MACROTECH DEVEOPERS LIMITED (SUCESSOR TO SHREENIWAS COTTON MILLS LIMITED,MUMBAI vs. DY COMMISSIONER OF INCOME TAX , CENTRAL RANGE-7(3), MUMBAI

These are the cross appeals against the order passed by the Commissioner of income tax (appeals) – 57, Mumbai (the learned CIT –

In ITA number 2384/M/2022, the assessee is aggrieved and has raised following grounds of appeal.

In ITA number 2384/M/2022 the learned deputy Commissioner of income tax (Central Circle) – 7 (3),

Brief facts of the case shows that assessee is a company engaged in construction and development of real estate projects in manufacturing industry – Textile/handloom/power looms. It filed its return of income on 17/10/2016 at a total income of ₹ 655,997,290 as per the normal

Assessee has paid a brokerage of ₹ 4,146,676 to its associated enterprises in Mauritius namely Lodha global Ltd. Assessee paid brokerage for various flats of the assessee bookbinding non-resident customers through its associated enterprises in the projects void one and the world towers at Worli, Mumbai. The brokerage has been paid at the rate ranging between 1% – 2% of the value of the flat. The assessee submitted the customer wise details of such brokerage expenses along with the copy of the invoices and supporting evidences. Assessee submitted the memorandum of understanding between the assessee and the associated enterprises. Assessee adopted the comparable uncontrolled price method as the most appropriate method for the aforesaid transaction and submitted that it has paid brokerage at the rate of 2% of the transaction value of properties sold to the unrelated parties and therefore the transaction of payment of brokerage to its associated enterprise is at arm's- length. The learned transfer pricing officer issued a show cause notice stating that internal cup should be rejected as AE belongs to Mauritius and the geographies comparable companies are you a and UK respectively. The assessee responded submitted that the location of the service provider should not make a difference since the assessee is availing the services and is a tested party for benchmarking the transaction. Alternatively it was stated that the group companies namely Lodha developers private limited and Bellissimo Crown build mark private limited has also availed services from Lodha global Ltd the associated enterprise and have brokerage is during the year under

The assessee also has entered into international transaction of incurring certain expenses on behalf of Lodha developers UK Limited aggregating to ₹ 2,800,148/–. The assessee was asked to justify the nature of reimbursement and show cause as to why markup of 10% should not be charged as assessee has provided employee services to its associated enterprises. The assessee submitted that the payment is towards reimbursement/advances to the employees visit to the United Kingdom in connection with the project activities of Lodha UK. These are routine expenses incurred by the assessee on behalf of that company. Assessee also substantiated by submitting the invoices on sample basis. It was also the case of the assessee that it is on cost-to- cost basis and is in the nature of reimbursement and therefore it should be considered consistent with the arm's-length principle. The learned TPO rejected the contention of the assessee and held that since the assessee has provided the services the transaction needs to be benchmarked to determine its arm's-length price. He held that the cup method is appropriate when there is a comparable service provided between independent enterprise in the recipient's market. As the assessee could not substantiate the nature of the services and the reasons for travel, the cup method would lose its relevance in absence of any documentary evidences. Accordingly the learned TPO held that this transaction will not occur cost free in 1/3 party scenario and therefore 10% markup should have been charged. Accordingly, he made an adjustment of Rs. 280,014.

Accordingly the learned transfer pricing officer made the following adjustment: –

Accordingly order under section 92CA (3) of the act was passed on 31/10/2019. Based on this the learned assessing officer Incorporated the above adjustment in the draft assessment order passed. During the course of assessment proceedings the learned AO noted that assessee has claimed dividend income of ₹ 7,548,937/– as exempt income however no disallowance under section 14 A was made by the assessee. The AO issued a show cause notice on 4/11/2019 asking why disallowance under section 14 A should not be worked out. The assessee as per letter dated 2/12/2019 submitted that about dividend has been received from mutual funds and the assessee is not incurred any expenses in relation to earning exempt income and hence there

The learned assessing officer further on perusal of the tax audit report found that assessee has deposited employees contribution to the provident fund beyond the due dates prescribed in the respective provident fund act amounting to ₹ 606,000/–. Accordingly he made the disallowance under section 36 (1) (va) read with section 2 (24) (X) of the act.

