60% Depreciation on routers and switches Allowed

V.S. Jadhav, DR for the Respondent.

ORDER

1. The assessee is aggrieved by the impugned order dated 12/08/2015 of the Ld. First Appellate Authority, Mumbai, the ground raised in this appeal pertains to not allowing claimed depreciation at the rate of 60% and holding that the assessee is eligible for depreciation at the rate of 15% on routers and switches etc. ignoring the decision in Dy. CIT v. Datacraft India Ltd. [2010] 40 SOT 295 (Mum.)(SB) and the case of UAE Exchange and Financial Services Ltd. (ITA No. 91/Bang/2014) order dated 10/10/2014 and further disallowance of payment of Rs. 4,88,052/- towards purchase and freight charges as per report in form no. 3CEB u/s 92E of the Act, broadly on the ground that such ground was not pressed in spite of the fact that the written submissions, with respect to the issue, were made vide letter dated 28/07/2015.

2. During hearing of this appeal, none was present in spite of issuance of registered/RPAD notice to the assessee. Thus, I have no option but to proceed ex-parte, qua the assessee, and tend to dispose of the appeal on the basis of material available on record. Shri V.S. Jadhav, ld. DR, was present for the Revenue, who defended the conclusion drawn in the impugned order.

2.1 I have considered the submissions of ld. DR and perused the material available on record. So far as, allowing the depreciation at the rate of 15% in place of 60%, claimed by the assessee, on routers and switches are concerned, as per ground no. 3 of the assessee, reliance has been placed upon the decision of Special Bench of the Tribunal in the case ofDCIT v. Datacraft India Ltd., which has been followed by the Bangalore Bench of the Tribunal in the case of M/s UAE Exchange and Financial Services Ltd. (supra). It is noted that the assessee is engaged in the business of service provider of HSIA (High Speed Internet Access), IPTV (Internet Protocol Television), VOD (Video on demand), I-media and mobile streaming services for hotel chains including Hilton, Marriot, Hayat, and Oberai etc. to cater the needs of their clients. The assessee claimed depreciation of Rs. 35,57,976/-, on fixed assets, shown as machinery and plant. These fixed assets includes installed hotel systems, containing certain accessories. Without these accessories, as per the assessee, internet connection through computer cannot be provided to the client. The crux of the claim is that these accessories form part of computers, therefore, eligible for depreciation at the rate of 60%. However, the ld. Assessing Officer was of the view that these accessories, instruments were not part of computers accordingly he allowed depreciation at the rate of 15%, therefore, the remaining claimed/excess depreciation of Rs. 26,68,482/- was disallowed. On appeal, before the ld. Commissioner of Income Tax (Appeals), the decision taken in assessment order was affirmed, against which the assessee is in appeal before this Tribunal.

2.2 It is noted that the ld. Assessing Officer has observed that though UPS, routers and switches, etc are connected to the computers but cannot be considered to be integral part of computers, consequently, relying upon the decision of the Delhi Bench in the case of Nestle India Ltd. v. Dy. CIT [2009] 27 SOT 9 (URO) disallowed the claim of the assessee. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, I have considered the rival submissions at length in the light of material placed before me and precedents relied upon. The chief question which falls for my adjudication/consideration is whether routers and switches are part of computer or not for the purposes of depreciation. Section 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- section (1) provides that in case of any block of asset, the deduction shall be allowed at such percentage on the written down value 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 Table in the Appendix I of these Rules on the written down value of such block of asset as are used for the purpose of business or profession of the assessee at any time during the previous year. Appendix-I, as applicable to assessment year 2002-03 under consideration, has different blocks of assets. I am concerned with the block of assets of machine and plant or whether such items are integral part of computer or not. General rate of depreciation provided is 25 per cent against item 1 in respect of machine and plant other than those covered by specific sub-items. Sub-item (2B) is “Computers” and the rate of depreciation prescribed is 60 per cent. Sub-item (5) is “Computers including computer software” on which rate of depreciation has been prescribed as 60 per cent. It is only with effect from assessment year 2003-04 that computer software has also been included in the category of computers for the purposes of allowing depreciation at the higher rate of 60 per cent. Thus, whereas up to assessment year 2002-03 only computers were eligible for depreciation at the rate of 60 per cent from assessment year 2003-04, the benefit of such enhanced depreciation rate has been extended also to computer software. Note No. 7 to the Appendix I, as applicable from assessment year 2003-04, defines “Computer software” to mean any computer program recorded on any disc, tape, perforated media or other information storage device. No definition of ‘Computers’ has been given in the Appendix, unlike that of Computer Software. It is nobody’s case that the routers or switches are computer software. Thus I shall restrict myself in understanding the meaning of the expression ‘Computers’, in the facts and circumstances of the case.

