DCIT, CHENNAI V. Danfoss Industries P Ltd., CHENNAI

ITA 1131/CHNY/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7783 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 15-12-2016
• Assessment Year: 2004-2005
• Appeal Filed On: 26-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R. DURAI PANDIAN
• Keywords: Transfer pricing; Capital expenditure; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , .. ' #$, & '( BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NOS.1131, 1132 & 1582/MDS/2016 * +* / ASSESSMENT YEARS : 2004-05, 2009-10 & 2010-11 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 1(1), CHENNAI - 600 034. V. M/S DANFOSS INDUSTRIES PVT. LTD., 296, OLD MAHABALIPURAM ROAD, SHOLINGANALLUR, CHENNAI - 600 119. PAN : AABCD 0321 M (-./ APPELLANT) (/0-./ RESPONDENT) -. 1 2 / APPELLANT BY : SHRI R. DURAI PANDIAN, JCIT /0-. 1 2 / RESPONDENT BY : SHRI RAGHUNATHAN SAMPATH, ADVOC ATE ' 1 3& / DATE OF HEARING : 15.12.2016 45+ 1 3& / DATE OF PRONOUNCEMENT : 23.02.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THESE APPEALS OF THE REVENUE ARE DIRECTED AGAINS T THE RESPECTIVE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS)-1, CHENNAI AND PERTAIN TO ASSESSMENT YEARS 2004-05, 2009-10 AND 2010-11. SINCE COMMON ISSUE ARISES FOR CONSIDERATI ON IN ALL THESE 2 I.T.A. NOS.1131, 1132 & 1582/MDS/16 APPEALS, WE HEARD THESE APPEALS TOGETHER AND DISPOS ING OF THE SAME BY THIS COMMON ORDER. 2. THE APPEALS FOR ASSESSMENT YEARS 2004-05 AND 200 9-10 IN I.T.A. NO.1131 & 1132/MDS/2016 ARE CONCERNED, THERE WAS A DELAY OF 3 DAYS IN FILING THESE APPEALS. THE REVENUE HAS FILED A PETITION FOR CONDONATION OF DELAY. WE HAVE HEARD THE LD. DE PARTMENTAL REPRESENTATIVE AND THE LD.COUNSEL FOR THE ASSESSEE. WE FIND THAT THERE WAS SUFFICIENT CAUSE FOR NOT FILING THESE APP EALS BEFORE THE STIPULATED TIME. THEREFORE, WE CONDONE THE DELAY A ND ADMIT THE APPEALS. 3. SHRI R. DURAI PANDIAN, THE LD. DEPARTMENTAL REPR ESENTATIVE, SUBMITTED THAT THE FIRST ISSUE ARISES FOR CONSIDERA TION FOR ASSESSMENT YEAR 2004-05 IS WITH REGARD TO TRANSFER PRICING ADJ USTMENT OF ` 30,89,628/-. ACCORDING TO THE LD. D.R., THE ASSESS EE IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF COMPONENTS OF REFRIGERATION, INDUSTRIAL CONTROLS, FREQUENCY CONVERTERS, ETC. IN THE COURSE OF BUSINESS ACTIVITY, THE ASSESSEE HAS ALSO IMPORTED S OME OF THE COMPONENTS FROM DANFOSS ASSOCIATE ENTERPRISES AND S ELLS FINISHED PRODUCTS TO THE INDUSTRIAL CUSTOMERS. ACCORDING TO THE LD. D.R., THE ASSESSING OFFICER HAS NOT MADE ANY ADJUSTMENT TO TH E CAPACITY 3 I.T.A. NOS.1131, 1132 & 1582/MDS/16 UTILIZATION. THE IDLE CAPACITY OF THE ASSEMBLY UNI T WAS 7200 UNITS. ACCORDING TO THE LD. D.R., THE CAPACITY ADJUSTMENT HAS TO BE MADE BEFORE BENCHMARKING AND OPERATING MARGINS OF THE CO MPARABLE COMPANIES. THE ASSESSING OFFICER