TMI Blog2016 (6) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... missible but using the same without confronting the assessee is impermissible. The FAA had also missed a very important fact that during the year under appeal NDTV was a pure content producer. Therefore, selection of NDTV, as a comparable in our opinion was not justified. Similarly, he should not have selected CL as a comparable because it was supplying contents to various entities including the assessee. Thus, there were two basic flaws in the approach of the TPO and the FAA. First to hold that the assessee was a producer of contents and secondly to include NDTV and CL in the list of the comparables. If both these comparables are taken out of the list no TP adjustment will be required. - Decided in favour of assessee Deductibility of license fee - Held that:- As decided in assessee's own case for the AY.2002-03 the Assessing Officer has disallowed the entire claim of payment of licence fee without looking into the merits of the case and the relevant provisions of the Act. In the impugned assessment year the claim of the assessee should have been examined in the light of the report of the Transfer Pricing Officer and the evidences filed by the assessee but the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les(P.) Ltd., (2012 (2) TMI 101 - SUPREME COURT OF INDIA) if any quantum of any receipt of the nature mentioned in clause (1) of Explanation (baa) has not been included in the profits of business of an assessee as computed under the head “Profits and gains of business or profession”, ninety per cent. of such quantum of the receipt cannot be deducted under Explanation (baa) to section 80HHC . . that ninety per cent. of not the gross rent or gross interest but only the net interest or net rent, which had been included in the profits of business of the assessee as computed under the head “Profits and gains of business or profession”, was to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business - Decided in favour of the assessee Depreciation of computer peripherals like servers, cable connection, KVM switches etc - Held that:- All the items were necessary to run the computers, thus in the circumstances of the case, are to be included in the block of 'computer' entitled to depreciation @ 60 per cent. See Datacrafts India Ltd.( 2010 (7) TMI 642 - ITAT, MUMBAI ) and BSES Rajdhani Powers Ltd (2010 (8) TMI 58 - DELHI HIGH COURT).- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 92, 757 In pursuance of the order of the TPO, the AO made an addition of ₹ 18.85 crores to the total income of the assessee. 4. Aggrieved by the order of the TPO/AO the assessee preferred an appeal before the First Appellate Authority(FAA). Before him, the assessee argued that during the year under consideration the assessee had procured more than 90% of its contents from external producers, that it was engaged in negligible content creation activity, that it merely procured the contents from third party for supply to its AEs, that the TPO had erred in using the margins of the companies engaged in creation of the contents, that the said data was not available to the assessee at the time of preparing TP study, that the TPO had selected four comparables, that two of the comparables namely NDTV and Cinevistass Limited (CL)ought not have been selected as comparable, that NDTV had earned an unusual operating cost of 30.90% as compared to operating cost margin earned by the other comparables, that selection of NDTV was not proper, that the financial statements of NDTV for the year under consideration were not available in public domain, that the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... procured from the content creators like NDV, CL, Balaji Telefilms, UTV Software Communication, etc. Finally, the FAA upheld the order of the AO. 5.Before us, the Authorised Representative(AR) stated that assessee was engaged in purchasing/procuring/sourcing content from external producers and in-house production for supply to its AE, that it had purchased/procured/sourced more than 90% of its contents from external producers by way of films (page 803 of the paper book), that it had created only 2% of its contents, that it would sell the content to its AE on a cost +5% markup which further sold the content to the general companies, that the assessee primarily acted as an export trader in respect of content purchased/procured/sourced, that the assessee used TNM and it was the most appropriate method, that it had considered the companies that were engaged in a broad range of export trading activity (Pg.555-56 of the PB), that based on the details search conducted it identified eleven comparables, that arithmetic mean of those companies was 5.75% , that the IT was concluded at arm s length(Pg.558 of the PB), that the TPO without following any proper procedure arbitrarily held that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he public domain are from AY.2004-05 onwards, that NDTV had admitted that it had entered into content reduction agreement with STAR and BBC (Pg.1182 of the PB), that the assessee had furnished the details of programmes procured from the external producers and the inhouse production (page 803 of the PB), that the assessee had filed details of the programs procured from NDTV, CL, Balaji Telefilms, etc. and a claim in this regard was also made before the AO (page 544, 588-589, 833-835 of the PB). The Departmental Representative(DR) referred to article 3 closes 3.1 and 3.2 of the agreement entered into with the UTV and stated that the assessee had control over production and procurement, that UTV had to produce the program as per the technical guidelines from the assessee, that