2.3 Section 32, which grants depreciation allowance, does not define the word ‘Computer’. It is an admitted position that the word ‘Computer’ has not been defined in the Income-tax Act or Income-tax Rules. I find that the term “Computer system” has been defined in Explanation below section 36(1)(xi) as follows :—

‘(a)”Computer system” means a device or collection of devices including input and output support device and excluding calculators which are not programmable and capable of being used in conjunction with external files, or more 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;’

2.4 At this juncture it will be relevant to note that clause (xi) of section 36(1) was inserted by the Finance Act, 1999 with effect from 1-4-2000 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 clause (xi) of section 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 1-4-1999 but before the first 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. It was in this context that phrase ‘Computer system’ came to be defined solely for the purpose of clause (xi) of section 36(1).

2.5 From the above discussion it is seen that the Explanation (a) defines ‘computer system’ and not ‘computer’ and that too only for the purposes of clause (xi) of section 36(1), which has force only for one year. As such I am not inclined to adopt this definition of ‘computer system’ for the purposes of granting depreciation under section 32 of the Act on ‘computers’. The Hon’ble Supreme Court, vide its judgment dated 7-5-2010, has held in Jt. CIT v. Saheli Leasing & Industries Ltd. [2010] 191 Taxman 165 that : ‘A particular word occurring in one section of the Act, having a particular object cannot carry the same meaning when used in different section of the same Act, which is enacted for different object. In other words, one word occurring in different sections of the Act can have different meaning, if the object of the two sections are different and when both operate in different fields’. In view of the fact that the object of section 36(1)(xi) is quite distinct from that of section 32, I am of the considered opinion that the definition of the term ‘computer system’ given in the Explanation to section 36(1)(xi) cannot be applied as such (for giving meaning to ‘computer’) in the context of section 32.

2.6 In some of the cases decided by the Tribunal, reliance has been placed on the definition of “computer” given by the Information Technology Act, 2000, section 2(i), which is as under :—

‘(i)”computer” means any electronic, magnetic, optical or other high speed data processing device or system which performs logical, arithmetic and memory functions by manipulations of electronic, magnetic or optical impulses, and includes all input, output, processing, storage, computer software or communication facilities which are connected or related to the computer in a computer system or computer network.’

2.7 Before, I go on to apply this definition in the context of section 32, the scheme of the Information Technology Act, 2000, needs to be examined. Its preamble indicates that it is an Act to provide legal recognition for transactions carried out by means of electronic data interchange and other means of electronic communication, commonly referred to as “electronic commerce”, which involves the use of alternatives to paper-based 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.

2.8 Having seen the object of the Information Technology Act, 2000, the question which arises for consideration is that can I import the definition of ‘computer’, as given in it, in the Income-tax Act, 1961 for the purposes of section 32 It has been held by the Hon’ble Supreme Court in CIT v. Venkateswara Hatcheries (P.) Ltd. [1999] 237 ITR 174  that the meaning assigned to a particular word in a particular statute cannot be imported to a word used in a different statute. Similar view has been expressed by the Hon’ble Rajasthan High Court in Arihant Tiles & Marbles (P.) Ltd. v. ITO [2007] 295 ITR 148 holding that the interpretation of any expression used in the context of one statute is not to be automatically imported while interpreting similar expression in another statute. This judgment has been approved by the Hon’ble Supreme Court in ITO v. Arihant Tiles & Marbles (P.) Ltd. [2010] 320 ITR 79