HAS NOT DISCUSSED ANYTHING IN THE ASSESSMENT ORDER REGARDING THE CAPITAL ADJUSTME NT. 4. REFERRING TO THE ORDER OF THE CIT(APPEALS), THE LD. D.R. SUBMITTED THAT THE CIT(APPEALS) FOUND THAT THE ASSE SSEES MARGIN WAS HIGHER THAN THE MARGIN ADOPTED BY THE TRANSFER PRICING OFFICER . THE CIT(APPEALS) HAS ALSO FOUND THAT THE ASSESSEES TRANSACTION WAS ONLY 2.5% OF THE TOTAL REVENUES, HENCE, THE TRA NSACTIONS SHALL BE AGGREGATED WITH OVERALL OPERATIONS OF THE ASSESS EE. ACCORDINGLY, HE ALLOWED THE CLAIM OF THE ASSESSEE. THE EXPENSES RELATING TO REPAIRS AND TO PREMISES AND POWER AND F UEL DID NOT DEPEND UPON CAPACITY UTILIZATION, THEREFORE, IT IS NOT PROPORTIONATE TO PRODUCTION ITSELF. REFERRING TO THE HEAD OF EXPENS ES, THE LD. D.R. SUBMITTED THAT THE ASSESSEE HAS NOT EXPLAINED THE N ATURE OF THE EXPENSES. THE IDLE CAPACITY AND CAPACITY UTILIZATI ON WAS NOT DEMONSTRATED BY THE ASSESSEE, THEREFORE, THE CIT(AP PEALS) IS NOT JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE. 4 I.T.A. NOS.1131, 1132 & 1582/MDS/16 5. ON THE CONTRARY, SHRI RAGHUNATHAN SAMPATH, THE L D.COUNSEL FOR THE ASSESSEE, SUBMITTED THAT THE TRANSFER PRICI NG OFFICER FOUND THAT THE FUNCTION PERFORMED BY THE ASSESSEE WAS ERR ONEOUSLY TAKEN INTO CONSIDERATION BY THE ASSESSING OFFICER. ACCOR DING TO THE LD. COUNSEL, THE INSTALLED CAPACITY OF THE ASSESSEE WAS 7200 UNITS IN THE ASSESSMENT YEAR 2004-05. HOWEVER, THE UTILISED CAPACITY WAS ONLY 200 UNITS. ADJUSTMENT SHALL BE MADE IN RESPEC T OF UNDER UTILIZATION OF THE CAPACITY. ACCORDING TO THE LD. COUNSEL, TRADING AND ASSEMBLING OPERATIONS SHOULD BE AGGREGATED AND TEST ED FOR ARM'S LENGTH PRICE. THEREFORE, ACCORDING TO THE LD. COUN SEL, THE CIT(APPEALS) HAS RIGHTLY FOUND THAT THE IDLE CAPACI TY ADJUSTMENT HAS TO BE MADE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. WITH REGARD TO ADJUSTMENT OF IDLE CAPACITY AND AGGREGATION OF TRAN SACTIONS ALLOWED BY THE CIT(APPEALS), IT IS NOT DISPUTED THAT THE TR ANSACTION NET MARGIN METHOD IS A MOST APPROPRIATE METHOD FOR THE PURPOSE OF MAKING ADJUSTMENT ON THE TRANSFER PRICING MATTERS. THE TRANSFER PRICING OFFICER AFTER RELYING ON FIVE COMPARABLES, DETERMINED THE ARITHMETIC MEAN OF 7.16%. THE ASSESSEES MARGIN AF TER ADJUSTMENT 5 I.T.A. NOS.1131, 1132 & 1582/MDS/16 FOR IDLE CAPACITY COMES TO ONLY 11.77%. THEREFORE, THE CIT(APPEALS) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. THE REFORE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 7. THE NEXT GROUND OF APPEAL IS WITH REGARD TO DISA LLOWANCE OF ` 33,63,810/- TOWARDS SOFTWARE EXPENSES. 