OnMobile Global Ltd. v. Additional Commissioner of Income-tax, Range -12, Bangalore

ORDER

Jason P. Boaz, Accountant Member - These are cross appeals, one each by the assessee and revenue, directed against the order of the Commissioner of Income Tax (Appeals)-III, Bangalore dt.27.6.2012.

2. The facts of the case, briefly, are as under :

2.1 The assessee is a company engaged in the business of providing mobile value added services ('MVAS' in short) and products such as caller and ring back tones, dynamic voice mail, missed call alert service and other interactive media solutions like tele-voting, interactive programming, etc. For Assessment Year 2008-09, the assessee filed its return of income electronically on 30.9.2008 declaring income of Rs.58,96,36,736. The return of income was processed under section 143(1) of the Income Tax Act, 1961 (herein after referred to as 'the Act'). The assessee filed a revised return of income on 30.3.2010 declaring income of Rs.58,48,05,807 which was on account of claiming deduction u/s.80JJAA of the Act to the tune of Rs.48,30,929. The case was selected for scrutiny and the assessment was completed by an order under section 143(3) of the Act dt.30.12.2010 wherein the income of the assessee was determined at Rs.70,98,59,466 by virtue of various additions / disallowances made by the Assessing Officer.

2.2 Aggrieved by the order of assessment for Assessment Year 2008-09 dt.30.12.2010, the assessee preferred an appeal before the CIT (Appeals) - III, Bangalore. The learned CIT (Appeals) disposed the assessee's appeal by order dt.27.6.2012 granting the assessee partial relief.

3. Aggrieved by the order of the CIT (Appeals) - III, Bangalore dt.27.6.2012 for Assessment Year 2008-09, both the assessee and revenue are in appeal before this Tribunal raising various grounds.

3.1 In its appeal, revenue has raised the following grounds :

3.2 The assessee has raised the following grounds in its appeal :

'Disallowance of legal and professional charges - Rs.2,20,40,131.

1.A. Professional charges for conducting due diligence for acquisition of Vox Mobili - Rs.1,96,32,131.

1.B. Legal and professional charges for filing patent application - Rs.24,08,000.

2. Adjustment in depreciation - Rs.9,06,45,983.

Before us, both the learned Departmental Representative and learned Authorised Representative were heard at length. The learned Authorised Representative also filed detailed notes on arguments to support the contentions put forth on the various issues involved. We shall first deal with the issues raised by revenue in its appeal.

ITA No.1175/Bang/2012 - Revenue's appeal for Assessment Year 2008-09.

4. The grounds raised by revenue at S.Nos.1, 4 and 5 are general in nature and therefore no adjudication is called for thereon.

5. Disallowance of Stamp Duty : Rs.6,87,770.

5.1 In the ground raised at S.No.2, Revenue contends that the learned CIT (Appeals), even while accepting the expenditure of stamp duty amounting to Rs.4,87,770 as capital expenditure erred in directing the Assessing Officer to allow the same under section 35D of the Act, without appreciating that the expenditure incurred in connection with the increase in authorized share capital is not an item of expenditure expressly allowable under section 35D of the Act. It is submitted that the Hon'ble Apex Court decision in the case of CIT v. General Insurance Corpn. [2006] 286 ITR 232/156 Taxman 96 on the same issue is very clear that expenses incurred for the issue of fresh share capital is capital expenditure.

5.2 In the course of assessment proceedings, the Assessing Officer observed that out of legal and professional charges, out of stamp duty debited to the extent of Rs.50,74,350, an amount of Rs.38,50,000 pertained to stamp duty paid for increasing the assessee's authorized share capital by issue of both bonus and fresh issue of shares through IPO. The Assessing Officer on examination of the same allowed deduction of the expenditure claimed towards the stamp duty related to the issue of bonus shares, but however, disallowed the portion of the stamp duty relating to the issue of fresh share capital through the IPO amounting to Rs.6,87,770.

5.3 On appeal, the learned CIT (Appeals) upheld the disallowance of the entire amount of stamp duty amounting to Rs.6,87,720 paid for increasing the authorized share capital of the assessee company through issue of bonus shares and the IPO as capital in nature. With regard to the assessee's alternate clause for deduction of the said expenses under section 35D of the Act, the learned CIT (Appeals) allowed amortisation of the same under section 35D of the Act observing that :—

5.4 In support of the grounds raised, the learned Departmental Representative submitted that the decision of the learned CIT (Appeals) is erroneous on legal principles. The learned Departmental Representative pointed out that while the Assessing Officer has made a distinction between the stamp duty related to the issue of bonus shares and the IPO, the decision of the learned CIT (Appeals) has blurred the distinction made by the Assessing Officer. The learned Departmental Representative contended that when the issue of stamp duty on the issue of bonus shares was not even agitated before the learned CIT (Appeals), even then the learned CIT (Appeals) adjudicated thereon. In view of this anamoly, the learned Departmental Representative submitted that the order of the learned CIT (Appeals) is defective and prayed that the order on this issue be set aside and that of the Assessing Officer be restored.

