Ita/340/2014 Of Commissioner Of Income Tax-Iii v. M/S. Onmobile Global Ltd

IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 18[TH|]DAY OF JANUARY 2071PRESENT| THE HON’BLE MR. JUSTICE ALOK ARADHE AND| THE HON’‘’BLE MR. JUSTICE NATARAJ RANGASW A ILT.A. NO.340 OF 2014 BETWEEN: 1.|COMMISSIONER OF INCOME. TAX-III, C.R. BUILDING QUEENS ROAD BANGALORE-560001. 2.|DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 12(2), BANGALORE. (BY MR. E.I. SANMATHI, ADVOCATE) .... APPELLANTS AND* M/S. ONMOBILE GLOBAL LTD.,NO.26, BANNERGHATTA ROADJ.P. NAGAR, III PHASEBANGALORE. (BY MR. K.R. VASUDEVAN, ADVOCATE) .., RESPONDENT THIS I.T.A. IS FILED UNDER SEC. J6O0-A OF INCOME TAXACT 1961, ARISING OUT OF ORDER DATED 21.02.2014 PASSEDIN ITA NO.1163/BANG/2012 AND ITA NO.11/75/BANG/2012 FORTHE ASSESSMENT YEAR 2008-09, PRAYING TO: | (1) DECIDE THE FOREGOING QUESTION OF LAW AND/OR-SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BYTHE HON BLE COURT AS DEEMED FIT.(ii) SET ASIDE THE APPELLATE ORDER DATED 21.02.2014|PASSED BY THE ITAT, B BENCH, BANGALORE IN APPEALPROCEEDINGSNO.LIANO.1163/BANG/2012AND|LIANO.1175/BANG/2012 FOR ASSESSMENT YEAR 2008-09. THIS I.T.A. COMING ON FOR’ HEARING, THIS’ DAY, |ALOK ARADHE J.,DELIVERED THE FOLLOWING: | JUDGMENT This appeal under Section 260-A of the Income TaxAct, 1961 (hereinafter referred to as ‘the Act’, for short) has|been filed by the revenue. The subject matter of the appealpertains to the Assessment Year 2008-09. Tne appeal wasadmitted by a Bencn of this Court vide order dated|20.04.2015 on the following substantial questions of law: 7WhetherOf)thefactsandInthecircumstances of the case, the Tribunal was|justified in law in holding tnat the expenditureincurred in connection with the issue of [PO|InteraliaStampduty|IS.af)allowableexpenditure under section 35D of the I.T. Act|despite the ruling of Apex Court in tne case ofGenerel[InsuranceCorporationV/s.CIT|(reported in 286 ITR page 232)? 2. WhetnerOP)thefactsand|In|thecircumstances of the case, the Tribunal was|justified in law in holding that the assesseeIs |eligible for claim of deduction under section|SOJJAA despite it neither being involved in tneactivities envisaged in the section 8OJJA nor|the employees for which the deduction isclaimed can be classified as “workmen @S|fnoted by tne assessing authority? 3. WhetnerrOP)thefactsand|In|thecircumstances of the case, the Tribunal was|justified in law in holding that the assesseeIs |eligible for claim of deduction under section|10A despite it being involved in activity of|mobile value added service which I[s not an I[enabled service by wrongly interpreting tne|CBDT Notification No.11571? 4. WhoetnerOP)thefactsand|In|thecircumstances of the case, the Tribunal was|justified in law in holding that the assesseeIs |eligible for claim of “Legal and Professional|CnargesOf|Rs.1,96,32,131/-and.Rs.24,08,000/-dS|frevenUuexpenditure|whereas the same nave peen J/ncurred forenauring benefit to the business and snould be treated only as capital expenditure as|rightly held by first appellate authority? 5. WhetherOP)thefactsandInthecircumstances of the case, the Tribunal was|justified in law in holding that the assesseeIs |eligible for depreciation of 60% on the Media|Resource Boards by classifying the same as|“Computers.whereasallthetecnnicalsystemslinkedtocomputercannotbetweaked and termed as ‘Computers’ eligible|for higher deduction and the same are to be.treated only as ‘plant and macninery” as NneldDytheCommissioner|Of|[ncome Tax.(Appeals)? . 2. Facts leading to filing of this appeal briefly stated arethat the assessee is engaged in the business of providingmobile value added services and products. Tne assesseefiled return of income for the Assessment Year 2008-09, In|which it declared the income of Rs.58,96,36,736/- andclaimed a refund of Rs.9,63,42,390/-. The aforesaid returnwas processed by the Assessing Officer under Section 143(1)of the Act and subsequently, regular assessment was takenup. Thereafter, on 30.12.2010, an order of assessment| 2. Facts leading to filing of this appeal briefly stated arethat the assessee is engaged in the business of providingmobile value added services and products. Tne assesseefiled return of income