The term computer is not defined under the Income tax Act, however, under Information Technology Act, the function of composing and sending an email and receiving a reply qualifies as a computer. The Amritsar bench of ITAT in a recent ruling held that iPads are communicating devices and thus, not a substitute for computers, which had sparked a debate among tax professionals warranting a discussion.

In this backdrop, the author CA K Prasanna (Associate Partner, M2K Advisors LLP) this article analyses the issue and rationale of the judgement wherein ITAT applied the dominant purpose test on iPads based on the SB ruling (supra) observation and concluded that the dominant purpose is only a communicating device. The author remarks “There is apprehension about whether the dominance test must be evaluated from the taxpayer's perspective or through common parlance”. Further, on ITAT’s conclusion being based on the fact that Apple store selling iPad as an entertainment device and the fact that iPad has an IMEI number, the author views “…purpose by which the supplier market the product cannot be the determinative factor of dominant use…even if the iPad has an IMEI number, it cannot automatically become a communicating device, and it cannot displace the requirement of mobiles in our day-to-day life”. The author concludes by saying “…the gadgets are developed with multi-functional features, are pocket-friendly, and can be adapted to the consumer's requirements. Hence there is a need to interpret the law in light of the circumstances surrounding it”.

Is iPad a Computer entitled to a higher depreciation rate?

1. Introduction

The digital revolution is far more significant than the invention of writing or even printing

Author: Douglas Engelbart

In today's world, the digital revolution has significantly altered the business dynamics as well as the personal lives of individuals, thanks to robust technological innovations.  One does not have an option but to adapt to the digital epoch in order to stay in the race. Further, the Covid-19 has exacerbated the significance of modern-day technology. Gone are the days when computers occupy an entire room to the present, where computers are at our palms.  So much so that the current generation attends the schools that are placed in the palm through e-learning. The digital evolution has a significant impact on the taxation front, with countries globally grappling and figuring out ways to tax the digitalized economy. In this context, one of the tax challenges that a business encounters is the classification of technological devices.

In this regard, a question that crops up is whether an 'iPad', a modern-day technological computing device, can be classified as a Computer to avail depreciation at higher rates under the Income-Tax Act.  Whether such a question is necessary in the first place is a matter of debate left for another occasion. The Amristar Tribunal indeed had an occasion to deal with such an issue on the allowability of depreciation at higher rates on iPads. The conclusion of the tribunal raised many eyebrows warranting a discussion, and this article is an attempt to unravel the issue and rationale of the judgement.

2. Facts of the case

Kohinoor Indian Private Ltd[1] (the Assessee), for the assessment year AY 2012-13 and AY 2013-14, had claimed depreciation on iPads at 60%, treating them as computers. The Assessing Officer (AO) had treated the iPads as plant and machinery and disallowed the excess depreciation. The AO had compared the Apple products, i.e., iPhone and Mac Book, and is of the view that the characteristics of iPads are similar to iPhone compared to Mac Book. The First Appellate Authority [CIT(A)] upheld the order of the AO.

3. Proceedings before the Tribunal

The Appellant had submitted the essential features of the iPad from a tech website named 'gsmarena.com' and argued that it is a tablet computer entitled to 60% depreciation. Further, it was pointed out that a cellular call cannot be a determinative factor to decide whether a particular device is a computer or iPhone.

The Hon'ble ITAT has observed that the term 'computer' is not defined under the Income-tax Act, 1961 (IT Act). The ITAT had referred to the definition of the 'computer' from the Information Technology Act, 2000 (I-Tech Act). Further, to import the definition from the I-Tech Act, the ITAT referred to the Special Bench (SB) decision in Datacraft India Ltd[2], which was rendered in the context of routers and switches.

The ITAT had referred to observations of the SB and concluded the dominant purpose of the iPad is communication and not a computing device, and the Apple store does not sell iPad as a computing device instead of selling it as a communicating/entertainment device. The ITAT also observed that the iPad has an IMEI number, and the Assessee has failed to produce any evidence to prove otherwise. The ITAT relied on the Hon'ble Supreme Court ruling in Dilip Kumar & Company[3]on the burden of proof. Accordingly, the ITAT held that iPads are not computers and not eligible for depreciation at 60%.

4. Analysis of the rulings

In para 5.5 of the order, the ITAT categorically observed that the iPads and smart mobiles are high-speed processing devices akin to computers as per the I-Tech Act definition. Having observed this, the ITAT applied the dominant test of iPads based on the SB ruling (supra) observation and concluded that the dominant purpose is only a communicating device.

There is apprehension about whether the dominance test must be evaluated from the taxpayer's perspective or through common parlance. The para 25 of the SB ruling (supra) suggested that to determine a particular machine to be a computer or not, the predominant function, usage, and common parlance understanding to be taken into account. Further, the SB in the same para held that the machine's principal output/object/function should be achievable only through 'computer functions'. All the factors mentioned should be considered together and not in isolation.

From the order, it appears that the dominant purpose of the iPad was tested using the common parlance rather than the actual usage by the Assessee.  The ITAT has also given importance to the perception of the Apple store while selling the iPad. In my humble view, that purpose by which the supplier market the product cannot be the determinative factor of dominant use. For e.g., a Smart TV is advertised as a substitute for a computer monitor or a mobile phone is advertised with a high resolution camera as its main feature.

