Appeal details
Counselvise Citation
[2020] 111 COUNSELVISE.COM (IT) 2017 (ITAT-CHENNAI)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 10 month(s) 29 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-05-2020
Appeal Filed By
Assessee
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
28-06-2017
Assessment Year
2007-2008
Appeal Filed On
09-06-2015
Judgement Text
, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: CHENNAI , !' # $! # % . . '( , * + BEFORE SHRI RAMIT KOCHAR , ACCOUNTANT MEMBER AND SHRI DUVVURU R.L.REDDY , JUDICIAL MEMBER ITA NOS.1406 & 1407/CHNY/2015 * , !-, /ASSESSMENT YEARS: 2007-08 & 2009-10 M/S. PENTAMEDIA GRAPHICS LTD., TAURUS, NO.25, FIRST MAIN ROAD, UNITED INDIA COLONY, KODAMBAKKAM, CHENNAI-600 024. V . THE DY. COMMISSIONER OF INCOME TAX, MEDIA CIRCLE-I, ROOM NO.311, 3 RD FLOOR, NEW BLOCK, 121, M.G.ROAD, NUNGAMBAKKAM, CHENNAI-600 034 [PAN: AAACP 1647 B ] ( ./ /APPELLANT) ( 01./ /RESPONDENT) ./ 2 3 / APPELLANT BY : MR. G. BASKAR, ADVOCATE AND MRS.SREE LAKSHMI VALLI, ADV. 01./ 2 3 /RESPONDENT BY : MR. A.SUNDARARAJAN, ADDL.CIT # ! 2 /DATE OF HEARING : 19.11.2019 & 11.03.2020 4- 2 /DATE OF PRONOUNCEMENT : 08.05.2020 5 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER : THESE TWO APPEALS FILED BY ASSESSEE ARE DIRECTED A GAINST COMMON APPELLATE ORDER DATED 23.03.2015 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-14, CHENNAI (HEREINAFTER CALLE D THE CIT(A)), IN ITA NO.38/11-12 & 70/13-14 CIT(A)-14 RESPECTIVELY , DATED 23.03.2015 FOR ASSESSMENT YEARS (AYS) 2007-08 & 2009-10 RESPE CTIVELY , THE ITA NOS.1406 & 1407/CHNY/2015 :- 2 -: APPELLATE PROCEEDINGS BEFORE LEARNED CIT(A) HAD ARI SEN FROM SEPARATE ASSESSMENT ORDER(S) , FOR AY: 2007-08 DATED 31.03.2 013 PASSED BY LEARNED ASSESSING OFFICER (HEREINAFTER CALLED THE AO) U/S.143(3) READ WITH SECTION 254 OF THE INCOME-TAX ACT, 1961 (HEREI NAFTER CALLED THE ACT) AND SECONDLY FOR AY: 2009-10 DATED 15.12.2011 PASSED U/S 143(3) OF THE 1961 ACT. THERE ARE COMMON ISSUES INVOLVED I N THESE APPEALS AND HENCE THESE TWO APPEALS WERE HEARD TOGETHER AND DIS POSED 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 AF FIDAVIT EXECUTED BY MANAGING DIRECTOR OF THE ASSESSEE COMPANY. THE LEAR NED 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 B EFORE US, WE ARE CONDONING THE DELAY OF FOUR DAYS IN FILING THIS APP EAL 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 MEM O OF APPEAL(S) FILED WITH THE INCOME-TAX APPELLATE TRIBUNAL, CHENNAI (HE REINAFTER CALLED THE TRIBUNAL) FOR AY: 2007-08 IN ITA NO. 1406/CHNY/201 5 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 (APP EALS) DATED 23.03.2015, IS ARBITRARY, ERRONEOUS, INCORRECT AND CONTRARY TO LAW AND FACTS. 2. THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N CONFIRMING THE ORDER OF THE LOWER AUTHORITY RESTRICTING THE GRANT OF DEPRECIATION TO 25% INSTEAD OF 60% AS CLAIMED BY THE APPELLANT. ITA NOS.1406 & 1407/CHNY/2015 :- 3 -: 3. THE COMMISSIONER OF INCOME-TAX (APPEALS) OUGHT T O HAVE NOTED THAT 'DIGITAL CONTENT' COMPRISES OF SOFTWARE THAT IS A TANGIBLE ASSET. 4. THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N MAKING A DISTINCTION BETWEEN 'CANNED' SOFTWARE AND 'CUSTOMIZED' SOFTWARE WHICH I S IRRELEVANT TO DECIDE THE ISSUE OF GRANT OF DEPRECIATION. 5. THE COMMISSIONER OF INCOME-TAX (APPEALS) INCORPO RATES 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 DEPRECIAT ION. 6. THE RELIANCE OF THE COMMISSIONER OF INCOME-TAX ( APPEALS) ON VARIOUS TECHNICAL LITERATURE IS OF NO RELEVANCE IN DECIDING THE PRESENT ISSUE. I N 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 I N 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, LICEN SE OR COMMERCIAL RIGHTS OF SIMILAR NATURE. ON THE OTHER HAND, APPENDIX I OF THE INCOME TAX RULES CLARIFIES IN NOTE 7 THEREOF THAT INFORMATION TECHNOLOGY SOFTWARE IS ELIGIBLE FO R DEPRECIATION @ 60%. THERE IS THUS NO SCOPE OR JUSTIFICATION IN CONFUSING TANGIBLE AND IN TANGIBLE ASSETS THAT HAVE BEEN DEMARCATED CLEARLY. 8. THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N RELYING UPON VARIOUS JUDGMENTS OF FOREIGN COURTS TO CONCLUDE THAT SOFTWARE IS AN INTA NGIBLE ASSET. HE OUGHT TO HAVE FOLLOWED THE LAW LAID DOWN BY THE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH TO THE EFFECT THAT COMPUTER SOFTW ARE IS A TANGIBLE ASSET. THE COMMISSIONER OF INCOME-TAX (APPEALS) IS BOUND IN TE RMS OF ARTICLE 141 TO FOLLOW THE LAW LAID DOWN BY THE INDIAN SUPREME COURT RATHER THAN T HE JUDGMENTS OF THE FOREIGN COURTS THAT HAS COME TO A DIFFERENT CONCLUSION. LIKEWISE, THE COMMISSIONER OF INCOME-TAX (APPEALS) PREFERS TO RELY UPON THE CLASSIFICATION O F SOFTWARE AS INTANGIBLE ASSET BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IGNORIN G 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 DIS TINGUISHED FOR WHOLLY UNACCEPTABLE REASONS. INTEREST 9. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED I N 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 (APP EALS) 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 I N 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 T O HAVE NOTED THAT 'DIGITAL CONTENT' COMPRISES OF SOFTWARE THAT IS A TANGIBLE ASSET. ITA NOS.1406 & 1407/CHNY/2015 :- 4 -: 4. THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N MAKING A DISTINCTION BETWEEN 'CANNED' SOFTWARE AND 'CUSTOMIZED' SOFTWARE WHICH I S IRRELEVANT TO DECIDE THE ISSUE OF GRANT OF DEPRECIATION. 5. THE COMMISSIONER OF INCOME-TAX (APPEALS) INCORPO RATES 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 DEPRECIAT ION. 6. THE RELIANCE OF THE COMMISSIONER OF INCOME-TAX ( APPEALS) ON VARIOUS TECHNICAL LITERATURE IS OF NO RELEVANCE IN DECIDING THE PRESENT ISSUE. I N 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) ERR ED 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, LICEN SE OR COMMERCIAL RIGHTS OF SIMILAR NATURE. ON THE OTHER HAND, APPENDIX I OF THE INCOME TAX RULES CLARIFIES IN NOTE 7 THEREOF THAT INFORMATION TECHNOLOGY SOFTWARE IS ELIGIBLE FO R DEPRECIATION @ 60%. THERE, IS THUS NO SCOPE OR JUSTIFICATION IN CONFUSING TANGIBLE AND IN TANGIBLE ASSETS THAT HAVE BEEN DEMARCATED CLEARLY. 8. THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N RELYING UPON VARIOUS JUDGMENTS OF FOREIGN COURTS TO CONCLUDE THAT SOFTWARE IS AN INTA NGIBLE ASSET. HE OUGHT TO HAVE FOLLOWED THE LAW LAID DOWN BY THE SUPREME COURT IN THE CASE OF TATA CONSULTANCY SERVICES VS. STATE OF ANDHRA PRADESH TO THE EFFECT THAT COMPUTER SOFTW ARE IS A TANGIBLE ASSET. THE COMMISSIONER OF INCOME-TAX (APPEALS) IS BOUND IN TE RMS OF ARTICLE 141 TO FOLLOW THE LAW LAID DOWN BY THE INDIAN SUPREME COURT RATHER THAN T HE JUDGMENTS OF THE FOREIGN COURTS THAT HAS COME TO A DIFFERENT CONCLUSION. LIKEWISE, THE COMMISSIONER OF INCOME-TAX (APPEALS) PREFERS TO RELY UPON THE CLASSIFICATION O F SOFTWARE AS INTANGIBLE ASSET BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IGNORIN G 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 DI STINGUISHED FOR WHOLLY UNACCEPTABLE REASONS. DISALLOWANCE U/S 14A OF THE INCOME TAX ACT 9. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED I N 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 INCOM E 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 PURSUAN T TO AN ORDER OF THE HIGH COURT SANCTIONING A SCHEME OF MERGER. HENCE, THE DISALLOW ANCE 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, H IGH AND LIABLE TO BE CANCELLED. 13. ANY OTHER GROUND THAT MAY BE RAISED AT THE T IME OF PERSONAL HEARING. 3. FIRST WE WILL TAKE UP APPEAL FILED BY ASSESSEE F OR AY: 2007-08 IN ITA NO. 1406/CHNY/2015. THE ONLY LIMITED ISSUE IN APPEAL FI LED BY ASSESSEE FOR AY: ITA NOS.1406 & 1407/CHNY/2015 :- 5 -: 2007-08 TO BE ADJUDICATED BY US IS AS TO RATE OF DE PRECIATION ALLOWABLE TO ASSESSEE ON DIGITAL CONTENT I.E. WHETHER ASSESSE E IS ENTITLED FOR A DEPRECIATION @ OF 25% OR 60%. THIS IS SECOND ROUND OF LITIGATION BEFORE TRIBUNAL AND IN THE FIRST ROUND OF LITIGATION BEFOR E 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. 14 4/MDS/2011 , VIDE ORDER DATED 09.09.2011 FOR RE-ADJUDICATION OF THE ISSUE B Y 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 1 43(3) READ WITH SECTION 254 OF THE 1961 ACT HELD THAT THE ASSESSEE IS ENTITLED FOR DEPRECIATION @ 25% ON DIGITAL CONTENT DEVELOPED B Y IT AS THE SAME IS INTANGIBLE ASSET AND THE ASSESSEE IS NOT ENTITLED FOR DEPRECIATION @ 60% AS THE SAID DIGITAL CONTENT IS NOT COMPUTER SOFTWAR E . THE ASSESSEE ON ITS PART HAD CONTENDED BEFORE THE AO IN SECOND ROUND OF LITIGATION THAT THE ASSESSEE IS AN ANIMATION & SPECIAL EFFECTS COMPANY USING COMPUTER AS CAMERA AND IT HAS PRODUCED EIGHT ANIMATION FILMS AN D VISUAL/SPECIAL EFFECTS FOR MORE THAN 500 INDIAN AND INTERNATIONAL FILMS. THE ASSESSEE SUBMITTED THAT THESE ANIMATION OF SPECIAL EFFECTS A RE PRODUCED USING COMPUTER SOFTWARE AND SPECIALLY PREPARED SOFTWARE F OR THE CHARACTERS , BACKGROUNDS AND PROPERTIES WHICH ARE MADE SPECIALLY AND THEN COMBINED USING MANY COMPUTERS PROCESSERS TO MAKE SHOTS. TH ESE ARE CALLED DIGITAL CONTENT WHICH IS AVAILABLE IN HARD DISK/D RIVE OF THE COMPUTER. THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS AN 100% EOU STATUS UNDER EHTP ITA NOS.1406 & 1407/CHNY/2015 :- 6 -: SCHEME AND IS ENGAGED IN DEVELOPMENT OF DIGITAL CO NTENT/ANIMATION SOFTWARE FOR UTILIZATION IN THE PRODUCTION OF FILM S. THE ASSESSEE SUBMITTED THAT THESE ARE CUSTOMIZED SOFTWARES AND DEPRECIATI ON CLAIMED FOR SOFTWARE IS 60% AS PER INCOME TAX ACT, 1961. FURTH ER, THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS CLAIMED DEPRECIATIO N ON THE DIGITAL CONTENT AND ANIMATION SOFTWARE DEVELOPED BY IT AND UTILIZED FOR THE PURPOSE OF PRODUCTION OF FILMS. THE ASSESSEE SUBMI TTED THAT IT ENGAGES SOFTWARE PROGRAMMERS WHO WRITE NECESSARY CODE FOR THE SOFTWARE WHICH IS LATER TRANSLATED INTO MACHINE READABLE FORM RESU LTING IN SOFTWARE THAT IS STORED IN AN INFORMATION STORAGE DEVICE LIKE HARD D ISK. THE SOFTWARE RELATES TO VARIOUS VISUAL EFFECTS THAT ARE UTILIZED FOR MAKING OF FILMS AND IT WAS SUBMITTED THAT THIS ANIMATION SOFTWARE CONSTITU TES STOCK IN TRADE OF THE ASSESSEE WHICH IS EXPLOITED BY IT IN PRODUCTION OF BUSINESS OF ANIMATION FILMS. THE ASSESSEE RELIED UPON EXPLANAT ION-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, TA PE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVICE; OR (B) ANY CUSTO MIZED ELECTRONIC DATA OR ANY PRODUCT OR SERVICE OF SIMILAR NATURE AS MAY BE NOTI FIED BY THE BOARD; WHICH IS TRANSMITTED OR EXPORTED FROM INDIA TO ANY PLACE OUT SIDE INDIA BY ANY MEANS; THE ASSESSEE SUBMITTED THAT ANIMATION SOFTWARE DEVE LOPED BY IT SATISFIES THE DEFINITION OF COMPUTER SOFTWARE , BEING A PROGR AMME, RECORDED AND STORED IN AN INFORMATION STORAGE DEVICE AND UTILIZE D IN THE BUSINESS OF THE ASSESSEE. THE ASSESSEE ALSO REFERRED TO THE JUDGME NT IN THE CASE OF ITA NOS.1406 & 1407/CHNY/2015 :- 7 -: COMMISSIONER OF CUSTOMS V. PENTAMEDIA GRAPHICS LTD. , WHEREIN THE HONBLE SUPREME COURT CONCLUDED IN CONTEXT OF LAWS APPLICABLE TO CUSTOMS THAT THE MOTION CAPTURE ANIMATION FILMS WOULD QUA LIFY TO BE CLASSIFIED AS INFORMATION TECHNOLOGY SOFTWARE. THUS , THE ASSESSE E SUBMITTED BEFORE THE AO THAT THE DIGITAL CONTENT/ANIMATION SOFTWARE DEVE LOPED BY IT IS OF THE NATURE OF APPLICATION SOFTWARE USED BY IT IN THE BU SINESS OF MOVIE PRODUCTION , ELIGIBLE TO DEPRECIATION @ 60%. THE ASSESSEE ALSO SUBMITTED THAT AS PER THE ACCOUNT ING STANDARD-26, THE INTANGIBLE ASSET IS IDENTIFIABLE AS UNDER: AN INTANGIBLE ASSET IS AN IDENTIFIABLE NON-MONETAR Y 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 ASSE TS 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 L IABILITIES, ON THE ACQUISITION, DEVELOPMENT, MAINTENANCE OR ENHANCEMENT OF INTANGIB LE RESOURCES SUCH AS SCIENTIFIC OR TECHNICAL KNOWLEDGE, DESIGN AND IMPLE MENTATION OF NEW