for the Assessment Year 2008-09, In|which it declared the income of Rs.58,96,36,736/- andclaimed a refund of Rs.9,63,42,390/-. The aforesaid returnwas processed by the Assessing Officer under Section 143(1)of the Act and subsequently, regular assessment was takenup. Thereafter, on 30.12.2010, an order of assessment| under Section 143(3) of the Act was passed by the AssessingAutnority, by which the assessing authority disallowed tne|deduction claimed in respect of stamp duty charges,|professional and legal charges, depreciation on computers aswell as claims made under Section 80JJAA of the Act as wellas Section 10A of the Act. 3. The assessee thereupon filed an appeal before theCommissioner of Income Tax (Appeals). The Commissionerof Income Tax (Appeals), by an order dated 27.06.2012,inter allaallowed the claim of the assessee in respect of |disallowance of stamp duty expenditure as well as underSection 8OJJAA and under Section 10A of the Act and|rejected the claim of the assessee in respect of disallowanceof legal and professional charges. Thus, the appeal preferredby the assessee was partly allowed. Being aggrieved, theassessee as well as the revenue filed appeal before theIncome Tax Appellate Tribunal (hereinafter referred to as ‘theTribunal’ for short). The Tribunal, by an order dated|21.02.2014, allowed the appeal preferred by the assesseewhereas the appeal preferred by the revenue was dismissed. In the aforesaid factual background, the revenue hasapproacned this Court. 4. Learned counsel for the revenue submitted tnat tne|Assessing Officer had disallowed the portion of stamp duty|relating to issue of fresh share capital tnrougn IPOamounting to Rs.6,87,/7/70/- as the same was capital inature and was not a revenue expenditure. It is furthersubmitted that the Commissioner of Income Tax (Appeals)|had accepted the aforesaid view of the Assessing Authority,but allowed the alternate claim of the assessee made under|Section 35D(3)(c) of the Act. It is also pointed out that the|Tribunal has upheld the aforesaid view taken by theCommissioner of Income Tax (Appeals). It is submitted tnatSection>35D(2)C(Iv),tnewords‘stampduty"IS.notmentionedandonly.expressionsnamely|underwritingcommission, brokerage and charges for drafting, typing,printing and advertisement of the prospectus are mentionedand therefore, the expressions used in Section 35D(2)C arerestrictive and not Illustrative in nature. _ 5. With regard to the claim of the assessee for.deduction under Section 80JJAA of the Act, it is submittedthat the Assessing Officer rightly did not allow the assessee,tne deduction claimed by it on the ground that the assesseeis not an industrial undertaking engaged in the manufactureof an articie or thing but is engaged in providing telecom|services. However, the Tribunal, by placing reliance on itsprevious decision inTEXAS INSTRUMENTS INDIA P. LTD.fFnas allowed the claim of the assessee. It iS pointed out tnatagainst the aforesaid decision, the appeal was preferrednamely ITA No.535/2007 along with ITA No.537/2007 whichwas decided by an order dated 17.02.2004 and the matterhas been remitted to consider the same afresh and therefore,the issue involved in this appeal with regard to the claim ofthe assessee for deduction under Section 8OJJAA of the Act|also deserves to be remitted. It is also urged that theCommissioner of Income Tax (Appeals) as well as theTribunal Nas erred in granting tne assessee, the benefit ofdeduction of Section 80JJAA of the Act and ignoring the fact|tnat the assessee was engaged in providing telecom servicesand was not engaged in manufacture of any article and activities of assessee may not be termed as IT enabled|services. activities of assessee may not be termed as IT enabled|services. 