Regarding the non-submission of proof relating to the IMEI number, in para 9 of the order, the Assessee has mentioned iPad purchased by them is a non-cellular feature[4], and further bill copies were submitted during the assessment proceedings. Inspite of this, the ITAT has made a categorical finding that Assessee has failed to submit any concrete evidence. In my humble view, even if the iPad has an IMEI number, it cannot automatically become a communicating device, and it cannot displace the requirement of mobiles in our day-to-day life.

4.1 Other Judicial precedents on mobiles/tablet and other equipments

The closest definition to a computer is defined under the Act as 'computer system',[5] which was relied on by the Bangalore ITAT[6] to upheld a 60% rate for Media Resource Board as it supports a combination of functions performed in conjunction with the servers and computers.

The Delhi ITAT[7], in the context of mobile phones and tablets, held that the company's field employees were required to update the regular information about market sports, dealer position of supply, and storage availability of store for taking decisions to approach the customer adopting marketing plan. It is used as a unit as part of the information system in the operations for conducting surveys and not merely for communicating equipment. Accordingly, a higher rate of depreciation is granted.

The Hyderabad ITAT[8] observed that any device when they are used along with computer and when their functions are integrated with the computer comes within the ambit of expression of 'computer'. Hence printers, scanners, modems, switches, hubs, cables/ cards, and software are eligible for 60% depreciation.

The Kerela High Court[9] has rejected the higher rate for EPABX and mobile phones as they did not found any ground to treat the communication device like a computer.

The Delhi ITAT[10] observed that there are smartphones that function equivalent to computers or much more than a computer. If the mobile phone's functionality is shown to be more than communication equipment, it may qualify as a computer. In the absence of information, a higher rate was denied by the ITAT relying on the Kerela High Court ruling in Federal Bank (supra).

The Bombay High Court[11], in the context of development rebate under section 33 of the IT Act office, discussed whether the "Office appliances" should be construed in the context of appliances that are generally used in the office as an aid or proper functioning of the office or contextually. The High Court held that installation and operation of data processing machines (DPS) is on a scientific basis and purpose for which the machines used can be described as computers. In view of the varied functions which the "system" is capable of performing, DPS cannot be classified as office appliances, hence entitled to a rebate. This ruling emphasizes the fact of actual functionality rather than common parlance.

The above rulings have dwelled into the usage of the equipment by the taxpayers and brought out a principle that as long as the devices are used dominantly towards the business and not for communication, it is entitled to a higher rate of depreciation. However, in the instant case, it appears that the actual usage of the iPad was never discussed. As long as the actual use of the devices is properly established, relying on the above-mentioned precedents, it is arguable that iPads could be entitled to a higher rate of depreciation.

5. Closing remarks

Technology has evolved at a faster pace, and the fundamental understanding of the features and functionality of electronics has also grown significantly. To illustrate, the feature of computers has changed from supercomputers, desktops, laptops, palmtops, tablets, iPad and smartphones, etc. Currently, the gadgets are developed with multi-functional features, are pocket-friendly, and can be adapted to the consumer's requirements. Hence there is a need to interpret the law in light of the circumstances surrounding it. A communication device such as a mobile phone can be used for various purposes beyond communication through applications; therefore, it does not mean its primary/dominant purpose is only communication. After all, a rose is a rose is a rose.

In his commentary titled 'Statutory Interpretation',[12] Francis Bennion has stressed the need to interpret a statute by giving allowances for any relevant changes that have occurred since the Acts passing in law, social conditions, technology, the meaning of words, and other matters. The Three Bench member of the Hon'ble Supreme Court[13] has observed that "It is presumed that Parliament intends the court to apply to an ongoing Act a construction that continuously updates its wording to allow for changes since the Act was initially framed (an updating construction). While it remains law, it is to be treated as always speaking. This means that in its application on any date, the language of the Act, though necessarily embedded in its own time, is nevertheless to be construed in accordance with the need to treat it as current law".

Looking at the rapid speed at which innovations are happening, it would not be a surprise that communication devices of the future would be embedded with our day-to-day lives more than what we would have envisaged. Hence, it is imperative that the tax laws must stay afloat with the digital revolution by proactively providing necessary guidance and avoid needless litigations.

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[1] [TS-806-ITAT-2021(ASR)]

[2] [TS-5590-ITAT-2010(Mumbai)-O]

[3] [TS-5418-SC-2018-O]

[4] The cellular features of iPad comes with IMEI number and non cellular feature has serial number

[5] Explanation to Section 36(1)(xi)

[6] OnMobile Global Ltd vs ADIT [TS-5164-ITAT-2014(Bangalore)-O]

[7] Hindustan Field Services P Ltd [TS-8911-ITAT-2019(Mumbai)-O]

[8] Ushodaya Enterprises Ltd. vs. ACIT [TS-6415-ITAT-2013(Hyderabad)-O]

[9] Federal Bank Ltd vs ACIT [TS-12-HC-2010(Kerala)-O]

[10] Falcon Business Resources Pvt Ltd (ITA No 1136/Del/2018)

[11] CIT vs I.B.M. World Treade Corporation [TS-10-HC-1977(BOM)-O]

[12] Quoted from Sil Import vs Exim Aides Silk Exports (SC) rendered in the context of Negotiable Instrument Act – Page 618

[13] State vs. S.J. Chaudhary (1996) (2 SCC 428) - Relied in CIT vs Poddar Cements P Ltd [TS-17-SC-1997-O] by the Hon’ble Supreme Court in the context of allowing depreciation under Section 32.