8. SHRI R. DURAI PANDIAN, THE LD. DEPARTMENTAL REPR ESENTATIVE, SUBMITTED THAT THE ASSESSING OFFICER DISALLOWED ` 33,63,810/-. ACCORDING TO THE LD. D.R., MATFLOW SOFTWARE WAS USE D BY THE ASSESSEE-COMPANY TO HANDLE ELECTRONIC ORDERING, MAT ERIALS MANAGEMENT, LOGISTICS, INVENTORY, ACCOUNTS RECEIVAB LES AND PAYABLE, ETC. MATFLOW SOFTWARE ACTS AS A PLATFORM TO INTEGRATE INDIVIDUAL SYSTEMS INTO EDI. THE SOFTWARE REQUIRES YEARLY UPGRADATION WITH SIGNIFICANT VERSIONS. ACCORDING T O THE LD. D.R., THE OWNERSHIP TEST IS MORE IMPORTANT THAN THE FUNCTIONA LITY TEST. THEREFORE, EVEN THOUGH THE ASSESSEE MAY NOT OWN THE SOFTWARE BUT ONLY PAYS LICENCE FEES, IN VIEW OF FUNCTIONAL AND E CONOMIC ROLE THE SOFTWARE PLAYS IN THE BUSINESS, THE SAME HAS TO BE TREATED AS CAPITAL EXPENDITURE. ACCORDINGLY, THE ADDITION MAD E BY THE ASSESSING OFFICER TO THE EXTENT OF ` 33,63,810/- HAS TO BE CONFIRMED. 6 I.T.A. NOS.1131, 1132 & 1582/MDS/16 9. ON THE CONTRARY, SHRI RAGHUNATHAN SAMPATH, THE L D.COUNSEL FOR THE ASSESSEE, SUBMITTED THAT IN THE ASSESSEE'S OWN CASE, FOR THE ASSESSMENT YEARS 2005-06, 2007-08 AND 2008-09, THIS TRIBUNAL HAD AN OCCASION TO CONSIDER THE SAME. BY AN ORDER DATE D 9 TH MAY, 2012 AND 28 TH JUNE, 2013, THE ASSESSEE TREATED SOFTWARE EXPENDIT URE AS REVENUE IN NATURE. THE CIT(APPEALS) BY PLACING HIS RELIANCE ON THE ASSESSEE'S OWN CASE, DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION TOWARDS CAPITALIZATION OF SOFTWARE EXPENSE S. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE CLAIMS ` 33,63,810/- TOWARDS SOFTWARE EXPENSES. IT IS NOT I N DISPUTE THAT MATFLOW SOFTWARE WAS USED BY THE ASSESSEE-COMP ANY TO HANDLE ELECTRONIC ORDERING, MATERIALS MANAGEMENT, L OGISTICS, INVENTORY, ACCOUNTS RECEIVABLES AND PAYABLES, ETC. MATFLOW SOFTWARE, IN FACT, IS ACTING AS A PLATFORM TO INTEG RATE INDIVIDUAL SYSTEMS INTO EDI. THE EXPENDITURE WAS FOR THE PURP OSE OF UTILISING THE APPLICATION SERVICE AND COMPENSATION RECEIVED F ROM DANFOSS A/S, DENMARK. THE CIT(APPEALS) BY PLACING HIS RELI ANCE ON THE ORDER OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CASE, FOR THE ASSESSMENT YEARS 2005-06, 2007-08 AND 2008-09, ALLO WED THE 7 I.T.A. NOS.1131, 1132 & 1582/MDS/16 CLAIM OF THE ASSESSEE. THEREFORE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUT HORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 11. NOW COMING TO THE ASSESSMENT YEAR 2009-10, THE FIRST ISSUE IS WITH REGARD TO PAYMENT MADE TO THE ASSOCIATE ENT ERPRISES FOR IMPARTING TRAINING AND MARKETING SKILLS TO THE EMPL OYEES OF THE ASSESSEE. 12. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF T HE ASSESSEE ON THE GROUND THAT THE PAYMENT MADE TO ASSOCIATE EN TERPRISES FOR IMPARTING TRAINING AND MARKETING SKILLS TO THE EMPL OYEES OF THE ASSESSEE-COMPANY HAS ENDURING BENEFIT OVER A PERIOD OF FOUR YEARS. THE LD.COUNSEL VERY FAIRLY SUBMITTED THAT THE ASSES SING OFFICER HAS FAIRLY CONCLUDED THAT THERE IS AN ENDURING BENEFIT, THEREFORE, HE MAY NOT HAVE ANY OBJECTION TO CONSIDER IT AS CAPITAL EX PENDITURE. 