6. Learned counsel for the revenue, witn regard toclaim of the assessee for deduction under Section 10A of theAct has submitted that the assessee is not engaged in exportand is neither engaged in computer software and the saleproceeds of such exports have not been brought into India inconvertible foreign exchange. Therefore, the provisions ofSection 10A of the Act are not attracted as conditionsmentioned therein are not fulfilled. It is also submitted that|reliance placed by the assessee on the notification dated|26.09.2000 issued by the Central Board of Direct Taxes is misconceived and tne case of the assessee does not fallwithin the expression content development or animation usedin tne aforesaid notification. It is also submitted tnat theTribunal has not examined the contents of the agreementwhich discloses the nature of activities and the notificationwhich was relied upon by the assessee dated 26.09.2000only pertains to information technology enabled products orservices. Sofar as the claim of the assessee witn regard to disallowance of professional charges, it is submitted that theAssessing Officer has rightly held that the payments weremade in regard to acquisition of a foreign company and_therefore, some are in the nature of capital expenditure. Itisalso pointed out that the Assessing Officer has rightly held|tnat tne expenses incurred for patent registration is alsocapital in nature since patent is capital asset of the company.However, the Tribunal has failed to appreciate the aforesaidaspect of the matter. It is also pointed out that theAssessing Officer has rightly denied the claim with regard toadjustment in depreciation and has _ re-classified mediresource board as plant and machinery but not as computersby holding them to be telecom equipment and has alloweddepreciation at 15% as applicable to plant and macninery.However, the Tribunal failed to appreciate that underexplanation (a) to Section 36(1)(xi) of the Act, it is evidentthat tne media resource board cannot pe considered asequivalent to computer. It is also pointed out that the mediaresource board is a device to support a combination of functions, performed in conjunction with the computer andservers and tne media resource Doard cannot be called as computers. It is argued tnat the boards are connected tocomputer servers whicn assist in receiving calls and would|function only when attached to computers and boardsincrease the working capacity of the computers to the extentthe computers receive calls and convert them into digitalform. In support of aforesaid submission, reliance nas been|placed on the decision rendered by the Constitution Bench ofthe Supreme Court in.‘COMMISSIONER OF CUSTOMS(IMPORT), MUMBAI Vs. DILIP KUMAR & CO. (2018) 68GST 239as well as|‘ABDUL KAYOOM Vs. CIT 44 ITR 689(SC)and‘'ALEMBIC CHEMICAL WORKS CO. LTD. Vs. CIT|177 ITR 377 (SC). 7. On the other hand, learned counsel for the assesseesubmitted that the findings recorded by the Commissioner of Income Tax (Appeals) as well as the Tribunal are based on|meticulous appreciation of evidence on record which do not|call for interference. It is further submitted that Section|35D(3)(c) was considered by the High Court of Bombay in.‘CIT Vs. MAHINDRA UGINE AND STEEL CO. LTD.|(2002) 120 TAXMAN 250 (BOMBAY)and the Division. 7. On the other hand, learned counsel for the assesseesubmitted that the findings recorded by the Commissioner of Income Tax (Appeals) as well as the Tribunal are based on|meticulous appreciation of evidence on record which do not|call for interference. It is further submitted that Section|35D(3)(c) was considered by the High Court of Bombay in.‘CIT Vs. MAHINDRA UGINE AND STEEL CO. LTD.|(2002) 120 TAXMAN 250 (BOMBAY)and the Division. Bench of Bombay High Court held that the stamp duty paid|on debenture issue was an allowable item of deduction underSection 35D of the Act. Therefore, in the light of aforesaiddecision of Bombay High Court, the conclusion of the Tribunalwith regard to allowance of deduction of stamp duty does notcall for any interference. While inviting our attention toparagraph 6.5.4 of the order passed by the Tribunal, it issubmitted that the Tribunal has specifically recorded a findingtnat the pusiness of tne assessee falis within the definition oftne term industrial Undertaking and the assessee is engagedin providing information technology enabled services i.e.computer software and the assessee has claimed deduction|only on those payments which were made to workmen whowere not employed in supervisory capacity. Therefore, thefinding on this issue has been recorded on merits. Therefore,in the fact situation of the case, there is no need