Tribunal Upholds 15% Depreciation Rate on Set Top Boxes (STBs) Aligning with TRAI Regulations

The Tribunal upheld the Assessing Officer's decision to grant depreciation on Set Top Boxes (STBs) at a rate of 15%, aligning with TRAI regulations, rejecting the CIT(A)'s allowance of 80% depreciation. The Tribunal dismissed the assessee's cross-objection to treat the expenditure on STBs as revenue expenditure, affirming that it was capital in nature. The appeal by the Revenue was allowed, confirming the depreciation rate of 15% and denying the claim for revenue expenditure treatment. The decision was pronounced on April 30, 2019.

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Issues Involved:
1. Whether the CIT(A) was justified in granting depreciation on Set Top Boxes (STB) at the rate of 80% instead of 15% granted by the Assessing Officer.
2. Whether the expenditure incurred on the purchase of STB should be allowed as revenue expenditure.

Issue-wise Detailed Analysis:

1. Depreciation Rate on Set Top Boxes (STB):

The primary issue raised by the Revenue in the appeal was the justification of the CIT(A) in granting depreciation on Set Top Boxes (STB) at the rate of 80% instead of the 15% granted by the Assessing Officer. The assessee, a private limited company engaged in the business of distribution of signals and internet supply to cable networking, had claimed depreciation on STB at Rs. 36,13,86,286 at the rate of 100%. The Assessing Officer restricted the claim to 15%, considering the STB as "Machinery and Plant" not covered under specific sub-items of the new Appendix I.

The CIT(A) concluded that the STB belonged to the assessee and was a capital asset, thus entitled to depreciation. The CIT(A) referenced the Customer Registration Form, which indicated that the STBs were the property of the appellant company, and directed the Assessing Officer to allow depreciation at the rate of 80% as per sub-item (8)(ix)(E)(k) of Part A item III of the Income Tax Rules, which covers energy-saving devices and electrical equipment.

However, the Tribunal noted that the CIT(A) had not provided an elaborate finding for granting depreciation at 80%. The Tribunal emphasized that for claiming a higher rate of depreciation of 80%, the assessee needed to prove that the STBs were energy-saving devices being electrical equipment. The Tribunal upheld the Assessing Officer's decision to grant depreciation at 15%, aligning with TRAI regulations, which prescribe a straight-line method of depreciation at a rate not exceeding 1.7% per month for customer premises equipment, including STBs.

2. Expenditure on Purchase of STB as Revenue Expenditure:

In the cross-objection filed by the assessee, an alternative contention was raised that the expenditure on the purchase of STB should be allowed as revenue expenditure. The assessee argued that the STBs were handed over to customers, and the cost was recouped in the name of installation charges, making the expenditure revenue in nature.

The CIT(A) observed that the STBs were the property of the appellant company and were treated as capital assets. The Tribunal, however, noted that the assessee collected installation charges, which included the cost of STBs, and also collected maintenance charges in advance as AMC for repairs. The Tribunal concluded that the expenditure incurred for acquiring STBs was for securing a tangible asset, generating a permanent source of income through annual service maintenance charges. Therefore, the expenditure was capital in nature, and the assessee was entitled to depreciation.

Conclusion:

The Tribunal allowed the appeal filed by the Revenue, confirming the depreciation rate of 15% on STBs as granted by the Assessing Officer, and dismissed the cross-objection filed by the assessee, denying the claim for treating the expenditure on STBs as revenue expenditure. The order was pronounced on April 30, 2019.

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