PROCESSES OR SYSTEMS, LICENCES, INTELLECTUAL PROPERTY, MARKET KN OWLEDGE AND TRADEMARKS (INCLUDING BRAND NAMES AND PUBLISHING TITLES). COMM ON EXAMPLES OF ITEMS ENCOMPASSED BY THESE BROAD HEADINGS ARE COMPUTER SO FTWARE, PATENTS, COPYRIGHTS, MOTION PICTURE FILMS, CUSTOMER LISTS, M ORTGAGE SERVICING RIGHTS, FISHING LICENCES, IMPORT QUOTAS, FRANCHISES, CUSTOMER OR SU PPLIER RELATIONSHIPS, CUSTOMER LOYALTY, MARKET SHARE AND MARKETING RIGHTS. GOODWIL L IS ANOTHER EXAMPLE OF AN ITEM OF INTANGIBLE NATURE WHICH EITHER ARISES ON AC QUISITION OR IS INTERNALLY GENERATED. NOT ALL THE ITEMS WILL MEET THE DEFINITION OF AN IN TANGIBLE ASSET, THAT IS, IDENTIFIABILITY, CONTROL OVER A RESOURCE AND EXPECT ATION OF FUTURE ECONOMIC BENEFITS FLOWING TO THE ENTERPRISE. IF AN ITEM COVERED BY TH IS STANDARD DOES NOT MEET THE DEFINITION OF AN INTANGIBLE ASSET, EXPENDITURE TO A CQUIRE IT OR GENERATE IT INTERNALLY IS RECOGNISED AS AN EXPENSE WHEN IT IS INCURRED. HO WEVER, IF THE ITEM IS ACQUIRED IN AN AMALGAMATION IN THE NATURE OF PURCHASE, IT FO RMS PART OF THE GOODWILL RECOGNISED AT THE DATE OF THE AMALGAMATION. SOME INTANGIBLE ASSETS MAY BE CONTAINED IN OR ON A PHYSICAL SUBSTANCE SUCH AS A COMPACT DISK (IN THE CASE OF COMPUTER SOFTWARE), LE GAL DOCUMENTATION (IN THE CASE OF A LICENCE OR PATENT) OR FILM (IN THE CASE OF MOT ION PICTURES). THE COST OF THE PHYSICAL SUBSTANCE CONTAINING THE INTANGIBLE ASSETS IS USUALLY NOT SIGNIFICANT. ITA NOS.1406 & 1407/CHNY/2015 :- 8 -: ACCORDINGLY, THE PHYSICAL SUBSTANCE CONTAINING AN I NTANGIBLE ASSET, THOUGH TANGIBLE IN NATURE, IS COMMONLY TREATED AS A PART O F THE INTANGIBLE ASSET CONTAINED IN OR ON IT. IN SOME CASES, AN ASSET MAY INCORPORATE BOTH INTANG IBLE AND TANGIBLE ELEMENTS THAT ARE, IN PRACTICE, INSEPARABLE. IN DETERMINING WHETHER SUCH AN ASSET SHOULD BE TREATED UNDER AS 10, ACCOUNTING FOR FIXED ASSETS, O R 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 CONTR OLLED 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 SA ME 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 INTANG IBLE ASSET. IT WAS SUBMITTED BY ASSESSEE BEFORE THE AO IN SECON D ROUND OF LITIGATION THAT THE DIGITAL CONTENT/ ANIMATION SOFTWARE DE VELOPED 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 HOL DING 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' AC QUIRED BY THE ASSESSEE IS ELIGIBLE DEPREDATION @60% AS APPLICABLE FOR COMPUTE R SOFTWARE OR @25% AS APPLICABLE TO INTANGIBLE ASSETS. 14.2. THE ISSUE CONSIDERED BY THE HON'BLE SUPREME C OURT IS WHETHER THE MOTION CAPTURE ANIMATION FILES' IS COMPUTER SOFTWARE AND I S 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 RELE VANCE TO THE CUSTOMS ACT. THE CUSTOMS ACT DEALS WITH THE GOODS AT THE POINT OF EN TRY AND THE SUBSEQUENT STATE OF THE GOODS IS NOT RELEVANT TO THE GRANT OF EXEMPT ION UNDER THE ACT. FURTHER, THE ISSUE HEREIN IS WHETHER THE ASSET IS A TANGIBLE ASS ET OR INTANGIBLE ASSET UNDER THE INCOME-TAX ACT. AS THE DECISION OF THE SUPREME COUR T IS ON DIFFERENT CONTEXT AND THE SUPREME COURT HAS NOT EXAMINED WITH RELEVANCE T O THE INCOME-TAX ACT, RELYING ON THE SAME BY THE ASSESSEE/IS NOT CORRECT. 14.3 THE ASSESSEE COMPANY HAS GIVEN CERTAIN CLIPS W HICH SHOW THE MANNER IN WHICH THE ANIMATION IS PRODUCED. IT SHOWS FIRST A D RAWING OF CARICATURES FOR A PARTICULAR SCENE AND CONVERTING THE SAME TO AN ANIM ATION FILM. IT APPEARS THAT THE ASSESSEE HAS MISUNDERSTOOD THE QUERY RAISED IN THE LETTER DATED 13.03.2013. ITA NOS.1406 & 1407/CHNY/2015 :- 9 -: THE PURPOSE OF THE QUERY WAS TO SEE HOW THE ASSESSE E COMPANY IS USING THE ANIMATION IN ITS BUSINESS. THE SOFTWARE WHICH IT AC QUIRES FROM OUTSIDE AND USES FOR ITS OWN BUSINESS AS APPLICATION SOFTWARE WITHOUT AL TERING THE SAME WOULD BE ELIGIBLE AS COMPUTER SOFTWARE. THE SAME IS LIKE MS- OFFICE, ETC. BUT, AS STATED BY THE ASSESSEE COMPANY ITSELF THE DIGITAL CONTENT WHI CH IS DEVELOPED IN-HOUSE IS USED IN THE BUSINESS OF MOVIE PRODUCTION. 14.4 FROM THE SUBMISSIONS OF THE ASSESSEE, IT IS CL EAR THAT IT HAS UTILIZED THE SOFTWARE IN THE PRODUCTION OF FILMS BUT THE SAME WA S DEVELOPED BY IT AS DIGITAL CONTENT/ ANIMATION SOFTWARE AND STILL OWNED BY IT. 14.5 LET US NOW DEAL WITH THE DIFFERENCE BETWEEN TH E SOFTWARE DEVELOPED/ACQUIRED AND COPY OF COMPUTER SOFTWARE PU RCHASED BY IT: IN THE CASE OF THE FIRST ONE, THE COMPANY HOLDS THE RIGHTS OF T HE 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 INTE LLECTUAL PROPERTY RIGHT HAVING ENDURING BENEFIT, AS CLAIMED BY ITSELF THAT IT IS E LIGIBLE TO USE THE ANIMATION IN SEQUELS, ETC. FOR EXAMPLE, THE ANIMATION ON CHARACT ERS 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 T HEY ARE INTANGIBLE ASSETS OF THE COMPANY IN THE FIRST PLACE. THEREFORE, IT IS CL EAR THAT THE SOFTWARE HAS LONGER AND ENDURING LIFE PERIOD, WHICH HAS BEEN DEMONSTRAT ED BY ASSESSEE'S OWN SUBMISSIONS. 14.6 FURTHER, IT IS TO BE CLEARLY UNDERSTOOD THA T IT IS NOT THE CASE THAT THE COMPANY HAS DEVELOPED SOFTWARE FOR A CLIENT AND SEL LS 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 PRECISELY THE INTELLECTUAL RIGHTS OF THE AS SESSEE. 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 INTE LLECTUAL 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. C OMPUTER SOFTWARE, TELECOMMUNICATION SERVICES, ELECTRICITY ARE SPECIFI CALLY INCLUDED IN THE DEFINITION OF 'INDUSTRIAL UNDERTAKING'. THIS SPECIF IC INCLUSION PROVIDED IN THE CASE OF SOFTWARE, ELECTRICITY OR IN THE MATTER OF P ROVISION OF CERTAIN TELECOMMUNICATION SERVICES IS NOT FOR THE REASON TH AT THEY ARE NOT INDUSTRIAL UNDERTAKING BUT SINCE INTELLECTUAL PROPE RTY RIGHTS ARE INVOLVED IN THEM TO AVOID ANY AMBIGUITY.' 14.8 THEREFORE, THE COMPUTER SOFTWARE WHICH HAVE BEEN DEVELOPED OR ACQUIRED ON ACQUISITION AS THAT OF ITS OWN, ARE TO BE CONSIDERED ONLY AS INTANGIBLE ASSETS AND ALLOWED DEPRECIATION @25%. 