THE ACIT, CIRCLE-1(1), THRISSUR, THRISSUR vs. M/S.KERALA COMMUNICATORS CABLE LTD, THRISSUR

Per Bench

This appeal at the instance of the Revenue and cross objection preferred by the assessee are directed against CIT(A)’s order dated 28.03.2018. The relevant assessment year is 2014-2015.

2 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. depreciation on Set Top Boxes (STB) at the rate of 80% instead of 15% granted by the Assessing Officer? In the cross objection filed by the assessee, apart from supporting the order of CIT(A) in granting depreciation on Set Top Boxes (STB) @ 80%, the assessee has also raised an alternative contention that expenditure incurred on purchase of STB should be allowed as a revenue expenditure.

3 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. contradicts the view taken in paragraphs 26 and 27 and holds that the assessee is entitled for depreciation at 15% being machinery and plant and not at the rate of 100% claimed by the assessee. It is also to be mentioned, in the course of assessment proceedings, the A.R. had furnished a revised depreciation statement claiming depreciation on STB at the rate of 80% in place of 100% claimed in the return of income. The relevant findings of the Assessing Officer in granting depreciation at 15% on STB and making disallowance of Rs.30,65,10,789 reads as follows:-

“26. The depreciation so claimed requires to be disallowed as no capital expenditure is incurred for the asset and the cost of the set top box is deemed to have been collected along with installation charges since admittedly the cost of STB’s is negligible. It is claimed by the assessee's A.R that the charges so collected are installation charges and 100% depreciation is claimed on set top boxes since the assessee is not having control over the same after handing over the possession to the customer. The assessee's A.R admits that physical possession of the set top boxes is handed over to the customer, charges for the STB’s are collected from the customers in the name of installation charges, the cost factor of set top box is admittedly negligible, and Set top box has no resale value in the market. Therefore, expenditure is revenue in nature. Hence there is no necessity to claim, capital expenditure and depreciation on the same. When this was pointed out, the assessee's A.R, furnished a revised depreciation statement claiming depreciation on set top boxes @ 80% in place of 100% claimed, which comes to Rs.35,16,93,816/-. The A.R. stated that the assessee has to attend to the repairing work of the set top boxes as and when needed and the deprecation has been claimed as the possession of

4 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. the instruments are handed over to the customer and the ownership lies with the assessee. It is to be noted that the assessee has been claiming repair charges from the customer as and when any repair is made on the set top boxes. The additions made during the year as per form 3CD was Rs.54,78,24,795/- in the nomenclature of "building: and the depreciation claimed on the same is at Rs.36,13,86,286/- @ 100% based on the date of put to use. Since the assessee is not having possession of the set top boxes and charges for installation of the same stands collected which includes cost of STB, the claim of depreciation on set top boxes was proposed to be disallowed as per pre-Assessment notice dated 14/12/2016 referred to above. The assessee's A.R., at the time of hearing on 19/12/1016 reiterated the same stand as has been taken earlier.

5 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. aware of the rate of depreciation of various block of assets specified under section 32 including building when the rate of depreciation on building is only 10% and not 100%. The equipments like STB can be considered, if at all admissible for depreciation, to be @ 15% under the "Plant & Machinery" and not @ 100%. In this view of the matter, if at all depreciation can be treated as admissible, it shall not exceed 15%. As discussed above, though the assessee is not entitled for any depreciation on STB in the absence of supporting evidence, taking a lenient view in favour of the assessee, I am allowing depreciation on the set top boxes @ 15% admissible to "Plant & Machinery" as against 100% claimed in the form 3CD under "building". The balance claim stands disallowed. The allowance of depreciation @ 15% is worked out as under:

Cost of Set Top Boxes purchased upto 17/09/2013 Rs.173182050

Cost of Set Top Boxes purchased from 01/10/13 to 31/03/2014 Rs.37,46,42,746

15% of the same comes to Rs.5,61,96,411

One and One half for use for less than 180 days (balance WDV 346544540) Rs.28098205

Total depreciation allowed @ 15% Rs.54075512

This is allowed in place of Rs.36,05,86,301/- claimed.

Disallowance comes to Rs.306510789/- (Rs.360586301 – 54075512)

Disallowance Rs.306510789/-. The depreciation table indicating WDV is attached separately.”

