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

ITA 2040/MUM/2022

AI Insights

The case involves cross-appeals by the Department of Income Tax and Macrotech Developers Ltd against the order of the Commissioner of Income Tax (Appeals) - 57, Mumbai, concerning the assessment year 2016-17. The primary issues revolved around the disallowance of certain expenses and the determination of arm's-length prices for international transactions. The Tribunal examined various aspects including the treatment of director's office expenses, the applicability of section 14A concerning exempt income, and the benchmarking of corporate guarantee commissions and brokerage expenses. The Tribunal's decision was influenced by precedents and interpretations of relevant sections of the Income Tax Act, particularly in relation to transfer pricing and the treatment of administrative expenses in project costing.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 113110 (ITAT-MUMBAI)
• Duration Of Justice: 7 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: J
• Next Hearing Date: 31-01-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 15-08-2022
• Other Referred Cases: CIT vs Gujarat State Road Transport Co., CIT vs Ghatge Patil Transport Ltd, Maxopp Investment Ltd vs CIT, Principal Commissioner of Income Tax vs Redington (India) P Ltd, Lodha Plaza vs ACIT, Hiranandani Palace Gardens Pvt Ltd vs ACIT, Reliance Industries Ltd vs ACIT, Asian Paints Ltd vs ACIT, Everest Kanto Cylinders Ltd vs ACIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction; Revenue expenditure
• Section: 92C; 92B; 14A; 115JB; 144C; 13; 22; 92CA; 20

Judgement Text

I N THE INCOME TAX APPELLATE TRIBUNAL “J” BENCH, MUMBAI BEFORE SHRI PRASHANT MAHARISHI, AM AND SHRI KULDIP SINGH, JM I TA No. 2384 /M UM /2022 (Ass es sme nt Ye ar 2 0 16-17) DCI T, CC-7(3) R oom No. 65 5, A ay a kar B hav an, M.K.R oa d, Mu mb ai-4 00 0 20 Vs. M/s. Mac ro tec h Dev elo pers L imi te d (Suc c es sor o f S hree n iw as C ot t on Mil ls L t d) 412, 4 th Fl oor, 1 7G, Vardh am an Cha mber, C aw asj i P at el S tre et, For t Mum ba i-40 0 0 01 (Appellant) (Respondent) I TA No. 2040 /M UM /2022 (Ass es sme nt Ye ar 2 0 16-1 7) M/s. Mac ro tec h Dev elo pers L imi te d (Suc c es sor o f S hree n iw as C ot t on Mil ls L t d) 412, 4 th Fl oor, 1 7G, Vardh am an Cha mber, C aw asj i P at el S tre et, For t Mum ba i-40 0 0 01 Vs. DCI T, CC-7(3) R oom No. 65 5, A ay a kar B hav an, M.K.Roa d, Mu mb ai-4 00 0 20 (Appellant) (Respondent) PAN No. AAACL1490J Assessee by : Shri N iraj She th Revenue by : Shri As if Kar ma li Date of h ea r ing: 01.0 2.20 23 Date of pronouncement : 27.03. 20 23 O R D E R PER PRASHANT MAHARISHI, AM: 01. These are the cross appeals against the order passed by the Commissioner of income tax (appeals) – 57, Mumbai (the learned CIT – Page | 2 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 A) for assessment year 2016 – 17. The learned assessing officer has filed ITA number 2384/M/2022 and assessee is filed an appeal in ITA number 2040/M/2022 against the appellate order dated 17/6/2022. 02. In ITA number 2384/M/2022, the assessee is aggrieved and has raised following grounds of appeal. I TA No. 2384 /M UM /2022 (Ass es sme nt Ye ar 2 0 16-1 7) “1. Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is justified in deleting the addition made u/s. 36(1)(va) r.w.s. 2(24)(x) of ₹ 6,06,000/- in the light of CIT vs Gujrat State Road Transport Co. (366 ITR170). 2. Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is justified in deleting the disallowance made on the Director‟s salary and Handover Facility of ₹ 8,01,74,844/- by overlooking the facts and the Director‟s Office is entirely involved in the project activity in real estate business. 3. Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is justified in deleting the disallowance made on the Director‟s salary and Handover Facility Expenses of ₹ 8,01,74,844/- overlooking the fact that assessee engaged in the business of real estate and following percentage completion method for revenue recognition and all the expenses directly related to the project have to be carried over and debited to the cost of project. 4. Whether on the facts and circumstances of the case and in law, the Learned CTI(A) is justified in deleting the disallowance of ₹ 3,31,070/- made u/s. 14A of the Act in the light of CBDT Circular No. 5 of 2014 dated 11.02.2014. 5. Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is justified in deleting the disallowance Page | 3 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 of ₹ 3,31,070/- made u/s. 14A of the Act while computing the book profit u/s. 115JB of the Act as the AO made disallowance based on calculation as per section 14A r.w. Rule 8. 6. Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is erred in directing the AO/TPO by taking ALP of Guarantee Commission at 0.3523% instead of 1.25% thereby allowing relief of ₹ 42,44,426/-. 7.Whether on the facts and circumstances of the case and in law, the Learned CIT(A) is erred in benchmarking the transaction of Corporate Guarantee Commission, under other method making Interest saving approach allocate the same equally between assessee & its AE (50% + 50%) without considering the fact that no FAR analysis has been done to allocate the interest saved. 