it would control the technical quality of the programs produced by UTV, that nature of the activities has to be decided on the basis of agreement, that the assessee was deeply involved in creation, that the assessee had picked up comparables that were engaged in marketing, that the TPO had selected comparables from the entertainment industry, that the assessee was not simply procuring programmes, that it was mon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . . If the selection process of comparables adopted by the TPO is examined it becomes clear that he had not adhered to the process as envisaged by the provisions of the Act and the Income tax Rules, 1962(Rules).In case of one comparable data of the year under consideration was not available in public domain. It was never made available to the assessee. We would discuss this issue at proper place. In short, the process adopted by the assessee with regard to select the comparable was faulty. 6.2. Now we would like discuss two of the comparables selected by the TPO and objected by the assessee. First of all we would refer to the agreement entered into by the assessee with UTVS i.e. the first comparable. The preamble of the agreement reads as under: .. STAR INDIA is engaged in the business of sourcing/supplying television programs UTV is in the business of producing programmes and has agreed to produce program the same on audiovisual medium to match the shape and emerge the script and screenplay to the pre-decided thing and/or concept as per given specification STAR INDIA has approached UTV for the creation, composition, filming, production, editing postp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee is not content producer like NDTV or CL. We agree with the argument advance by the assessee that quality control is totally different from manufacturing. If a businessman or trader gets anything produced or manufactured for his business he would definitely ask the supplier for certain quality. Whether he is the final consumer or not will not make any difference. In the competitive world of entertainment one has to keep in mind likes and dislikes of the viewers. The assessee was supplying the programmes to its AE and finally the programmes were to be telecasted. Without quality control or a guiding policy for the programmes one cannot go with the changing tastes and moods of the viewers. But, such guidance will not make the assessee content producer. The job profile of a content producer is totally different from an assessee who purchases programmes from them. Content producers have to hire artists, script writers, and technicians and produce serials or programmes. For that they have to spend a lot for site locations, shootings and have to pay remuneration to the artists and technicians. The profits and loss account and balance sheets of content producers will be tota ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the SLP filed by the department, that the Tribunal had directed the AO to reconsider the claim of assessee, while deciding appeal for AY.2002-03, that the AO himself allowed the deduction at the assessment stage while completing assessment for the AY.s2005-06 and 2006-07.The DR left the issue to the discretion of the bench. 8. We find that while adjudicating the appeal for the AY.2002-03 the Tribunal had dealt the issue(ITA/3585 3586/Mum/2006/ dtd.28.05.2008) as under: 15. Having heard the rival submissions and from a careful perusal of records we find that in the impugned assessment yeas though Assessing Officer made a reference to the Transfer Pricing Officer under Section 2 of the I.T. Act to determine the arms length price of the licence fee but while adjudicating the issue he squarely relied upon his order for the Assessment Year 2001-02. He did not even made reference of the report of the Transfer Pricing Officer. The Assessing Officer even did not take into account the amendment brought in Section 92 with effect from 01- 04-2002, i.e. Assessment Year 2002-03 according to which allowance for any expenses or interest arising from an international transaction shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer and the evidences filed by the assessee but the Assessing Officer as well as the CIT(A) have not adjudicated the issue in accordance with law. We, therefore, are of the view that this issue requires fresh adjudication. Since the report of the Transfer Pricing Officer has already been obtained and the issue requires proper examination by the Assessing Officer in the light of the report of TPO, detailed analysis of licence fee paid and other evidences filed by the assessee, we set aside the order of the CIT(A) in this regard and the matter is restored to the file of the Assessing Officer to readjudicate the issue in terms indicated above. Respectfully following the above we are restoring the issue to the file of the TPO/AO, who would decide the issue after hearing the assessee. First ground of appeal is decided in favour of the AO, in part. 9. Second Ground deals with deductibility of advertisement and publicity expenses. We find that the Tribunal had decided the issue against the AO for the AY.s 1997-98 to 2000-2003, that the Hon ble High Court and the Apex Court did not entertain the appeals filed by the department. We would like to repro - duce the relevant part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (wrongly mentioned as addition of ₹ 23, 64, 41, 347/- in the ground no 2 raised by the assessee). Briefly stated, the facts are that assessee was acting as an agent for booking advertisements on behalf of its principle against which it was entitled to commission. In Assessment Year 1997-98, it was noticed by the Assessing Officer that up to