCE, SECTION 40A(2)(A) WAS NOT APPLICABLE. BOTH T HE COMMISSIONER (APPEALS) AND THE TRIBUNAL HAD ACCEPTE D THE EXPLANATION GIVEN BY THE ASSESSEE WITH REGARD TO DI FFERENCE IN PAYMENT OF BOTTLING CHARGES VIS-A-VIS B AND THE ASS ESSEE. THE PAYMENTS MADE AS ROYALTY WERE DEDUCTIBLE. SIMILARLY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. IAEC (PUMPS) LTD. (SUPRA) HAS DISALLOWED THE EXPENDITURE. UNDER AN AGREEMENT ENTERED INTO BY THE ASSESSEE WI TH A FOREIGN COMPANY THE ASSESSEE WAS GRANTED A LICENCE TO USE ITS PATENTS AND DESIGNS EXCLUSIVELY IN INDIA. THE AGREE MENT WAS FOR A DURATION OF 10 YEARS WITH THE PARTIES HAVING THE OPTION TO EXTEND OR RENEW THE AGREEMENT. THE FOREIGN COMPA NY UNDERTOOK NOT TO SURRENDER ITS PATENTS WITHOUT THE CONSENT OF THE ASSESSEE AND TO MAKE AVAILABLE TO THE ASSESSEE ANY IMPROVEMENTS, MODIFICATIONS AND ADDITIONS TO DESIGN S. IT HAD ALSO UNDERTAKEN TO ENABLE THE ASSESSEE TO DEFEND AN Y COUNTERFEIT BY OTHERS. THE ASSESSEE WAS NOT TO DISC LOSE TO THIRD PARTIES ANY OF THE DOCUMENTS MADE AVAILABLE BY THE FOREIGN COMPANY TO THE ASSESSEE WITHOUT HAVING RECEIVED A W RITTEN AUTHORISATION FROM THE FOREIGN COMPANY. THE HIGH CO URT HELD THAT THESE FEATURES OF THE AGREEMENT CLEARLY ESTABL ISHED THAT WHAT WAS OBTAINED BY THE ASSESSEE WAS ONLY A LICENC E AND WHAT WAS PAID BY THE ASSESSEE TO THE FOREIGN COMPAN Y WAS ONLY A LICENCE FEE AND NOT THE PRICE FOR ACQUISITIO N OF ANY CAPITAL ASSET. ON APPEAL BY THE DEPARTMENT TO THE S UPREME COURT: HELD, AFFIRMING THE DECISION OF THE HIGH COURT, THA T THE HIGH COURT HAD APPLIED THE PROPER PRINCIPLES OF LAW AND HAD RIGHTLY HELD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS ONLY REVENUE EXPENDITURE. 15. FROM THE ABOVE IT BECOMES ABSOLUTELY CLEAR THAT ONCE LICENSE IS TAKEN ONLY FOR USAGE OF COPYRIGHT THEN SUCH PAYMENTS WOULD CON STITUTE REVENUE EXPENDITURE. IT WOULD HAVE BECOME CAPITAL EXPENDITURE IF THE ASS ESSEE HAS PURCHASED THE COPYRIGHT ON OUTRIGHT BASIS WITHOUT ANY FURTHER PAY MENT WHICH IS NOT THE CASE 12 BEFORE US. THEREFORE, WE SET ASIDE THE ORDER OF LD. CIT(A) AND HOLD THAT COPYRIGHT OF PAYMENTS ARE OF REVENUE NATURE. 16. GROUND NO.3 : AFTER HEARING BOTH THE PARTIES W E FIND THAT DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT ASSE SSEE HAS CLAIMED A SUM OF RS. 3,91,651/- ON ACCOUNT OF GRRS/SMS TESTING. SINCE SU FFICIENT DOCUMENTARY EVIDENCE WAS NOT FILED, THE ASSESSING OFFICER DISAL LOWED 20% OF THE EXPENSES. THE ORDER OF THE ASSESSING OFFICER HAD BEEN CONFIRMED B Y LD. CIT(A). 17. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT EXPENDITURE WERE INCURRED BY WAY OF PAYMENT TO STAFF FOR TESTING OF RING TONES. 18. ON THE OTHER HAND LD. DR SUPPORTED THE ORDER OF LD. CIT(A). 19. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND SINCE NO EVIDENCE WAS FURNISHED BEFORE ASSESSING OFFICER OR EVEN BEFORE U S, THEREFORE, ESTIMATED 20% DISALLOWANCE IS JUSTIFIED. 20. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ITA NO. 1274/CHD/2010 ; 21. IN THIS APPEAL REVENUE HAS RAISED THE FOLLOWING GROUNDS:- 1. THAT LEARNED CIT(A) HAS ERRED IN LAW AND FACTS IN C ONFIRMING THE ADDITIONS OF RS. 17,97,785/- ON ACCOUNT OF ROYA LTY PAID TO DIRECTOR HOLDING THE SAME TO BE CAPITAL EXPENDITURE . 