6 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. 4. Aggrieved by the assessment order, the assessee preferred an appeal to the first appellate authority. The CIT(A) was of the view that the STB belongs to the assessee and it is a capital asset of the assessee. The CIT(A) held that the assessee was entitled to depreciation for the same. The CIT(A) took the above view after perusing the customer Registration form. As regards the rate of depreciation, the CIT(A) held that the assessee is entitled to depreciation at the rate of 80% on the STB as per sub Item No.(8), (ix) (E)(k) of Part A item III being machinery and plant [new Appendix – I, which prescribes the table of rates at which the depreciation is admissible]. Therefore, the CIT(A) partly allowed the claim of the assessee. The relevant finding of the CIT(A) as regards the STB being the capital asset of the assessee-company and the findings that the assessee is entitled for depreciation at the rate of 80%, reads as follows:-

“7.8 I have gone through the assessment order and the submissions of appellant. In para 27 of the Assessment order, the assessing officer concluded that the total depreciation claimed on set top boxes has to be disallowed since the appellant has collected the cost of STBs and possession of the same has already been handed over. The AO also observed that there is no asset in the possession of the appellant and the appellant is not eligible to claim any depreciation on an item the cost of which has already been collected in the name of Installation charges. However, the AO allowed the depreciation @ 15% to the appellant on said set top boxes. This would mean that the Assessing Officer has treated the said Set top Boxes as Capital Asset owned by the appellant. The treatment so given by AO is clearly at variance with the conclusions held by him in para 27

7 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. of the order.

7.9 Coming to merits of the case I have perused the Customer Registration Form. As per the Terms and Conditions of the said document the said boxes are the property of KCCL i.e. the appellant. These boxes are to be used by customer himself and at the address given in the Registration Form. Further, the customer is not allowed to alter the STB and in case of any loss or damage to STB, customer is liable to make up the loss. Further, on termination of agreement the customer is required to return the STB to the appellant company. These terms clearly indicate that the Set Top Boxes is the property of the appellant company. I also find force in the contention of appellant that if these Set top boxes are not treated as assets of the appellant company but the property of the customer then the entire cost of these set top boxes which are sold during the year is allowable as revenue expenditure. Therefore on overall reading of the agreement between appellant and its customers and in totality of facts, I treat the STBs as the assets of the appellant company.

7.10 Now coming to the rate of depreciation, the appellant company claims that admissible rate is 80% on these assets. In its submissions, it has quoted rule 5 of IT rules as under "In Rule-5, Income-tax Rules Rates of depreciation in PART A, III MACHINERY AND PLANT 8(ix)(E) (k) classifies set top boxes under

Remote terminal units/intelligent electronic devices, computer hardware/software, router/bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission system"

8 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. 7.11 Considering the submissions of appellant and the legal provisions, I am of the view that the Set Top Boxes are squarely covered within the above definition and entitled for rate of deprecation as per this rule. Therefore I direct the Assessing officer to allow depreciation @80% on these STBs depending on the period for which these are put to use. This ground is, therefore, partly allowed.”

“1. The order of the learned Commissioner of Income Tax (Appeals) in ITA No.1356/16-17 dated 28.03.2018 for the Assessment year 2014-15 is erroneous in law, facts and circumstances of the case.

“Remote terminal units/intelligent electronic devices, computer hardware/software, router/bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and

9 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. distribution management systems for power transmission systems”.

The Set Top Box is not coming under any of the categories mentioned above. Hence depreciation on the same is applicable at the rate of 15% only. As per TRAI regulations dated 01.04.2015 the depreciation on the price of customer premises equipment (which included Set Top Box and remote control for Set Top Box) shall be calculated using straight line method at the rate not exceeding 1.7% for every completed calendar month or part thereof. Thus the rate of depreciation at the rate of 15% allowed by Assessing Officer treating the same as Plant and Machinery is as per the provisions of the Act and in tune with TRAI regulations. Depreciation claimed by the assessee under Rule 8(ix)(E)(k) is not applicable to Set Top Box, a device connected to a TV and which allows a subscriber to receive in unencrypted and descrambled form subscribed channels through an addressable system.

5.1 The assessee has filed Cross Objection in CO No.

55/Coch/2018 raising following grounds of appeal:

i) The entire issue regarding allowability of depreciation at the higher rate has been considered by the CIT(A) in detail, after peruse of all the evidences and the assessment order of the Assessing Officer as well as

10 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. averments of the AR of the assessee, and thus, the same does not call for any disturbance.

2) Assessing Officer allowed 80% depreciation on Set Top boxes as depreciation in FY 2014-15 (assessment year 2015-16), and also in earlier year, in F.Y. 2012-13 in detailed scrutiny/verification proceedings. Therefore, the same needs to be followed consistently and is binding.

The contention that TRAI is allowing 1.70% depreciation per month on straight line basis is totally irrelevant for the purpose of depreciation under the income-tax Act.

Items falling within Energy saving device category as per sl no. (3) above, then application of general rate of depreciation at 15% is excluded.

4) In view of principles of accounting, taxation and natural justice vide section 14A of the Income Tax Act, revenue and expense shall follow matching concept, the claim of assessee of depreciation at such higher rates is proper.

