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TMI Blog2023 (4) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... 12) TMI 1649 - ITAT MUMBAI ] following the order of Lodha Plaza [ 2014 (12) TMI 1272 - ITAT MUMBAI ] held that such costs are not included in the cost of work in progress. Identical issue arose in [ 2019 (4) TMI 259 - ITAT MUMBAI ] wherein 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. Decided Against revenue. Disallowance u/s 14 A - necessity of recording satisfaction - HELD THAT:- In absence of satisfaction the learned assessing officer was not authorized to make the disallowance u/s 14 A - See case of Maxopp investment Ltd [ 2018 (3) TMI 805 - SUPREME COURT ] Accordingly, additional ground fire by the assessee are allowed and AO is directed to delete the disallowance -Consequently, the addition to the book profit under section 115 JB of the act is also not sustain - Decided in favour of assessee. TP Adjustment - arm's-length price of the guarantee commission at the rate of 0.3523 percentage instead of 1.25% - HELD THAT:- The rate of guarantee commission is required to be determined on the basis of cred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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. Decided against assessee. Appeal of Revenue and assessee are partly allowed. - ITA No. 2384/MUM/2022 And ITA No. 2040/MUM/2022 - - - Dated:- 27-3-2023 - Shri Prashant Maharishi, AM And Shri Kuldip Singh, JM For the Assessee : Shri Niraj Sheth For the Revenue : Shri Asif Karmali ORDER 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 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. ITA No. 2384/MUM/2022 (Assessment Year 2016- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In ITA number 2384/M/2022 the learned deputy Commissioner of income tax (Central Circle) 7 (3), Mumbai (the learned AO) has raised following grounds of appeal. ITA No. 2040/MUM/2022 (Assessment Year 2016-17) 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 reimbur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see 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 part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly 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. 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 reimbursemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 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 off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 not incurred any expenses in rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ;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 ground number 2 and 3 of the appeal of the assessee. With respect to the benchmarking of the g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkup 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. 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 low ..... X X X X Extracts X X X X X X X X Extracts X X X X
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