Second NOIDA unit qualifies for Section 10A deduction as separate undertaking despite revenue's challenge

Delhi HC held that a second unit (NOIDA-II) was entitled to deduction under Section 10A as it constituted a separate undertaking, not merely an extension of the first unit. The court noted doubled seating capacity, separate space rental, and additional asset investment. Revenue's acceptance of the unit's eligibility in initial years precluded re-agitation without changed circumstances. Regarding transfer pricing, the court ruled ALP determination should be at enterprise level rather than unit-wise, as external comparables were entity-level and a single agreement governed services across units. The payroll tax liability crystallized upon reconciliation in July 2003. All issues decided favoring the assessee.

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Issues Involved:

1. Eligibility of the "second unit" for deduction under Section 10A of the Income Tax Act, 1961.
2. Directions given by the ITAT for computation and exemption under Section 10A.
3. Transfer pricing adjustments and the benchmarking process.
4. Allowability of expenditure of Rs. 19,26,120/- as a prior period expense.

Issue-Wise Detailed Analysis:

1. Eligibility of the "Second Unit" for Deduction Under Section 10A:

The primary issue was whether the NOIDA-II unit was entitled to deduction under Section 10A of the Income Tax Act, 1961. The Assessing Officer (AO) had held that NOIDA-II was a mere extension of the existing NOIDA-I unit and not a new undertaking. However, the ITAT found that the NOIDA-II unit was set up with fresh capital and was a separate and distinct undertaking from NOIDA-I. The ITAT relied on the fact that the gross block of the company had doubled, and the seating capacity increased from 300 to 700 seats, indicating a new undertaking. The court upheld the ITAT's decision, emphasizing that the new unit was not formed by splitting or reconstructing an existing business, thus qualifying for Section 10A benefits.

2. Directions Given by the ITAT for Computation and Exemption Under Section 10A:

The court examined whether the ITAT's directions for computation and exemption under Section 10A were in accordance with the law. The ITAT had followed its previous decision for the assessment year 2003-04, which was not challenged by the Revenue, thereby confirming the eligibility of the NOIDA-II unit for deduction. The court agreed with the ITAT's interpretation that the benefit under Section 10A is for the undertaking and not the assessee as a whole, and once eligibility is established in the initial year, it should not be re-agitated in subsequent years without new evidence.

3. Transfer Pricing Adjustments and Benchmarking Process:

The Revenue challenged the ITAT's decision to delete the transfer pricing adjustments made by the TPO. The TPO had determined the Arm's Length Price (ALP) separately for each STP unit, but the ITAT held that the benchmarking should be done at the entity level. The ITAT found that there was unity of business, management, and funds, and the terms of service were governed by a single agreement with the associated enterprises. The court upheld the ITAT's decision, stating that the TNMM method applied should consider the enterprise as a whole, as the transactions were interlinked and covered by a single agreement.

4. Allowability of Expenditure of Rs. 19,26,120/- as a Prior Period Expense:

The AO had disallowed the expense of Rs. 19,26,120/- as a prior period expense. However, the CIT (A) and the ITAT accepted the assessee's contention that the liability for payroll taxes crystallized in June 2003, making it allowable in the assessment year 2004-05. The court found no error in this conclusion, as the liability was determined and paid in the relevant assessment year, and thus, the expense was rightly allowed.

Conclusion:

The court dismissed the Revenue's appeal, upholding the ITAT's decisions on all issues. The NOIDA-II unit was deemed eligible for Section 10A benefits, the transfer pricing adjustments were correctly benchmarked at the entity level, and the expense of Rs. 19,26,120/- was allowable in the year it was crystallized.

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