2016 (8) TMI 1470 - HC - Income Tax

TP Adjustment - comparable selection - Whether the ITAT was justified in concluding that the Assessee is involved in the research and development activity and not provision of market support services? - HELD THAT - The Court is of the considered view that the ITAT did not have sufficient material before it to come to the conclusion that HRDI was into core R D activity. That finding of the ITAT would only cause confusion before the CIT(A) in the remand proceedings. On the other hand there was sufficient material in the form of the remand report of the TPO for AY 2005-2006 as well as DRP s order for 2007-2008 to show that HRDI was not into core R D activity. Accordingly Question (i) is answered in the negative by holding that the ITAT was not justified in concluding that HRDI was involved in R D activity and not provision of market support services. The order of the CIT(A) which was reversed by the ITAT is restored. ITAT in remanding the matter to the CIT (A) on the issue of appropriate comparables - HELD THAT - As already noticed the ITAT overlooked the fact that the TPO in his remand report had accepted three comparables suggested by HRDI. The DRP in its order dated 12th July 2011 gave cogent reasons why ITDC should be included as a comparable. This is consistent with the conclusion reached by the CIT(A). Consequently Question (ii) is also answered in the negative i.e. in favour of the Assessee and against the Revenue and it is held that the ITAT was not justified in remanding the matter to the CIT (A) on the issue of appropriate comparables. ITAT remanding the matter concerning disallowance of 50% of depreciation on fixed assets acquired from the liaison office of the parent company - physical transfer of the asset - HELD THAT - Physical transfer of the assets took place in June 2003 when the assets were shifted from New Delhi to Gurgaon where both the LO of HRDJ and HRDI shared a common office. Thereafter there was no occasion for any further physical transfer of the assets. As far as legal transfer of the assets was concerned it could not have taken place unless approvals from the RBI were obtained both for transfer of the assets which approval was granted on 13th July 2004 and for closure of LO which was granted on 30th September 2004. Till then the Assessee had physical possession of the assets. Therefore it could not be said that during the AY in question the assets had been put to use for less than 180 days. CIT(A) was fully justified in accepting the plea of HRDI for grant of 100% depreciation on the assets transferred to it from the LO of HRDJ. Consequently Question (iii) is answered in the negative i.e. in favour of the Assessee and against the Revenue. It is held that the ITAT was not justified in remanding the matter concerning disallowance of 50% of depreciation on fixed assets acquired from the liaison office of the parent company.

Summary

Issues Involved:
1. Whether the Assessee is involved in research and development activity or provision of market support services.
2. The appropriateness of remanding the matter to the CIT(A) on the issue of appropriate comparables.
3. The justification of remanding the matter concerning disallowance of 50% depreciation on fixed assets acquired from the liaison office of the parent company.

Issue-wise Detailed Analysis:

1. Involvement in Research and Development Activity vs. Market Support Services:
The core issue was whether HRDI was involved in core R&D activities or merely providing market support services. The ITAT concluded that HRDI undertook core R&D activities, rejecting ITDC as a comparable. However, the High Court found that the ITAT's conclusion was not supported by sufficient material. The remand report of the TPO for AY 2005-2006 and the DRP's order for AY 2007-2008 indicated that HRDI was not involved in core R&D activities. The High Court emphasized that HRDI's activities were limited to market research and testing services, not core R&D. Consequently, the High Court held that the ITAT was not justified in concluding that HRDI was involved in R&D activity and restored the order of the CIT(A).

2. Remanding the Matter to CIT(A) on Appropriate Comparables:
The ITAT remanded the issue of appropriate comparables to the CIT(A), disregarding the TPO's remand report which had accepted three comparables suggested by HRDI. The High Court noted that the DRP had previously included ITDC as a comparable for AY 2007-2008, and the TPO's remand report for AY 2005-2006 had also accepted certain comparables. The High Court criticized the ITAT for creating confusion by remanding the issue again and held that the ITAT was not justified in remanding the matter to the CIT(A) on the issue of appropriate comparables. The order of the CIT(A) was restored.

3. Disallowance of 50% Depreciation on Fixed Assets:
The ITAT disallowed full-year depreciation, asserting that the assets were put to use for less than 180 days. HRDI contended that the physical transfer of assets occurred in June 2003, and the legal transfer was completed after obtaining RBI approvals in 2004. The High Court agreed with HRDI, noting that the assets were in use for more than 180 days, and thus, HRDI was entitled to 100% depreciation. The High Court held that the ITAT was not justified in remanding the matter concerning disallowance of 50% depreciation and restored the CIT(A)'s order allowing full depreciation.

Conclusion:
The High Court set aside the ITAT's order and restored the CIT(A)'s order, allowing HRDI's appeal on all counts. The appeal was allowed with no orders as to costs.