On perusal of the various expenses debited by the assessee to the profit and loss account the learned assessing officer was of the view that assessee has debited the director's office expenses to the profit and loss account and why the 50% of the director's office expenses should not be capitalized to the cost of project. The assessee submitted that as per accounting standard 2 and submitted that administrative costs, which are not related to bringing the inventory to the present location, cannot be included in the cost of the project. It was submitted that the director's salaries nothing but a part of general administrative cost and it cannot be transferred to work in progress. Without prejudice to the submission of the assessee that no cost should be charged to the work in progress, it submitted the working of addition to the work in progress. The assessee has worked out the disallowance of ₹ 36,312,729 and Rs 228,64,740/– with respect to the two products. Assessee did not allocate any product to another project which is completed hundred percent. Accordingly the assessee gave the working of this was sum of ₹ 59,177,469/–. The learned assessing officer disagreed with the contention of the assessee. According to him, the director's office is epic centre of all the construction and development activities carried out by the assessee. The strategy for construction of project, planning, finance

Accordingly the draft assessment order was passed determining the total income of the assessee at ₹ 744,632,810/–. The learned assessing officer further made an addition while computing the book profit under section hundred and 15 JB of the disallowance under section 14 A of ₹ 331,070/–. Accordingly, the book profit was also adjusted and revised book profit was computed at ₹ 526,180,729.

The assessee did not file any objection before the learned dispute resolution panel and accordingly assessment order under section 143 (3) read with section 144C (3) of the act computing the normal income at ₹ 744,632,810 and the revised book profit at ₹ 526,180,729/–.

Assessee aggrieved with the above order preferred an appeal before the learned CIT – A who passed an order on 17/06/2022. The learned CIT – A with respect to the transfer pricing adjustment of corporate guarantee commission of ₹ 5,910,40 /– following the decision of CIT – A4 assessment year 2016 – 17 holding that the facts are similar computed the guarantee commission arm's-length price at 0.35%. The decision that has been followed by the learned CIT – A was based on the interest saving approach for computation of arm's-length price of the guarantee commission determining the savings attributable to guarantee based on computing the credited ratings of standard and

Now we first take up the appeal of the learned assessing officer. The first ground of appeal is with respect to the disallowance deleted by the learned CIT – A with respect to the late payment of employees contribution of provident fund of ₹ 606,000/-. There is no dispute that assessee has deposited the employees' contribution late beyond the due dates prescribed in the respective provident fund act. The learned

The second ground of appeal is with respect to the deletion of the disallowance made on the director's salary and administrative facility of ₹ 80,174,844/–. The brief facts of this ground show that from the perusal of the details of various expenses it was found that that assessee has debited directors office expenses of ₹ 209,973,847. The claim of the assessee is that the salary cost of the Department which is directly related to the functioning of the project are charged to respective project as the employees are rendering services to all the projects the salaries are located based on the ratio of total cost incurred in the year with respect to the respective floor space index against the total floor space index available. The direct salary cost of accounts, taxation, finance, directors office et cetera that cannot be specifically assigned to a project located on the basis of cost of construction of the company and subsequently salary cost in charge to the profit and loss account. The assessee has submitted the details of allocation of salary. AO noted that the director's office expenses is entirely debited to the profit and loss account with the allocating it to the cost of project. AO issued a show cause notice to the assessee stating that why the 50% of the director's office expenses should not be capitalized to the cost of project. The claim of the assessee is that according to accounting standard – 2 it is not permissible and submitted those administrative costs, which are not related to bringing the inventory to the present location, cannot be included in the cost of the project. It was the claim of the assessee that director's

The learned departmental representative may mentally supported the order of the learned assessing officer and the learned authorized representative relied upon the order of the learned CIT – A and submitted that this issue is covered in favour of the assessee by the

