TaxTMI 
TaxTMI 
2016 (8) TMI 1470
X X X X Extracts X X X X
X X X X Extracts X X X X
....rket. It is stated to have also provided certain auxiliary administrative services to HRDJ during the AY in question. It is stated that the above services were provided pursuant to a Research and Service Agreement dated 1st August, 2003 entered into between HRDJ and HRDI. In terms of the said Agreement, HRDJ sub-contracted to HRDI a portion of the Research and Development activities ("R&D activities‟) related to research and development of automobiles, motorcycles, all terrain vehicles, power products, all-purpose products, associated products, components and all other products to be manufactured by Honda Motor or its licensees. HRDI was to provide the following services to HRDJ: i. Market research, information-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.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....servation and event management services. HRDI also prayed for allowing adjustment for difference in level of working capital while comparing its margins with those of the comparables. 9. The submissions made by HRDI were referred by the CIT(A) to the TPO for his comments. A remand report dated 14th December 2010 was submitted by the TPO where inter alia he stated that Transactional Net Margin Method ("TNMM‟) was the MAM. He also rejected three of the comparables suggested by HRDI, viz., Cyber Media Limited, Capital Trust Limited and ITDC, since they were performing functions different from those undertaken by HRDI. However, the TPO stated that three other comparables suggested by HRDI, i.e., Idma Laboratories, Hi Tech Laboratories and Venus Diagnostics could be taken into consideration 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to the file of the CIT(A) for deciding the issue afresh. The ITAT also disallowed the depreciation for the full year against half year that was allowed on the basis that the assets had been put to use for less than 180 days in the AY in question. 13. While admitting the present appeal on 26th November, 2015, the Court framed the following questions for consideration: "(i) 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? (ii) Whether the ITAT was justified in remanding the matter to the CIT (A) on the issue of appropriate comparables? (iii) Whether the ITAT was justified in remanding the matter concerning disallowance of 50% of depreciation on fixed assets acquired 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 R....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and ITDC were rejected. 18. The CIT(A)‟s order in the present case is largely based on the above remand report of the TPO, which implicitly accepted that HRDI was not into core R&D activities. Secondly it also accepted three of the comparables suggested by HRDI. In fact, this remand report of the TPO for the AY in question, i.e., 2005-2006 formed the basis of the order passed by the ITAT for AY 2004-2005 remanding the matter to the CIT(A), which proceedings are still pending. That order of the ITAT for 2004-2005 has not been challenged by the Revenue and has attained finality. 19. Now turning to the order of the DRP dated 12th July, 2011 for AY 20072008, it is seen that in para 4.5 it was stated as under: "4.5 Facts on record show that assessee has Research, Service Agreement 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....et segment was concerned, as a comparable. However, working capital adjustments were not allowed. A direction was issued to the AO to complete the assessment in terms of the above directions by excluding TCG Lifesciences and including ITDC (seg.). 21. It must be mentioned at this stage that the DRP comprises three members, all of whom are CITs. The DRP‟s order dated 12th July, 2011 attained finality as far as Revenue was concerned. There was no provision in the Act at the relevant time permitting enabling the Revenue to challenge the DRP's order. The resultant position is that: (i) As far as AY 2004-2005 is concerned the order of the ITAT sending the matter back to the CIT(A) in light of the remand report of the AO for AY 2005-2006 attained finality. That order implicitly accepted the plea of HRDI that 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gative 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. 27. As far as Question (ii) is concerned, 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. 28. Turning to Question (iii), the ITAT 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 sh....