8. Whether on the facts and circumstances of the case and in law, the Ld.CIT(A) is erred accepting the benchmarking of corporate guarantee commission adopted by the assessee without appreciating the intrinsic flaws in arriving at the credit rating of the AE i.e. non availability of figures of Sales growth and Inventory Sales ratio. 9. Whether on the facts and circumstances of the case and in law, the Ld.CIT (A) has erred while directing to delete adjustment to brokerage expense amounting to ₹ 13,35,454/- holding that location of the payee is immaterial which is contrary to the provision of Rule 10(B)(2)(d). 10. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in directing not to reject “Internal CUP” as submitted by the assessee, without appreciating that in fact it was a controlled transaction between two related parties of Lodha Group.” 03. I n ITA nu mber 238 4/M /2 022 t he lear ned de pu t y Com mis si on er of in c ome tax ( Cen tra l Circ le) – 7 ( 3), Page | 4 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 Mum ba i (th e le arne d AO) ha s rai sed f o llo wi ng gr oun ds o f app ea l. I TA No. 2040 /M UM /2022 (Ass es sme nt Ye ar 2 0 16-1 7) “1. On the facts and circumstances of the case and in law, the leaned Commissioner of Income tax-(Appeals) [„CIT (A)‟] erred in upholding the action of the learned Assessing Officer [Ld AO] of levying 10% mark up on the reimbursement of expenses of ₹ 28,00,148/- paid by Lodha Developers UK Limited to the assessee company without appreciating the fact that the same were incurred for administrative convenience and there is no service element. 2. On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) [„CIT(A)‟] erred in upholding the action of the learned Assessing Officer [Ld AO] by not appreciating that explanation to section 92B of the Act as amended by Finance Act, 2012 does not alter the basic character of the definition of „international transaction‟ u/s. 92B and therefore, since provision of guarantee (by the assessee to its AE) did not have any bearing on profits, income, losses or assets of enterprise, it would be outside the ambit of „international transaction‟. 3. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax(appeals) [„CIT(A)‟] erred in upholding the action of the learned Assessing Officer [Ld AO]by not appreciating that provision of guarantee is essentially in the nature of shareholder activity and is arising out of implicit support due to passive association of the assessee with its AE; accordingly, ALP for the same should be nil.” 04. 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 Page | 5 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 computation of income and book profit under section 115JB was determined at ₹ 525,849,659/–. Return of the assessee was picked up for scrutiny and necessary notice under section 143 (2) was issued on 24/7/2017. In report under section 92C in form number 3CDB the assessee has disclosed the international transaction as well as specified domestic transactions which were referred to the learned deputy Commissioner of income tax (transfer pricing) – 1 (1) (1), Mumbai (the learned TPO) for determination of arm's-length price. The international transactions and its determination of ALPA by the assessee as well as the learned transfer pricing officer are as under: – 05. 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 Page | 6 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 consideration. The assessee contended that the transfer pricing policy of the Lodha global Ltd is same to the assessee company as that of the other companies in the Lodha group and therefore it should be considered at arm's-length. The learned TPO held that the brokerage expenses paid by the group concerns are also a controlled transaction and therefore the cup method cannot be accepted for benchmarking the transaction. The AO found that 1% of the brokerage is at arm's- length rate of brokerage for availing such services. Accordingly he computed the arm's-length price of the brokerage at the rate of 1% of the transaction value and made an adjustment of ₹ 13,33,554/–. 06. 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. Page | 7 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 07. The assessee had an associated enterprises in Mauritius namely Lodha developers international Ltd. The AE has raised bonds for US$ 200 million, which was listed on the Singapore stock exchange. For issuance of the above bonds assessee company along with its parent company Lodha developers private limited and other two concerns had given a joint and several corporate guarantees as shareholders/direct subsidiary of Lodha developers private limited. Based on conversion rate of US dollar to INR, the learned TPO computed the amount of bond at 1326.60 crores and adopted the guarantee commission rate at the rate of 1.25%. The assessee share in the same based on the number of days the loan was outstanding computed the guarantee commission of ₹ 5,910,140. 08. Accordingly the learned transfer pricing officer made the following adjustment: – i. adjustment on account of arm's-length price of brokerage expenses ₹ 3,033,454 ii. adjustment on account of reimbursement of expenditure paid on behalf of Lodha developers UK Limited Rs 280,015/– iii. adjustment on account of security, guarantee commission of ₹ 5,910,140 09. 