DCIT, CHENNAI vs. DANFOSS INDUSTRIES P LTD., CHENNAI

These appeals of the Revenue are directed against 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 consideration in all these appeals, we heard these appeals together and disposing of the same by this common order.

The appeals for assessment years 2004-05 and 2009-10 in & 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. Departmental Representative and the Ld.counsel for the assessee. We find that there was sufficient cause for not filing these appeals before the stipulated time. Therefore, we condone the delay and admit the appeals.

Shri R. Durai Pandian, the Ld. Departmental Representative, submitted that the first issue arises for consideration for assessment year 2004-05 is with regard to transfer pricing adjustment of `30,89,628/-. According to the Ld. D.R., the assessee 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 some of the components from Danfoss Associate Enterprises and sells finished products to the industrial customers. According to the Ld. D.R., the Assessing Officer has not made any adjustment to the capacity utilization. The idle capacity of the assembly unit was 7200 units.

Referring to the order of the CIT(Appeals), the Ld. D.R. submitted that the CIT(Appeals) found that the assessee’s margin was higher than the margin adopted by the Transfer Pricing Officer . The CIT(Appeals) has also found that the assessee’s transaction was only 2.5% of the total revenues, hence, the transactions shall be aggregated with overall operations of the assessee. Accordingly, he allowed the claim of the assessee. The expenses relating to repairs and to premises and power and fuel did not depend upon capacity utilization, therefore, it is not proportionate to production itself. Referring to the head of expenses, the Ld. D.R. submitted that the assessee has not explained the nature of the expenses. The idle capacity and capacity utilization was not demonstrated by the assessee, therefore, the CIT(Appeals) is not justified in allowing the claim of the assessee.

On the contrary, Shri Raghunathan Sampath, the Ld.counsel for the assessee, submitted that the Transfer Pricing Officer found that the function performed by the assessee was erroneously taken into consideration by the Assessing Officer. According 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 respect of under utilization of the capacity. According to the Ld. counsel, trading and assembling operations should be aggregated and tested for arm's length price. Therefore, according to the Ld. counsel, the CIT(Appeals) has rightly found that the idle capacity adjustment has to be made.

We have considered the rival submissions on either side and perused the relevant material available on record. With regard to adjustment of idle capacity and aggregation of transactions allowed by the CIT(Appeals), it is not disputed that the Transaction 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 assessee’s margin after adjustment for idle capacity comes to only 11.77%. Therefore, the CIT(Appeals) has rightly allowed the claim of the assessee. Therefore, we do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

The next ground of appeal is with regard to disallowance of `33,63,810/- towards software expenses.

On the contrary, Shri Raghunathan Sampath, the Ld.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 dated 9th May, 2012 and 28th June, 2013, the assessee treated software expenditure 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 expenses.

We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims `33,63,810/- towards software expenses. It is not in dispute that MATFLOW software was used by the assessee-company to handle electronic ordering, materials management, logistics, inventory, accounts receivables and payables, etc. MATFLOW software, in fact, is acting as a platform to integrate individual systems into EDI. The expenditure was for the purpose of utilising the application service and compensation received from Danfoss A/S, Denmark. The CIT(Appeals) by placing his reliance on the order of this Tribunal in the assessee's own case, for the assessment years 2005-06, 2007-08 and 2008-09, allowed the claim of the assessee. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Now coming to the assessment year 2009-10, the first issue is with regard to payment made to the Associate Enterprises for imparting training and marketing skills to the employees of the assessee.

The Assessing Officer disallowed the claim of the assessee on the ground that the payment made to Associate Enterprises for imparting training and marketing skills to the employees of the assessee-company has enduring benefit over a period of four years. The Ld.counsel very fairly submitted that the Assessing Officer has fairly concluded that there is an enduring benefit, therefore, he may not have any objection to consider it as capital expenditure.

We have heard the Ld.counsel for the assessee also. Since the Ld.counsel for the assessee has very fairly admitted before this Tribunal that expenditure relating to imparting training and marketing skills to the employees of the assessee is enduring benefit spread over a period of four years, the CIT(Appeals) is not justified in allowing the claim of the assessee. Accordingly, the order of the CIT(Appeals) is set aside and that of the Assessing Officer is restored.

The next ground of appeal is with regard to software expenses.

We have heard the Ld. Departmental Representative and the Ld.counsel for the assessee. The CIT(Appeals), in fact, by placing reliance on the order of this Tribunal in the assessee's own case for assessment years 2005-06, 2007-08 and 2008-09, allowed the claim of the assessee. Since the CIT(Appeals) placed reliance on the order of this Tribunal in the assessee's own case, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Now coming to assessment year 2010-11, the first issue arises for consideration is transfer pricing adjustment made by the Assessing Officer to the extent of `46,33,024/-.

Shri R. Durai Pandian, the Ld. Departmental Representative, submitted that the assessee has made payment to the Associate Enterprises for imparting training and marketing skills to the employees of the assessee’s sales programme, therefore, it is an enduring benefit.

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, this Tribunal is of the considered opinion that the CIT(Appeals) is not justified in allowing the appeal of the assessee. Therefore, the order of the CIT(Appeals) is set aside and that of the Assessing Officer is restored.

The next issue arises for consideration is with regard to software expenses.

As in the case of other years, the CIT(Appeals) placed his reliance on the order of this Tribunal for the assessment years 2005-06, 2007-08 and 2008-09, therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

In the result, appeal of the Revenue for assessment year 2004-05 in is dismissed. However, for the assessment years 2009-10 and 2010-11 in I.T.A. No.1132/Mds/2016 and I.T.A. No.1582/Mds/2016 are partly allowed.