TMI Blog2020 (2) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... ibution of MGF Development Ltd., towards the completion of the project by providing financing and technical expertise, providing brand name and other technical assistance for the completion of the project and when the assessee has proved the commercial expediency in incurring the expenditure, therefore, detailed reasoning given by the CIT(A) against each allegation raised by the AO, which has been reproduced in the preceding paragraphs, we are of the considered opinion that the order of the CIT(A) does not suffer from any infirmity. Accordingly, the same is upheld and the grounds raised by the Revenue are dismissed. - ITA No.5828/Del/2014 - - - Dated:- 30-1-2020 - Shri R.K. Panda, Accountant Member And Shri Kuldip Singh, Judicial Member For the Assessee : Shri I.P. Bansal And Shri Vivek Bansal, Advocates; And Ms Suman Sapra, CA For the Revenue : Shri J.K. Mishra, CIT, DR ORDER PER R.K. PANDA, AM: This appeal filed by the Revenue is directed against the order dated 14th August, 2014 of the CIT(A)-1, New Delhi relating to assessment year 2010-11. 2. The grounds raised by the Revenue are as under:- 1. The order of Ld. CIT(A) is not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereof over a period of time. During the year, the company has sold its Integrated Hotel project at the consideration of ₹ 95 crores and accordingly the company has attributed ₹ 57 crores (60% of ₹ 95 Crores) as per the terms of the above agreement. The sales of Integrated Hotel project amounting to ₹ 95 Crores is shown in the Profit and loss account after netting off Revenue attributed to collaborator amounting to ₹ 57 crores. 3.1 He further noted that this transaction is also reflected in annexure-2, which is particulars of payments made to persons specified u/s. 40A(2)(b) of Audit Report u/s. 44AB, which is as follows:- Name Nature of Payment Amount MGF Development Ltd. Revenue attribution on sale of hotel site ₹ 57,00,00,000/- 4. From the collaboration agreement dated 6th September, 2004, the AO noted that the assessee, i.e., the first party acquired the land measuring 7426.26 sq. mtrs for the purpose of construction and development of commercial mall and a luxury hotel at Plot No.1, Opposite Nehru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., and the role played for construction. The AO also asked the assessee to justify the payment of ₹ 57 crores as a revenue sharing @ 60% of hotel share consideration to M/s MGF Development Ltd. under the guise of revenue sharing agreement dated 6th September, 2001. 6. It was submitted by the assessee that MGF Development Ltd.: a) Provided finance to the assessee company towards the construction cost of integrated project at Jaipur; b) Assisted the company in securing finance from bank/institutions by providing corporate bank guarantee of M/s MGF Development Ltd.; c) Provided technical and management competence as to the development of project; d) Allowed the assessee company to use the brand value of MGF Metropolitan which is the registered trade mark of M/s MGF Development Ltd. 7. It was further submitted by the assessee that as per the initial estimate, the cost of the project was estimated to be ₹ 75 to ₹ 80 crores and MGF Development Ltd. had agreed to provide financial support in terms of 60% of the total cost of the project and its brand expertise in the real estate field as per the various clauses of the agreement and in v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the funds. By virtue of being the owner of the assessee company the associated company having substantive share holding had already assumed the inherent risks associated with the project. Therefore, such assumption of risk could not be a factor for revenue sharing between the related entities. vi) No TDS has been deducted from this payment and therefore even the provisions of section 40(a)(ia) would get attracted. vii) If the Collaboration Agreement is assumed words to words then the validity of the agreement has expired on 05.09.2008, as it was valid only for four years from the date of agreement i.e. 06.09.2004, whereas, the hotel has been sold on 01.05.2009. This implies that the sharing of revenue on account of sale of hotel on the strength of alleged Collaboration Agreement dated 06.09.2004 is not valid. viii)Since the transaction is between two related entities it is hit by the provisions of section 40A(2)(a). Execution of agreement dated 06.09.2004 is a self serving document and there are no real and tangible services rendered by the holding company to the assessee company for claiming this amount as its share of revenue. ix) The quantum of shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inked to the actual cost incurred by M/s. MGF Development Ltd. but as per the prevailing