14.9 THE ASSESSEE COMPANY HAS ALSO DRAWN PARALLEL W ITH THE SOFTWARE LIKE MICROSOFT PRODUCTS, ADOBE, ETC. EVEN THIS PARALLEL GOES AGAINST THE CONTENTION OF THE ASSESSEE. IT HAS BEEN THE UNIVERSALLY ACCEPTED FACT THAT THE MICROSOFT HOLDS INTELLECTUAL PROPERTY RIGHTS OF ITS. PROPERTIES (SO FTWARE) AND ONLY ISSUES COPIES OF THE SAME WITH THE LICENSE FOR ITS USE AND IT CONTIN UES TO EXPLOIT ITS SOFTWARE WITH ITA NOS.1406 & 1407/CHNY/2015 :- 10 -: THE RIGHTS OWNED BY IT. SIMILAR IS THE CASE OF SOF TWARE, LIKE PHOTOSHOP, ETC OF ADOBE.' 14.10 IT IS TO BE NOTED HEREIN THAT SECTION 32 DEAL S WITH AN ASSET, WHETHER IT IS TANGIBLE OR INTANGIBLE IN THE FIRST PLACE. THE PRES CRIBED RATES COMES INTO PLAY ONLY ONCE THE ASSET IS CATEGORISED AS TANGIBLE OR INTANG IBLE. ANIMATION SOFTWARE DEVELOPED BY THE COMPANY IS ELIGIBLE FOR DEPRECIATI ON AS APPLICABLE TO INTANGIBLE ASSETS SINCE THE COMPANY HOLDS INTELLECTUAL PROPERT Y RIGHTS AND EXPLOITS THE SAME. 14.11 IN VIEW OF THE ABOVE, IT IS CLEAR THAT THE AS SESSEE COMPANY IS ELIGIBLE TO CLAIM DEPRECIATION @25% ONLY ON DIGITAL CONTENTS DE VELOPED BY IT AS THE SAME IS HELD AS INTANGIBLE ASSETS. 4. THE ASSESSEE BEING AGGRIEVED BY AN ASSESSMENT FR AMED BY AO IN SECOND ROUND OF LITIGATION VIDE ASSESSMENT ORDER DA TED 31.03.2013 PASSED U/S 143(3) READ WITH SECTION 254 OF THE 1961 ACT , FILED FIRST APPEAL BEFORE LD.CIT(A). THE LEARNED CIT(A) WAS PLEASED TO DISMIS S 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 T HE 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 RELAT ION TO 'COMPUTER SOFTWARE'. THE ASSESSING AUTHORITY OUGHT TO HAVE NOTED THAT TH E 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 SUPREM E COURT IN THIN CONTEXT SUPPORTS STAND OF THE APPELLANT IN THIS REG ARD.' THE APPELLANT RELIES ON APPENDIX I TO THE INCOME TA X 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 ME DIA OR OTHER INFORMATION STORAGE DEVISE. IT WAS CLAIMED THAT THE DIGITAL CON TENT DEVELOPED BY THE APPELLANT IS ESSENTIAL 'COMPUTER SOFTWARE' IN SO FAR AS IT RE LATED 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 MULTIMED IA AND ENTERTAINMENT INDUSTRY AND, BY ITS VERY NATURE, IS A SERIES OF SOFTWARE PR OGRAMMES 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 VAL UE OF SUCH BLOCK OF ASSETS AS ARE USED FOR THE PURPOSES OF THE BUSINESS OR PROFES SION OF THE ASSESSEE AT ANY TIME DURING THE PREVIOUS YEAR. PART A OF THE APPEND IX I DEAL WITH THE RATES FOR TANGIBLE ASSETS . THIS TABLE (III. MACHINERY AND PLANT (5)) PRESCRI BES DEPRECIATION @ 60% FOR COMPUTERS INCLUDING COMPUTER SOFTWARE. COMP UTER SOFTWARE HAS NOT BEEN ITA NOS.1406 & 1407/CHNY/2015 :- 11 -: 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 A NY DISK, TAPE, PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVICE. 6.3 THE FIRST ISSUE IN THE PRESENT CASE IS WHET HER THE COMPUTER SOFTWARE IS A TANGIBLE OR INTANGIBLE ASSET AND WHETHER THE ASSESS EES GET OWNERSHIP RIGHT BY ACQUIRING / DEVELOPING THE SAME. IN SEVERAL CASES T HE COMPUTER SOFTWARE IS ACQUIRED OFF THE SHELF. THE AGREEMENT UNDER WHICH S OFTWARE IS COMMONLY ACQUIRED, THE ASSESSEES ACQUIRE ONLY A LICENCE TO U SE THE COMPUTER SOFTWARE FOR THEIR OWN PURPOSE AND THERE IS AS SUCH NO ACQUISITI ON OF ANY ASSET. THE INTELLECTUAL PROPERTY RIGHTS IN COMPUTER SOFTWARE IS RECOGNIZED AND PROTECTED BY THE COPYRIGHT ACT AND AS PER THE PROVISIONS OF S. 14(B) OF THE SA ID STATUTE, THE USE OF A COMPUTER SOFTWARE UNDER A LICENCE IS NOT EXERCISE OF A COPYR IGHT. THE ACQUISITION OF COMPUTER SOFTWARE UNDER LICENCE COULD BE CONSIDERED AS A PURCHASE OF A COPYRIGHTED ARTICLE WHEREIN NO COPYRIGHT RIGHT IS T RANSFERRED EITHER AS PER THE COPYRIGHT ACT OR EVEN AS PER THE U.S. REGULATIONS ON THIS SUBJECT. THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF TC S (2004) 271 ITR 401 (SC) HOLDING THAT COMPUTER SOFTWARE PUT IN A MEDIUM OF D ISK WOULD BE GOODS MAY LEAD TO THE INFERENCE THAT PURCHASE OF SUCH DISK IS ACQU IRING A TANGIBLE ASSET. IF THE DISK, TAPE OR FLOPPY OR OTHER ELECTRONIC MEDIUM IN WHICH THE SOFTWARE IS STORED IS BY ITSELF GOODS, THEN THE ASSESSEE ACQUIRES THE SAM E, ACQUIRES A TANGIBLE ASSET. 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 COMP UTER PROGRAM RECORDED ON ANY DISK, TAPE, PERFORATED MEDIA OR OTHER INFORMATION S TORAGE DEVICE. THEREFORE COMPUTER SOFTWARE IN CANNED FORM IS GOODS AND A TAN GIBLE 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 BOUG HT 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 INSTRUCTI ONS IN COMPUTER LANGUAGE IS SUBJECT-MATTER OF A LICENCE. IT HAS ITS VALUE TO TH E 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 IND ISPUTABLY BECOMES AN OBJECT OF TRADE AND COMMERCE. 'CANNED SOFTWARE' MEANS THAT IS NOT SPECIFICALLY C REATED FOR A PARTICULAR CONSUMER. THE SALE OR LEASE OF, OR GRANTING A LICEN SE 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 DE PRECIATION @ 60%. 6.5 BUT IN THE PRESENT CASE, THE SOFTWARE IS NOT A CQUIRED 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 PURCHASE D TO RUN THE HARDWARE. BASICALLY, THERE ARE TWO TYPES OF SOFTWARE PROGRAMS . THE FIRST IS AN OPERATIONAL PROGRAM WHICH CONTROLS THE HARDWARE AND ACTUALLY MA KES THE MACHINE RUN; IT IS FUNDAMENTAL AND NECESSARY TO THE FUNCTIONING OF THE COMPUTER HARDWARE ITSELF. SECONDLY, THERE IS AN APPLICATIONAL PROGRAM WHICH I S 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 PR OGRAMS INSTRUCT THE CENTRAL PROCESSING UNIT OF THE COMPUTER TO PERFORM THE FUND AMENTAL COMPUTATIONS, COMPARISONS, AND SEQUENTIAL STEPS REQUIRED TO TAKE INCOMING INFORMATION AND ITA NOS.1406 & 1407/CHNY/2015 :- 12 -: COMPUTE THE DESIRED OUTPUT. [COMMERCE UNION BANK VS . TIDWELL 538 SW. 2D 405]. THE 60% RATE FOR DEPRECIATION IS STIPULATED FOR I. COMPUTER SOFTWARE ACQUIRED OFF THE SHELF, II. OPERATIONAL SOFTWARE THAT CONTROLS H ARDWARE, III. WHERE THE SOFTWARE IS AN INTEGRAL PART OF THE RELATED HARDWARE ETC. IN TH ESE CASES THESE SOFTWARE WHICH ARE RECORDED IN ANY MEDIUM BECOMES TANGIBLE ASSET. 