5.5 Per contra, the learned Authorised Representative strongly supported the decision of the learned CIT (Appeals) in allowing amortization of the expenses by invoking the provisions of section 35D(2)(c)(iv) of the Act. It was submitted that the proceeds from the issue of shares were primarily utilized for business expansion and hence the stamp duty incurred towards such issue would qualify as a deductible expenditure under section 35D of the Act. It was also submitted that the reliance placed by the Assessing Officer on the decision of the Hon'ble Apex Court in the case of General Insurance Corpn. (supra) is misplaced; since the decision was on the allowability as revenue, of expenditure incurred in connection with the issue of bonus shares. In support of its claim, the assessee placed reliance on the following decisions :

5.6-1 We have heard the rival contentions and perused and carefully considered the material on record including the judicial decisions cited by both parties. Admittedly, the stamp duty charges claimed as deduction by the assessee included the charges pertaining to both the issue of bonus shares and the IPO. It is settled law that the expenditure related to the issue of bonus shares is revenue expenditure as held by the Hon'ble Apex Court in the case of General Insurance Corpn. (supra). In this view of the matter, the Assessing Officer's action in allowing the stamp duty charges related to the issue of bonus shares as revenue expenditure is in order.

5.6-2 As pointed out by the learned Departmental Representative, the decision of the learned CIT (Appeals) in disallowing the entire stamp duty charges by holding it to be capital in nature, is not in tune with the decision of the Hon'ble Apex Court in General Insurance Corpn. (supra). Since the assessee has not raised any ground challenging this decision of the learned CIT (Appeals), we refrain from rendering any decision on the same. This mistake, is itself, cannot be a ground for setting aside the issue, as requested by the learned Departmental Representative, as the issue involved is a legal principle and there is no verification required to be made.

5.6-3 Section 35D(3)( c ) of the Act reads as under :

"…… 35D(2) The expenditure referred to in sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely :—

(c) where the assessee is a company, also expenditure—

The issue in question is whether stamp duty charges are included within the scope of the expenditure enumerated in the aforesaid section. The Hon'ble Madhya Pradesh High Court in the case of Shree Synthetics Ltd. (supra) has held that the items of expenditure mentioned in section 35D(2)(c) of the Act is only illustrative and not restrictive. In the cited case, the company had incurred certain expenditure in connection with the issue of shares. The Assessing Officer disallowed the assessee's claim with respect to expenditure incurred in connection with refunding the over subscribed amount contending that the same is not covered under section 35D(2)(c)(iv) of the Act. The Hon'ble High Court held as under :

'…. Clause (c) of sub-section (2) of section 35D starts with the words "where the assessee is a company, also expenditure," which if read with sub-clause (iv) "in connection with the issue, for public subscription, of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus" would indicate that the word "being" used here is "illustrative and not restrict." On the contrary, if after the words "also expenditure", sub-clause (iv) would have started with the words "being underwriting commission, brokerage and charges for drafting, typing printing and advertisement of the prospectus, in connection with the issue, for public subscription of shares in or debentures of the company", the submission of learned counsel for the Revenue would have some force because this word "being" as it stands today in the section cannot be read backwards, but has to be read as a whole. Therefore, we are of the opinion that the word "being" has been used here by way of illustration and is not restricted only to the words " underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus. Thus questions Nos.(1) and (2) have to be answered in favour of the assessee and against the Department.'

5.6-4 Following the decision of the Hon'ble Madhya Pradesh High Court in Shree Synthetics Ltd. (supra), the ITAT, Ahmedabad Bench in the case of Amtrex Appliances Ltd. (supra) held that all expenditure incurred in connection with the issue of IPO, etc inter alia including stamp duty to be allowable expenditure u/s.35D of the Act. Following the aforesaid decisions (supra), we hold that stamp duty charges incurred by the assessee for the public issue of shares etc. is allowable as deduction under section 35D of the Act. In this view of the matter, the ground No.2 raised by revenue is dismissed.

6. Deduction u/s.80JJA of the Act.

6.1 In the ground at S.No.3, revenue contends that the learned CIT (Appeals) erred in granting the assessee deduction under section 80JJAA ignoring the fact that the assessee's business is providing telecom services and that such services cannot be termed as IT Enabled Services. It is contended that, on the other hand, the learned CIT (Appeals) has rejected the assessee's contention that Media Resources Boards (NMS CG cards) are computers, holding that the assessee is engaged in providing telecom services and not in the activity of manufacturing an article or thing.

6.2 The factual position on this issue, as emanate from the record, is that the assessee had claimed deduction of Rs.48,30,929 under section 80JJAA of the Act with respect to wages paid to new workmen. The Assessing Officer did not allow the assessee the deduction claimed, holding that the assessee is not an 'industrial undertaking' engaged in the manufacture of an article or thing. The Assessing Officer also held that the said employees of the assessee do not fall under the definition of 'workmen' as their average salary is to the tune of Rs.3.28 lakhs per annum.