5) Alternatively, cost of digital set top boxes shall be allowed in full as revenue expenditure.

6) It is not true that needed documents/details were not furnished to the Assessing Officer. All needed and available documents/details were furnished as and when called for:

11 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. 7) The appeal filed by the appellant in this case is time- barred as filed beyond the 60 days time limit allowed by law.

8) Such other grounds as may be urged at the time of hearing.

6.1 The learned AR, on the other hand, had filed written

submission and also a paper book enclosing balance sheet for

the year ending 31.03.2014, ledger account of SET TOP BOX,

bill issued for activation charges etc. The Ld. AR submitted

that the assessee is entitled for higher rate of depreciation as

it is a capital expenditure for the following reasons:-

(i) buildings, machinery, plant or furniture, being

tangible assets;

(ii) know-how, patents, copyrights, trade marks,

licences, franchises or any other business or

commercial rights of similar nature, being intangible

12 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. assets acquired on or after the 1st day of April,

1998,

owned, wholly or partly, by the assessee and used for

the purposes of the business or profession, the following

deductions shall be allowed—

(i) in the case of assets of an undertaking engaged in

generation or generation and distribution of power,

such percentage on the actual cost thereof to the

assessee as may be_prescribed”. (See rule_5(1A) and

Appendix IA of the Income-tax Rules.)

(ii) in the case of any block of assets, such

percentage on the written down value thereof as may

be prescribed”:(See rule 5(1) and Appendix I of

Income-tax Rules.)

6.2 He drew our attention to the following:

Appendix I of Income-tax Rules.

Rates of depreciation

III Machinery and Plant

Machinery and plant other than those covered by sub- items (2), (3) and (8) below : 15%

13 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. Machinery:

....some mechanical contrivances which by themselves or in combination with one more other mechanical contrivances, by combined movement and interdependent operation of the respective parts generate power, or evoke, modify, apply or direct natural forces with the object in each case effecting so definite or specific result ....

6.3 The Ld. AR relied on the following judgments of the

Supreme Court:

THE PRIVY COUNCIL in Corporation of Calcutta v Chairman Cossipore & Chitpon AIR 1922 PC 27.

CIT vs Mir Mohammed Ali 1964-53 ITR 165-SC. It was held as under:

43(3) "plant includes ships, vehicles, books, scientific apparatus and surgical equipment Used for the purposes of the business or profession but does not include tea bushes or livestock or buildings or furniture and fittings;

E. Electrical equipment:

(k) Remote terminal units/intelligent electronic devices, computer hardware/software, router / bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission systems.

14 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. Power includes power is the rate of doing work or transferring heat, the amount of energy transferred or converted per unit time. It includes Electrical, Mechanical, Chemical powers

6.4 The Ld. AR submitted that the operation of the company

is all about data transfers only, through the cable network by

way of signals. Various types of data routinely transferred in

cable/satellite telecommunications can be broadly classified

into three categories - audio data, video data and textual data.

Whatever the type of data, data of all kinds are basically

lifeless and, therefore, lack spontaneous movement of its own.

To cause transfer/movement of such data from one place to

another, some specific carrier (energy) is indispensably

required. Without such carrier, the data cannot even be

imagined to move an inch forward, let alone at the speed of

light, such data carrier energy is the artificially created light

energy (ACLE) which is acting as the sole driving force behind

every type of data transfer in communications. ACLE is

possessable in the same sense as the electrical energy, as the

customers can use it any time they want the data to any

destination, according to his choice of customers. The fact

15 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. that the network consists of mainly computers, fibres,

boosters and set top boxes as a whole. The light carrier/ACLE

works very much as "electrical energy". In simple terms,

electrical energy is a "flow of electrons" while ACLE is a "flow

of protons". They operate in a very similar way, but with

different and distinct properties, utilities and fields of

application. Therefore, if flow of electrons is energy , the flow

of protons also gives energy in the network. The plain actual

fact is that after reaching the first the control room

connections, the data gets carried to the destination, only by

OFC's invariably. The scientific reason for this is that radio

frequencies have limited transmission capacity, and,

therefore, can carry data on electromagnetic energy.

6.5 It was submitted that the data carrier in

signal/telecommunications, always and without exception, is

energy, associated with the frequencies, and not the

frequencies themselves. The difference between frequencies

and the energy is comparable to the difference between goods

vehicle carrying parcel loads on the roads, parcel loads being

comparable to data, goods vehicle to the data carrier energy,

16 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. frequencies being comparable to roads. It is nowhere

mentioned in the Act/Rules or Appendix that POWER and

ENERGY means ELECTRICAL POWER only or ELECTRICAL

ENERGY only.

6.6 According to the Ld. AR, the lexical ambiguity in

meaning as well as in sense has to addressed accordingly. The

power is not used in its general meaning or sense but in terms

of technology. Then it is to be addressed in scientific terms

only.