6.6 IN THE PRESENT CASE WE ARE CONCERNED WITH SOFTW ARES DEVELOPED BY THE ASSESSEE, ITSELF. WHERE THE SOFTWARE IS NOT AN INTE GRAL PART OF THE RELATED HARDWARE, COMPUTER SOFTWARE IS TREATED AS AN INTANG IBLE ASSET [ACCOUNTING STANDARD 26 UNDER DEFINITION SL. NO. 10] 6.7 THE ASSESSEE SUBMITTED THAT IT DEVELOPED SOFTWA RE RELATING TO ANIMATION GRAPHICS AND SPECIAL EFFECTS, BASED ON WHICH SEVERA L ANIMATION FILMS HAVE BEEN PRODUCED BY IT, SOME EVEN NOMINATED FOR THE OSCAR A WARDS. THE COMPUTER ANIMATION AND SPECIAL EFFECTS IN THE FORM OF COMPUT ER SOFTWARE AND ARE REFERRED TO AS DIGITAL CONTENT, STORED IN THE HARD DISC OF THE COMPUTER. 6.8 THE EXPENDITURE INCURRED BY THE ASSESSEE ON DEV ELOPMENT OF SOFTWARE IS CAPITAL IN NATURE. THE ASSESSEE HAD NOT INCURRED EX PENDITURE TOWARDS ANY ASSET WHICH IS DEPRECIABLE UNDER THE PROVISIONS OF INCOME -TAX ACT. I PLACE RELIANCE ON THE DECISION IN THE CASE OF HYLAM LTD. V. CIT [1973 ] 87 ITR 310 (AP) FOR THE PROPOSITION THAT IF THE EXPENDITURE WAS INCURRED FO R 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 FLO PPY DISC, THE CD-ROM AND THE HARD DISC ARE EACH TANGIBLE COMMODITIES, THAT C OULD BE BOUGHT, SOLD AND RESOLD, THE SOFTWARE EMBEDDED IN THESE MEDIA ARE IN TANGIBLE AND FALL INTO A VERY DIFFERENT CATEGORY. IN THE BOOK 'SOFTWARE ENGINEERING' BY ROGER S. PRES SMAN, IT HAS BEEN STATED THAT A SOFTWARE IS AN INSTRUCTION THAT WHEN EXECUTED PRO VIDES DESIRED FUNCTION AND PERFORMANCES. IT IS STATED THAT A SOFTWARE IS COMPO SED OF PROGRAMS, DATA AND DOCUMENTS. EACH OF THESE ITEMS COMPRISES A CONFIGUR ATION THAT IS CREATED AS PART OF THE SOFTWARE ENGINEERING PROCESS. THE DEFINITIONS OF 'COMPUTER PROGRAMME' IN THE COPY RIGHT ACT, 1957 READ AS FOLLOWS: 'COMPUTER PROGRAMME' MEANS A SET OF INSTRUCTIONS EX PRESSED IN WORDS, CODES, SCHEMES OR IN ANY OTHER FORM, INCLUDING A MA CHINE 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 I S AN INTANGIBLE PROPERTY. 6.10 THE APEX COURT REFERRED TO THE JUDGMENTS OF TH E 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; FIRS T 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 ITA NOS.1406 & 1407/CHNY/2015 :- 13 -: NORTHEAST DATACOM, INC. V. CITY OF WALLINGFORD, 563 A2D 688 HOLDING THAT COMPUTER SOFTWARE IS INTANGIBLE PERSONAL PROPERTY. [INFOTECH SOFTWARE DEALERS ... VS UNION OF INDIA ON 24 AUGUST, 2010 (MAD) W.P.NOS. 3811 & 18886 OF 2009] 6.11 IN COMMERCE UNION BANK V. TIDWELL (TENN. 1976) , 538 S.W.2D 405, THE SUPREME COURT OF TENNESSEE HELD THAT COMPUTER SOFTW ARE IN THE FORM OF MAGNETIC TAPES OR PUNCH CARDS IS INTANGIBLE PERSONAL PROPERT Y AND THEREFORE NOT SUBJECT TO THAT STATE'S SALES AND USE TAX. THE COURT REASONED THAT ONLY INFORMATION WAS BEING CREATED AND SOLD, 'AND THE MAGNETIC TAPES WHICH CON TAIN THIS INFORMATION ARE ONLY A METHOD OF TRANSMITTING THESE INTELLECTUAL CREATIO NS FROM THE ORIGINATOR TO THE USER. IT IS MERELY INCIDENTAL THAT THESE INTANGIBLE S ARE TRANSMITTED BY WAY OF A TANGIBLE REEL OF TAPE THAT IS NOT EVEN RETAINED BY THE USER. IN THE CASE OF FIRST NATIONAL BANK V. BULLOCK (TEX. CIV. APP. 1979), 584 S.W.2D 548, THE BANK OBTAINED LICENSES TO USE FOUR PROGRAM S, THAT IS, SOFTWARE, WHICH INSTRUCTED THE BANK'S COMPUTER TO PERFORM DEPOSIT A ND LENDING FUNCTIONS AND PROCESS GENERAL ACCOUNTING. THE INFORMATION WAS CON TAINED, ON MAGNETIC TAPES. THE COURT STATED THAT IT WOULD LOOK TO THE 'ESSENCE OF THE TRANSACTION' TO DETERMINE WHETHER THE PROPERTY PURCHASED WAS TANGIB LE OR INTANGIBLE. THE COURT HELD THAT, SINCE THE INFORMATION ON THE TAPES COULD HAVE BEEN COMMUNICATED IN SEVERAL DIFFERENT WAYS., AND THE COMPUTER COULD EVE N HAVE BEEN PROGRAMMED OVER THE TELEPHONE OR BY HAND, THE ESSENCE OF THE P URCHASE WAS NOT THE TAPES, BUT THE PROCESS WHICH ENABLED THE COMPUTER TO FUNCT ION. THE SOFTWARE WAS THEREFORE IN ESSENCE INTANGIBLE PROPERTY. IN ST ALBANS CITY AND DISTRICT COUNCIL V INTERNATIO NAL COMPUTERS LTD [1997 FSR 251] SIR LAIN GLIDEWELL IN DECIDING ON WHETHER PROG RAMS WERE GOODS, COMMENTED ON TANGIBILITY. HE REFERRED TO THE SOFTWARE OR PROG RAMS AS 'THE INTANGIBLE INSTRUCTIONS OR COMMANDS'. 6.12 THE COURTS HAVE HELD THAT SOFTWARE IS INTRINS ICALLY INCORPOREAL AND THAT IT IS MERE INTANGIBLE 'KNOWLEDGE' WHICH 'RESTS IN THE MAC HINE. [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 [ST ATE V. CENTRAL COMPUTER SERVS., INC., 349 SO. 2D 1160, 1162 (ALA. 1977), HO NEYWELL INFORMATION SYSA., INC. V. BOARD OF ASSESSMENT APPEALS, [1980) 7 COMPU TER L. SERV. REP. (BIGELOW) 486, 491 (COLO. DIST CT. 1975); NOVA COMP UTING SERVS., INC. V. ASKEW, [19801 6 COMPUTER L. SERV. REP. (BIGELOW) 18 , 27 (FLA. DIV. ADMIN. HEARINGS 1976); COMMERCE UNION BANK V. TIDWELL, 53 8 S.W.2D 405, 408 (TENN. 1976).] BECAUSE THE TAPE, DISK, CARD, OR OTHE R TRANSFERRING MEDIUM MAY BE STORED, RETURNED, OR DESTROYED AFTER BEING USED BY THE VENDEE MACHINE, THE UNIVERSAL COURT REASONED THAT THE VISIBLE M ANIFESTATION OF SOFTWARE-THE MEDIUM-IS INCONSEQUENTIAL TO THE TRANSACTION. THEREFORE, THE COURT ASSUMED, THE OBJECT OF THE TRA NSACTION 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 C ATEGORIES OF 'COMPUTER AND SOFTWARES' INDICATED IN APPENDIX-1 (PART-A) WHICH D EALS ONLY WITH TANGIBLE ASSETS. SINCE THE SOFTWARES DEVELOPED BY THE ASSESSEE COMPA NY 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. ITA NOS.1406 & 1407/CHNY/2015 :- 14 -: 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 INTANGIBLE ASSET ELIGIBLE FOR DEPRECIATION AT 25 PER CENT FOR THE RELEVANT ASSESSMENT YEAR; PAYMENT WAS NOT DEDUCTIBLE IN ITS ENTIRETY AS REVENUE EXPENDITURE. SUDARSHAN CHEMICAL INDUSTRIES LTD. VS. ACIT (2008) 114 TTJ (PUNE) 131 : (2008) 110 ITD 171 (PUNE) II. SINCE THE ASSESSEE ITSELF HAS CLAIMED WEBSITE D EVELOPMENT EXPENSES AS PART OF BLOCK OF ASSETS ON WHICH DEPRECIATION HAS BEEN CLAI MED AND ALLOWED, THE SAME CANNOT BE TREATED AS REVENUE EXPENDITURE. DEPRECIAT ION @ 25% APPLICABLE ON INTANGIBLE ASSETS IS ALLOWABLE ON SUCH EXPENDITURE SOFTWARE DEVELOPMENT EXPENDITURE MAKEMYTRIP (INDIA) (P.) LTD. VS. DCIT ( 2012) 51 SOT 19 (DELHI) : (2012) 147 TTJ (DEL) 231 : (2012) 72 DTR (DEL) (TRI B) 466. III. ASSESSEE BEING COMPANY ENGAGED IN BUSINESS OF SOFTWARE DEVELOPMENT AS WELL AS SALES AND ITS EXPORTS - ASSESSEE WAS ELIGIBLE FO R DEPRECIATION ON INTANGIBLE ASSETS ACQUIRED BY IT. DCIT VS. NETVISIIN WEB TECHN OLOGIES LTD. (2013) 37 CCH 280 AHDTRIB. IV. IN THE CASE OF DCIT VS. HONDA SIEL CARS LTD.