Commissioner of Income Tax v. OCHOA Laboratories Ltd.
In the Income Tax Appellate Tribunal, Delhi
ITA No. 4114/Del/2009
Before Mr H.S. Sidhu, JM and Mr O.P. Kant, AM
Decided on August 25, 2017

Relevancy of the case: Whether a depreciation rate of 60% can be allowed for UPS by considering them under the definition of a computer?

Statutes & Provisions Involved

• The Information Technology Act, 2000 (Section 2(1)(i))
• The Income Tax Act, 1961 (Section 2(24)(x), 32, 36(1)(va), 37(1), 143(2), 143(3))
• The Indian Medical Council Act, 1956 (Section 20A, 33(m))
• The Finance Act, 1998

Relevant Facts of the Case

• During the year under consideration, the assessee company was engaged in the business of trading in pharmaceutical products by procuring finished products as well as manufactured products through loan licensing.
• The return of income tax was filed declaring total income of Rs. 2,61,13,312 and the case was selected for scrutiny. In the assessment, the assessing officer disallowed sales and promotion expenses amounting to Rs. 1,63,90,136. Aggrieved, the Revenue is in appeal before the tribunal.
• The grounds raised by the revenue were that the learned CIT(A) has erred in deleting the disallowance of Rs. 40,56,310 made by AO out of sales promotion expenses on account of non-business purposes and craves to alter any other grounds of appeal.
• The cross-objections raised by the assessee is that the learned CIT(A) has erred in sustaining the addition of Rs. 2,58,429 being the depreciation claimed by the assessee on UPS, rack, switch and battery.
• Hence, the calculation of the depreciation rate of UPS is to be done by the tribunal in light of the provisions of the Information Technology Act, 2000 with regard to the definition of UPS.

Prominent Arguments by the Advocates

• Prem Nath Monga, Counsel on behalf of the Assessee:
• According to the case of CIT v. BSES Yamuna Powers Ltd., computer accessories and peripherals such as printers, scanners and server etc. form an integral part of the computer system and cannot be used without a computer. Hence, they are eligible for depreciation at the rate of 60%.

Opinion of the Bench

• Initially, the learned CIT(A) following the decision of the tribunal in the case of Nestle India Ltd., held that UPS is not eligible for depreciation at the rate of 60%.
• The above was held because of the fact that as per Section 2(1)(i) of the Information Technology Act, 2000, a UPS can’t be said to be a part of the computer. There is no in-built system of power supply in the computer. UPS is a source of alternative supplier of power to the computer and applying the functional tests also, it is part of the power supply system and not the computer system. Hence, it is not an integral part of the computer.
• A higher rate of depreciation is provided on computers mainly because the technology used in making computers is rapidly developing and becomes obsolete very fast. Hence, UPS can’t be treated as a computer since the technology used in making UPS is not developing fast to make it obsolete in a short span.
• Eventually, the tribunal relied upon the case of Steel Authority of India in which it was observed that the judgment in Nestle India Ltd. was very old.
• It was observed that computer fibre networking and UPS/Inverters were eligible for depreciation at 60%.

Final Decision

• Following the decision of the tribunal in the case of Steel Authority of India, the finding of the learned CIT(A) on the issue in dispute stand reversed.
• Facts and Circumstances of the year under consideration being identical to the facts and circumstances of the assessee for the assessment year 2007-2008, the ground of appeal of the revenue, as well as cross objection of the assessee in the year under consideration, are allowed.
• The three appeals of the Revenue and both the cross-objections of the assessee are allowed.

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