Assessment Year 1996-97, the assessee was offering commission income on the basis of invoice amount billed on the advertisers and the income was declared in the year in which the invoices were raised. However, from Assessment Year 1997-98, assessee was of the view that commission income accrued only when the amount was collected or received by it from the advertisers. Consequently, the assessee started offering the commission income in the year in which the amount was received from the advertisers. The Assessing Officer, for the reasons given in his order for the Assessment Year 1997- 98, held that it was a case of change of method of accounting from Mercantile system to cash system of accounting which was not permissible. It may be noted at this stage that up to Assessment Year 1997-98, the assessee was acting as an agent of Satellite T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 68. After going through the relevant terms under both the agreements, we do not find any material difference since under both the agreements, the commission is to be paid on the basis of amount collected by the assessee. Clause (E)(4) specifically provides that no commission shall be due to the assessee against the amounts not received. Therefore it is clear from the terms of both the agreements that commission income accrued to the assessee only when the invoiced amount was received by the assessee on behalf of principle. Therefore there is no reason to deviate from the earlier order of the Tribunal. Following the said decision of the Tribunal for earlier years, the issue is decided in favour of the assessee by holding that accrual of commission income arose in the year in which the invoiced amount were received by the assessee even under the Mercantile System of accounting. The order of the learned CIT(A) is therefore, set aside on this issue and consequently, the addition confirmed by him is hereby deleted. Respectfully, following the above, third ground is decided against the AO. 11. Fourth Ground of appeal deals with net commission and net miscellaneous income from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be deducted from the profits of the assessee for determining profits of the business of the assessee under Explanation (baa) to section 80HHC . Explanation (baa) has to be construed on its own language and as per the plain natural meaning of the words used in it, the words receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head Profits and gains of business or profession referred to in the first part of Explanation (baa). Accordingly, if any quantum of any receipt of the nature mentioned in clause (1) of Explanation (baa) has not been included in the profits of business of an assessee as computed under the head Profits and gains of business or profession , ninety per cent. of such quantum of the receipt cannot be deducted under Explanation (baa) to section 80HHC . .that ninety per cent. of not the gross rent or gross interest but only the net interest or net rent, which had been included in the profits of business of the assessee as computed under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ist of computers, that those devices were entitled to depreciation @25% only. The AR stated that all the items were necessary to run the computers. He relied upon the cases Datacrafts India Ltd.(133TTJ377)and BSES Rajdhani Powers Ltd(ITA 1266 of 2010). 12.3. We have heard the rival submissions and perused the material before us. We find that in case of Datacrafts India Ltd. (supra), the Special Bench of the Mumbai Tribunal and held as under:- 11. We have considered the rival submissions at length in the light of material placed before us and precedents relied upon. The chief question which falls for our adjudication is whether routers and switches are part of computer or not for the purposes of depreciation. Sec. 32(1) provides that where assets are owned wholly or partly by the assessee and used for the purpose of business or profession, deduction shall be allowed. Clause (ii) of sub-s. (1) provides that in case of any block of asset, the deduction shall be allowed at such percentage on the WDV thereof as may be prescribed. Rule 5(1) stipulates that depreciation in respect of any block of asset shall be calculated at the percentages specified in the second column of the Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which contain computer programmes, electronic instructions, input data and output data, that performs functions including, but not limited to, logic, arithmetic, data storage and retrieval, communication and control; 13. At this juncture it will be relevant to note that cl. (xi) of s. 36(1) was inserted by the Finance Act, 1999 w.e.f. 1st April, 2000 with a view to allowing relief in overcoming the immediate problem of Y2K likely to come up at the close of the calendar year 1999. From the Budget Speech of the Finance Minister in 1999 [236 ITR (St) 26] it can be seen that the Government assisted business sector in overcoming the Y2K problem by proposing that the expenditure incurred in making the computer system Y2K compliant, be allowed as revenue expenditure. It was with this intention that cl. (xi) of s. 36(1) was inserted which is relevant only for financial year 1999-2000 providing for deduction of any expenditure incurred by the assessee on or before the 1st day of April, 1999 but before the 1st day of April, 2000, wholly and exclusively in respect of a non-Y2K compliant computer system, owned by the assessee and used for the purposes of his business or profession. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly referred to as electronic commerce , which involves the use of alternatives to paperbased methods of communication and storage of information, to facilitate electronic filing of documents with the Government agencies and further to amend the Indian Penal Code, the Indian Evidence Act, 1872, the Bankers' Books Evidence Act, 1891 and the Reserve Bank of India Act, 1934 and for matters connected therewith or incidental thereto. The statement of objects and reasons of this Act divulges that new communication systems and digital technology have made dramatic changes in the way we live. A revolution is occurring in the way people transact business. Business and consumers are increasingly using computers to create, transmit and store information in the electronic form instead of traditional paper documents. Information stored in electronic form has many advantages. Paras 3 and 4 of the Statement of Objects and Reasons, which are relevant for our purpose, read as under: 3. There is a need for bringing in suitable amendments in the existing law in our country to facilitate e-commerce. It is, therefore, proposed to provide for legal recognition of electronic records and digita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter' as given in the Information Technology Act, 2000, cannot be applied in the context of s. 32 of the IT Act. However, though the learned Authorised Representative also agreed that the definition in the Information Technology Act cannot be imported, we are of the opinion that a perusal of the objects of that enactment and a perusal of the definition of the term 'computer' given in the Information Technology Act, 2000 are nothing but common parlance definition which can be of some use in the definition of a computer. Thus in our considered view, aid can be taken of the definition of the term 'computer' given in Information Technology Act, 2000. 19. As per the General Clauses Act, 1897, if a particular word is not defined in the Central statute then meaning given to such expression under General Clauses Act may be considered for guidance and adoption in the former enactment. However, it is noticed that the word 'computer' has not been defined therein. Under such circumstances meaning of an expression has to be understood by applying the principles of statutory interpretation i.e., in this context we have to give a meaning to the expression 'com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt article then it would amount to manufacturing activity. 22. Similar view has been taken by the Hon'ble Supreme Court in Mangulu Sahu Ramahari Sahu vs. STO 1974 CTR (SC) 14 by holding that in the absence of specific definition, the meaning as understood in common parlance has to be adopted. From the legal position as enunciated in the above judgments, it is crystal clear that where a word has not been defined in the Act, it is desirable to comprehend its meaning as is understood in its natural sense. 23. A computer, in common sense and as popularly understood, refers to any electronic or other high speed data processing device which performs logical, arithmetic and memory functions on data' (hereinafter called the 'computer functions') and includes all input and output devices which are connected to or related to it. Para 24 of the assessment order indicates that the AO was also of the opinion that the meaning of the word computer , as understood in the common parlance is 'an electronic device for storing and processing data and making, calculating and controlling machine which also includes input device like keyboards or mouse and the output dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... function is the result of some sort of 'computer functions' in conjunction with some non-computer functions. In order to be called as computer, it is sine qua non that the principal output/object/function of such machine should be achievable only through 'computer functions'. 26. Having analysed the meaning of 'computer' in common parlance, let us proceed to ascertain the concept, meaning and functions of 'router'. Again we find that the term 'router' has not been defined in the IT Act, 1961. Accordingly it also needs to be assigned the meaning as it is understood in common parlance. The learned Departmental Representative has placed some literature from the internet explaining the meaning of 'router' as a device in computer networking that forwards data packets to their destinations, based on their addresses. As per this literature the working of router has been explained by which data packets are transmitted over a network (say the internet), they move from many routers (because they pass through many networks) in their journey from the source machine to the destination machine. Routers work with IP packets, meaning that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rter version of routers, which perform similar functions as that of routers but within a limited sphere. 30. On functioning of a router we find that there is no dispute on the fact that a router does not perform any logical, arithmetic and intermediary functions on data nor it manipulates or processes data, the way a computer would do. A router does not have a CPU . It only enables transmission of data and data packages, in a sophisticated manner, to intended places. A data cable also carries data from one place to another, but it does not selectively interchange packets of data between places. The difference between a cable and a router is that in a router data is routed as per the specification. Thus a router may not by itself be called a computer. 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 oft ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter'. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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