6.7 He submitted that the set top box device, subject matter

in this issue, is a digital set top box and compared to analog

technology devices is far superior and power saving and

energy efficient device, capable of multiple high definition

channel delivery at speeds and volume that was not possible

under the analog technology scenario, and is a chip (micro-

processor based) system rather than Board based analog

technology devices. It was submitted that the assessee was

having more than 2500000 connections in entire state, these

connections are linked with nearly 10000 kisoks. The energy

17 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. consumption and energy savings in a kiosk is electricity bill

for a Kiosk in the cable TV net work. There is substantial

deduction in cost due less usage of energy.

6.8 The ld. AR contended that the assessee is entitled to

depreciation claimed u/s. 8(ix)(E)(k) being energy devices and

electric equipments. He also submitted that it is entitled to

claim of depreciation under (8) (ix) (B) (c). It was submitted

that alternatively, the device also fits in the below description

in Appendix-I Rates of Depreciation which reads as follows:

(8) (ix) Energy saving devices, being—

B. Instrumentation and monitoring system for monitoring

energy flows:

(c) Micro-processor based control systems

A White paper by BROADCOMM, which is a international

technology leader in this field (manufacturer and supplier

of 1C chipset for Set top boxes). As these devices are not

manufacture of India, the same are imported from China,

the suppliers from China use 1C chipsets from across the

globe (like Broadcomm, Motorola etc. among several

18 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. others) , this white paper details the superior advantage

and benefits of digital technology based on 1C chipsets as

compared to older analog RF tuners, are self explanatory,

needs no further recourse. In page-2, para-2 , "Since

analog tuners consume the largest amount power in the

RF front end, the overall system power increases and the

footprint for four RF tuners account for considerable

board size and increased costs."

And in page-4 , para-4, gives the real benefits of use of

DIGITAL devices using modem technology- "with the

removal of the power-hungry analog cable tuners, overall

system power is reduced enabling small, attractive form

factors. Reduced power enables green products and

allows systems to meet current and future energy

consumption standards......”

6.9 It was submitted that in the present instance, the basis

of claim for higher depreciation and as allowed by the

assessing officer, is in line with the decision of jurisdictional

Kerala High Court in the case of Commissioner Of Income-Tax

19 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. Vs. Cochin Refineries Limited, (1988) (173 ITR 461) in which

the high court had adopted a liberal view and held as follows:

"6. The assessee had claimed depreciation and development rebate at the higher rate on certain assets such as waste ponds, fresh water tank, pipe racks, alloy piping, jetty facilities, cherry picker cranes, etc. The assessee claimed depreciation and development rebate on these items at the higher rate applicable to the refinery plant. The Income-tax Officer, however, allowed depreciation and development rebate only at the lower rate applicable to each of the assets, depending upon whether it represented building, machinery, etc. The Appellate Assistant Commissioner, on appeal, allowed depreciation and development rebate at the higher rate in respect of certain items, but allowed only lower rates in respect of other items. On further appeal by the assessee, the Tribunal allowed the higher rate of depreciation and development rebate for all the items. In our view, the Tribunal was light in doing so, for by the very nature of the assets in question, no doubt that they form part of the refinery plant and are as such entitled to these allowances at the higher rate. Accordingly, we answer question No. 3 in the affirmative, that is, in favour of the assessee and against the Revenue.”

He also relied on the judgment of the Madhya Pradesh High Court in Dy. CIT vs. Vippy Solvex Products Ltd. dated 29 March, 2017.

6.9.1 Further, he submitted as follows: 2. Claim for higher depreciation on part of computer –

Set Top Box (STB) is a customer premise device acting

as REMOTE TERMINAL UNIT in the control and

20 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. enforcement of a set computer equipments installed

central unit. CAS (Conditional access system) through

which the Operating company (This assessee) can

supply control and monitor and activate/deactivate

signals from the control centre COMPUTER system

which keeps track of the usage signals and channels

viewed/accessed and duration of each of these. STB is

a 2-way communicating unit at the customer end

connected to the transmission and distribution system

of the assessee company.

6.9.2 The Ld. AR relied on the order of the Tribunal in the

case of Ushodaya Enterprises Ltd. vs. ACIT in ITA

No.1241/Hyd/2008 dated 31/10/2013 wherein it was held

that “various items like Editing equipments, charter

generators and v. Sat equipments i.e., DVC transfer recorder,

player, satellite receivers, encoders, vidilink transmit and

receivers and fibre optic link work etc. are part of computer

and eligible for higher depreciation at 60%. He also relied on

the decision of the Tribunal in the case of Pankaj Almadi vs.