to remandthe matter. Sofar as the claim of the assessee with regard todeduction under Section 10A of the Act is concerned, learnedcounsel for the assessee has submitted that the aforesaidissue Nas been dealt with in paragrapn 7.4.4 by the Tribunal,where the Tribunal has examined the activities of the assessee in detail and has held that the nature of the activityof the assessee would amount to development content andconversion of procured content into mobile readable format.Therefore, the assessee is entitled to the benefit of'notification dated 26.09.2000. In support of aforesaidsubmission, reliance Nas been placed on the decision of theDelhI]HighCourtin'CIT-II,NEWDELHIYs.MLOUTSOURCING SERVICES (P) LTD. (2015) 228TAXMAN 54, (DELHI) AND CIf-Il Vs. McKINSEYKNOWLEDGECETNREINDIAPVT.LTD,‘DATED27,03.2015 IN ITA NO.217/2014and our attention has/§been invited to paragrapns 9 and 10, respectively. 8. With regard to the legal and professional charges, itis submitted that the Tribunal by assigning valid and cogentreasons which have been recorded in paragraph 9.7 of theorder, has rightly allowed the claim for deduction. It is alsourged that the adjustment in depreciation has rigntly beenallowed. In this connection, our attention has been invited tofindings recorded by the Tribunal in paragraph 10.6.2 andhas been submitted that the Tribunal has taken note of the functions of the media source board and by placing reliancein the case of|"DCIT Vs. MICROSOFT CORPORATIONINDIA P. LTD.’ 139 TTJ 40, which deal with the case ofrouters, has rightly recorded the conciusion that the mediaresource board is a necessary accessory to be called acomputer component. It is further submitted tnat the orderpassed by the Tribunal does not call for any interference. QO. We nave considered the SUDMISSIONS made on potnsides and nave perused the record. We propose to deal withthe substantial questions of law ad seriatum. The firstsubstantial question of law pertains to the claim of theassessee with regard to stamp duty for an amount ofRs.6,8/7,7/0/-. The Assessing Officer has disallowed theaforesaid claim on the ground that the expenditure is capitalin nature and not revenue’ expenditure. Even the.Commissioner of Income Tax (Appeals) has accepted theaforesaid finding of the Assessing Officer. However, thebenefit of deduction of stamp duty has been granted in viewof Section 35D(3)(c) of the Act. The Tribunal has affirmed the aforesaid finding. The relevant extract of Section 35D(3)(c) reads as under: "(c) where the assessee is a company, alsoexpenaiture QO. We nave considered the SUDMISSIONS made on potnsides and nave perused the record. We propose to deal withthe substantial questions of law ad seriatum. The firstsubstantial question of law pertains to the claim of theassessee with regard to stamp duty for an amount ofRs.6,8/7,7/0/-. The Assessing Officer has disallowed theaforesaid claim on the ground that the expenditure is capitalin nature and not revenue’ expenditure. Even the.Commissioner of Income Tax (Appeals) has accepted theaforesaid finding of the Assessing Officer. However, thebenefit of deduction of stamp duty has been granted in viewof Section 35D(3)(c) of the Act. The Tribunal has affirmed the aforesaid finding. The relevant extract of Section 35D(3)(c) reads as under: "(c) where the assessee is a company, alsoexpenaiture (iv) in connection with the tssue, for public|subscription, of shares in or debentures of the.company,beingunderwritingcommission,brokerage and charges for drafting, typing,printing and advertisement of the prospectus" 10. The expression ‘in connection with issue for public|subscription of shares in or debentures of the company’ is anexpression of wide import. The Supreme Court in ‘|INDIA.CEMENTS LTD, Vs. CIT 60 ITR 52Nas held tnat§expenditure on account of stamp duty even after introductionof 35D, is an admissible expenditure in connection with issueof public subscription. The aforesaid decision was reliedupon by High Court of Bombay in|MAHINDRA UGINE ANDSTEEL CO. LTD, SUPTa, and it was held that the aforesaid|expression would improve stamp duty payable by theassessee on the debenture issue. In view of aforesaidenunciation of law, the expenses incurred by the assessee towards stamp duty in connection with issue for publicsubscription of shares in or debentures of the company is anallowable expenditure under Section 35D of the Act.