This is a composite, illustrative scenario, not an account of a named client. The company leased its head office floor from an entity owned by the promoter's immediate family, at a rent that worked out to roughly ₹145 per square foot per month. An unrelated tenant leasing a comparable floor two levels below, in the same building, was found — through a commercial lease listing and a direct enquiry with the building's facilities office — to be paying roughly ₹78 per square foot per month, essentially double the rate for office space in the identical location with no material difference in fit-out or amenities.
Why the comparison worked as well as it did
Benchmarking related-party rent usually runs into the problem that no two properties are quite comparable — different location, different building grade, different lease terms. Finding an unrelated tenant in the exact same building removed almost every one of those variables at once: identical location, identical building amenities, a broadly similar floor plate, and a lease signed within the same eighteen-month window as the related-party lease's most recent renewal. That left rent per square foot as close to a clean, isolated comparison as this kind of testing usually gets.
What the testing checked before concluding it was overpriced
- 01Confirmed the comparability of the two floors directlyVisited both floors; the unrelated tenant's floor had a marginally lower-grade fit-out, if anything, which if adjusted for would widen rather than narrow the gap.
- 02Checked whether the related-party lease included anything the comparison lease didn'tNo additional services, parking allocation, or exclusivity terms in the related-party lease that would justify a premium.
- 03Obtained a second data point from a commercial broker's listing for the same micro-marketThe broker's quoted range for comparable office space in that building and immediate vicinity sat close to the unrelated tenant's rate, not the related-party rate.
- 04Checked whether the lease and its rent had gone through section 188 approval as a related-party transactionIt had been approved by the board, but the approval note did not reference any market benchmarking — the rate itself appeared to have been set without reference to comparable rents at all.
| Tenant | Relationship | Rent per sq ft/month |
|---|---|---|
| This company | Related party (promoter family entity as landlord) | ₹145 |
| Unrelated tenant, same building, two floors below | Arm's length | ₹78 |
| Broker's quoted range for the micro-market | Market reference | ₹70–85 |
What went into the file
- The unrelated tenant comparison and the broker's range, both as corroborating, independent evidence of market rate.
- The section 188 approval reviewed for whether it had actually considered arm's length pricing, and the gap noted explicitly.
- The quantified excess paid over the market rate for the year, as the basis for the related-party disclosure and for a recommendation to management to renegotiate or justify the premium specifically.
- A note that the finding concerns pricing and disclosure adequacy, not the legitimacy of leasing from a related party as such — a related-party lease is not itself a problem if priced and approved properly.
Regulatory requirement
Section 188 of the Companies Act requires related-party contracts, including leases, to be on arm's length terms and approved accordingly, with disclosure of the particulars in the board's report. An approval that exists on paper but was never actually benchmarked against market rent does not satisfy the arm's length requirement in substance, whatever the resolution says.
This is practical guidance written for audit teams, not an authoritative statement of any standard or statute. Standards, forms and timelines change. Check the current text issued by the ICAI and the relevant authority before relying on anything here in an audit file.
Related resources
- Related parties & disclosuresHow to test related-party rent and lease arrangements for arm's-length pricingBuild an independent comparable rent benchmark, test the non-price terms as carefully as the rate itself, and document how the benchmark was actually built.
- Related parties & disclosuresRelated-party transaction pricing benchmarking: what documentation to expectA board resolution approving a related-party transaction at a stated price is not evidence the price is reasonable — that evidence has to be a comparison to what an unrelated party was actually charged or quoted.
- Related parties & disclosuresRelated-party disclosure checklist for financial statementsA related-party note that lists transactions but not relationships, or balances but not terms, is an incomplete disclosure even if every number in it is correct.
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