market practice, the cost of brand is normally charged by the brand owner on the basis of its visibility, respect and reputation. Normally the brand fee charged by the brand owner are varying in the range of 0.5% to 5%, in the Indian scenario. Thus, taking the visibility and reputation of MGF Group in the real estate business in which brand/image is really important to attract the customers for sale of the unit in shopping malls project. Therefore, taking a moderate view the cost of brand utilization i.e. brand fee is taken @ 3% of the sale of units sold in shopping mall and hotel project. At this rate, the sale effected by the assessee company since A.Y. 2004-05 to A.Y. 2009-10 comes to ₹ 134,96,94,844/- and the brand fee @ 3% comes to ₹ 4,04,90,845/-. Thus, taking a very liberal view, the assessee s company contention for utilization of finance and brand image provided by M/s. MGF Development Ltd. could utmost be rewarded to the extent of interest at ₹ 5,87,72,012/- and brand fee at ₹ 4,04,90,845/-, which can be allowed as a fair compensation payable to M/s. MGF Develo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uting 68% of the fund requirement for the project. The entire project generated revenue of about ₹ 135 crore, out of which ₹ 57 crore was shared as revenue by the appellant with MGFD out of sale proceeds of ₹ 95 crore realized from the hotel portion. The revenue shared was, as per agreement, 60% of the sale proceed of hotel but only 42% of the entire revenue of ₹ 135 crore generated from sale of hotel as well as mall portion. 4.4 The revenue has disallowed a large portion of the income / revenue allocated to MGFD (₹ 47,07,37,143/-) and allowed only ₹ 4,04,90,845/- for branding being 3% of the total sales of hotel and mall at ₹ 134.97 crore and another ₹ 5,87,72,012/- being interest payable @ 12% on the daily closing balance method. Thus, the revenue has allowed expenditure / revenue sharing to the extent of ₹ 9,92,62,857/- out of ₹ 57,00,00,000/- actually shared. To reach such conclusion various observations made by the revenue, which are summarized, and my findings thereto are given, as under: Observation of Revenue (1) Reliance upon agreement dated 06.09.2004 is an afterthought. This document never existed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , it was the responsibility of the owners of the company to arrange for the funds. By virtue of being the owner of the assessee company the associated company having substantive share holding had already assumed the inherent risks associated with the project. Therefore, such assumption of risk could not be a factor for revenue sharing between the related entities. Finding No doubt MGFD holds equity in the appellant, but business transactions are entered into on commercial considerations. It is not for the revenue to step into the shoes of the businessman. Yes, if there are related party transactions, it may be seen whether the transactions are in terms of commercial and expediency at arm s length (this aspect is discussed later). In fact the arrangement does not affect long-term profitability, as the appellant does not have much activity / revenues after completion of this project whereas MGFD is a flagship company having continued activities and revenues. Transfer of profits to MGFD generates income taxes in its hands both in the year under consideration and in the future. Observation of Revenue (3) No TDS has been deducted from this payment and therefore even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practice in similar project development cases and cannot be said to be excessive. 4.6 I also find that the present case is not one of diversion of income by overriding tine but one of revenue sharing on joint project development. 4.7 It is seen from the records that the administrative expenses of the appellant were only ₹ 4,95,371/- (last year ₹ 32,34,088/-), which included salary of ₹ 85,067/- (last year ₹ 5,33,661/-). On the other hand, the administrative expenses of MGFD were ₹ 4,75,94,931/- (last year ₹ 9,55,82,501/-), besides personnel expenses of ₹ 2,89,94,163/- (last year ₹ 5,22,08,595/-). This itself establishes that the appellant was only the landowner and the entire project was actually executed by MGFD. In this view of the matter, and keeping in view the market practice, the revenue shared by MGFD should have been ₹ 81 crore (i.e. @ 60% of ₹ 135 crore) and not ₹ 57 crore (being 42% of gross project revenue). 