6.3 On appeal, the ld. CIT(A) allowed the assessee's claim for deduction u/s.80JJAA of the Act holding that the activities of the assessee qualify it to be considered as an industrial undertaking engaged in the production of computer software which is in the nature of an "article or thing" in the relevant context.

6.4 Both the ld. D.R. for revenue and the ld. A.R of the assessee were heard. The learned D.R. relied on the order of the A.O. to argue that the decision of the ld. CIT(A) be reversed. Per contra, the learned A.R. strongly supported the decision of the ld. CIT(A) and submitted that the decision of the co-ordinate bench of this Tribunal in the case of Asstt. CIT v. Texas Instruments India (P.) Ltd. [2009] 27 SOT 72 (Bang.)(URO) is squarely applicable to the facts of the issue under consideration.

6.5-1 We have heard the rival consideration and perused and carefully considered the material on record, including the judicial decisions cited. Section 80JJAA of the Act allows for deduction of additional wages paid to new workmen for an industrial undertaking. While the term "industrial undertaking" has not been defined in section 80JJAA of the Act, it has been defined in other provisions of the Act; like section 10(15) and 72A so as to include undertaking which is engaged, inter alia, in :

6.5-2 It is seen that the co-ordinate bench of this Tribunal in the case of Texas Instruments India (P.) Ltd. (supra), has held that a company that is engaged in development, design and manufacture of software should be considered as being an industrial undertaking for the purposes of section 80JJAA of the Act. As the assessee is engaged in the development and manufacture of software, the assessee is covered within the definition of industrial undertaking.

6.5-3 Another condition stipulated under the Act is that the assessee should be engaged in the manufacture or production of article or thing. The definition of "industrial undertaking" as stipulated in section 10(15) and section 72A of the Act extends to undertakings that are engaged, inter alia, in the manufacture of computer software or recording of programme on any disc, tape, perforated media or other information devices.

6.5-4 Section 80JJAA refers to "workmen" as defined in section 2(5) of the Industrial Disputes Act, 1947,wherein a 'workmen' is defined as :

'"Workmen" means any person (including an apprentice) employed in any industry to do any manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward, whether the terms of employment be express or implied, and for the purposes of any proceeding under this Act in relation to an industrial dispute, includes any such person who has been dismissed, discharged, or retrenched in connection with, or as a consequence of, that dispute, or whose dismissal or discharge or retrenchment has led to that dispute, but does not include any such person -

The above definition includes employment of workmen having technical skill but excludes any workmen in managerial or administrative or supervisory capacity. In the case on hand, the persons in respect of which deduction u/s.80JJAA of the Act is being claimed would fall within the above definition of the term "workmen" as defined in the Industrial Disputes Act, 1947.

6.5-5 A co-ordinate bench of this Tribunal in the case of Texas Instruments India (P) Ltd. (supra) at para 7 thereof has held that the assessee would be eligible for deduction u/s.80JJAA in respect of salary paid to the software engineers not employed in the supervisory role by holding that :

"7. As stated earlier the assessee had filed the details of the software engineers employed during the years under consideration containing the names of the employees, designation and date of joining. Further, in the same list the details of total number of employees joined during both the assessment years, number of employees without supervisory roles, workmen joined, number of supervisors joined and workmen joined and relieved during the years under consideration. A cursory perusal of this list shows that the assessee had claimed deduction in respect of employees, who had joined as engineers in their respective field such as systems engineer, test engineer, software design engineer, IC design engineer, lead engineer etc. A cursory perusal of those lists establishes that the assessee had claimed deduction in respect of the engineers employed not in the category of supervisory control. All these details were filed before the Assessing Officer during assessment proceedings. These facts were not properly considered by the Assessing Officer. Further, from the order of the CIT(A), it is seen that he had taken note of the notification issued by the Government of Karnataka and concluded that as per the notification issued, the assessee company engaged in the development of software is covered by the Industrial Disputes Act, 1947. Further it is not the case of the revenue that the assessee did not fulfill the conditions extracted elsewhere in this order. Considering all those factual matters we do not find any infirmity in the order of CIT(A) according relief to the assessee. In fact he had clarified the relevant portions related to Industrial Disputes Act, 1947 and Income-tax Act while granting relief to the assessee which are extracted at pp. 5 and 6 of this order. After carefully considering the same, we are inclined to accept the reasons shown by the learned CIT(A). The learned CIT-Departmental Representative could not assail the finding reached by the learned CIT(A) by bringing in any valid materials. The order of the CIT(A) is confirmed. It is ordered accordingly."

As the facts of the assessee in the case on hand are similar to the facts of the above cited case of Texas Instruments India (P.) Ltd. (supra), the deduction u/s.80JJAA of the Act is allowed on the basis of the following facts :—

In view of the above, we uphold the decision of the learned CIT (A) in allowing the assessee deduction u/s.80JJAA of the Act. Accordingly, the ground raised at S.No.3 by revenue is dismissed.

7. Deduction u/s.10A of the Act : Rs.55,61,880.

7.1 In the ground raised at S.No.4, revenue has challenged the decision of the learned CIT (A) in allowing deduction u/s.10A of the Act holding that the assessee is not engaged in the manufacture of article or thing. Whereas in contrast while deciding the issue of depreciation, the learned CIT (A) has held that the assessee is engaged in telecom services which are not in the nature of IT Enabled Services to claim deduction u/s.10A of the Act. It is contended that the learned CIT (A) merely relied on the words "content management" in the Notification of the CBDT on IT Enabled Services. While that content management was in conjunction with data processing, the assessee's content development was in the context of telecom services.

7.2 The facts of the case on this issue are that the assessee had claimed deduction of an amount of Rs.55,61,880 u/s.10A of the Act. The A.O. disallowed the assessee's claim for deduction u/s.10A of the Act for the following reasons :

7.3 On appeal by the assessee, the learned CIT (A) reversed the decision of the A.O. and allowed the assessee deduction u/s.10A of the Act. In doing so, the learned CIT (A) rendered the following reasons / observations :

7.4-1 We have heard the rival contentions and perused and carefully considered the material on record. In this regard, it would be relevant to extract and examine the provisions of section 10A of the Act :

"10A. Special provision in respect of newly established undertaking in free trade zone, etc. — (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :

(3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf."

As can be seen from the above, section 10A of the Act stipulates the following criteria for an undertaking to claim deduction under this section :

7.4-2 Explanation 2 to section 10A defines 'Computer Software' as under :

"Computer Software" means —

which is transmitted or exported from India to any place outside India by any means..'

7.4-3 The CBDT has issued Notification No.11521 [SO 890(E) (F.No.142/49/2000-TPL)] dt.26.9.2000 specifying the information technology enabled products / services eligible to claim deduction u/s.10A, 10B and 80HHE of the Act, which inter alia includes content development or animation. Thus, in addition to the undertakings engaged in the manufacture or production, the aforesaid Notification also extends the benefit of deduction u/s.10A of the Act to data processing and content development undertakings.

7.4-4 In the light of the provisions of law and the CBDT Notification above, we shall examine the activities of the assessee. It is seen that the assessee is engaged in the business of mobile value added services, which involve 'content development' in its STP unit. It is seen that the assessee has a dedicated studio in its STP unit where music related content is developed. The assessee also procures music and other content from third parties. The music content developed in - house and procured by the assessee is processed to a customized format to make it compatible for deployment. The assessee also develops its own content (viz. music ring tones, caller tunes, etc.) in its studio. The assessee also uses its studios for the content development. The studio of the assessee is equipped with dedicated computer systems loaded with the required software. The assessee also uses multiple softwares like Protocols v7.4, M-Powered, Adobe Audition, etc. The assessee also uses other advanced equipments which includes several hardware and systems like Sound Cards, Monitors, MIDI Controllers, Microphones, etc. which are used for development of content. These equipments, both hardware and software systems, are used for processing before it is made available for use by the customers. Once all the activities in the process are complete, the mobile compatible content is uploaded on the software platforms in the servers. From the above, it is clear that the assessee's activity of "developing content" and "conversion of the procured content into mobile readable format" would qualify to be classified as "Content Development" or "Data Processing" specified in CBDT's Notification NO.11521 and therefore the assessee can be considered as rendering IT Enabled Services.

7.4-5 As regards exports, the content developed by the assessee is uploaded on software platforms which are then transferred to the servers situated outside India from where it is accessed by mobile subscribers of that country. This, in our considered view, would qualify as exports for the purposes of section 10A of the Act.

7.4-6 In the light of the factual and legal matrix of the case as discussed above, it is seen that the assessee satisfies the twin conditions of export of computer software and repatriation of exports proceeds in convertible foreign exchange as prescribed in section 10A of the Act. We, therefore, concur with the finding of the learned CIT (A) that the assessee is entitled for deduction u/s.10A of the Act. Accordingly, ground No.4 raised by revenue is dismissed.

8. In the result, revenue's appeal is dismissed.

ITA No.1163/Bang/2012 - Assessee's appeal for Assessment Year 2008-09.

9. Disallowance of Legal & Professional Charges : Rs.2,20,40,131.

9.1 Disallowance of Professional Charges for conducting due diligence for acquisition of Vox Mobili : Rs.1,96,32,131 - In grounds raised at 1.A(a) to (d), the assessee challenges, as erroneous, the order of the learned CIT (Appeals) in holding that the amount of Rs.1,96,32,131 paid towards legal and professional charges for acquisition of Vox Mobili, France is capital nature and not revenue expenditure as claimed by the assessee. It is also contended that the learned CIT (Appeals)'s order in rejecting the assessee's alternate ground / claim for allowing deduction of these expenses under section 35D of the Act by holding that this deduction is not available for techno-financial analysis made for acquiring an existing business.

9.2 Disallowance of Legal and Professional Charges for filing patent application : Rs.24,08,000 - In grounds raised at S.No.1B(a) and (b), the assessee contends that the order of the learned CIT (Appeals) is erroneous in holding that an amount of Rs.24,08,000 paid for legal and professional charges for filing patents applications to be capital in nature and not revenue expenditure incurred by the assessee in the normal course of its business.

9.3 The brief facts of the matter, as emanate from the record, are that the assessee had claimed an amount of Rs.6,68,98,726 as expenditure incurred as "legal and professional charges" in its profit and loss account. Out of this, the Assessing Officer disallowed an amount of Rs.2,20,40,131 comprising of;

On examination thereof, the Assessing Officer was of the view that these payments have been made in connection with the acquisition of a foreign company and are therefore in the nature of capital expenditure. The Assessing Officer also held that the expenses incurred for patent registration is also capital in nature since the patent is a capital asset of the company.

9.4-1 On appeal, the learned CIT (Appeals) confirmed the aforesaid disallowance made by the Assessing Officer with the following observations :

9.4-2 In coming to this finding the learned CIT (Appeals) relied on the following judicial pronouncements, viz. K.T.M.T.M. Abdul Kayoom v. CIT [1962] 44 ITR 689 (SC) and Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC) to hold that even if the right is acquired for a short period, the expenditure on acquisition should be treated as capital expenditure and that a new acquisition could be considered of revenue nature, only if it did not increase the volume of productive capacity of the undertaking.

9.4-3 The learned CIT (Appeals) also held that, the same ratio of enduring benefit hits the assessee's claim for patent application to be allowed as revenue expenditure and in this regard placed reliance on the judgment of the ITAT, Delhi in Modi Revlon (P.) Ltd. v. Asstt./Dy. CIT [2010] 2 ITR (Trib) 632 (Delhi) which followed the decision of the Hon'ble Apex Court in the case of CIT v. Ciba of India Ltd. [1968] 69 ITR 692 to hold that where the benefit from a patent acquisition resulted in enduring benefit, the said expenditure cannot be claimed as revenue.

9.5-1 Supporting the grounds raised at 1A(a) to (d), the learned Authorised Representative assailed the impugned order of the learned CIT (Appeals) submitting that the expenditures in question were not incurred for acquiring a capital asset or any enduring benefit but only for the purpose of conducting due diligence on Vox Mobili, France before acquisition. The learned Authorised Representative submitted that the acquisition was for strategic reasons and was not in the nature of an investment for future gains. It was further submitted that since the expenditure was incurred on conducting due diligence and feasibility studies before acquiring a company or making investment, it is in the nature of revenue expenditure. The said expenditure may or may not result in the investment being finally made. It is only a preliminary step to determine the feasibility of undertaking a particular project and is purely revenue in nature. In support of its arguments, the assessee placed reliance on the following judicial pronouncements :

9.5-2 The learned Authorised Representative also put forth the assessee's alternate plea, that if the aforesaid expenditure is not allowed as revenue expenditure, then it should be allowed as a deduction in accordance with the provisions of section 35D of the Act.

9.6 Per contra, the learned Departmental Representative supported the orders of the authorities below.

9.7 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited regarding the issue of the allowability or otherwise of professional charges ofRs.1,96,32,134 for carrying out of due diligence for acquisition of Vox Mobili, France viz. grounds of appeal 1A(a) to (d)]. It is not in dispute that the aforesaid expenditure has been incurred in conducting due diligence, in preparation of a feasibility report on Vox Mobili, France in which investments are being made leading to its acquisition. On a careful appreciation of the facts of the matter in the case on hand, we find that the issue in question is squarely covered by the decision of the Delhi Bench of the ITAT in the case of Intercontinental Hotels Group India (P.) Ltd. (supra) wherein at para 6 thereof, it was held that payments in relation to due diligence and risk analysis of potential targets would not be capital in nature and held that such expenditure is incurred in the ordinary course of business of the assessee and accordingly is revenue in nature. Following this decision of the ITAT, Delhi Bench, we hold that the expenditure incurred by the assessee for conducting due diligence in report of Vox Mobili, France which was to be acquired by the assessee is revenue in nature and is accordingly allowed as a deductible expenditure under section 37(1) of the Act. Accordingly the assessee's grounds raised at 1A(a) to (d) are allowed. Since the assessee's grievance has been addressed by our order (supra), there is no requirement for us to adjudicate on the alternate grounds raised at 1A(c) and (d) in respect of the claim of deduction under section 35D of the Act at this stage.

9.8-1 Regarding the grounds raised at 1B (a) & (b) in respect of legal and professional charges of Rs.24,08,000 incurred for filing patent application, the learned A.R. in support of the grounds raised submitted that these legal charges paid for reviewing and filing of the patent application were expenses incurred in the regular course of business of the assessee, and are not capital in nature. It was also submitted that the purpose of incurring these charges was not to acquire any enduring benefit but was only a preliminary step to protect the patent acquired and is therefore revenue in nature. In support of this proposition the assessee relied on the decision of the Hon'ble Apex Court in the case of CIT v. Finlay Mill Ltd. [1951] 20 ITR 475 wherein it has been held as under :

"In our opinion, the contention urged on behalf of the appellant must fail. It is not contended that by the Trade Marks Act a new asset has come into existence. It was con- tended that an advantage of an enduring nature had come into existence. It was argued that just as machinery may attain a higher value by an implementation causing greater productive capacity, in the present case the trade mark which existed before the Trade Marks Act acquired an advantage of an enduring nature by reason of the Trade Marks Act and the fees paid for registration there under were in the nature of capital expenditure. In our opinion, this analogy is fallacious. The machinery which acquires a greater productive capacity by reason of its improvement by the inclusion of some new invention naturally becomes a new and altered asset by that process. So long as the machinery lasts, the improvement continues to the advantage of the owner of the machinery. The replacement of a dilapidated roof. by a more substantial roof stands on the same footing. The result however of the Trade Marks Act is only two-fold. By registration, the owner is absolved from the obligation to prove his ownership of the trade mark. It is treated as prima facie proved on production of the registration certificate. It thus merely saves him the trouble of leading evidence, in the event of a suit, in a court of law, to prove his title to the trade mark. It has been said that registration is in the nature of collateral security furnishing the trader with a cheaper and more direct remedy against infringers, Cancel the registration and he has still his right enforceable at common law to restrain the piracy of his trade mark. In our opinion, 'this is neither such an asset nor an advantage as to make payment for its registration a capital expenditure. In this connection it may be useful to notice that expenditure incurred by a company in defending title to property is not considered expense of a capital nature. In Southern (H. M. Inspector of Taxes) v. Borax Consolidated Limited (1). it is there stated that where a sum of money is laid out for the acquisition or the improvement of a fixed capital asset it is attributable to capital, but if no alteration is made in the fixed capital asset by the payment, then it is properly attributable to revenue, being in substance a matter of maintenance, the maintenance of the capital structure or the capital asset of the company. In our opinion, the advantage derived by the owner of the trade mark by registration falls within this class of expenditure. The fact that a trade mark after registration could be separately assigned, and not as a part of the goodwill of the business only, does not also make the expenditure for registration a capital expenditure. That is only an additional and incidental facility given to the owner of the trade mark. It adds nothing to the trade mark itself."

It is the contention of the learned Authorised Representative of the assessee that the principles laid down by the Hon'ble Apex Court in respect of 'Trade Marks' in that case are equally applicable to the issue of 'patents' in the case on hand and prayed that in view of this, the expenditure of Rs.24,08,000 incurred by the assessee be allowed as revenue expenditure.

9.8-2 Per contra, the learned Departmental Representative supported the order of the learned CIT (A) on this issue.

9.8-3 We have heard both parties and perused and carefully considered the material on record including the judicial decisions referred. The facts of the matter on this issue are not in dispute. The Assessing Officer was however of the view that this expenditure incurred for filing the patent application is for registration of patent and the same is capital expenditure since the patent is a capital asset of the assessee company. As held by the Hon'ble Apex Court in the case of Finlay Mill Ltd. (supra) in respect of trademarks; expenses incurred for the purpose of registration of trademarks goes to protect the trademark and not create the trademark per se, we are of the considered opinion that the same analogy would apply in the case on hand to expenses incurred for filing patent application; i.e. that such expenditure would go to protect the patent and not create the patent per se. In this view of the matter, we hold that the expenditure of Rs.24,08,000 incurred as legal charges for filing the patent application is revenue expenditure incurred in the course of the assessee's business and is to be allowed as a deduction. It is accordingly ordered. The grounds raised by the assessee at 1B(a) & (b) are accordingly allowed.

10. Adjustment in Depreciation : Rs.9,06,45,983

10.1 In the grounds raised at 2(a) and (b), the assessee contends that the order of the learned CIT (A) is erroneous in so far as it held that media resource boards are 'telecom equipment' and would therefore form part of 'plant and machinery' and not 'computers' for the purposes of computing allowable depreciation u/s.32 of the Act, failing to comprehend that media resource boards are a part of the server and therefore ought to be classified as computers.

10.2 The facts of the matter are that in the period under consideration, the assessee purchased Media Resource Boards ('MRB' in short) amounting to Rs.29,33,43,011 added the same to the block of assets viz. computers and claimed depreciation thereon @ 60%. The Assessing Officer on examination of the assessee's claim, did not accept the same, reclassified the 'MRB' as 'plant and machinery' holding them to be telecom equipment and allowed depreciation at 15% as applicable to 'plant and machinery.'

10.3 The learned CIT (A) in his order, upheld the order of the Assessing Officer observing as under :

10.4-1 The learned Authorised Representative was heard in support of the grounds raised. It was contended that the learned Authorised Representative, that the MRBs cannot be classified as 'plant and machinery' and the only classification possible for MRBs is under 'computers.' It was submitted that MRBs provide port capabilities as to support a variety of functions like voice play / record, tone detection / generation, echo cancellation and voice compression, as well as trunking, fax, conferencing and VOIP functions in a single PCI, compact PCI or PCI Express slot. It eliminates the need to use multiple specialized boards, provides easy access to all supported features and reduces the time spent on configuration and development.

10.4-2 The learned Authorised Representative also submitted that the MRBs can be used only in computer servers and do not have any alternate use. The MRBs form part of the computer servers, similar to modems, and help in interpreting calls and conversion of calls from digital form to voice and vice-versa. These are connected to the computer servers and help in interpreting the calls landing in the net work and routes to the respective content fillers for Ring Back Tone Services and other value added services which the assessee provides to its customers. The learned Authorised Representative submitted that in view of the above, MRBs in conjunction with the computer and servers would constitute a complete 'computer system', which enables computer servers to perform more advanced functions than a computer would generally be required to do. In support of the proposition, the learned Authorised Representative relied on the following judicial decisions :

10.5 Per contra, the learned Departmental Representative supported the orders of the authorities below and prayed for the dismissal of the assessee's appeal on this issue of depreciation for MRBs.

10.6-1 We have heard both parties and perused and carefully considered the material on record including the judicial decisions cited. The issue for our consideration is whether MRBs are to be classified as 'plant and machinery' or 'computers' for the purposes of depreciation. In this regard, it would be relevant to understand the term 'computer'. While 'computer' has not been defined in the Income Tax Act, 1961, the term 'Computer System' has been defined under Explanation (a) to section 36(1)(xi) of the Act as under :

From the above definition, it follows that a computer system would encompass a collection of devices including input and output support devices that perform functions including, but not limited to, logic, arithmetic, data storage and retrieval communication and control.

10.6-2 In the light of the above definition of 'Computer System', the functions of MRBs require to be examined. From the details on record, it appears that the function of MRBs is to support a combination of functions, performed in conjunction with the computer and servers. The MRBs are boards which are connected to computer servers which assist in receiving calls and would function only when attached to the computer. The MRBs increase the working capacity of the computers to the extent the computers receive calls and convert them into digital form. The MRBs work in conjunction with and as a part of the computer servers and cannot, in any way, be called as 'telecom equipment'. We also find that the facts of this issue in the case on hand, is similar to the facts of the case Datacraft India Ltd. (supra) wherein the Special Bench of the Mumbai Tribunal o f this order held as under :

'31. Now we have to consider whether a 'router' can be considered as "computer hardware" or a "computer component". Computer hardware refers to the physical parts of a computer and related devices. Internal hardware devices include motherboards, hard drives, and RAM. External hardware devices include monitors, keyboards, mouse, printers, and scanners. The internal hardware parts of a computer are often referred to as 'components', while external hardware devices are usually called 'peripherals'. Together, they all fall under the category of computer hardware. 'Software', on the other hand, consist of the programs and applications that run on computers. Because software runs on computer hardware, software programs often have 'system requirements', that list the minimum hardware required for the software to run.

31.1 In short, "Router" is a hardware device that routes data (hence the name) from a local area network (LAN) to another network connection. A router acts like a coin sorting machine, allowing only authorized machines to connect to other computer systems. Most routers also keep log files about the local network activity. Now the question is whether this "machine" can be used independent of Computer. If yes, then it cannot be called "Computer Hardware" in all circumstances.

31.2 When "Computer Hardware", is used as a component of the computer, it becomes part and parcel of the computer, as in the case of operating software in the computer. In such a situation, hardware in question can be considered as a part of a computer and hence a 'computer'. Per contra, when the machine is not used as a necessary assessory or in combination with a Computer, it cannot be called a 'Computer component.'

31.3 Coming to the Routers, it is seen that these can also be used with a Television and in such use, no computer is required. These are also called T.V. routers. Similarly, "Internet Service Providers", give connectivity, by installing a router in the premises of the persons/institutions availing the internet connection. In these cases the router is not used along with a computer. In such a situation, it would be a "Stand alone" equipment. In such cases this cannot be considered a component of a computer or computer Hardware. Giving another example, a computer software can be used in many devices including washing machine, televisions, telephone equipment etc. When such software is used in those devices, it integrates with that particular devices. The predominant function of the device determines its classification. Only if the Computer software, resides in a computer, then it become a part and parcel of a computer and, as long as it is as integral part of a computer, it is classified as a 'Computer'.

31.4 In view of the above discussion, we are of the considered view that router and switches can be classified as a computer Hardware when they are used along with a computer and when their functions are integrated with a 'computer' In other words, when a device is used as part of the computer in its functions, then it would be termed as a computer.

32. Now we will advert to the decisions relied on by the rival parties. We have set out above the cases decided by various Benches of the Tribunal in favour of the assessee. The lead order is in the case of Samiran Majumdar (supra) which has been followed, directly or indirectly, in most of the subsequent cases. We will take up this case for discussion, in which the question was whether printer and scanner could be allowed a higher rate of depreciation as applicable to computers. The Bench noticed that the printer and scanner cannot be used without computer. It was on this appreciation of the factual position that the printer and scanners were held to be part of computer qualifying for depreciation at the rate applicable to computer. In the opposition the orders taking view in favour of the Revenue are led by the case of router mania Technologies (supra). In this case it was observed that the router is a device which links or connects the computers for the exchange of relevant data. In reaching the conclusion that router is not eligible for depreciation at the rate applicable to computer, the Bench noticed that the router at its own does not perform any logical, arithmetical or memory functions by manipulations of electronic, magnetic or optical impulses.