DCIT in ITA No. 6883/Del/2015 dated 28/08/2017 and DCIT

vs. Datacraft India Ltd., ITAT Mumbai.

21 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. 6.9.3 He also submitted that the statutory compliance cost

should be allowed as revenue expenditure. It was submitted

that this cost towards set top boxes were necessitated by

legal compulsion for the replacement of existing analog to

digital set top boxes to fulfil the requirement of cable

television Digitisation policy of the government of India, so as

to keep the assessee statutory compliant in its business

(Cable Television Networks (Regulation) Amendment Act,

2011 had mandated a switch-over of the existing analogue

cable TV networks to digital addressable system (DAS) in four

phases.

Phase -I Four Metros of___Delhi,_Mumbai, Kolkata. Chennai 31.10.2012

Phase-ll Cities with population more than one million 31.12.2013

Phase III all urban areas 31.12.2015

Phase IV Rest of India 31.12.2016

It was submitted that the consumers of 4 metros & 38 cities

who were covered under phase-l & II of digitalization are

getting the benefits of Digital Cable TV services. As mentioned

above, the cut off date in respect of phase-Ill, which covers

remaining urban areas, is 31st December 2015, after which

22 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. no analog signal transmission or re-transmission of TV

channels will be permitted. The list of urban areas, covered

under phase-Ill of digitalisation, is available on the website of

the Ministry of Information & Broadcasting.

6.9.4 The Ld. AR also submitted that expenses incurred in

connection with legal compulsion should be treated as

revenue expenditure. For this purpose, he relied on the

judgment of the Supreme Court in the case of Empire Jute

Co. vs. CIT reported in 124 ITR 1 (SC), where their Lordships

had duly distinguished the enduring benefit in the revenue

field and enduring benefit in the capital field. They had held

that pursuant to incurrence of expenses , if there is some

enduring benefit in the revenue field , then the same would

only amount to revenue expenditure. We hold that the

expenditure incurred by the assessee towards technology

upgradation charges which requires frequent replacement due

to rapid change in technology and constant need for

upgradation would only be revenue in nature. Hence we do

not find any infirmity in the order of the ld. CIT(A) in this

23 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. regard. Accordingly, the Ground No. 1 raised by the revenue

is dismissed.”

He also relied on the judgment of the Supreme Court in the

case of Lakshmiji Sugar Mills Co. vs. CIT, 1972 AIR 159 (SC)

6.9.5 The Ld. AR also referred to the claim for 100%

deduction as Revenue expenditure- Technical upgradation.

He relied on the order of the Tribunal , Kolkata Bench in the

case of DCIT vs. M/s. Alliance Broad Band Services in ITA

No. 1318/Kol/2015 dated 6th December, 2017 wherein it was

held that cost towards necessitated by technological up

gradation due to compulsion for the replacement technology

of existing Analog to digital to fulfill the requirement of cable

television digitalisation policy of the government of India, so

this is a technological up gradation so this capital

expenditure should be treated as a revenue expenditure

6.9.6 He relied on the following case laws:

24 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd.

3.CIT v Janakiram Mills Ltd (2005) (275 ITR 403) (Mad)

4.CIT V Sundram Clayton Ltd (2010) (321 ITR 69) (Mad)

5.DCIT v Lasik Centre (India) P Ltd (2013) (22 ITR

(Trib)462) Chennai

6.9.7 The Ld. AR further relied on the judgment of the

Supreme Court in the case of CIT vs. Vegetable Products Ltd.

[(1972) (88 ITR 192) wherein it was held that "if two

reasonable constructions of a taxing provisions are possible,

that construction which favours the assessee must be

adopted". This principle has been consistently followed by the

various authorities as also by the Supreme Court itself.

record. The issue involved in the appeal filed by the Revenue

and the Cross Objection filed by the assessee is with regard to

expenses incurred by the assessee on installation of set top

boxes is revenue expenditure or capital expenditure. If it is

capital expenditure, whether the assessee is entitled for

depreciation on set top boxes at 80% or 15% as granted by the

25 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. Assessing Officer. The Ld. AR submitted that expenses incurred on purchase of set top boxes is revenue expenditure and it is to be allowed. The assessee claimed expenses on purchase of set top boxes as revenue expenditure. The assessee had raised this issue before the CIT(A). This issue was discussed by the CIT(A) in para 7.9 as follows:

“Coming to the merits of the case I have perused the Customer Registration Form. As per the Terms and Conditions of the said document the said boxes are the property of KCCL, i.e., the appellant. These boxes are to be used by the customer himself and at the address given in the Registration Form. Further, the customer is not allowed to alter the STB and in case of any loss or damage to STB, customer is liable to make up the loss. Further, on termination of agreement the customer is required to return the STB to the appellant company. These terms clearly indicate that the Set Top Boxes is the property of the appellant company. I also find force in the contention of appellant that if these Set Top Boxes are not treated as assets of the appellant company but the property of the customer then the entire cost of these set top boxes which are sold during the year is allowable as revenue expenditure. Therefore, on overall reading of the agreement between appellant and its customers and in totality of facts, I treat the STBs as the assets of the appellant company.”