|Therefore, the first substantial question of law is answeredagainst the revenue and in favour of the assessee. 11. Sofar as claim for deduction of the assessee under.Section 10A of the Act is concerned, before proceedingfurther, it is apposite to take note of relevant extract of|Section 10A(1) of the Act which reads as under: "10A (1) Subject to the provisions of this section,a deduction of sucn profits and gains as arederived by an undertaking from tne export ofarticles or things or computer software for aperiod of ten consecutive assessment yearsbeginning witn the Assessment Year relevant to.tne previous year in which tne unaertaking begins.to manufacture or produce sucn articles or thingsor computer software, as the case may De, shall|be allowed from the total Income of the’assessee. Thus, from perusal of the relevant extract of Section 10A(1),it is evident that the deduction under Section 10A of the Act is available to an undertaking if sale proceeds of articles ofthings of computer software exported out of India or receivedin or brought into in India in convertible foreign exchange,within a period of six months from the end of previous yearor within such further period that the competent authoritymay aliow in this behalf. Tne Tribunal, in paragrapn 7.4.4has taken note of the activities of the assessee and has heldthat the assessee is engaged in the business of mobile addedvalue services, whicn involve content development in its STPunit. It has further been held that the assessee has aGcedicated studio In this STP unit wnere music related contentis developed. The assessee procures music and othercontents on the third parties. The assessee also uses itsstudios for content development. It has further been heldthat assessee is engaged in the activity of developing contentand conversion of procured content into mobile readableformat and the same would qualify to be classified as content|development or data processing and the same would becovered under the notification dated 26.09.2000 issued bytne Central Board of Direct Taxes. The High Court of Delni inML OUTSOURCING P. LTD.,SUPIdand|MCKINSEYfSUPFa, has interpreted the notification and has held that intention oftne legislature is not to constrain or restrict but to enable theBoard to include several services of products of similarnature in the ambit of Section 10A of tne Act. It nas furtnerbeen held that the notification covers within its ambit eventhe services whicn cannot be sent abroad. Thnus, the Tribunalhas rightly held that the assessee is entitled to benefit ofdeduction under Section 10A of the Act. Thus, the third|substantial question of law is also answered against therevenue and in favour of the assessee. 17.The.aSSCSSCEChas|claimed.anamount.ofRs.6,68,98,726/- aS expenditure incurred as legal and.professional charges in its profit and loss account. Out of theaforesaid amount, the Assessing Officer has disallowed anamount of Rs.2,20,40,131/- that is the amount incurred onaccount of legal and _ professional charges incurred iconnection with acquisition of the Company in France andlegal and professional charges to file patent application for asum of Rs.24,08,000/-. The Assessing Officer has held thesame to be in the nature of capital expenditure. The Tribunal, by following the decision of its co-ordinate Benches,has held that expenditure incurred by the assessee forconducting due diligence in report of a company which was tobe acquired by the assessee is revenue in nature and nastreated the same to be deductible expenditure under Section37(1) of the Act. Tne aforesaid finding of the Tribunal isbased on meticulous appreciation of material on record anddoes not call for any interference. In the result, the fourthsubstantial question of law is also answered against therevenue and in favour of the assessee. 13. Now we may deal with the claim of the assessee|with regard to depreciation on block of assets and hasclaimed depreciation thereon at the rate of 60%. #£=ThAssessing Officer has held that the media resource board isplant and machinery but is not a computer by holding it to bea telecom equipment and allowed depreciation at 15% asapplicable to plant and machinery. Tne expression computersystem has been defined in explanation (a) to Section36(1)(xi) of the Act which reads as under: ‘(a) “computer system” means a device or.collection of devices including input and output.support devices and excluding caiculators which|are not programmable and capable of being.used in conjunction with external files, or more.Of|WNICHcontain|computerprogrammes,electronic instructions, input data and output.data, that performs functions inciuding, but not.limited to, logic arithmetic, data storage and.retrieval, communication and control.” The Tribunal, in paragraphs 10.6.2 to 10.6.4, hasdiscussed the aforesaid issue and has held that function ofmedia resource board is to support a combination offunctions performed in conjunction with computers andservers and media resource boards are the boards which areconnected to computer servers wnicn assist in receiving callsand would function only when attached to computers. Themedia resource boards increase the working capacity ofcomputers to the extent that computers receive calis andconvert them into digital form. Thus, the media resourceboards work in conjunction and as part of computer serversand cannot be served as telecom equipment. In support ofaforesaid finding, the Tribunal has relied the decision of special bench of Mumbai Tribunal inDCIT Vs. DATA CRAFT|INDIA LTD. (2010) 40 SOT 295 (MUM)Therefore, theTribunal has rightly held that media resource boards cannotbe treated as plant and macninery. The aforesaid finding|cannot be termed as perverse. Thus, the fifth substantialquestion of law is also answered against the revenue and in|favour of the assessee. special bench of Mumbai Tribunal inDCIT Vs. DATA CRAFT|INDIA LTD. (2010) 40 SOT 295 (MUM)Therefore, theTribunal has rightly held that media resource boards cannotbe treated as plant and macninery. The aforesaid finding|cannot be termed as perverse. Thus, the fifth substantialquestion of law is also answered against the revenue and in|favour of the assessee. 14. Now, we may deal with the second substantial|question of law. The Assessing Officer has held thatcondition precedent for claim deduction under Section 80JJAAof the Act is that the assessee should be a company which isengaged in the manufacture of production of article or thing.However, in the instant case, the assessee is providingtelecom services and therefore, the assessee cannot betermed as an industrial undertaking. It has further been heldthat highly qualified persons are employed by assessee andadditional wages stated to be paid to them to 49 people isshown to be Rs.1,61,03,098/- which comes to Rs.3,28,000/-per year. Therefore, any person drawing a sum _ ofRs.3,28,000/- and having technical qualifications would be an independent executive and cannot be treated aS workman.Therefore, the claim for deduction under Section 80JJAA ofthe Act was disallowed. However, the Tribunal by placing|rellance on the decision of the Tribunal in the case oT TEXASINSTRUMENTS (INDIA) P. LTD., SUPTaallowed the claim|of the assessee. It is pertinent to note that tne decision of|TEXAS INSTRUMENTS (INDIA) P. LTD.SUDIaWaSchallenged before this Court in ITA No.535/2007 and ITA|No.537/2007 and the matter was remitted by an order dated17.02.2014 to decide the matter afresh. However, we find|tnat the Tribunal in paragraph 6.5.4 nas rather recorded tne|conclusions and has failed to assign any reasons. Therefore,the matter insofar as it pertains to claim of the assessee for|deduction under Section 80JJAA of the Act’ requiresreconsideration by the Tribunal. Accordingly, the secondsubstantial question of law is answered. The impugned order|dated 21.02.2014 insofar as it dismisses the appeal of the|revenue to tne extent of cnallenge of the claim of the.assessee under Section 80JJAA of the Act is hereby quashed. In the result, the matter is remitted to the Tribunal to decide the claim of the assessee for deduction under Section8SOJJAA of the Act afresh in accordance with law. In the result, the appeal is disposed of. Sd/-JUDGE Sd/-JUDGE