33. We prefer the view taken in the case of Samiran Majumdar (supra) over that in the case of Router mania Technologies (supra) ; With utmost respect, the Mumbai Bench had taken a narrow view on this issue, by holding that only a device which can perform logical, arithmetical or memory functions by manipulations of electronic impulses etc. is computer. It has restricted the meaning of computer only to the CPU of the computer and pulled out the input and output devices from the ambit of computer. No doubt the function of the computer, as one composite unit, is to perform logical, arithmetical or memory functions etc., but it is not only the equipment which performs such functions that can be called as computer ; All the input and output devices, as discussed above, which support in the receipt of input and outflow of the output are also part of computer. CPU alone, in our opinion, cannot be considered as synonymous to the expression 'Computer'. The function of CPU is akin to the brain playing a pivotal role in the conduct of the body. As we do not call the brain alone as the body, similarly the CPU alone cannot be described as computer. Thus the computer has to necessarily include the input and output devices within its scope, subject to their exclusive user with the computer, as discussed above. If we constrict the definition of computer only to processing unit, as has been held in the case of Router mania (supra), then even the keyboard and mouse etc. will not qualify to be called as computer because these equipments also do not perform logical, arithmetical or memory functions. In the light of the meaning of 'computer' discussed in earlier paras, we are inclined to agree with the view taken by the Kolkata Bench in Samiran Majumdar (supra).

34. We therefore answer the question referred to this Special Bench in affirmative by holding that the routers and switches in the circumstances of the case, are to be included in the block of 'Computer' entitled to depreciation at the rate of 60%.'

10.6-3 The above decision of the ITAT, Mumbai Special Bench in the case of Datacraft India Ltd. (supra) has been followed by the Delhi Tribunal in the case of Microsoft Corpn. India (P.) Ltd. (supra) wherein at para 16 of the order, it was held that :

"16. … it is clear that the above equipment primarily include the routers, switches, modems, etc. which are in the nature of input and output support devices which performs the functions including communication and control and, thus, they are computer hardware when they are used along with computer and when their functions are integrated with 'computer.' Such devices used as part of the computer in its functions and, thus, it can be termed as 'computer' only, therefore, eligible for depreciation @ 60%. Therefore, also we find no infirmity in the claim of the assessee of depreciation @ 60% of ITG networking equipments."

10.6-4 A similar view was adopted by a co-ordinate bench of this Tribunal in the case of NCR Corpn. (P.) Ltd. (supra) wherein at para 10 thereof it was held as under :

"10. Having heard both the parties and having gone through the material on record, we find that this issue is more or less covered by the decision of the Special Bench in the case of Datacraft India Ltd. (cited supra) wherein it has been held that as long as the functions of the computer are performed along with other functions and the other functions are dependent upon the functions of the computer it is a computer entitled to the higher rate of depreciation. The Special Bench has also stated that all the input and output devices of the computer such as key board, mouse, monitor, etc are to form part of the block of computers. In the case before us also the ATM machine is doing both the logical, arithmetic and memory functions by manipulations of electronic magnetic or optical impulses giving debit or credit cash and thereafter dispenses the cash and gives a printed receipt. Thus as can be seen, the computer is an integral part of the ATM machine and on the basis of the information processed by the ITA No.353(Bang)/2010, computer in the ATM machine only, the mechanical functions of the dispensation of cash or deposit of cash is done. Its functions are not limited to the location at which it is placed but it also records the increase or decrease of the balance in the assessee's account in the bank consequent to such deposit or withdrawal and all this is done instantly. Thus it involves the use of internet facilities also to discharge the above functions."

10.6-5 In the above cases, a distinction has been drawn between a computer component being a necessary accessory to be called a "computer component" and not being a necessary component. The MRBs operate along with the servers and computers and are a necessary component of the "computer system". The MRB cannot function without the computers and the computers cannot perform the necessary functions required in the case on hand without the presence of the MRBs. In this view of the matter, we are of the opinion that MRBs fit into the definition of a "computer component" as explained above and therefore the decision of the ITAT Special Bench of Mumbai in the case of Datacraft India Ltd. (supra) rendered in respect of "routers" is equally applicable to the "MRBs" used by the assessee. Following the principle as explained in afore-cited decision of the Special Bench of the ITAT, Mumbai (supra), we hold that the MRBs are to be classified as "computers" for the purposes of the claim of depreciation @ 60%. Accordingly, the grounds raised by the assessee at S.Nos.2 (a) & (b) are allowed.

11. In the result, revenue's appeal is dismissed and the assessee's appeal is allowed.