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 Page | 8 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 cannot be any disallowance under section 14 A. Assessee also submitted that even otherwise assessee had sufficient network for making investment in shares and mutual fund and there is no interest attributable/related to making such investment for which income is exempt. The learned AO rejected the contention of the assessee and computed the average value of the investment at ₹ 6,62,14,000 and made a disallowance under rule 8D (2) (iii) of the act at the rate of 0.5% amounting to ₹ 331,070/–. 010. 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. 011. 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 Page | 9 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 and other project related activities are discussed and determined in the office of the director therefore the director's office is entirely involved in the project activity therefore the contention of the assessee that no expenditure on account of directors office is attributable to the project cost is not acceptable. Accordingly, he found that the director's office expenses of ₹ 209,973,847/– debited to the profit and loss account should have been carried to the work in progress. The AO further was of the view that some of the projects are at initial stage for the year under consideration and therefore another 10% of the director's office expenses deserve to be located. Accordingly, further disallowance over and above the disallowance the assessee has given without prejudice, the AO computed 10% as further disallowance. Accordingly total disallowance of ₹ 80,174,844/– was made. 012. 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. 013. 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/–. 014. 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 Page | 10 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 poor. In that decision, he computed the arm's-length Margie for non- guaranteed deals, and reduced the arm's-length margin for guarantee deals and thereafter whatever is the saving in the interest cost you to guarantee provided by the appellant he attributed such saving at the rate of 50%. Thus, the adjustment of the guarantee commission arm's- length price was computed at 0.35%. With respect to the international transaction of brokerage expenses when the addition of ₹ 1,333,454/– was made, he held that location of the PE is immaterial as long as the nature of transaction remains same of brokerage paid for selling the flats. Accordingly, he held that rejection of internal cup adopted by the assessee was not proper. Thus, he deleted the adjustment on account of brokerage paid to the associated enterprises. With respect to the reimbursement adjustment of Rs. 280,014/– he confirmed the addition holding that 1/3 party scenario, nobody would provide such services without Mark up, and therefore the markup of 10% used by the learned transfer pricing officer is reasonable. With respect to the disallowance under section 36 (1) (va) of deposit of provident fund of employees contribution beyond the due dates described by the provident fund act, following the decision of the honourable High Court in case of Ghatge Patil transport Ltd 368 ITR 749, the addition was deleted. With respect to the allocation of cost of director's office, he held that issue is squarely covered by this decision in assessee's own case for assessment year 2016 – 17 in favour of the assessee and accordingly he deleted the disallowance. With respect to the disallowance under section 14 A of the act of ₹ 331,070/– under rule 8D (2) (iii) of the IT act, he directed the learned assessing officer to compute the disallowance considering only those investments, which have resulted into exempt income. Therefore, both the parties aggrieved with that order has preferred this appeal. 015. 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 Page | 11 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 CIT – A has allowed the claim of the assessee following the decision of the honourable Bombay High Court. However, now honourable Supreme Court has decided this issue in checkmate services private limited versus CIT [2022] 143 taxmann.com 178 (SC) holding that non- deposit of employees contribution within the due date prescribed under the respective statute is disallowable under section 36 (1) (BA) read with section 2 (24) (x) of the act. Therefore, now in view of the above decision and the decision of the learned CIT – A is unsustainable in law and accordingly the ground number one of the appeal of the learned assessing officer is allowed. The order of the learned assessing officer on this ground is restored. 016. 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 Page | 12 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 salary is nothing but a part of general administration cost and it cannot be transferred to work in progress. It is also claim that since directors salary is part of general administrative expenses and incurred in order to run the assessee's business smoothly which is purely in the nature of revenue expenses and not related to the construction activity of the assessee, hence they have been charged to the profit and loss account. It was also the claim of the assessee that this method of accounting is regularly employed by the assessee in its books of account. Without prejudice, assessee submitted that even if, it is required to be allocated, the assessee determined the percentage of completion of three different projects respectively and worked out the disallowance at ₹ 36,312,729/– and Rs. 228,64,740 in respect of two projection who are ongoing and did not allocate any cost to the third project which is hundred percent complete. The learned assessing officer rejected the claim of the assessee for the reason that according to him the director's office is epic centre of all the construction and development activity carried out by the assessee. The strategy for construction of project, planning, finance and other project rejected activities are discussed in determined in the office of the director and therefore the director officer is entirely involved in the project activity hence the contention of the assessee that no expenditure on account of directors office is attributable to project cost is not acceptable. Accordingly without prejudice disallowance computed by the assessee was further increased by 10% of the director's office expenses with respect to the third project which was completed hundred percent. Accordingly the disallowance was worked out to ₹ 80,174,844/–. When the matter reached before the learned CIT – A, the assessee referred to the projects of the assessee as well as the revenue recognition in those entire project. It was submitted that assessee was having 5 projects out of which revenue recognition commenced in three projects and two projects did not commence at all. As per the accounting policy the assessee allocated the employee cost between work in progress and profit and loss account based on projects for which revenue has been recognized or not stop the assessee placed reliance on the export advisory committee report on applicability of the revised accounting standard 7 wherein it is stated Page | 13 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 that work in progress and constitute the inventory for the builders and shall be valued as per accounting standard – 2 issued by the Institute of chartered accountants of India. The assessee referred to paragraph number 13 of that accounting standard and submitted that the administrative expenses which are not related to bringing the inventory is to their present location and conditions are to be excluded from the inventory is. As the directors salary is part of administrative expenses, which is not related to bringing the inventory to its present location, is to be excluded from the inventory is being work in progress. The assessee also drew support from India AS – 11 construction contracts wherein it is provided that the costs that are specifically chargeable to the customer under the terms of the contract is to be included in the cost of project. Thus, claim of the assessee was that these is merely a general administrative cost should not be considered in the cost of working capital. The assessee also relied on the decision of the sister concern of the assessee wherein the coordinate bench has decided this issue in ITA number 2298/M/2012 dated 10/12/2014 whereas per paragraph number 11 the coordinate bench has held that administrative expenses, office employee salaries and marketing and selling expenses are not to be included in cost of work in progress. Assessee further stated that the coordinate bench decision was followed in case of sister concern of the appellant in ITA number 2818/M/2012 and ITA number 5 to 83 and 5303/M/2014. The assessee also placed reliance on the decision of the coordinate bench in case of ITA number 1576/Bangalore/2020 (115 taxmann.com 90). The learned CIT – A considered his own decision in assessee's sister concern for assessment year 2016 – 17 wherein on identical facts and circumstances he held that that the director's office expenses and handover facility expenses are not to be included in the cost of work in progress but should be allowed to the assessee in the year in which those are incurred. 017. 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 Page | 14 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 decision of the coordinate bench in assessee's sister concern case where after considering the identical facts and circumstances the coordinate bench has held that directors office expenses and handover facility expenses are to be allowed to the assessee in the year in which those are incurred and not to be included in the cost of work in progress. 018. 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 Page | 15 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 in the order of the learned CIT – A. Accordingly ground number 2 and 3 of the appeal of the AO is dismissed. 019. 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. 020. 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:- 2. On the facts and circumstances of the case disallowance under section 14 A of the income tax act, 1961 or to be deleted 3.on the facts and circumstances of the case the learned Commissioner of income tax (appeals) order in not appreciating the fact that the learned assessing officer has failed to record satisfaction for making disallowance under section 14 A of the act. 4.On the facts and circumstances of the case the learned Commissioner of income tax (appeals) erred in directing the learned assessing officer to recompute the disallowance made under rule 8D (2) (ii) of the income tax rules and upholding the disallowance made under section 14 A of the act 5. on the facts and circumstances of the case the learned Commissioner of income tax (appeals) erred in not appreciating the Page | 16 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 fact that the appellant had sufficient own funds much more than the investment is made and as such no disallowance can be made in view of the decision of the honourable Supreme Court in the case of principal Commissioner of income tax versus syntax industries Ltd (2018) 93 taxmann.com 24 (SC) as PO (civil) (diary) number – 39602 of 2017. 