7.1 It was brought on record by the Assessing Officer that the assessee collected the installation charges at the time of supply of STB which included cost of STB. It was also brought on record that maintenance charges were collected in

26 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. advance as AMC for the repairs/maintenance as and when

required. The Assessing Officer observed that the assessee

had been collecting cost of the set top boxes from the

customers in the name of “installation charges” apart from

monthly charges of subscription for the connections and also

annual service maintenance contract charges on each of the

set top box installed. The Assessing Officer noted that the

assessee did not produce sale bill or invoices showing

installation charges of subscription for the connections and

also annual service maintenance even after repeated requests

and that the physical possession of set top boxes were handed

over to the customers at the time of its installation and

therefore installation charges collected included cost of set top

boxes as per copy of bills produced in the case of Asianet

Satellite Communication Ltd. The Assessing Officer observed

that when the cost of STB was collected from the customers

on its first installation, possession of the instrument stands

handed over to the customers at the time of installation and

subscription charges and annual maintenance charges are

also collected, the claim of the assessee of having ownership

over the same for that matter, the claim of depreciation @

27 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. 100% on the set top boxes is not justified. This was

disallowed by the Assessing Officer in para 26 of the order as

follows:

“26. The depreciation so claimed required to be disallowed as no capital expenditure is incurred for the asset and the cost of the set top box is deemed to have been collected along with installation charges since admittedly the cost of STB is negligible. It is claimed by eh assessee’s AR that the charges so collected are installation charges and 100% depreciation is claimed on set top boxes since the assessee is not having control over the same after handing over the possession to the customer. The assessee’s AR admits that physical possession of the set top boxes is handed over to the customer, charges for the STB are collected from the customers in the name of installation charges, the cost factor of the set top box is admittedly negligible, and set top box has no resale value in the market. Therefore, expenditure is revenue in nature. Hence there is no necessity to claim capital expenditure and depreciation on the same. When this was pointed out, the assessee’s AR furnished a revised depreciation statement claiming depreciation on set top boxes @80% in place of 100% claimed, which comes to Rs.35,16,93,816/-. The AR stated that the assessee has to attend to the repairing work of the set top boxes as and when needed and the depreciation has been claimed as the possession of the instruments are handed over to the customer and the ownership lies with the assessee. It is to be noted that the assessee has been claiming repair charges from the customer as and when any repair is made on the set top boxes. The additions made during the year as per Form 3CD was Rs.54,78,24,795/- in the nomenclature of “building” and the depreciation claimed on the same is Rs.36,13,86,286/- @ 100% based on the date of put to use. Since the as sis not having possession of the set top boxes and charges for installation of the same stands

28 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. collected which includes cost of STB , the claim of depreciation on set top boxes was proposed to be disallowed as per pre-Assessment notice dated 14/12/2016 referred to above. The assessee’s AR, at the time of hearing on 19/12/2016 reiterated the same stand as has been taken earlier.

7.2 However the Assessing Officer allowed 15% depreciation

by observing as follows:

“28. Even if the claim of assessee for depreciation on STB is treated to be admissible, it cannot at any rate be admissible at 100% or 80% as claimed in Form 3CD treating it as “”building”. The assessee also claims that Form 3CD is generated online and in the depreciation blocks there is no item specified 100% other than head ‘building’, it was an accidental omission. The argument of the assessee’s AR is not true and correct and not acceptable. Being a responsible chartered accountant who is supposed to certify correctness of entries in the statutory form 3CD, the assessee’s AR is supposed to be well aware of the rate of depreciation of various block of assets specified under section 32 including building when the rate of depreciation on building is only 10% and not 100%. The equipments like STB can be considered if at all admissible for deprecation, to be @ 15% under the “plant and machinery” and not @ 100%. In this view of the matter, if at all depreciation can be treated as admissible, it shall not exceed 15%. As discussed above,

29 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. thought the assessee is not entitled for any depreciation on STB in the absence of supporting evidence, taking a lenient view in favour of the assessee I am allowing depreciation on the set top boxes @15% admissible to “Plant and Machinery” as against 100% claimed in the form 3CD under “building”. The balance claim stands disallowed. The allowance of depreciation @15% is worked out as under.”