We find that the identical issue has been decided by the coordinate bench in assessee's sister concerns case on identical facts and circumstances. In case of Lodha Plaza versus ACIT in ITA number 2298/M/2012 for assessment year 2008 – 09 the issue before the tribunal was that whether the indirect expenses such as employees cost, office and administration and marketing and selling expenses have to be allowed as a revenue expenditure in the year in which they are incurred or are to be included in the cost of work in progress. The coordinate bench after considering the accounting standard – 2 and 7, the guidelines issued by the Institute of chartered accountants of India and after considering the provisions of section 145A of the act held that such expenses are to be allowed in the year in which they are incurred and not to be included in the cost of work in progress. The identical issue was also decided by the coordinate bench in ITA number 4579/M/2013 for assessment year 2009 – 10 in case of Hiranandani Palace Gardens private limited per order dated 30/12/2015, following the order of Lodha Plaza held that such costs are not included in the cost of work in progress. Identical issue arose in ITA number 5283/M/2014 for assessment year 2007 – 08 wherein coordinate bench for order dated 27/12/2018 held that expenditure pertaining to employee cost, administrative expenses and selling and marketing expenses debited to the profit and loss account are to be allowed in the year in which those are incurred. The same view is further taken by the Bangalore bench in ITA number 1576/2017 for assessment year 2012 – 13 per order dated 3/3/2020. The learned CIT – A while deciding the appeal of the assessee relied on the order of the sister concern for the same assessment year wherein he followed all these judicial precedents, therefore, we do not find any infirmity

Ground number 4 of the appeal is against the deletion of the disallowance of ₹ 331,070/– made under section 14 A of the act by the learned CIT – A. Ground number 5 is also against the deleting the disallowance of the same amount while computing the book profit under section 115JB of the act.

This ground is also connected with additional ground raised by the assessee wherein a request was made by letter dated 18 January 2023 submitting that disallowance under section 14 A of the act was made without recording satisfaction of the learned assessing officer about the correctness of the claim of the assessee. The assessee submits that no fresh facts are required to be investigated on this issue. The ground is available to the assessee on the decision of the honourable Supreme Court in case of Maxopp investment Ltd versus CIT 402 ITR 640. Therefore, it deserves to be admitted. The assessee has filed an application for additional ground of appeal as per letter dated 18 January 2023 wherein assessee has raised following additional grounds:-

On careful reading of the grounds of appeal raised by the assessee before the learned (CIT – A at page number 2 and 3 of the order of the learned CIT – A, the assessee has challenged the disallowance under section 14 A of the act of ₹ 331,070/– both under the normal provisions of the act and while computing book profit under section 115JB of the act. Therefore it is apparent that this ground of appeal was before the learned CIT – A. As per the additional grounds, assessee has merely raised an alternative plea that in absence of satisfaction about the correctness of the claim of the assessee with respect to the disallowance under section 14 A of the act, no disallowance can be made. Further assessee has already challenged the increase in the book profit under section 115JB of the act with respect to the disallowance made under section 14 A of the act. Therefore these issues were before the learned CIT – A also.

As no fresh facts are required to be investigated, it is an alternative legal plea available to the assessee in view of decisions of the superior courts, therefore, these grounds are admitted.

We find that disallowance under section 14 A of the act has been dealt with by the learned assessing officer as per paragraph number 6 of assessment order. Assessee has claimed dividend income of ₹ 7,548,937/– which is claimed as exempt income, assessee did not make any disallowance under section 14 A of the act holding that it is

Ground number 6 is with respect to the direction of the learned CIT – A2 the learned AO/learned TPO to take the arm's-length price of the guarantee commission at the rate of 0.3523 percentage instead of 1.25%. The fact shows that the associated enterprises in Mauritius of the assessee M/s Lodha developers international Ltd has raised bonds for US dollar 200 million which is listed on the Singapore stock exchange. For the issuance of bonds along with its parent company and to other group companies (total 6 entities) has given joint and several corporate guarantees as shareholders as well as direct subsidiary of the Mauritius entity. ODI forms were also submitted. The assessee did not charge any guarantee commission leading that it is a shareholders activity and therefore is not an international transaction. The learned AO held to be an international transaction and further determine the arm's-length price of the international transaction at the rate of proportionate amount of guarantee commission adopting the arm's-length price at the rate of 1.25% and made an adjustment of ₹ 5,910,140. The learned CIT (A) rejected arguments of the assessee that it is not an international transaction in view of explanation (c) to section 92B (1) introduced by the finance act 2012 wherein it is clearly held that guarantee is an international transaction. For benchmarking, following his own order in assessee's own case for assessment year 2016 – 17 on issue of guarantee with respect to the above bonds as mentioned in paragraph number 7.8 of that order and reproduced at

The learned departmental representative supported the order of the learned assessing officer/transfer pricing officer. The assessee supported the order of the learned CIT – A. The assessee further submitted that guarantee is not an international transaction is challenged by ground number 2 and 3 of its ground.

