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2024 (12) TMI 324 - HC - Income TaxSecond unit entitled to deduction u/s 10A - whether it is not a part or mere extension of the first unit ? - HELD THAT - In the present case, the fact that NOIDA-II unit was engaged in the same business is not dispositive of the question whether the said undertaking does not fulfil the criteria as specified in Clauses (ii) and (iii) of sub-section (2) of Section 10A of the Act. The Assessee had explained that it would set up the new undertaking to cater to its growth plans. It had hired a separate space from NOIDA (New Okhla Industrial Development Authority) for establishing the said unit. It had made an investment in the additional assets for setting up the said unit and resultantly not only the Assessee s gross block but also the seating capacity had doubled. As noted before, the Assessee s claim that the sitting capacity had increased from 300 seats to 700 seats with the establishment of the new undertaking (NOIDA-II unit) has not been controverted. The question whether a new undertaking has been set up, which is eligible for deduction u/s 10A of the Act is, therefore, most relevant in the initial year of operation. Since the Revenue accepts in the initial year of operation that a new undertaking has been set up and does not fall within the exclusionary clauses that is, it is not formed by the splitting up, or the reconstruction of an extant business or by transfer to a new business of machinery or plant previously used for any purpose the controversy must rest for future years as well. This is of course subject to the condition that no additional material or facts, which establish otherwise are found subsequently. It would be debilitating to the rule of consistency and certainty in the matter of taxation, if the question of eligibility of a unit is permitted to be re-agitated on the same set of facts despite the Revenue having accepted the findings which are essentially factual findings in favour of the Assessee in the initial year(s). It is difficult to accept that the Revenue could accept a set of facts in one year and yet challenge the same in another, without any change in circumstances or any new fact coming to light. The proceeding relating to each assessment year are separate and it is settled law that the principle of res judicata does not apply to the subsequent assessment proceedings. However, this is a fit case where it would be apposite to apply the principles enunciated by the Supreme Court in the case of Radhasoami Satsang Saomi Bagh, Agra 1991 (11) TMI 2 - SUPREME COURT Thus, no infirmity with the decision of the learned ITAT in upholding the view that NOIDA-II unit was entitled to deduction under Section 10A of the Act in respect of its profits and gains derived from NOIDA-I unit. TP Adjustment - method used by the AO for benchmarking the ALP on the basis of external comparables - TPO had determined the PLI (operating profit over total cost) in respect of each of the three STP units and had proceeded to determine the quantum of ALP adjustment as required for each of the three separate unit- Assessee s challenge to the TP adjustment as directed by the TPO, inter alia, on the ground that there was no significant functional difference in the software development and maintenance services - HELD THAT - In the present case, the TPO benchmarked each of the three STP units separately. However, the profit margin of external uncontrolled transactions was determined on entity level and not on a unit or segmental level. Whilst TNMM is tolerant to minor functional dissimilarities, it will be necessary that the comparable international transactions are of a similar nature. It would be impermissible to use uncontrolled comparable transaction with different parameters that controlled international transactions. It is also relevant that reasonably accurate and authentic data of the uncontrolled transaction is available so as to reasonably determine the profit margin arising from the said transaction. As noted at the outset, the object of undertaking the transfer pricing analysis is to impute a real value to the transaction that would obtain in case the same was not controlled on account of being inter se AE. Thus, it is necessary to determine the profit margin if a similar transaction was executed by an unrelated entity. In this regard, the facts that the agreement between the AE under which services were rendered by the Assessee through its various undertaking is the same, it would be apposite to compare the services provided by unrelated entity under a similar agreement. The singularity of an agreement would be relevant for determining the overarching transaction that is required to be benchmarked. This would not permit the overarching transactions to be split up between various undertakings for comparing the profit margin derived by an unrelated entity from a comparable uncontrolled transaction. In addition to the above, the learned CIT (A) had also noticed that there was interlacing of funds and unity of management which are necessary aspects required to be factored while using TNMM for determining the ALP. If in a given case, the transactions fall within the scope of a domestic specified transaction under Section 92BA of the Act, the said exercise of determining the ALP would be required. However, if a particular transaction does not fall within the sweep of the statutory provisions, it is obvious that it will not be permissible to readjust the prices on account of a possible domestic transactions that may possibly distort the quantum of benefit available u/s 10A of the Act. The only question to be addressed is whether the decision of the learned CIT (A) and the learned ITAT to direct that the ALP be determined on the basis of TNMM by comparing the PLI at an enterprise level is erroneous or contrary to the guidelines for determining the ALP as prescribed under the Rules. - Decided in favour of assessee. Crystallization and accrual of liability towards payroll taxes - date on which the liability to pay had arisen - HELD THAT - As the reconciliation of payroll tax was conducted at the end of Australian tax year in July, 2003 and the amount in question was crystallized on such reconciliation. Decided in favour of assessee.
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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