2. THAT LEARNED CIT(A) HAS ERRED IN LAW AND FACTS I N CONFIRMING THE DISALLOWANCE OF RS. 2,03,78,978/- TREATING THE USAGE CHARGES PAID TO COPY RIGHT HOLDERS AND DEBITED AS C OPY RIGHT EXPENSES, AS CAPITAL EXPENSES. 13 3. THAT LEARNED CIT(A) HAS ERRED IN LAW AND FACTS I N MAKING AN ADHOC DISALLOWANCE OF 20% OUT OF GPRS / SMS TESTING EXPENSES. 22. AFTER HEARING BOTH THE PARTIES WE FIND THAT DUR ING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAS CLA IMED DEPRECIATION @ 60% ON COMPUTERS. FURTHER, PERUSAL OF THE RECORD DEPICTED THAT DEPRECIATION ON COMPUTER KIOSK WAS ALSO CLAIMED @ 60%. THE ASSESSING OFFICER WAS OF THE OPINION THAT KISOKS IS NOT COMPUTER BECAUSE IT IS BASICALLY A ST EEL FRAME IN WHICH A PERSONAL COMPUTER IS HOUSED AND, THEREFORE, WOULD FALL IN TH E CATEGORY OF FURNITURE. ACCORDINGLY, DEPRECIATION ON KISOKS PORTION WAS RES TRICTED TO 10%. 23. ON APPEAL, IT WAS MAINLY SUBMITTED AS UNDER:- 'THE LEARNED ASSESSING OFFICER IN PARA 3 OF THE ORD ER, HIMSELF SAYS THAT 60% DEPREDATION IS ALLOWED ONLY ON COMPUTER AN D COMPUTER SOFTWARE BUT HAS IGNORED DEFINITION GIVEN BY ASSESS EE. THE DEFINITION GIVEN IS COMPLETE DEFINITION. COMPUTER KIOSK IS ASSEMBLY OF PERSONAL COMPUTER WIT H TOUCH SCREEN, BLUE TOOTH & OTHER COMPUTER PARTS LOADED WITH SOFTWARE, HOUSE IN A STEEL FRAME MAKING IT SECURE AND PORTABLE FOR DOWN LOADING VARIOUS VALUE ADDED SERVICES LIKE RING TONES, CALLER RING B ACK TONE, WALL PAPERS, VIDEO ETC. THE LEARNED ASSESSING OFFICER HA S IGNORED THE WHOLE DEFINITION AND JUST PICKED UP THE WORD STEEL FRAME TO MAKE THE ADDITIONS. IF WE LOOK INTO DETAIL THE STEEL FRAME IN WHICH THE SYSTEM IS FITTED IS JUST 5% OF THE TOTAL COST OF THE KIOSK AND IS FITTE D JUST FOR SAFETY AND PLACEMENT PURPOSES. THESE KIOSK ARE PLACED AT PUBLI C PLACES LIKE RAILWAY STATIONS, CINEMA HALLS, MALLS AND MARKET PL ACES. THE STEEL FRAME IS MADE JUST TO PROTECT IT FROM DAMAGE AND PL ACEMENT BECOMES EASIER. THE FRAME DOES NOT CHANGE THE NOMEN CLATURE OF THE SYSTEM. THE LEARNED ASSESSING OFFICER IS CLEARLY INDICATING THAT ASSESSES IS NOT DENIED THE DEPRECIATION ON COMPUTER BUT DEPRECI ATION CANNOT BE ALLOWED ON KIOSK AT THE SAME RATE, BUT HAS FAILED TO SEPARATE THE COST OF THE KIOSK (STEEL FRAME). THE DETAIL GIVEN ON PAGE 3 OF THE ASSESSMENT ORDER OF THE INTERACTIVE KIOSK ALSO GIVES COMPONENT SPECIFICATIO N WHICH IS THE SAME AS GIVEN IN THE DEFINITION. 14 OTHERWISE ALSO IF WE LOOK INTO INCOME TAX RULE DEPR ECIATION SCHEDULE PART A TANGIBLE ASSETS SUB POINT U THE WOR D KIOSK IS NOT MENTIONED IN FURNITURE AND FITTINGS DETAIL. WE ARE OF THE VIEW THAT THE LEARNED ASSESSING OFFIC ER HAS JUST ERRED IN JUDGEMENT FROM THE DEFINITION GIVEN AND HAS DISA LLOWED DEPREDATION ON COMPUTER KIOSK BY CONSIDERING IT FUR NITURE & FITTINGS WHICH UNJUSTIFIED AND WRONG.' 24. ON THE BASIS OF ABOVE SUBMISSIONS THE LD. CIT(A ) WAS OF THE OPINION THAT KIOSKS WAS PART OF THE COMPUTER AND, THEREFORE, ASS ESSEE WAS ENTITLED TO DEPRECIATION @ 60%. 