6. On the facts and circumstances of the case the learned Commissioner of income tax (appeals) erred in not adjudicating the ground raised by the appellant that no disallowance under section 14 A of that should be made while computing the book profit under section 115JB of the act. 021. 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. 022. 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. 023. 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 Page | 17 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 not incurred any expenses in relation to the exempt income because this dividend was received from the mutual funds. Further, assessee has sufficient network for making investment in shares and mutual fund and therefore there is no interest attributable for making such investment for which income is exempt. According to the provisions of section 14 A (2), if assessing officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this act, the learned assessing officer is empowered to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this act in accordance with the third prescribed. Therefore, before invoking the provisions of disallowance as perennial method prescribed, it is mandatory on the part of the AO to record satisfaction about the correctness of the claim of the assessee with regard to the accounts of the assessee. Therefore, it is mandatory that the learned assessing officer has to record satisfaction that how the claim of the assessee is incorrect. Such satisfaction should be drawn from the accounts of the assessee. In the present case, we do not find any such satisfaction recorded by the learned assessing officer that why the claim of the assessee that it has not incurred any expenditure and further it has sufficient interest free funds available and therefore no disallowance of interest can be made. The issue is squarely covered in favour of the assessee by the decision of the honourable Bombay High Court in case of principal Commissioner of income tax – 2 versus Bombay stock exchange Ltd (2020) hundred and 13 taxmann.com 303 (Bombay) dated 15/10/2019 which followed the decision of the honourable Supreme Court in case of Maxopp investment Ltd versus CIT (20 18) 40 ITR 640 (SC). Accordingly, we find that disallowance under section 14 A of the act of ₹ 331,070/– made by the learned assessing officer is not sustainable. The learned CIT – A has directed the learned assessing officer to compute the disallowance under rule 8D (2)(ii) & (iii) by considering only those investments which have resulted into exempt income. There is no finding with respect to the inclusion of the above amount in the book profit for computing book profit taxation under Page | 18 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 section 115JB of the act. Based on the decision of the honourable Supreme Court, we are of the opinion that in absence of satisfaction the learned assessing officer was not authorized to make the disallowance under section 14 A of the act of ₹ 3 31070/–. Accordingly, additional ground fire by the assessee are allowed and AO is directed to delete the disallowance of ₹ 331,070/–. Consequently, the addition to the book profit under section 115 JB of the act is also not sustainable. In the result, additional ground number 3 of the appeal of the assessee is allowed. Other additional grounds become academic and therefore no adjudication is required. Consequently, ground number 4 and 5 of the appeal of the learned assessing officer is dismissed. 024. 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 Page | 19 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 page number 46 of his order for this year. In that appellate order, on the same transaction in case of Bellissimo Crown build mart private limited (Lodha Crown build mark private limited), the benchmarking of the guarantee commission was made. The method adopted was interest saving approach. The guarantee transactions were analyzed based on the creditworthiness of the borrower from Moody's RiskCalc where standalone credit rating of the issuer company was found act one year and five-year credit rating act B 3 (S&P equivalent B-). Further, the search was made on the Dealscan database applying the filter of time period, deal currency and interest rate. Additional adjustments were also made with respect to Tenor adjustment finding the scrap rates from ZC curve using Bloomberg swap manager. On the basis of nonguaranteed deals 839 and guarantee deals number 12, the arm's-length rate was 470.13 for nonguaranteed deals whereas for guarantee deals was worked out at 399.67 BPs. Thus saving in interest cost you to the guarantee provided by the assessee was worked out at 70.46BPS. It was then shared on the basis of sharing of the economic benefit as per the relative contributions on 50:50 basis. Therefore, the arm's-length rate of guarantee commission was determined at 35.23%. This finding is challenged by the learned AO. 025. 