2.9 From the above, it is evident that the rationale behind the Information Technology Act, 2000 is quite distinct from that of the Income-tax Act, as can be seen from its preamble, which is ‘An Act to consolidate and amend the law relating to income-tax and super tax’. Thus it is palpable that both these Acts are not in pari materia. There is significant difference in the scope, purpose and substance of these two statutes. Ex consequenti the definition of ‘computer’ as given in the Information Technology Act, 2000, cannot be applied in the context of section 32 of the Income-tax Act. However, though the learned Authorised Representative also agreed that the definition in the Information Technology Act cannot be imported, I am 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 my considered view, aid can be taken of the definition of the term ‘computer’ given in Information Technology Act, 2000.

2.10 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 I have to give a meaning to the expression ‘computer’ not merely going by the dictionary meaning but by applying common parlance and commercial parlance tests as well as by analysing the intendment of providing for higher rate of depreciation. I may refer to several case law to analyse as to which formula would aptly suit the situation in the given case. The ratio laid down in following cases further throw light.

2.11 In Indian Hotels Co. Ltd. v. ITO [2000] 245 ITR 538  (SC), the issue was about the granting of deduction under section 80J to an industrial undertaking. It was noticed that section 80J provides for grant of deduction to an assessee who derives income from an industrial undertaking or a ship or the business of a hotel to which the section applies and the section applies to any industrial undertaking, any ship or business of any hotel if the conditions prescribed under sub- sections (4), (5) and (6) respectively, are satisfied. It was noticed that the words ‘industrial undertaking’ have not been defined in the Act. In this background of facts, the Hon’ble Court posed the question to itself as to whether the assessee has derived profits and gains from an “industrial undertaking” or from the “business of a hotel”. After discussing the issue threadbare, it was held that : Industrial undertaking is not given any meaning under the Act, hence it is to be understood as per common parlance language. Taking into this account, apparently, the business of the assessee is that of a hotel, which is a trading activity and not that of an industrial undertaking.’ Resultantly the benefit of deduction was denied.

2.12 In Aspinwall & Co. Ltd. v. CIT [2001] 251 ITR 323  (SC), their Lordships were concerned with the question of granting investment allowance, for which one of the prerequisite conditions as per section 32A was that the industrial undertaking should be engaged inter alia in the manufacturing. It was noticed that the word “manufacture” was not defined in the Income-tax Act. In such circumstances it was held that : “In the absence of a definition, the word “manufacture” has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity.”

2.13 Similar view has been taken by the Hon’ble Supreme Court in Mangulu Sahu Ramahari Sahu v. STO AIR 1974 SC 390 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.

2.14 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 Assessing Officer 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 devices like the printer or monitor.’

2.15 I would like to clarify here that the meaning of computer cannot be extended to a device or set of devices which are meant to perform some independent function(s) even though in achieving such desired independent function(s), some sort of ‘computer functions’ are also involved. Today is an electronic age. Most of the products used by us involve some sort of mechanism, which may be loosely called as computer functions. Take the instance of Television set, Mobile phone and cars etc., all of which, inter alia, involve one form or the other of computer functions. Simply because some ‘computer functions’ are involved in these equipments or the assistance of computers is taken as such at one stage or the other in their operation, these will not become computer. The meaning of computer cannot be extended to another machine that operates with the assistance of computer. Conversely an item, which is an integral part of the computer, cannot be defined by its operations which it is capable of performing, e.g. : A wire and plug are electrical items in general but cost of a wire, integrally connected to television, may be added to cost of TV whereas a wire and plug attached to the computer system has to be treated as computer.

2.16 Thus in order to determine whether a particular machine can be classified as a computer or not, the predominant function, usage and common parlance understanding, would have to be taken into account. To analyse further, I take the case of a Television, the principal task of which is to deliver visuals accompanied with audio. The signals are received through the relevant networks such as Dish TV, Tata Sky etc. But TV does not become computer for the reason that its principal function cannot be done only with the aid of ‘computer functions’ notwithstanding the fact that in the entire process of networking or receiving the output from different channels and making it available to the viewers, some sort of computer functions are necessarily involved. Similarly take the case of mobile phone. Its principal task is to receive and send calls. It is not a stand- alone apparatus which can operate without the relevant network, such as Airtel, BSNL, Reliance. It, therefore, follows that any machine or equipment cannot be described as computer, if its principal output or 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’.

