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TMI Blog2016 (8) TMI 1470X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue 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 whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion-gathering and analysis; ii. Design research and concept-making; iii. Product planning and proposals to HRDJ; iv. Study, analysis and development of the products referred to above; v. Technical consultation about HRDJ's designated products; vi. Arrangement for the purchase of goods and samples, and export and import processing for HRDJ; vii. Assisting HRDJ in intellectual property affairs; viii. Assisting HRDJ in entering into contracts with third parties; ix. Recruiting human resources for research and development; x. Administrative support and services; and xi. Providing services incidental to R&D activities including without limitation computer-related services. 4. HRDI was to supply HRDJ with all results of the R&D activities, including but not limited to reports, documents, information and materials in whatever form related to the R&D activities. 5. HRDI filed its return of income for AY 2005-2006 declaring a total loss of ₹ 64,03,970/-. The return was picked up for scrutiny under Section 143(3) of the Act. The Assessing Officer referred to the Transfer Pricing Officer ("TPO‟) the issue of determination of Arm's Length P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration with an average of 11.10%. The TPO was of the view that no adjustment be made for working capital difference since the comparables were chosen by HRDI itself. 10. As regards disallowance of 50% depreciation in respect of assets acquired by HRDI from the Liaison Office ("LO‟) of HRDJ, it was submitted before the CIT(A) that the fixed assets were legally transferred by the LO to HRDI only in the month of September, 2004 although the sale/purchase agreement was entered into on 1st April, 2004. It was explained that the approval of the Reserve Bank of India ("RBI‟) for the transfer of assets was obtained only on 30th July, 2004 and for the closure of the LO on 10th September, 2004. Therefore, at the time of transferring of the assets, the assets were in the same premises from which both the LO and HRDI were operating and the legal transfer did not require any physical movement of the assets. Accordingly the assets had been put to use for more than 180 days by the Assessee and, therefore, it was entitled to 100% depreciation thereon. It was further clarified that the physical movement of the fixed assets had already taken place in June, 2003, itself from Delhi to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired from the liaison office of the parent company?" 14. This Court has heard the submissions of Mr. Nageshwar Rao, learned counsel for HRDI and Mr. Rahul Chaudhary, learned Senior Standing Counsel, for the Revenue. 15. At the outset, it requires to be noticed that the first year of operation of HRDI was AY 2004-2005. Cross-appeals were filed both by the Assessee as well as the Revenue against the order dated 13th October, 2009 of the CIT(A) before the ITAT for AY 2004-2005. The CIT(A) had by the said order upheld the addition of ₹ 1,27,02,704/- made by the AO by way of TP adjustment on account of international transactions relating to sale of services by HRDI to HRDJ. Inter alia the CIT(A) adopted the profitability of four comparables after adopting TNMM instead of CPM. The Revenue‟s appeal was directed against the deletion by the CIT(A) for disallowance of ₹ 10 lakh on account of estimated addition of depreciation claimed by HRDI and a similar addition made of ₹ 15,67,537/- which had been upheld. 16. The ITAT in its order dated 16th September, 2011 for AY 2004-05 noted the contention of the Authorised Representative ("AR‟) of HRDI that the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with its AE i.e. Honda R&D Japan. Under the agreement - HRID undertakes market research of product, styling modification and testing activities related to research and development of products to be manufactured by Honda Motors. The show cause notice dated 10.09.2010 states the functions performed by assessee are strategic management, corporate services, research services, testing services. An analysis of work done shows no hard core R&D. In. our view assessee gathers information from market and analyses it for further action by its AE. So we find that the assessee is engaged in providing "market" research services and testing services which lead to the development of better products by their associated enterprises and that the assessee does not itself develop or undertake research for these products. In our view, the type of R&D by the assessee, cannot be compared to pure science R&D where product is developed, clinically tried, refined and soft marketing intangibles are also created. Even if there is no vertical segregation as claimed by TPO, we find there is a major functional difference. While assessee does analysis and passes it on to its AE for product development ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it was not into core R&D activities and that the comparables suggested by it based on such functional profile required to be examined by the CIT(A). (ii) For AY 2005-2006, the remand report of the TPO accepted three of the comparables suggested by HRDI while again implicitly proceeding on the basis that the Assessee was not into core R&D activity. (iii) The DRP, for AY 2007-2008, accepted ITDC (Seg.) while excluding TCG Lifesciences as comparable. 22. In the above background, the approach of the ITAT in the impugned order for AY 2005-2006 appears to take a contrary view which does not appear to be supported by any of the other findings referred to above. The ITAT appears to have discarded ITDC as a comparable by taking up all of the functions of ITDC whereas only one segment of its activities were offered by HRDI for comparison, viz., the market research segment. Therefore, the conclusion of the ITAT that "ITDC is in entirely different activity bearing no resemblance worth the name with HRDI‟s nature of activity, which is R&D" is erroneous as it is not the entire activity of the ITDC which was the subject matter of comparison. 23. The ITAT appears to have ignore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT appears to have misunderstood the purport of the submissions made by HRDI before CIT(A) regarding the transfer of the assets from the LO of HRDJ to HRDI. One is the issue of physical transfer of the assets. It appears that this 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. 29. In the considered view of the Court, the 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 Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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