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. 026. 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 Page | 20 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 ground number 2 and 3 of the appeal of the assessee. With respect to the benchmarking of the guarantee commission, the find that on the same transaction, adopting interest saving approach after considering the credit rating of the issuer company and after making all the adjustments, sharing of the risk on the interest saving approach, the arm's-length price of the rate of guarantee commission was determined at 0.3523% base points. The learned departmental representative could not show us any reason that the guarantee commission rate determined by the learned CIT – A is faulty for any reasons. The rate of guarantee commission is required to be determined on the basis of credit rating of the issuer company, comparison of interest rates without guarantee and with guarantee. The difference of the two is required to be shared between the issuer as well as the guarantor. The proper database for credit rating was used. The database for scanning of various deals was used. The tenor adjustments were also made. No reasons were shown for sharing of the interest saving not properly applied. Further, in some of the cases the honourable Bombay High Court has also applied guarantee commission rate at 0.20% i.e. additional CIT versus Asian paints limited ITA number 2126/M/2012 and CIT versus Everest Kanto cylinders limit Ltd in ITA number 1165 of 2013. In case of reliance industries Ltd versus ACIT in ITA number 4475/M/2007, the coordinate bench has adopted the guarantee commission rate at 0.38%. In view of this, we do not find any infirmity in the order of the learned CIT – A in holding that arm's-length price of the guarantee commission is 0.3523 percentage. Accordingly, ground numbers 6 – 8 of the appeal of the AO are dismissed. 027. 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 Page | 21 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 1% and 2% is at arm's-length considering internal cup. The learned TPO rejected the internal comparable is for the reason that the associated enterprise belongs to Mauritius and where the comparable is our station at UAE and United Kingdom. The assessee submitted that brokerage is paid with respect to the property situated in India purchased by non-resident Indian customers and therefore where the property is situated is to be seen not the situs of the broker. The learned AO rejected the same and held that 1% is the arm's-length price of the brokerage paid. The learned CIT – A held that location of the recipient of brokerage fees is immaterial as long as the nature of transactions remains the same of brokerage paid for selling the flats situated in India. Therefore, internal cup adopted by assessee was appellant. Learned AO is aggrieved. 028. 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. 029. 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 Page | 22 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 is no transaction at the rate of 1% used by the learned TPO for benchmarking the brokerage paid. The comparables shown by the assessee as internal cup cannot be found fault with. Accordingly, we do not find any reason to disturb the order of the learned CIT – A. Accordingly ground number 9 – 10 of the appeal of the AO is dismissed. 030. 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. 031. 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. 032. 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. Page | 23 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 033. We have carefully considered the rival contention and perused the orders of the learned lower authorities. We have also look that annexure seven placed before us. These are the amount paid on behalf of Lodha developers UK Limited starting from 4 June 2015 2/29 of March 2016. As on 31st of March 2016, respective bills for prepared stating that these are reimbursement expenses paid on behalf of the UK entity. The fully agree with the orders of the learned lower authorities that no independent party would have kept on paying on behalf of somebody else and as on the last date of the accounting year, the bills raised for reimbursement. For the purpose of reimbursement of the expenditure, firstly the associated entity should have given an authority to the assessee to incur such expenditure on its behalf. In absence of that, it cannot be said that these are merely reimbursement of expenditure. The fully concur with the orders of the lower authorities. Accordingly, ground number 1 of the appeal of the assessee is dismissed. 034. In the result appeal of the learned assessing officer and assessee are partly allowed. Order pronounced in the open court on 27.03.2023 Sd/- Sd/- (KULDIP SINGH) (PR ASH ANT M AH AR I S HI ) (JUDI CI AL ME MBER ) (ACCOUNTAN T M EMB ER ) Mumbai, Dated: 27.03.2023 Dragon Copy of the Order forwarded to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, True Copy// Page | 24 ITA No.2384 & 2040/MUM/2022 Macrotech Developers Ltd (Successor of Shreeniwas Cotton Mills Ltd),;A.Y.2016-17 Sr. Private Secretary/ Asst. Registrar Income Tax Appellate Tribunal, Mumbai