THE COMMISSIONER OF INCOME T vs. M/S.DANFOSS INSUTRIES PVT LTD

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TCA/552/2018HC Madras26 August 2022Bench: Hon`ble Mr Justice R. MAHADEVAN6 pages
AI SummaryWithdrawn

What did the High Court hold?

The High Court did not decide the substantial questions of law on merits. The learned counsel for the appellant (Revenue) brought to the court's notice Circular No.17/2019 dated 08.08.2019 issued by the Central Board of Direct Taxes (CBDT). This circular stipulates that appeals shall not be filed or pursued by the Department before the High Court if the tax effect does not exceed Rs.1,00,00,000/- (Rupees One Crore). The Revenue submitted that the tax effect in these appeals was less than this threshold limit. Consequently, the High Court, in light of the submissions regarding the monetary limit, dismissed the present appeals as withdrawn. The court explicitly stated that the substantial questions of law remain open for determination in appropriate cases. No costs were awarded.

What were the facts?

The Revenue (Commissioner of Income Tax, Chennai) filed three appeals (T.C.A.Nos.552 to 554 of 2018) before the High Court of Judicature at Madras. These appeals challenged a common order dated 23.02.2017 passed by the Income Tax Appellate Tribunal (ITAT), Chennai 'D' Bench. The ITAT's order pertained to assessment years 2004-05, 2009-10, and 2011-11, concerning the assessee M/s. Danfoss Industries Pvt. Ltd. The appeals were preferred under Section 260A of the Income Tax Act, 1961. The core of the dispute involved transfer pricing adjustments and the classification of expenses related to software acquisition.

What were the issues?

The Tribunal had to decide three substantial questions of law: 1. Whether the Tribunal was correct in deleting a Transfer Pricing adjustment of Rs.30,89,628/-, considering underutilization of production capacity and the nature of expenses like repairs, power, and fuel which are proportionate to production, thus requiring adjustment? (Question of law and fact, concerning transfer pricing provisions). 2. Whether the Tribunal was correct in holding that expenses for acquiring a license to use MATFLOW software through a service arrangement with Danfoss IT Denmark Company represented the acquisition of a right with no enduring benefit, thus qualifying as revenue expenditure under Section 37 of the Income Tax Act, 1961, as opposed to capital expenditure providing an enduring advantage? (Question of law and fact, concerning Section 37). 3. Whether the Tribunal was correct in deleting the disallowance of revenue expenditure for MATFLOW software, which provides enduring benefit, high functional utility for integrated operations, and support for routine operations, thus classifying it as capital expenditure? (Question of law and fact, concerning capital vs. revenue expenditure). The Revenue argued that the Tribunal erred in its findings on these issues. The Assessee's arguments are not explicitly detailed in the provided text, but their position was contrary to the Revenue's claims.

Which sections of the Income-tax Act were involved?

Section 37,Section 260A

AI-generated summary — verify with the full judgment below

T.C.A.Nos.552 to 554 of 2018 IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 26.08.2022 CORAM : THE HONOURABLE MR. JUSTICE R. MAHADEVAN AND THE HONOURABLE MR. JUSTICE MOHAMMED SHAFFIQ T.C.A.Nos.552 to 554 of 2018 The Commissioner of Income Tax, Chennai. ... Appellant in all TCAs Versus M/s.Danfoss Industries Pvt. Ltd., 296, Old Mahabalipuram Road, Sholinganallur Chennai - 600 119.

... Respondent in all TCAs (PAN No.AABCD0321M) Appeals preferred under Section 260A of the Income Tax Act, 1961, against the common order of the Income Tax Appellate Tribunal, Chennai “D” Bench, dated 23.02.2017 in I.T.A.Nos.1131/Mds/2016, 1132/Mds/2016 and 1582/Mds/2016. For Appellant in all TCAs' : Mr.T.Ravi Kumar Senior Standing Counsel For Respondent in all TCAs' : Mr.R.Sivaraman Page 1/6 https://www.mhc.tn.gov.in/judis T.C.A.Nos.552 to 554 of 2018 COMMON JUDGMENT (Judgment of the Court was delivered by R.MAHADEVAN, J.) These tax case appeals have been filed by the appellant / Revenue, challenging the common order dated 23.02.2017 passed by the Income Tax Appellate Tribunal, Madras 'D' Bench in I.T.A.Nos.1131/Mds/2016, 1132/Mds/2016 and 1582/Mds/2016, relating to the assessment years 2004-05, 2009-10 and 2011-11 respectively, by raising the following substantial questions law:- “(i) Whether the Tribunal was right in deleting the Transfer Pricing adjustment of Rs.30,89,628/- without appreciating the fact of under utilization of production capacity and further not acknowledging the fact that expenses relating to repairs to premises, power and fuel do not depend on the capacity utilization and are rather proportionate to production itself, requiring adjustment on these factors? (ii) Whether the Tribunal was right in holding that expenses claimed towards acquisition of License to use MATFLOW software through a service arrangement with Danfoss IT Denmark Company is acquisition of a right, which is having no enduring benefit and therefore is to be allowed as revenue expenditure Page 2/6 https://www.mhc.tn.gov.in/judis T.C.A.Nos.552 to 554 of 2018 under Section 37 of the I.T.Act especially when the Assessing getting enduring advantage over a period of time and therefore capital in nature? (iii) Whether the Tribunal was right in deleting the disallowance of revenue expenditure claim on MATFLOW software which provides an enduring benefit to the Assessee by providing high functional utility to generate standardized templates to integrated sales, finance and logistic operation, use of ERP systems which is uniform/customs made for usage among the group companies and for support software to supplement routine operations and therefore is to be classified as capital expenditure?” 2. When the matters were taken up for consideration, the learned counsel for the appellant / Revenue brought to the notice of this court the Circular No.17/2019 dated 08.08.2019 issued by the Central Board Direct Taxes, wherein, it is stipulated that appeal shall not be filed/pursued by the Department before the High Court in cases where the tax effect does not exceed Rs.1,00,00,000/- (Rupees One Crore). It is also submitted that the tax effect in these appeals is less than the threshold limit. 3. In the light of the aforesaid submissions made by the learned counsel for the appellant / Revenue, the present appeals, wherein, the tax effect is Page 3/6 https://www.mhc.tn.gov.in/judis T.C.A.Nos.552 to 554 of 2018 said to be less than the monetary limit imposed, are dismissed as withdrawn, keeping open the substantial questions of law for determination in appropriate cases. No costs. (R.M.D., J.) (M.S.Q., J.) 26.08.2022

Internet : Yes

Index : Yes / No r n s Page 4/6 https://www.mhc.tn.gov.in/judis T.C.A.Nos.552 to 554 of 2018 To 1. The Income Tax Appellate Tribunal, 'D' Bench, Chennai. 2.The Commissioner of Income Tax (Appeals)-1, Chennai - 34. 3. The Deputy Commissioner of Income Tax, Company Circle-I (4) Chennai - 34. Page 5/6 https://www.mhc.tn.gov.in/judis T.C.A.Nos.552 to 554 of 2018 R. MAHADEVAN, J. and MOHAMMED SHAFFIQ, J. r n s T.C.A.Nos.552 to 554 of 2018 26.08.2022 Page 6/6 https://www.mhc.tn.gov.in/judis

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