7.3 Now the contention of the assessee is that expenditure

incurred on purchase of set top boxes is to be allowed as

revenue expenditure. It is a well-accepted legal preposition

that no test of universal application can be laid down to

determine the question whether an expenditure incurred by

the assessee is revenue or capital. It depends on the overall

facts and circumstances of each case. Such matters have to

be decided from a practical view and on application of the

proper principles of law. A few principles in this regard can be

enumerated as under-

i) One of the guidelines for distinguishing revenue expenditure from capital expenditure is that if the expenditure is incurred for obtaining an advantage of enduring benefit it would be capital expenditure. But, the test of enduring benefit is not a certain or conclusive test and it is not be applied blindly and mechanically. In other words every advantage of enduring nature acquired by an assessee is not covered by the said concept. In a given case, the test of enduring benefit might break down. The idea of once for all payment and enduring benefit are not something akin to statutory conditions; nor are the notions

30 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. of capital or revenue a judicial fetish. Concepts of capital/revenue expenditure are not eternal verities, but are flexible ones.

ii).What is material in this regard is to consider the type, nature and character of the advantage in a commercial sense on one hand and on the other to look in to the aim, intended object, effect of the expenditure and in the larger context of necessity and expediency. Legal rights secured in the process are also relevant in deciding the issue.

iii).If the expenditure is related to the carrying on or conduct of the business or is intrinsically connected with the running of a business the expenditure is to be regarded as revenue expenditure even though the advantage may endure for some indefinite future.

iv. A payment made with a view to obtain the benefit of technical assistance for running the assessee's business more efficiently so as to earn more profits and 'not by way of transfer of fruits of research once and for all', can be treated as an item of revenue expenditure

v. Expenditure incurred in connection with the profit earning apparatus would be revenue expenditure.

vi. Where the advantage is on the capital field the expenditure would be treated a capital Expenditure. If the advantage leaves the fixed capital untouched, the expenditure would be on revenue account.

vii. Expenditure in the acquisition of a concern would be capital expenditure; expenditure in carrying on the concern would be revenue expenditure.

xi. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would fall in the category of capital expenditure.

31 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. xii. If the amount is spent for preserving and maintaining the present asset in existence, it cannot be said that the expenditure so incurred is capital in nature

xiii. Where the object of incurring an expenditure is to effect a capital structure as a result of which certain incidental advantage flows, the expenditure will be of capital nature. Capital expenditure can be incurred after a company is floated or after it starts its business.

xiv).Ordinarily, the word capital expenditure refers to the expenditure which is of a permanent nature or securing tangible or intangible property, corporeal or incorporeal right.

7.4 As discussed earlier, in this case, the assessee had not

produced the copy of purchase bill and sale bill of the set top

boxes on which depreciation has been claimed. Hence, the

Assessing Officer produced sale bill from similar income

generating company indicating the details of sale of set top

boxes in order to ascertain the sale value of set top boxes.

From that he came to the conclusion that the assessee is

entitled to depreciation at 15%. But from the available

records, in our opinion, it transpires that the expenditure

incurred for acquisition of set top boxes and not for trading

it. In other words, it was incurred for securing tangible asset

on which the assessee collected annual maintenance charges.

The acquisition brought into existence a new asset and the

32 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. assessee obtained a new advantage. It is to be noted that not

only advantage flowed from such acquisition and the

investment is in the capital field but the expenditure has also

effected the fixed capital of the assessee. In our opinion,

expenditure was incurred in connection with the profit

earning apparatus which generated permanent source of

income for the assessee by way of annual service maintenance

charges. Thus, we are of the opinion that the expenditure

incurred by the assessee was capital in nature and it cannot

be said that it is revenue expenditure. Accordingly, the

assessee is entitled for depreciation on the same.

set top boxes at 15% only.

8.1 The assessee in the return of income had claimed

depreciation at the rate of 100% on STB’s. The STB’s were

purchased on different dates during the relevant assessment

year 2014-2015. The total depreciation claimed was

Rs.36,13,86,286/- taking into account the period they were

put to use. Depreciation at the rate of 100% was claimed for

33 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. more than 180 days amounting to Rs.17,47,76,077 and 50%

on remaining items purchased from 01.10.2013 to

31.03.2014. The assessee was not able to point out the basis

on which 100% depreciation was claimed on these STB’s. In

the course of assessment proceedings, the assessee furnished

revised depreciation statement claiming depreciation at 80%

in lieu of 100% already claimed in the return of income. In

paragraphs 26 and 27 of the assessment order, the Assessing

Officer was of the view that the depreciation claimed cannot

be allowed to the assessee since the assessee had collected

cost of STB’s and the possession of the same was already

handed over to its customers. However, the A.O. contradicted

his earlier position mentioned in paragraphs 26 and 27 of the

assessment order and in paragraph 28 concluded that the

assessee was entitled to depreciation at the rate of 15%

treating the cost of STB’s as normal `plant and machinery’, as

per new Appendix I Part A-III(1). In holding so, the A.O. states

at para 28 of the impugned assessment order that he is

taking a lenient view for granting depreciation at the rate of

15%. However, the contention of the assessee is that it is

entitled to depreciation under the new Appendix – I Part III

34 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. (8) (ix)(E)(k), wherein the rate of depreciation provided for