25. BEFORE US, LD. DR SUBMITTED THAT KIOSKS IS MERE LY STEEL FRAME AND CANNOT BE CALLED PART OF THE COMPUTER AND, THEREFORE, ASSESSI NG OFFICER WAS RIGHT IN ALLWIONG 10% DEPRECIATION. 26. ON THE OTHER HAND LD. COUNSEL REITERATED THE SU BMISSIONS MADE BEFORE CIT(A) AND SUPPORTED THE IMPUGNED ORDER. 27. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND FORCE IN THE SUBMISSIONS OF LD. COUNSEL FOR THE ASSESSEE BECAUSE COMPUTER KIOSK S IS AN ASSEMBLY OF COMPUTER WITH TOUCH SCREEN, BLUETOOTH AND OTHER COMPUTER PAR TS LOADED WITH SOFTWARE. IN THIS BACKGROUND LD. CIT(A) HAS CORRECTLY HELD THE SAME TO BE PART OF THE COMPUTER, AND THEREFORE, WE FIND NOTHING WRONG WITH THE ORDER OF LD. CIT(A)A ND CONFIRM THE SAME. 28. GROUND NO.3 : AFTER HEARING BOTH THE PARTIES WE FIND THAT ON THE SIMILAR LOGIC, DEPRECIATION ON IVR CARD WAS ALSO CLAIMED @ 60% BUT THE SAME HAS BEEN ALLOWED BY THE ASSESSING OFFICER @ 15% BY HOLDING T HAT SAME WOULD FALL UNDER THE HEAD PLANT AND MACHINERY. 15 29. ON APPEAL BEFORE CIT(A), IT WAS SUBMITTED AS UN DER:- 'IVR CARD IS A DEVICE LOADED WITH SOFTWARE TECHNOLO GY THAT ALLOWS THE COMPUTER TO INTERACT WITH HUMANS THROUGH THE VOICE AND DTMF KEYPAD INPUTS. THE LEARNED ASSESSING OFFIC ER HAS NOT GIVEN ANY REASON FOR DISALLOWING THE DEPRECIATI ON @ 60% AND HAS ALLOWED @1 5% BY COVERING IT IN THE HEAD PL ANT & MACHINERY. IVR CARD IS ALSO FITTED INTO THE COMPUTER FOR VOICE REPLYING TO CUSTOMER CALLS AUTOMATICALLY AND WORKS WITH SPECIFI C SOFTWARE. THE LD. ASSESSING OFFICER HAS REFERRED IN THE FIRST POINT OF COMPUTER KIOSK THAT COMPUTER SOFTWARE IS ALLOWED DEPRECIATION @ 60% BUT HERE DISALLOWED THE SAME. TH E DEFINITION OF COMPUTER IN PART A TANGIBLE ASSETS SU B CLAUSE 5 DEFINES IT ' COMPUTER INCLUDING COMPUTER SOFTWARE A ND COMPUTER SOFTWARE MEANS ANY COMPUTER PROGRAMME RECO RDED ON ANY DISC, TAPE PERFORATED MEDIA OR OTHER INFORMA TION STORAGE DEVICE. IVR CARD IS DEVICE FITTED INTO COMPUTER WITH SOFTWARE TO ANSWER THE CUSTOMER WITH SOFTWARE TO ANSWER THE CU STOMER'S CALLS AUTOMATICALLY. HENCE, THE LD. ASSESSING OFFICER IS NOT JUSTIFIED IN DISALLOWING THE DEPRECIATION OF@ 60% ON IVR CARD. ' 30. THE LD. CIT(A) IN VIEW OF THE ABOVE SUBMISSIONS ALLOWED THE DEPRE CIATION @ 60%. 31. BEFORE US, LD. DR SUPPORTED THE ORDER OF ASSESS ING OFFICER. 32. ON THE OTHER HAND LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE CIT(A). 33. AFTER EXAMINING THE RIVAL SUBMISSIONS WE FIND T HAT ONCE IVR CARD IS LOADED WITH SOFTWARE WHICH ALLOWS THE COMPUTER TO INTERACT WITH HUMANS THROUGH THE VOICE AND DTMF, KEYPADS INPUTS. THIS TECHNICAL JARGON HAS NOT BEEN DENIED BY THE REVENUE. ONCE IVR CARD IS INTERACTING WITH THE HUMA NS THROUGH SOFTWARE 16 OBVIOUSLY THE SAME WOULD FORM PART OF THE COMPUTER AND HENCE ENTITLED FOR 60% DEPRECIATION. THEREFORE, WE FIND NOTHING WRONG WIT H THE ORDER OF LD. CIT(A) AND WE CONFIRM THE SAME. 34. IN THE RESULT APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 03/07/2015. SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED 03 RD JULY, 2015 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR