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Income Tax Appellate Tribunal, MUMBAI BENCH “K”, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANDEEP GOSAIN
The captioned appeal by the assessee is directed against the order dated 31.12.2015 passed by the Assessing Officer u/s 143(3) r.w.s 144C(13) of the Income Tax Act, 1961 (in short ‘the Act’) giving effect to the directions of Dispute Resolution Panel-2, Mumbai (DRP) dated 16.11.2015.
In this appeal, the assessee has raised the following Grounds of appeal:-
Shree Ahuja Properties & Realtors P. Ltd.
A) Order passed u/s. 143(3) r.w.s. 144C(13) is bad in law and liable to be quashed
The learned DRP erred in passing order dated 16.11.2015 giving directions to the AO and the AO erred in passing assessment order u/s. 143(3) r.w.s. 144C(13) giving effect to the directions issued by DRP without appreciating the fact that a search and seizure action was conducted u/s.132 of the Act against the appellant on 25.6.2015 and hence, both the proceedings pending on the date of search action (i.e. proceedings before DRP as also the assessment proceedings before the AO) abated as per the provisions of section 153 A of the Act and thus, the order passed u/s.143(3) r.w.s. 144C(13) of the Act is bad in law and liable to be quashed.
Without prejudice to the above, on merits:
B) TP Adjustment made u/s.92CA(3) of Rs.7,31,02,817/- in respect of interest paid on FCCDs is without any justification and liable to be deleted:
2. The Ld. AO / DRP erred in making TP adjustment of Rs.7,31,02,817/- in respect of interest paid to AE on FCCDs by adopting base rate of 7.50% plus 300 basis points thereby adopting interest rate of 10.50% as against the actual interest paid @14.87% on FCCDs by adopting SBI PLR plus 300 basis points and hence, the TP adjustment made of Rs.7,31,02,817/- is without any justification and liable to be deleted.
The Ld. AO / DRP failed to appreciate that the appellant had followed Comparable Uncontrolled Price ("CUP") method and the comparable study of 8 comparables arrived arithmetic mean of 14.28% which was comparable to the rate of interest paid by appellant @ 14.87% thereby the transaction with AO was at arms-length and whereas both the TPO as well as DRP did not adopt any of the methods prescribed for arriving at the TP adjustment and hence, the TP adjustment made of Rs.7,31,02,817/- is without any justification and liable to be deleted.
4. The Ld. AO / DRP erred in taking into consideration safe harbour rules even though the same was not applicable for the year under consideration and therefore the rate adopted @10.50% as against the rate adopted by TPO @12.50% and as against the actual rate of interest on FCCD paid by the appellant @14.87% and thereby making TP adjustment of Rs.7,31,02,817/- is without any justification and liable to be deleted.
Shree Ahuja Properties & Realtors P. Ltd.
C) Disallowance of Business Promotion Expenses - Rs.6,62,95,682/-
5. The Ld. DRP erred in directing the AO to capitalize the business promotion expenses of Rs.6,62,95,682/- instead of allowing the same as business expenses as claimed in the return of income.
6. Without prejudice to the above, the Ld. AO erred in disallowing business promotion expenses of Rs.6,62,95,682/- without appreciating that the DRP in its order directed for capitalizing of the said expenses as no income was offered during the year and the project was at initial stage and hence, the AO ought to have capitalized the said expenses and not disallow the same and thus, the AO be directed to capitalize the said expenses amounting to Rs.6,62,95,682/- in terms of the directions issued by the DRP.
D) Computation of Book Profits u/s. 115JB:
7. The Ld. AO erred in making adjustments to the computation of book profits u/s.115JB of the Act by the amount of TP adjustments made u/s.92CA(3) of Rs.7,31,02,817/- and the capitalization of business promotion expenses of Rs.6,62,95,682/- both aggregating to Rs.13,93,98,499/- without appreciating that no such adjustment to the book profits could be made u/s. 115JB of the Act and the only adjustments that can be carried out is in terms of Explanation 1 to section 115JB of the Act and hence, the adjustments made to book profits of the appellant is without any justification and liable to be deleted.
3. The appellant before us is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of real estate development. For the assessment year under consideration, it filed a return of income declaring a loss of Rs.10,58,22,231/-, which was subject to a scrutiny assessment whereby the total income has been assessed at Rs.3,35,76,268/- after making certain additions/disallowances which are a subject matter of appeal as per the aforestated Grounds of appeal.
Shree Ahuja Properties & Realtors P. Ltd.
Insofar as Ground of appeal no. A(i) is concerned, the same has not been pressed at the time of hearing and is accordingly dismissed.
Insofar as Ground of appeal no. B is concerned, the substantive dispute is with regard to the transfer pricing adjustment made in terms of Sec. 92CA(3) of the Act of Rs.7,31,02,817/- with respect to interest paid by the assessee on Fully Compulsory Convertible Debentures (FCCDs) issued by the assessee. The relevant facts in this context are summarised as follows. As noted earlier, the assessee is in the business of real estate development and in pursuance thereof, it was undertaking construction of a residential project named ‘Ahuja Towers’ in accordance with the Slum Rehabilitation Scheme. During the year under consideration, assessee had issued 13147000 FCCDs to one, M/s. Cupino Ltd., Cyprus, an associate enterprise, on which interest of Rs.21,11,56,699/- was paid. Since the payment of interest was an ‘international transaction’ within the meaning of Sec. 92B of the Act, it was referred by the Assessing Officer u/s 92CA(1) of the Act to the Transfer Pricing Office (TPO) to determine its arm’s length price. The TPO vide his order passed u/s 93CA(3) of the Act dated 30.01.2015 did not accept the interest payment as being at an arm’s length and instead, determined that interest of Rs.16,43,37,500/- was the arm’s length interest and accordingly, he worked out an adjustment of Rs.4,68,19,199/- that was required to be made in order to bring the expenditure of interest to its arm’s length price. The Assessing Officer passed a draft assessment order accordingly, which was carried by the assessee to the Dispute Resolution Panel (DRP). The DRP, after considering the submissions of the assessee, not only declined to reduce the addition, but held that the arm’s length price of Shree Ahuja Properties & Realtors P. Ltd.
the interest expenditure in question worked out to Rs.13,80,53,882/-, which was lower than the arm’s length price worked out by the TPO. Accordingly, the DRP directed that addition on account of transfer pricing adjustment be made to the extent of Rs.7,31,02,817/- and not Rs.4,68,19,199/- as made by the Assessing Officer in the draft assessment order. Accordingly, the Assessing Officer finalised the assessment whereby the transfer pricing adjustment has been determined at Rs.7,31,02,817/-, against which assessee is in further appeal before us.
In the above background, the rival counsels have made their submissions and the relevant material has been perused. In order to appreciate the controversy, slight background is necessary. Notably, assessee had issued FCCDs to its associate enterprise, M/s. Cupino Ltd., Cyprus as also to other Indian individual promoters on same terms and conditions. In fact, the learned representative for the assessee had explained that assessee had entered into arrangement to raise funds for its project which, inter-alia, included issuance of FCCDs. It has been explained that assessee entered into an agreement dated 18.04.2008 with (i) M/s. CPI (India) Ltd. (a company of Mauritius); (ii) M/s. Cupino Ltd., Cyprus; (iii) Shri Jagdish Ahuja, individual promoter; and, (iv) Shri Gautam Ahuja, individual promoter of the assessee-company. In terms of the arrangement, assessee was to issue and allot equity shares to the extent of 49% of its total shareholding to M/s. CPI (India) Ltd., a Mauritius concern. To the other three entities, namely, M/s. Cupino Ltd., Cyprus, Shri Jagdish Ahuja and Shri Gautam Ahuja, assessee was to issue FCCDs. FCCDs were to be issued to M/s. Cupino Ltd., Cyprus to the extent of 19702000 of Rs.100/- each in different tranches. The rate of interest payable was agreed at the lower of Shree Ahuja Properties & Realtors P. Ltd.
23.40% p.a. payable quarterly or State Bank of India (SBI) Prime Lending Rate (PLR) + 300 basis points. Another feature of the FCCDs was that they are issued without any security. It was also brought out that the terms and conditions of the issue of FCCDs to M/s. Cupino Ltd., Cyprus was similar to the FCCDs issued to the two individual promoters. The learned representative pointed out that since M/s. Cupino Ltd., Cyprus and M/s. CPI (India) Ltd. were group concerns, and since more than 26% of the assessee’s shareholding was owned by M/s. CPI (India) Ltd., the holder of FCCDs, i.e. M/s. Cupino Ltd., Cyprus, fell within the meaning of the expression ‘associate enterprise’ as per Sec. 92A(2)(b)(c) of the Act.
So far as the instant year is concerned, assessee had issued and allotted 13147000 FCCDs to M/s. Cupino Ltd., Cyprus and interest for the instant period came to Rs.21,11,56,699/-, which was on the basis of average rate of interest of 14.87%, i.e. SBI PLR + 300 basis points. It was also explained in the context of the working of interest payment that the interest was payable on compounding quarterly basis and since it was not paid quarterly, the accrued quarterly interest was again added to the principal amount of FCCDs and interest was thereafter calculated on quarterly cumulative basis. Before the TPO, the assessee asserted that such rate of interest of 14.87% was at an arm’s length price. In order to justify its assertions, assessee contended that the CUP method was applicable. In any case, in para 6.1.5 of the order of TPO, it is brought out that assessee used the Prowess database and NSDL website to cull-out concerns with similar transactions. The list of said concerns enumerated in para 6.1.5 of the order of TPO shows the average interest rate on debentures issued by such concerns to be 14.28%. Comparing it with assessee’s actual rate being at Shree Ahuja Properties & Realtors P. Ltd.
14.87%, and after availing of the benefit of + 5% under the proviso to Sec. 92C(2) of the Act, assessee asserted that its interest payment was at an arm’s length price. The TPO disagreed with the assessee. Instead, the TPO considered it more appropriate to arrive at the arm’s length price by using the SBI PLR corresponding to the financial year under consideration, which was 12.50%. He accordingly held that the arm’s length price of interest payable was to be taken @ 12.50% and worked out an adjustment of Rs.4,68,19,199/- that was required to be made while allowing the expenditure incurred by assessee on account of interest payment on FCCDs issued to M/s. Cupino Ltd., Cyprus.
Before the DRP, assessee objected to the stand of the TPO by pointing out that no method prescribed in law was adopted by the TPO to arrive at the arm’s length price. The assessee also asserted that an external CUP data was brought out before the TPO, which has been wrongly rejected. It was pointed out that a sister concern of the assessee had raised loan from Cosmos Bank @ 16.50% and that the said rate of interest was a good CUP data to benchmark assessee’s payment of interest to its associate enterprise. Alternately, assessee also pointed out that interest has been paid on FCCDs to the promoters also at the same rate of interest and which has not been found to be excessive than the market rate in terms of Sec. 40A(2)(a) of the Act and, therefore, it was to be treated as the arm’s length rate.
The DRP rejected the submissions of the assessee and instead, held that a higher addition is merited. The DRP found fault with the action of the TPO in considering the arm’s length rate of interest at SBI PLR and rather,
Shree Ahuja Properties & Realtors P. Ltd. held that the arm’s length price should be determined with reference to the SBI base rate of lending. The DRP referred to the safe harbour rules in this context and held that the SBI base rate + 300 basis points was the appropriate benchmark rate. The SBI base rate of the year was taken at 7.50% and adding 300 basis points, the DRP held that the arm’s length price of the interest was 10.50% thereby increasing the transfer pricing adjustment to Rs.7,31,02,817/-.
The learned representative pointed out that before the TPO assessee had given eight comparable concerns where the average interest paid on debentures came to 14.28%, and such comparables have been rejected on the ground that the terms and conditions of issuance of the debentures was not available. Countering the aforesaid, the learned representative pointed out that so far as the terms and conditions of five out of eight concerns were concerned, assessee culled-out the same on the basis of the data available on the website of NSDL and for such five concerns, the arithmetic mean of the interest rate worked out to 15.60%. On this basis also, it is sought to be canvassed that the contracted rate of interest, i.e. SBI PLR + 300 basis points, was quite appropriate and did not require any adjustment.
The learned representative emphasised that neither the TPO and nor the DRP have used any of the prescribed methods to arrive at the arm’s length price and, therefore, the adjustment made is not at all justified. In any case, it is pointed out that no justification was advanced for not accepting the actual rate of interest paid by the assessee, which corresponds to SBI PLR + 300 basis points and which is very much in line with the interest paid by the comparable concerns brought out by the assessee.
Shree Ahuja Properties & Realtors P. Ltd.
On the other hand, the ld. CIT-DR appearing for the Revenue has defended the orders of the authorities below by placing reliance thereon. The ld. CIT-DR pointed out that though assessee had issued FCCDs to M/s. Cupino Ltd., Cyprus as also the individual promoters, yet there was a distinction between the two as has been discussed by the DRP in para 5.8 of its order. It is pointed out that the FCCDs allotted to M/s. Cupino Ltd., Cyprus were convertible into Class ‘C’ shares and those allotted to the individual promoters (i.e. S/Shri Jagdish Ahuja and Gautam Ahuja) were convertible into Class ‘D’ shares. It is pointed out that so far as Class ‘C’ shares are concerned, they are non-voting equity shares of the face value of Rs.10/- each having preferential dividend and distribution rights over the Class ‘D’ shares. It was, therefore, contended that the shares held by the associated enterprise, i.e. M/s. Cupino Ltd., Cyprus carry a higher intrinsic value and, therefore, interest paid on the FCCDs issued to the associated enterprise, M/s. Cupino Ltd., Cyprus should carry a lower rate of interest than payable on the FCCDs issued to the individual promoters. The ld. CIT- DR has primarily reiterated the stand taken by the lower authorities, which we have already noted in sufficient detail in the earlier paras and is not being repeated for the sake of brevity.
We have carefully considered the rival submissions. Factually speaking, the issue before us relates to the determination of arm’s length rate of interest paid by the assessee on FCCDs issued to its associated enterprise, namely M/s. Cupino Ltd., Cyprus, the agreed rate of interest being lower of 23.40% or SBI PLR + 300 basis points. At this point, it may be noted that the TPO has held that the effective rate of interest paid by the Shree Ahuja Properties & Realtors P. Ltd.
assessee works out to 16.06%. This was for the reason that interest was computed on quarterly cumulative basis inasmuch as unpaid quarterly interest gets added to the principal amount of FCCDs outstanding. The TPO computed the effective rate of interest by basing it on the actual interest paid vis-a-vis the principal amount of FCCDs. Be that as it may, the first and the foremost plea raised by the assessee is that neither the TPO and nor the DRP thereafter have adopted a prescribed methodology to arrive at the arm’s length rate of interest and, therefore, the adjustment made by disallowing the interest expenditure is untenable. In this context, we find that the plea raised by the assessee is starkly borne out in the approach of the TPO as well as the DRP. Per contra, assessee had canvassed before the TPO a list of eight concerns (as tabulated in para 6.1.5 of the order of the TPO) who had paid interest on debentures issued and their average rate came to 14.28%. The TPO had rejected the aforesaid benchmark by stating the absence of the terms and conditions of the issue of debentures. In this context, we find that in five out of eight such concerns, assessee succeeded in bringing out the relevant details, viz. the coupon rate, tenure of the debentures, etc., and copies of the same have also been placed before us at pages 101 to 103 of the Paper Book. It is also emerging from the record that the said details were obtained by the assessee from the website of NSDL and the arithmetic mean of interest paid by such five concerns worked out to 15.65%. Ostensibly, there is no justifiable reason advanced by the lower authorities to disregard the benchmark so canvassed by the assessee, especially considering the fact that the methodology adopted by the TPO, and also thereafter by the DRP, is not based on a recognised method of benchmarking. The TPO straightaway adopted the SBI PLR rate of the instant period, which was 12.50% and he considered it as the arm’s length
Shree Ahuja Properties & Realtors P. Ltd. rate of interest. The DRP, on the other hand, adopted the SBI base rate + 300 basis points, thus, adopting 10.5% as the arm’s length rate of interest. In our considered opinion, both the approaches are not in compliance with the provisions of the Act. It is well accepted that the SBI PLR rate is the rate at which the bank may lend to a highly rated customer, which is quite rare in the common parlance. The SBI PLR plus certain basis points is a more appropriate rate of interest at which the lending takes place. The learned representative for the assessee pointed out that the rate canvassed by the assessee, i.e. SBI PLR + 300 basis points, is otherwise also a reasonably accepted rate and for that matter, referred to the decision of the Delhi Bench of the Tribunal in the case of DCIT vs M/s. Delhi Call Centres P. Ltd., dated 30.11.2017. Although the said decision is in a different context wherein in respect of outstanding receivables from an associate enterprise for more than six months, the TPO benchmarked the international transaction on the basis of SBI PLR + 300 basis points. The aforesaid decision has been referred merely to point out that the rate canvassed by the assessee, i.e. SBI PLR + 300 basis points is a good benchmark.
Similarly, so far as the approach of the DRP is concerned, the same is also unacceptable. The DRP considered the base rate of SBI, which was 7.50%, and adding 300 basis points arrived at 10.50%. The approach of the DRP is quite ad-hoc and without any basis. It is quite well-known that no bank lends at the SBI base rate and, therefore, the same has no relevance in the present context, even more so, considering that assessee is engaged in real estate activity, which is not a priority area of lending for the banks. In Shree Ahuja Properties & Realtors P. Ltd.
any case, the approach of the DRP not being consistent with any of the methods prescribed, deserves to be negated. We hold so.
In the above background, we may conclude by holding that neither the TPO and nor the DRP has brought out any material to reject the arm’s length nature of the actual rate of interest paid by the assessee, which is based on SBI PLR + 300 basis points. Therefore, on this aspect, assessee succeeds and accordingly, we set-aside the order of the authorities below and direct the Assessing Officer to delete the addition.
So far as the Ground of appeal no. C is concerned, the same relates to business promotion expenses of Rs.6,62,95,682/-. In this context, the relevant facts are that during the assessment proceedings, the Assessing Officer perused the expenses incurred under the head ‘Business Promotion Expenses’ of Rs.6,74,21,582/-. In para 5 of the draft assessment order, the Assessing Officer noted that as per his examination “the company has no water tight control over the expenditure”. Therefore, he disallowed Rs.67,42,158/-, being 10% of the total expenditure, and it is further noted by him that the same was agreed to by the representative of the assessee. The assessee raised objection before the DRP against the draft assessment order. Assessee pointed out that it had not agreed for any such addition and claimed that it had proper internal controls commensurate with the size of its business and in the absence of the Assessing Officer having brought out any specific discrepancies, no ad-hoc disallowance could be made.
The DRP examined the details of administrative and other expenses and noted that assessee had claimed heavy expenditure under Professional
Shree Ahuja Properties & Realtors P. Ltd. fee – Rs.6,35,84,615/- and Business Promotion expenses – Rs.6,44,59,618/-. The DRP noted that there was no income which has been earned by the assessee during the year and that out of the total expenditure of Rs.16,62,58,970/-, expenses of Rs. 6,17,48,549/- was transferred to the ‘Project Work-in-Progress’ account and only the balance of Rs.10,45,10,368/- was debited in the Profit & Loss Account. The DRP noted that the major expenses under the head ‘Business Promotion Expenditure’ of Rs.6,44,59,618/- and Professional fee of Rs.6,35,84,615/- related to real estate project which was being implemented by the assessee. Accordingly, it directed that the entire expenditure of ‘Business Promotion Expenditure’ of Rs.6,44,59,618/- and Professional fee of Rs.6,35,84,615/- was relatable to the project under implementation and, therefore, was required to be transferred to the work-in-progress. After giving credit for the expenses already transferred to the work-in-progress of Rs.6,17,48,549/-, the DRP directed the Assessing Officer to disallow and capitalize sum of Rs.6,62,95,684/- in the work-in-progress account. In this manner, the assessee is in appeal before us.