We have carefully considered the rival contention and perused the orders of the lower authorities. Whether the guarantee issued by the assessee to its AE is an international transaction or not, we find that the amendment made to the provisions of section 92B (1) by introduction of explanation (C) by the finance act 2012, clearly provides that it is an international transaction. Further, the honourable madras High Court in case of principal Commissioner of income tax versus Redington (India) P Ltd has also held that corporate guarantee is an international transaction. Therefore, the learned CIT – A has correctly rejected this argument. Accordingly, we dismiss

The ground number 9 of the appeal of the AO is with respect to the deletion of the adjustment to the brokerage expenses. The fact shows that assessee has paid brokerage of ₹ 4,146,676/– to its associated enterprises in Mauritius. Assessee has also benchmarked the same transaction considering cup method as most appropriate method and submitted that it has also paid brokerage at the rate of 2% of the transaction of the value of the properties sold to unrelated overseas brokers. Therefore, the brokerage paid by the assessee at the rate of

Learned departmental representative vehemently submitted that the internal cup selected by the assessee is not correct. The learned authorized representative supported the order of the learned CIT – A.

We have carefully considered the rival contention and perused the orders of the learned transfer pricing officer and the learned CIT – A. For the purpose of payment of the brokerage, assessee adopted the cup as the most appropriate method and adopted the comparable is of internal cup wherein the brokerage paid to other unrelated parties is also at the same rate to which the brokerage is paid to the associated enterprises. The learned transfer pricing officer has rejected the internal cup for the only reason that the comparable is of brokerage paid to unrelated parties where the unrelated parties are situated in a different geographical location to the geography can location of the associated enterprises is not correct. We find that the impugned transaction is sale of property to the non-resident Indians. The property is situated in India, the brokerage is paid for the sale of property to the non-resident. The Mauritius AE as well as the uncontrolled independent parties in a different location does not make any difference. Even otherwise, the action of the learned TPO to adopt brokerage at the rate of only 1% as arm's-length price is also not supported by any data or transaction. For the purpose of transfer pricing, only transaction is to be compared with a transaction. There

The solitary ground in the is ground number 1 of the appeal of the assessee wherein the learned CIT – A has upheld the action of the learned assessing officer/TPO of living 10% mark up on the reimbursement of expenses of ₹ 2,800,148/– paid by Lodha developers UK Limited to the assessee company. The fact shows that assessee has incurred certain expenses on behalf of its associated enterprises of ₹ 2,800,148/–. Assessee did not charge any markup on the above. Reason for not charging any markup was that the payment is towards reimbursement/advances to the employees visit to the United Kingdom in connection with the project activities of associated enterprises. These are routine expenses incurred by the assessee on cost-to-cost basis and therefore it does not deserve any markup. The learned TPO held that assessee has provided services and therefore the transaction needs to be benchmarked. According to him, cup method is the appropriate method, assessee would not have incurred such expenditure on behalf of any third party, and therefore 10% markup was made. The learned CIT – A upheld the order of the learned transfer-pricing officer holding that in a third-party scenario nobody would provide such services without Mark up. Accordingly, the adjustment was appellant. Assessee is aggrieved and is in appeal.

The learned authorized representative referred page number 30 office paper book wherein contesting ground number 3 before the learned CIT – A submitting that on reimbursement of expenditure cannot be a markup. He referred to annexure 7 placed in paper book.

The learned departmental representative submitted that no independent party would have provided the services without Mark up. He supported the order of the learned AO and learned CIT appeal.

In the result appeal of the learned assessing officer and assessee are partly allowed.