(20 13) 21 ITR (TRIB) 497 (DELHI) : (2013) 142 ITD 783 (DELHI), IT IS HELD: '8.1 THE SPECIAL BENCH FARTHER OBSERVED THAT THE RI GHTS 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 AS SESSEE'S OWNERSHIP OF LIMITED RIGHT OVER THE TANGIBLE ASSET IS TO CONCLUD E THAT THE ASSESSEE IS THE OWNER OF THE PLANT. IT WAS ALSO OBSERVED THAT IN TH E CASE OF MARUTI UDYOG LTD. V. DY. CIT (2005) 92 ITD 119, RADHA KRISHNA FO ODLAND LTD. ; ESCORTS LTD. V. ASSTT. CIT (2006) 8 SOT 167 AND HERO HONDA MOTORS LTD., THE CONCLUSION THAT THE EXPENDITURE ON PURCHASE OF COMP UTER 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 (IND IA) PVT LTD VS DCIT CIRCLE [2012] 19 TAXMANN.COM 137 (DELHI), BY THE INCOME TA X 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 T HE WEBSITE AS SOFTWARE. HOWEVER, THE DELHI ITAT HELD THAT A WEBSITE CANNOT BE CONSID ERED AS SOFTWARE. RATHER, IT SHOULD BE CLASSIFIED AS AN INTANGIBLE ASSET AND ONL Y 25 PER CENT OF ITS COST IS ALLOWABLE AS DEPRECIATION. 6.16 ONE OF THE ARGUMENTS BY THE ASSESSE IS THAT SU PREME COURT HAS CONSIDERED THE IDENTICAL QUESTION OF CLASSIFICATION OF THE 'D IGITAL 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 AS SESSMENT ORDER. THE ISSUE CONSIDERED BY THE HON'BLE SUPREME COURT IS WHETHER THE 'MOTION CAPTURE ANIMATION FILES' IS COMPUTER SOFTWARE AND IS ELIGIB LE FOR EXEMPTION FROM CUSTOM DUTY OR NOT. THE SUPREME COURT HAS HELD THAT THE S AME 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 UND ER 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 COU RT IS ON DIFFERENT CONTEXT AND ITA NOS.1406 & 1407/CHNY/2015 :- 15 -: THE SUPREME COURT HAS NOT EXAMINED WITH RELEVANCE T O THE INCOME TAX ACT, RELYING ON THE SAME BY THE ASSESSE IS NOT CORRECT. 6.17 I HAVE ALREADY DEALT WITH THE DIF FERENCE BETWEEN THE SOFTWARE/DEVELOPED/ACQUIRED AND COPY OF COMPUTER SO FTWARE PURCHASED BY IT. IN THE PRESENT CASE, SOFTWARE DEVELOPED IS ITS INTELLE CTUAL PROPERTY RIGHT HAVING ENDURING BENEFIT, AS CLAIMED BY THE ASSESSEE THAT I T IS ELIGIBLE TO USE THE ANIMATION IN SEQUELS ETC. THESE ITEMS ARE IN THE FO RM OF DEVELOPED SOFTWARE AND ARE INTANGIBLE ASSETS OF THE COMPANY IN THE FIRST P LACE. 6,18 ACCORDING TO ACCOUNTING STANDARD 26 (AS-26) IS SUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) ALSO ALL SOFT WARE THAT ARE DEVELOPED EITHER WITHIN AN ORGANISATION OR AVAILED THROUGH OTHER SOU RCES, AND PROVIDE ENDURING BENEFITS ENABLING EARNINGS IN THE PRESENT AND IN FU TURE, SHOULD BE TREATED AS INTANGIBLE CAPITAL ASSETS. IN VIEW OF ABOVE REASONINGS JUDICIAL PRONOUNCEMENTS , I HELD THAT THIS SOFTWARE WHICH WERE DEVELOPED BY THE ASSESSE COMPANY ARE ENT ITLED FOR DEPRECIATION @ 25%. HENCE, THE ASSESSMENT MADE BY THE AO IN THIS R ESPECT IS JUSTIFIED AND ACCORDINGLY, THE GROUNDS NO. A,B,C,D,E & F SET OUT IN THE GROUNDS OF APPEAL ARE DISMISSED. IN THE RESULT, THE APPEAL FILED BY THE APPELLANT IS DISMISSED. 5. AGGRIEVED BY AN APPELLATE ORDER PASSED BY LEARNE D CIT(A), THE ASSESSEE HAS FILED AN APPEAL WITH TRIBUNAL. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A SOFTWARE DEVELOPER AND THE ISSUE BEFORE THE TRIBUNAL IS WHETHER THE ASSESSEE IS ENTITLED FOR DEPRECIATION @ 25% OR 60% ON COMPUTER SOFTWARE . IT WAS SUBMITTED THAT IN FIRST ROUND MATTER WENT UP TO TRIBUNAL AT THE BEHEST OF REVENUE AND THE TRIBUNAL WAS PLEASED TO SET ASIDE T HE MATTER TO FILE OF THE AO FOR FRESH ADJUDICATION OF THE ISSUE. IT WAS SUBMITTED T HAT 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 19 61 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 APPE LLATE ORDER PASSED BY LEARNED CIT(A). IT WAS SUBMITTED THAT IN ASSESSEES OWN CASE IN CONTEXT OF CUSTOMS LAW, HONBLE SUPREME COURT HAS HELD IN COMMISSIONER OF CUSTOMS ITA NOS.1406 & 1407/CHNY/2015 :- 16 -: V. PENTAMEDIA GRAPHICS LTD., THAT THE MOTION CAPTU RE ANIMATION FILMS WOULD QUALIFY TO BE CLASSIFIED AS INFORMATION TECHN OLOGY SOFTWARE, IN CIVIL APPEAL NO. 2576 OF 2001 VIDE JUDGMENT DATED 09.05.2 006. THE LEARNED COUNSEL FOR THE ASSESEE ALSO RELIED UPON DECISION O F ITAT, CHENNAI BENCHES IN ITA NO. 107/MDS/2012 IN LASER SOFT INFOS YSTEMS LIMITED V. ITO , VIDE ORDERS DATED 31.01.2013. THE ASSESSEES COUNSEL ALSO BROUGHT TO OUR NOTICE, ORDER PASSED BY ITAT, CHENNAI IN ASS ESSEES OWN CASE IN FIRST ROUND IN ITA NO. 144/MDS/2011, DATED 09.09.20 11. 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 B Y LEARNED CIT(A). IT WAS SUBMITTED THAT DIGITAL CONTENT DEVELOPED BY ASS ESSEE IS INTANGIBLE ASSET. IT WAS SUBMITTED THAT HONBLE 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 OR DER PASSED BY LEARNED CIT(A). 