13. WE HAVE HEARD THE LD.COUNSEL FOR THE ASSESSEE A LSO. SINCE THE LD.COUNSEL FOR THE ASSESSEE HAS VERY FAIRLY ADM ITTED BEFORE THIS TRIBUNAL THAT EXPENDITURE RELATING TO IMPARTING TRA INING AND MARKETING SKILLS TO THE EMPLOYEES OF THE ASSESSEE I S ENDURING BENEFIT SPREAD OVER A PERIOD OF FOUR YEARS, THE CIT (APPEALS) IS NOT 8 I.T.A. NOS.1131, 1132 & 1582/MDS/16 JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE. A CCORDINGLY, THE ORDER OF THE CIT(APPEALS) IS SET ASIDE AND THAT OF THE ASSESSING OFFICER IS RESTORED. 14. THE NEXT GROUND OF APPEAL IS WITH REGARD TO SOF TWARE EXPENSES. 15. WE HAVE HEARD THE LD. DEPARTMENTAL REPRESENTATI VE AND THE LD.COUNSEL FOR THE ASSESSEE. THE CIT(APPEALS), IN FACT, BY PLACING RELIANCE ON THE ORDER OF THIS TRIBUNAL IN THE ASSES SEE'S OWN CASE FOR ASSESSMENT YEARS 2005-06, 2007-08 AND 2008-09, ALLO WED THE CLAIM OF THE ASSESSEE. SINCE THE CIT(APPEALS) PLAC ED RELIANCE ON THE ORDER OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CA SE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 16. NOW COMING TO ASSESSMENT YEAR 2010-11, THE FIRS T ISSUE ARISES FOR CONSIDERATION IS TRANSFER PRICING ADJUST MENT MADE BY THE ASSESSING OFFICER TO THE EXTENT OF ` 46,33,024/-. 17. SHRI R. DURAI PANDIAN, THE LD. DEPARTMENTAL REP RESENTATIVE, SUBMITTED THAT THE ASSESSEE HAS MADE PAYMENT TO THE ASSOCIATE ENTERPRISES FOR IMPARTING TRAINING AND MARKETING SK ILLS TO THE 9 I.T.A. NOS.1131, 1132 & 1582/MDS/16 EMPLOYEES OF THE ASSESSEES SALES PROGRAMME, THEREF ORE, IT IS AN ENDURING BENEFIT. 18. WE HAVE HEARD LD.COUNSEL FOR THE ASSESSEE ALSO. SINCE THE ASSESSEE HAS VERY FAIRLY CONCEDED THAT THE BENEFIT ACCRUED TO THE ASSESSEE SPREAD OVER TO THE PERIOD OF FOUR YEARS, T HIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE CIT(APPEALS) IS NOT JUSTIFIED IN ALLOWING THE APPEAL OF THE ASSESSEE. THEREFORE, TH E ORDER OF THE CIT(APPEALS) IS SET ASIDE AND THAT OF THE ASSESSING OFFICER IS RESTORED. 19. THE NEXT ISSUE ARISES FOR CONSIDERATION IS WITH REGARD TO SOFTWARE EXPENSES. 20. AS IN THE CASE OF OTHER YEARS, THE CIT(APPEALS) PLACED HIS RELIANCE ON THE ORDER OF THIS TRIBUNAL FOR THE ASSE SSMENT YEARS 2005-06, 2007-08 AND 2008-09, THEREFORE, THIS TRIBU NAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 21. IN THE RESULT, APPEAL OF THE REVENUE FOR ASSESS MENT YEAR 2004-05 IN I.T.A. NO.1131/MDS/2016 IS DISMISSED. H OWEVER, FOR THE 10 I.T.A. NOS.1131, 1132 & 1582/MDS/16 ASSESSMENT YEARS 2009-10 AND 2010-11 IN I.T.A. NO.1132/MDS/2016 AND I.T.A. NO.1582/MDS/2016 ARE PA RTLY ALLOWED. ORDER PRONOUNCED ON 23 RD FEBRUARY, 2017 AT CHENNAI. SD/- SD/- ( . . ' #$ ) ( . . . ) (D.S. SUNDER SINGH) (N.R.S. GANESAN) & / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 7 /DATED, THE 23 RD FEBRUARY, 2017. KRI. 1 /3#8 98+3 /COPY TO: 1. -. /APPELLANT 2. /0-. /RESPONDENT 3. ' :3 () /CIT(A)-1, CHENNAI 4. PRINCIPAL CIT-1, CHENNAI 5. 8; /3 /DR 6. * < /GF.