energy saving device being electrical equipments is at the rate

of 80% (now 40% with effect from 01.04.2017). The CIT(A),

while allowing depreciation at the rate of 80%, had not given

an elaborate finding. The relevant finding of the CIT(A) as

regarding the grant of depreciation at the rate of 80% reads as

follows:-

“7.10 Now coming to the rate of depreciation, the appellant company claims that admissible rate is 80% on these assets. In its submissions, it has quoted rule 5 of IT rules as under "In Rule-5, Income-tax Rules Rates of depreciation in PART A, III MACHINERY AND PLANT 8(ix)(E) (k) classifies set top boxes under

Remote terminal units/intelligent electronic devices, computer hardware/software, router/bridges, other required equipment and associated communication systems for supervisory control and data acquisition systems, energy management systems and distribution management systems for power transmission system"

7.11 Considering the submissions of appellant and the legal provisions, I am of the view that the Set Top Boxes are squarely covered within the above definition and entitled for rate of deprecation as per this rule. Therefore I direct the Assessing officer to allow depreciation @80% on these STBs depending on the period for which these are put to use. This ground is, therefore, partly allowed.”

35 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. 8.2 To understand the controversy in issue, the relevant

provision needs to be reproduced:-

Depreciation. 32.(1) In respect of depreciation of – (i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998,

Owned, wholly or partly, by the assessee and used for the purpose of the business or profession, the following deductions shall be allowed –

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed (see rule 5(1A) and Appendix IA of the Income-tax Rules)

(ii) in the case of any block of assets, such percentage on the written down value thereof as (emphasis supplied) may be prescribed.

7.2 The prescription in Rule 5(1) and Appendix I of Income- tax Rules and the same reads as follows:-

Appendix I of Income-tax Rules. Rates of depreciation III. Machinery and Plant

36 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. Machinery and plant other than those covered by sub- items (2)(3) and (8) below : 15%.

8.3 The Assessing Officer granted depreciation at the rate of

15% being machinery and plant other than those covered by

sub-items (2), (3) and (8). According to the assessee, it is

covered under sub-item (8)(ix)(E)(k). Sub-item (ix) of item (8) is

energy saving device and (E) is electric equipment. For

claiming higher rate of depreciation of 80%, assessee has to

prove that the STB’s are energy saving devices being electrical

equipment. In the absence of proving so, STB’s would be

entitled for depreciation under general category of `machinery

and plant’ and not a sub-item mentioned under (8) i.e. energy

saving device being electric equipment. The finding rendered

by the CIT(A) is insufficient to come to a conclusion that the

assessee is entitled to the depreciation at the rate of 80%. The

order of the assessment relied on by the assessee for

assessment year 2015-2016 stating that the Assessing Officer

had granted depreciation on STB’s at the rate of 80% for that

year has been revised by the Commissioner u/s 263 of the

I.T.Act and is no longer in existence. Therefore, the assessee

cannot place reliance on the assessment order for assessment

37 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. year 2015-2016, wherein the assessee was granted

depreciation at the rate of 80%. As per TRAI regulations dated

01.04.2015, the depreciation on the price of customer

premises equipment (which included Set Top Box and remote

control for Set Top Box) shall be calculated using straight line

method at the rate not exceeding 1.7% for every completed

calendar month or part thereof. Therefore, the rate of

depreciation at the rate of 15% allowed by the Assessing

Officer treating the same as Plant and Machinery is in tune

with TRAI regulations. Set Top Box is a device connected to a

TV and which allows a subscriber to receive in unencrypted

and descrambled form subscribed channels through an

addressable system and unless assessee proves that STB’s

comes within Rule 8(ix)(E)(k), it cannot claim higher

depreciation of 80%.

38 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd. 8.4 In view of the above, we uphold the order of the lower

authorities and direct the Assessing Officer to allow

depreciation on STB at 15% only.

the Cross Objection filed by the assessee is dismissed.

Order pronounced on this 30th day of April, 2019.

sd/- sd/- (George George K.) (Chandra Poojari) ( JUDICIAL MEMBER ACCOUNTANT MEMBER

Cochin ; Dated : 30th April, 2019. Devdas*

Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. The CIT (A), Thrisur. 4. The Pr.CIT, Thrisur. 5. DR, ITAT, Cochin 6. Guard file.

BY ORDER,

(Asstt. Registrar) ITAT, Cochin

39 ITA No.271/Coch/2018 & CO 55/C/2018. M/s.Kerala Communicators Cable Ltd.