6. WE HAVE CONSIDERED RIVAL CONTENTIONS AND PERUSED THE MATERIAL ON RECORD INCLUDED CITED CASE LAWS. WE HAVE OBSERVED T HAT LIMITED ISSUE FOR OUR ADJUDICATION IS AS TO ELIGIBILITY OF THE ASSESS EE FOR DEPRECIATION ON DIGITAL CONTENT DEVELOPED BY ASSESSEE AND WHICH I S HELD BY ASSESSEE AS AN ASSET WHICH IS USED IN VARIOUS FILMS BY ASSESS EE, IS TO BE ALLOWED AT THE RATE OF 60% BEING COMPUTER SOFTWARE OR IT IS TO BE ALLOWED @25% AS AN INTANGIBLE ASSET. THE REVENUE IS CONTENDING THAT THIS DIGITAL CONTENT ITA NOS.1406 & 1407/CHNY/2015 :- 17 -: DEVELOPED BY ASSESSEE IS MERELY INTANGIBLE ASSET WH ICH ENTITLES ASSESSEE FOR DEPRECIATION @ 25% WHILE ASSESSEE IS CONTENDING THAT THE SAME IS COMPUTER SOFTWARE AND THE ASSESSEE IS ELIGIBLE FOR DEPRECIATION @ 60%. IN ANY CASE THE EFFECT WILL BE TAX NEUTRAL AS OVERALL DEPRECIATION SPREAD OVER SEVERAL YEARS WILL ULTIMATELY CANNOT EXCEED IN ALL CUMULATIVELY COST OF THE ASSET. THE ASSESSE HAS CONTENDED THAT IT HAS DEVEL OPED SOFTWARE RELATING TO ANIMATION GRAPHICS AND SPECIAL EFFECTS, BASED ON WHICH SEVERAL ANIMATION FILMS HAVE BEEN PRODUCED BY IT , EVEN SOM E NOMINATED FOR THE OSCAR AWARDS. THE COMPUTER ANIMATION AND SPECIAL EF FECTS IN THE FORM OF COMPUTER SOFTWARE ARE REFERRED TO AS DIGITAL CONTE NT, STORED IN THE HARD DISC OF THE COMPUTER. THUS, THE ASSESSEE IS CLAIMIN G THAT DIGITAL CONTENT DEVELOPED BY IT IS ESSENTIALLY COMPUTER SOFTWARE IN SO FAR AS IT RELATED TO THE COMPUTER PROGRAM THAT HAS BEEN RECORDED ON A ST ORAGE DEVICE SUCH AS A DISC. THE ASSESSEE HAS CLAIMED THAT THE CONTENT DEVELOPED IS UTILIZED IN THE MULTIMEDIA AND ENTERTAINMENT INDUSTRY AND , BY IS VERY NATURE, IS A SERIES OF SOFTWARE PROGRAMME RECORDED ON STORAGE DE VICE. AS PER RULE 5 TO INCOME-TAX RULES, 1962, THE DEPRECIATION IN RESP ECT OF BLOCK OF ASSETS SHALL BE CALCULATED AT PERCENTAGES SPECIFIED IN APP ENDIX 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 ASSES SEE AT ANY TIME DURING THE PREVIOUS YEAR . IN APPENDIX 1 TO INCOME-TAX RUL ES, 1962 AT PART A UNDER CLAUSE III- MACHINERY AND PLANT AT SUB-CLAUSE 5 , IT IS SPECIFIED THAT COMPUTERS INCLUDING COMPUTER SOFTWARE SHALL BE ELIG IBLE FOR DEPRECIATION @ 60%. THE SAID ALSO REFER TO NOTE NUMBER 7 WHICH CLA RIFY THAT COMPUTER ITA NOS.1406 & 1407/CHNY/2015 :- 18 -: SOFTWARE MEANS ANY COMPUTER PROGRAM RECORDED ON AN Y DISC, TAPE , PERFORATED MEDIA OR OTHER INFORMATION STORAGE DEVIC E. WHILE PART B SPECIFIES INTANGIBLE ASSETS WHICH INCLUDE KNOW-HO W, PATENTS , COPY RIGHTS , TRADE MARKS , LICENSES , FRANCHISE OR ANY OTHER B USINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE WHICH SHALL ENTITLE ASSESS EE FOR DEPRECIATION @25%. THE ASSESSEE HAS RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN ITS OWN CASE RENDERED IN CONTEXT OF CUSTOM S LAWS IN COMMISSIONER OF CUSTOMS, CHENNAI V. PENTAMEDIA GRAP HICS LIMITED IN APPEAL(CIVIL) 2576 OF 2001 DATED 09.05.2006, WHEREI N IN CONTEXT OF CUSTOMS NOTIFICATIONS AS WERE APPLICABLE ANY KIND O F DATA WHICH IS CAPABLE OF BEING MANIPULATED BY MEANS OF AUTOMATIC DATA PRO CESSING MACHINE WOULD BE COVERED BY THE TERM INFORMATION TECHNOLOG Y SOFTWARE. PRESENTLY, WE ARE CONCERNED WITH THE 1961 ACT AND T HE 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) ITA NOS.1406 & 1407/CHNY/2015 :- 19 -: NOTE 7 STIPULATES COMPUTER SOFTWARE MEANS ANY COM PUTER PROGRAM RECORDED IN ANY DISC, TAPE, PERFORATED MEDIA OR OTH ER INFORMATION STORAGE DEVICE. THUS, AS PER NOTE 7, COMPUTER SOFTWARE HAS BEEN GIV EN RESTRICTED COVERAGE TO COMPUTER PROGRAM VIS--VIS CUSTOMS N OTIFICATIONS REFERRED TO BY HONBLE SUPREME COURT IN THE AFORESTATED CASE IN ASSESSEES OWN CASE , WHEREIN THE SAID CUSTOM NOTIFICATIONS REFER RED TO INFORMATION TECHNOLOGY SOFTWARE MEANS ANY REPRESENTATION OF IN STRUCTIONS, DATA, SOUND OR IMAGE INCLUDING SOURCE CODE AND OBJECT COD E , RECORDED IN A MACHINE READABLE FORM , AND CAPABLE OF BEING MANIPU LATED OR PROVIDING INTERACTIVITY TO A USER , BY MEANS OF AN AUTOMATIC DATA PROCESSING MACHINE TO BE COVERED BY THE TERM INFORMATION TECH NOLOGY SOFTWARE . THUS, THE COVERAGE UNDER CUSTOMS LAWS WAS VERY WIDE WHILE WE ARE DEALING WITH 1961 ACT READ WITH 1962 RULES AND COVE RAGE OF THE TERM COMPUTER SOFTWARE IS RESTRICTIVE TO COMPUTER PROGRA M WHICH IS RECORDED IN ANY DISC , TAPE , PERFORATED MEDIA OR OTHER INFORMA TION STORAGE DEVICE. THUS, AS COULD BE SEEN THAT THE ASSESEE HAS DEVELOP ED DIGITAL CONTENT WHICH IS HELD BY ASSESSEE AS AN ASSET AND IS USED I N VARIOUS FILMS ETC AFTER BEING MANIPULATED. THIS IN OUR CONSIDERED VIEW CANN OT BE EQUATED WITH A COMPUTER PROGRAM BUT WHAT IS HELD BY ASSESSEE IS A DIGITAL CONTENT WHICH IS USED BY ASSESSEE IN VARIOUS FILMS ETC. . THE COM PUTER ANIMATION AND SPECIAL EFFECTS ARE DIGITAL CONTENT WHICH ARE STORE D IN THE HARD DISC OF THE COMPUTER. THIS DIGITAL CONTENT DEVELOPED BY ASSESSE E IS UTILIZED IN THE ITA NOS.1406 & 1407/CHNY/2015 :- 20 -: MULTIMEDIA AND ENTERTAINMENT INDUSTRY AND AT BEST I T IS A COPYRIGHTED INTANGIBLE ASSET OWNED BY ASSESSEE WHICH IS MANIPUL ATED BY ASSESSEE TO BE USED IN VARIOUS FILMS ETC. BUT TO CONTEND THAT I T IS A COMPUTER SOFTWARE WITHIN THE MEANING OF APPENDIX 1 WILL BE FAR FETCHE D AS IT IS NOT A COMPUTER PROGRAM. IF THE LANGUAGE IN THE STATUTE IS CLEAR AND UNAMBIGUOUS THEN STRICT INTERPRETATION HAS TO BE DO NE 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 INS TRUCTIONS THAT CAN BE EXECUTED BY A COMPUTER TO PERFORM A SPE CIFIC TASK. MOST COMPUTER DEVICES REQUIRE PROGRAMS TO FUNCTION PROPE RLY. A COMPUTER PROGRAM IS USUALLY WRITTEN BY A COMPUTER PROGRAMMER IN A PROGRAMMING LANGUAGE. FROM THE PROGRAM IN ITS HUMAN-READABLE FO RM OF SOURCE CODE, A COMPILER OR ASSEMBLER CAN DERIVE MACHINE CODEA FOR M 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 O F COMPUTER PROGRAMS, LIBRARIES, AND RELATED DATA ARE REFERRED TO AS SOFTWARE. COMPUTER PROGRAMS MAY BE CATEGORIZED ALON G FUNCTIONAL LINES, SUCH AS APPLICATION SOFTWARE AND SYSTEM SOFTWARE. T HE UNDERLYING METHOD USED FOR SOME CALCULATION OR MANIPULATION IS KNOWN AS AN ITA NOS.1406 & 1407/CHNY/2015 :- 21 -: ALGORITHM.COMPUTER PROGRAMMING IS THE PROCESS OF DE SIGNING AND BUILDING AN EXECUTABLE COMPUTER PROGRAM TO ACCOMPLISH A SPEC IFIC COMPUTING RESULT. PROGRAMMING INVOLVES TASKS SUCH AS: ANALYSI S, GENERATING ALGORITHMS, PROFILING ALGORITHMS' ACCURACY AND RESO URCE CONSUMPTION, AND THE IMPLEMENTATION OF ALGORITHMS IN A CHOSEN PROGRA MMING LANGUAGE (COMMONLY REFERRED TO AS CODING). THE SOURCE CODE O F A PROGRAM IS WRITTEN IN ONE OR MORE LANGUAGES THAT ARE INTELLIGIBLE TO P ROGRAMMERS, RATHER THAN MACHINE CODE, WHICH IS DIRECTLY EXECUTED BY THE CEN TRAL 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 