Before us, the learned representative for the assessee pointed out that it had rightly claimed the expenses in the Profit & Loss Account and that there was no justification for the direction of the DRP. By referring to the details of the Business Promotion expenses it was canvassed that they are mostly in the nature of marketing and advertisement and do not relate to the cost of construction and development of the project and, therefore, following the decision of the Mumbai Bench of the Tribunal in the case of Lodha Palazzo vs ACIT dated 10.12.2014 (copy placed on record), the same could not be treated as a part of the work-in-progress. Reliance was also Shree Ahuja Properties & Realtors P. Ltd.
placed on the decision of Mumbai Bench of the Tribunal in the case of M/s. Hiranandani Palace Gardens P. Ltd. vs ACIT dated 30.12.2015 (copy placed on record) wherein also the expenses incurred on marketing, selling, sales promotion, advertisement, etc. were allowed as revenue expenditure in the Profit & Loss Account.
On the other hand, the ld. CIT-DR has defended the directions of the DRP by placing reliance on the discussion contained therein.
We have carefully considered the rival submissions. Firstly, so far as the stand of the Assessing Officer in the draft assessment order is concerned, in our view, the same is completely untenable. The Assessing Officer resorted to ad-hoc disallowance, based on a generalised observation, and not pointing out any specific expenses to justify disallowance of expenses on an ad-hoc basis. Secondly, so far as the order of DRP is concerned, in para 7.1 it records that expenses under the head ‘Business Promotion’ and ‘Professional fee’ relate to “only the real estate project, which has been implemented by the assessee company”. Therefore, it deemed fit to capitalise such expenditure as a part of work-in-progress. On the contrary, the plea of the assessee is that the expenses do not relate to the cost of construction and development of the project and, therefore, following the decision of the Tribunal in the case of Lodha Palazzo (supra) and M/s. Hiranandani Palace Gardens P. Ltd. (supra), such expenditure need not be capitalised as part of work-in-progress, but rather is to be allowed by way of debit in the Profit & Loss Account of the period in which the same has been incurred. The same has also been sought to be supported by the details of expenses which have been placed in the Paper Book filed before
Shree Ahuja Properties & Realtors P. Ltd. us. So far as the proposition of law being canvassed by the assessee is concerned, the same is supported by the aforesaid precedents, so however, in the absence of any concrete finding by the lower authorities as to whether or not such expenses are relatable to the cost of construction and development of the project, we are unable to apply the legal principles appropriately. Therefore, we set-aside the order of the lower authorities and direct the Assessing Officer to revisit the said controversy in the light of the decisions of the Tribunal referred above and thereafter pass an order on this limited aspect, as per law. Needless to mention, the Assessing Officer shall allow the assessee due opportunity of being heard and only thereafter pass an order afresh, as per law. Thus, on this aspect, assessee succeeds for statistical purpose.
So far as Ground of appeal no. D is concerned, same relate to adjustments made to the book profit determined in terms of Sec. 115JB of the Act. In the assessment order dated 31.12.2015, the Assessing Officer made adjustments to the book profit of Rs.13,93,98,499/-, which represented the amount of transfer pricing adjustment and Business Promotion expenses disallowed while computing the income under the normal provisions of the Act. The aforesaid action is being challenged by the assessee before us by pointing out that the action of the Assessing Officer is completely misconceived. It is pointed out that the bare provisions of Sec. 115JB of the Act do not permit any such adjustments and, therefore, the action of the Assessing Officer is untenable.
Shree Ahuja Properties & Realtors P. Ltd.
Apart from reiterating the computation of book profit made by the Assessing Officer in the assessment order, the ld. CIT-DR has not made any specific arguments.
On this aspect, we find that the re-computation of book profit made by the Assessing Officer by including the disallowances made while determining the income under the normal provisions of the Act is quite misconceived and inconsistent with the provisions of Sec. 115JB of the Act. It is also noticeable that in the draft assessment order passed by the Assessing Officer on 27.02.2015, no such adjustments have been made and the book profit u/s 115JB of the Act was determined at NIL, i.e. Rs. (-)10,78,02,627/-. Further, it is only while passing the final assessment order in pursuance of the directions of the DRP that he has made the aforesaid adjustments and determined the book profit u/s 115JB of the Act at Rs.3,15,95,872/-, and, ostensibly, there is no direction in the order of DRP regarding the computation of book profit u/s 115JB of the Act. Be that as it may, the action of the Assessing Officer being untenable is hereby directed to be set-aside. Accordingly, assessee succeeds on this ground.
In the result, appeal of the assessee is partly allowed.
Order pronounced in the open court on 12th October, 2018.