2.17 Having analysed the meaning of ‘computer’ in common parlance, I proceed to ascertain the concept, meaning and functions of ‘router’. Again I find that the term ‘router’ has not been defined in the Income-tax Act, 1961. Accordingly it also needs to be assigned the meaning as it is understood in common parlance. When a packet of data arrives at a router, its header information is scrutinized by the router. Based on the destination and source IP addresses of the packet, the router decides which neighbour it will forward it to.

2.18 So far as, use of routers/switches is concerned, the routers are crucial device that let the messages flow from one computer to another. Router has two separate but related jobs, viz., (a) to ensure that the information does not go where it is not needed and (b) it makes sure that the information does make it to the intended destination.

2.19 A router is a networking device whose software and hardware are customized to the tasks of routing and forwarding information. A router has two or more network interfaces, which may be to different physical types of network (such as copper cables, fibre or wireless) or different network standards. Each network interface is a small computer specialized to convert electric signals from one form to another. Routers connect two or more logical subnets, which do not share a common network address. The subnets in the router do not necessarily map one-to-one to the physical interfaces of the router. The term “layer 3 switching” is used often interchangeably with the term “routing”. The term switching is generally used to refer to data forwarding between two network devices that share a common network address.

2.20 In simple words, a router means a device that routes data from one computer to another or from one network to another. Routers provide connectivity inside enterprises, between enterprises and the internet, and inside internet providers. From the above discussion it transpires that the function of a router is to receive the data from one computer and make it available to another computer for viewing or further processing. Apart from facilitating the flow of data between two computers, the routers also help in the transfer of data from network to computer. Thus the essential function of the router in a commercial organization is to facilitate the flow of data from one computer to another for its processing or storage. Switches are shorter version of routers, which perform similar functions as that of routers but within a limited sphere.

2.21 On functioning of a ‘Router’ I 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.

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

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

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

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

2.25 No doubt the function of the computer, as one composite unit, is to perform logical, arithmetical or memory functions etc., but it is not only the equipment which performs such functions that can be called as computer; All the input and output devices, as discussed above, which support in the receipt of input and outflow of the output are also part of computer. CPU alone, in my opinion, cannot be considered as synonymous to the expression ‘Computer’. The function of CPU is akin to the brain playing a pivotal role in the conduct of the body. As I do not call the brain alone as the body, similarly the CPU alone cannot be described as computer. Thus the computer has to necessarily include the input and output devices within its scope, subject to their exclusive user with the computer, as discussed above. If I construct the definition of computer only to processing unit, as has been held in the case of Routermania Technologies (P.) Ltd. (supra), then even the keyboard and mouse etc., will not qualify to be called as computer because these equipments also do not perform logical, arithmetical or memory functions. In the light of the meaning of ‘computer’ discussed in earlier paras, I am inclined to agree with the view taken by the Kolkata Bench in Samiran Majumdar’s case (supra). I, therefore, hold that the routers and switches in the circumstances of the case, are integral part of Computer, entitled to depreciation at the rate of 60 per cent. Thus, this ground of the assessee is allowed.

3. So far as, ground no. 4 with respect to non-pressing the ground, as mentioned by the ld. Commissioner of Income Tax (Appeals), is concerned, the stand of the Commissioner of Income Tax (Appeals) is that written submissions were filed before the ld. First Appellate Authority vide letter dated 28/07/2015 and the ground was pressed, therefore, this ground of the assessee is remanded back to the file of the ld. Commissioner of Income Tax (Appeals) to analyze the factual matrix and decide afresh in accordance with law. Needless to mention here, that assessee be given opportunity of being heard with further liberty to furnish evidence, if any, in support of its claim, thus, this ground of the assessee is allowed for statistical purposes.

Finally, the appeal of the assessee is partly allowed for statistical purposes.