EXPERTIS E IN SEVERAL DIFFERENT SUBJECTS, INCLUDING KNOWLEDGE OF THE APPLICATION DO MAIN, SPECIALIZED ALGORITHMS, AND FORMAL LOGIC.TASKS ACCOMPANYING AND RELATED TO PROGRAMMING INCLUDE: TESTING, DEBUGGING, SOURCE COD E MAINTENANCE, IMPLEMENTATION OF BUILD SYSTEMS, AND MANAGEMENT OF DERIVED ARTIFACTS, SUCH AS THE MACHINE CODE OF COMPUTER PROGRAMS. THES E MIGHT BE CONSIDERED PART OF THE PROGRAMMING PROCESS, BUT OFT EN THE TERM SOFTWARE DEVELOPMENT IS USED FOR THIS LARGER PROCESS WITH TH E TERM PROGRAMMING, IMPLEMENTATION, OR CODING RESERVED FOR THE ACTUAL W RITING OF CODE. THE SCOPE OF INFORMATION TECHNOLOGY SOFTWARE AS I S REFERRED TO IN HONBLE SUPREME COURT JUDGMENT IN ASSESSEES OWN CASE WAS I N CONTEXT OF CUSTOMS LAWS WHICH WAS VERY VIDE DEFINITION AND HEN CE WE CANNOT DRAW ITA NOS.1406 & 1407/CHNY/2015 :- 22 -: ANALOGY IN THE 1961 ACT READ WITH 1962 RULES. THUS, TO SAY THAT DIGITAL CONTEND DEVELOPED BY ASSESSEE CAN BE EQUATED WITH C OMPUTER PROGRAM IS FAR FETCHED BUT RATHER IT IS A COPYRIGHTED MATERIAL DEVELOPED BY ASSESSEE WHICH IS STORED IN COMPUTER . THIS DIGITAL CONTENT WAS MANIPULATED BY ASSESSEE TO BE USED IN DIFFERENT FILMS BUT STILL IT CANNOT BE CATEGORIZED T A HIGHER PEDESTAL OF BEING TERMED AS COMPUTER PROGRA M RATHER IT STILL RETAINS THE CHARACTER OF COPYRIGHTED MATERIAL BEING INTANGIBLE ASSET AND IN OUR CONSIDERED VIEW, THE ASSESSEE IS ELIGIBLE FOR D EPRECIATION @ 25% AS THESE COPYRIGHTED MATERIAL DEVELOPED BY ASSESSEE BE ING DIGITAL CONTENT WHICH IS USED BY THE ASSESSEE IN VARIOUS FILMS ETC. . THUS, WE CONCUR WITH THE VIEW OF LEARNED CIT(A) WHO HAS PASSED WELL REAS ONED ORDER WHICH WE AFFIRM AND DISMISS THE APPEAL OF THE ASSESSEE ON T HIS ISSUE. THUS, GROUND NUMBER 2 TO 8 STAND DISMISSED. THE GROUND NUMBER 1 AND 10 ARE GENERAL IN NATURE AND DOES NOT REQUIRE SEPARATE ADJUDICATIO N WHILE GROUND NUMBER 9 IS CONSEQUENTIAL IN NATURE. WE ORDER ACCORDINGLY . 7. IN THE RESULT APPEAL IN ITA NO. 1406/CHNY/2015 F OR 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 IS SUE IS DECIDED BY US AGAINST ASSESSEE BY US WHILE ADJUDICATING APPEAL FO R AY: 2007-08 IN THIS COMMON ORDER . OUR DECISION IN ITA NO. 1406/CHNY/ 2015 FOR AY: 2007- ITA NOS.1406 & 1407/CHNY/2015 :- 23 -: 08 SHALL APPLY MUTATIS MUTANDIS TO APPEAL IN ITA NO . 1407/CHNY/2015 FOR AY: 2009-10 SO FAR AS DEPRECIATION ON DIGITAL CONT ENT IS CONCERNED. THUS, THE ASSESSEE FAILS ON THIS ISSUE. THUS, GROUND NUMB ER 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 INCU RRED BY ASSESSEE IN RELATION TO EARNING OF AN EXEMPT INCOME BY THE AO B Y 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 INVESTME NTS. THE LEARNED CIT(A) HAS AFFIRMED THE DECISION OF THE AO. IT IS N O MORE RES-INTEGRA THAT RULE 8D OF THE 1962 RULE SHALL BE APPLICABLE FOR TH E IMPUGNED ASSESSMENT YEAR. THE ONLY GRIEVANCE RAISED BY ASSESSEE BEFORE US IS THAT THE ASSESSEE HAS MADE INVESTMENTS IN FOREIGN COMPANIES FROM WHIC H DIVIDEND INCOME WAS RECEIVED DURING THE YEAR UNDER CONSIDERATION ON WHICH THE ASSESSEE HAS PAID DUE TAXES TO THE GOVERNMENT AS THE SAID DI VIDEND INCOME WAS NOT EXEMPT FROM TAX AND WAS INFACT CHARGEABLE TO TA X. IT IS PRAYED THAT THE SAID INVESTMENTS IN FOREIGN COMPANIES BE EXCLUD ED WHILE APPLYING SECTION 14A OF THE 1961 ACT READ WITH RULE 8D OF TH E 1962 RULES. WE FIND MERIT IN THE CONTENTION OF THE ASSESSEE THAT ONCE T HE INCOME IS CHARGEABLE TO INCOME-TAX , SECTION 14A SHALL HAVE NO APPLICABI LITY. WE ARE RESTORING THE MATTER BACK TO THE FILE OF THE AO FOR VERIFICAT ION OF THE CONTENTION OF THE ASSESSEE AND RE-ADJUDICATE ON MERITS IN ACCORDA NCE WITH LAW AFTER DUE ITA NOS.1406 & 1407/CHNY/2015 :- 24 -: VERIFICATIONS AND ALL SUCH FOREIGN INVESTMENTS ON W HICH DIVIDEND INCOME HAS SUFFERED TAXATION IN INDIA SHALL STAND EXCLUDED . SECOND CONTENTION OF THE ASSESSEE BEFORE US IS THAT THE ASSESSEE HAS MAD E INVESTMENTS IN CERTAIN INDIAN COMPANIES FROM WHICH NO DIVIDEND INC OME WAS RECEIVED DURING THE YEAR AND HENCE NO EXEMPTION WAS CLAIMED. IT IS PRAYED THAT SUCH INVESTMENTS IN INDIAN COMPANIES FROM WHICH NO DIVIDEND INCOME WAS RECEIVED DURING THE YEAR BE EXCLUDED WHILE COMPUTIN G DISALLOWANCE OF EXPENDITURE U/S 14A OF THE 1961 ACT. WE FIND MERIT IN CONTENTIONS OF THE ASSESSEE THAT THE INVESTMENTS IN INDIAN COMPANIES W HICH DID NOT YIELDED EXEMPT INCOME DURING THE YEAR CANNOT BE INCLUDED FO R 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-ADJUDI CATE THE MATTER ON MERITS IN ACCORDANCE WITH LAW. THUS, ALL THOSE INVE STMENTS IN INDIAN COMPANIES WHICH DID NOT YIELDED EXEMPT DIVIDEND INC OME DURING THE YEAR SHALL BE EXCLUDED WHILE COMPUTING DISALLOWANCE OF E XPENDITURE U/S 14A READ WITH RULE 8D(2)(III) OF THE 1962 RULES. THE DE CISION OF SPECIAL BENCH OF ITAT, DELHI IN THE CASE OF ACIT V. VIREET INVEST MENT PRIVATE LIMITED (2017) 165 ITD 27(DEL. SB-TRIB.) IS RELEVANT. THIS GROUND NUMBER 9-11 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AS IND ICATED ABOVE. WE ORDER ACCORDINGLY. ITA NOS.1406 & 1407/CHNY/2015 :- 25 -: 10. THE GROUND NUMBER 1 AND 13 ARE GENERAL IN NATUR E AND DOES NOT REQUIRE SEPARATE ADJUDICATION, WHILE GROUND NUMBER 12 IS CONSEQUENTIAL IN NATURE. WE ORDER ACCORDINGLY. 11. IN THE RESULT , APPEAL IN ITA NO. 1407/CHNY/201 5 FOR AY: 2009-10 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT, THE APPEAL FILED BY ASSESSEE IN ITA NO.1406/CHNY/2015 FOR AY: 2007-08 STAND DISMISSED W HILE APPEAL IN ITA NO. 1407/CHNY/2015 FOR AY: 2009-10 STAND PARTLY ALL OWED FOR STATISTICAL PURPOSES. WE ORDER ACCORDINGLY. ORDER PRONOUNCED ON THE 8 TH DAY OF MAY, 2020 IN CHENNAI. SD/- SD/- ( # $! # % . . '( ) ( DUVVURU R.L.REDDY ) * /JUDICIAL MEMBER ( ) ( RAMIT KOCHAR ) /ACCOUNTANT MEMBER /CHENNAI, 6' /DATED: 8 TH MAY, 2020. TLN 5 2 0*7 87- /COPY TO: 1. ./ /APPELLANT 4. # 9 /CIT 2. 01./ /RESPONDENT 5. 7!:; 0** /DR 3. # 9 ( ) /CIT(A) 6. ;(, > /GF
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