4.8 Apart from the conclusion reached in Para-4.7 above, I also find that the revenue of ₹ 57 crore included in the revenue of MGFD and offered to tax as its income has been accept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er submitted that once an amount is reduced from the gross receipts, but, booked in the nature of expense, then it has to be decided on the touchstone of section 37 of the IT Act, 1961. The assessee has merely claimed expense for fixed percentage on the basis of the so-called agreement and no specific details of expenses claimed have been furnished. The onus is always on the assessee to substantiate that the expenses have been claimed wholly and exclusively for the purpose of business. In the instant case, the assessee has not proved any nexus between the business and expenses claimed. Further, in the reply dated 5th February, 2013, MGF Development Ltd. has not given the reply regarding specific details of services provided to the assessee. He submitted that this was an integrated project consisting of shopping malls upto three floors and hotel of 4-6 floors. Revenue sharing was done only for the hotel and not for shopping mall. Further, no TDS has been made from the payments made against services provided. The provisions of section 40A(2)(b), according to the ld. CIT, DR were also required to be examined for considering the issue of sharing of revenue. He submitted that this proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the Hon ble Supreme Court while agreeing with the view taken by the Hon ble Delhi High Court in the case of Dalmia Cement (Bharat) Ltd. (supra) has held that no businessman can be compelled to maximize its profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own point but that of a prudent businessman. He also relied on the following decisions:- i) CIT vs. Rajan Nanda (2012) 349 ITR 8 (Del); ii) Vodafone South Ltd. vs. CIT (2015) 378 ITR 410 (Del); and iii)CIT vs. Rockman Cycle Industries (P) Ltd. (2011) 331 ITR 401 (P H). 15. He accordingly submitted that the order of the CIT(A) be upheld and the grounds raised by the Revenue should be dismissed. 16. We have considered the rival arguments made by both the parties, perused the orders of the AO and the CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee company, in the instant case, developed a commercial shopping complex-cum-hotel complex at Jaipur. The hotel project, named Hotel F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D is not correct. According to him, the findings given by the ld.CIT(A) are irrelevant and, therefore, the well reasoned order of the AO should be restored and the order passed by the CIT(A) should be set aside. It is the submission of the ld. Counsel for the assessee that the ld.CIT(A) has passed a speaking and well reasoned order and, therefore, the same should be upheld wherein he has discussed all the points threadbare which needs no interference. 17. We find considerable force in the arguments advanced by the ld. Counsel for the assessee. It is an admitted fact that the AO in the order itself has allowed an amount of ₹ 5,87,72,012/- being the utilization of funds provided by M/s MGF Development Ltd. Similarly, he has also allowed an amount of ₹ 4,04,90,845/- towards brand fee as a fair compensation payable to M/s MGFD. Thus, the AO, in the instant case, has admitted the brand value of MGFD and the finance provided by the MGFD to the assessee. It is also an admitted fact that in the order passed u/s 143(3) in the case of MGFD, the amount of ₹ 57 crores has been accepted by the AO as the share of revenue @ 60% of the hotel project at Jaipur. We, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. vs. CIT reported in [2007] 288 ITR 1 (SC) at para 34 of the order has observed as under:- 34. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 20. We find the Hon ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss expenditure if it was incurred on grounds of commercial expediency. In other words, if it is such expenditure as a prudent businessman would incur for the purpose of business. (iii) Once it is established that there was nexus between the expenditure and the purpose of the business, not necessarily the business of the Assessee itself, the Revenue cannot put itself in the armchair of the businessman and decide how much of the expenditure is reasonable having regard to the circumstances of the case. 22. We find the Hon ble Punjab Haryana High Court in the case of CIT vs. Rockman Cycle Industries (P.) Ltd. [2011] 331 ITR 401 (Punjab Haryana) has observed as under:- 23. In view of our aforesaid discussion and pronunciation of law, as referred to above, the question referred for consideration by the larger Bench can very well be answered by opining that the Assessing Officer or the appellate authorities and even the courts can determine the true legal relation resulting from a transaction. If some device has been used by the assessee to conceal true nature of the transaction, it is the duty of the taxing authority to unravel the device and determine its true chara ..... X X X X Extracts X X X X X X X X Extracts X X X X
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