DCIT Vs Jetair Private Limited (ITAT Mumbai)
ITAT Mumbai held that addition towards lower commission charged by Jetair Pvt. Ltd. to Jet Airways (India) Ltd. on account of Online Reservation Commission by applying arm’s length price not sustained as the transaction was neither international transaction nor a specified domestic transaction and hence transfer pricing (TP) provisions doesn’t apply.
Facts- Assessee Company is engaged in business as General Sales Agent for international and domestic airlines offering marketing, sales and accounting services. A survey u/s. 133A was conducted in the case of the assessee. During the course of survey proceedings, statement of Smt. Vidyagauri Samant, General Manager (Finance) of the assessee company was recorded u/s. 131 in which she stated that, Jet Airways (India) Ltd had paid ORC commission to other entities at a higher rate than what was received to the assessee company, a group concern.
AO in the show-cause notice to the assessee asked the assessee as to why charging less commission rate from group concern should not be added as compared to the commission paid from other entities. He noted that in respect of Online Reservation Commission for passengers 0.2% to 0.99% for the related party Jet Airways / Jet Air averaging about 0.6% while for other unrelated airlines it averaged to around 2.5%
AO further deduced that, since both Jet Airways (India) Ltd. and Jetair Pvt. Ltd. are private parties in charge of lower rate of commission are indicative of a mechanism deliberately employed to lower the payment of commission without any ostensible reasons which is in violation of arm’s length principle.
CIT(A) deleted the addition. Being aggrieved, revenue has preferred the present appeal.
Conclusion- In fact, if the sister concern namely Jet Airways India Limited which is loss making company were to pay the same rates as paid by other clients of the assessee then such transaction in normal business parlance would have been colourable device or mechanism to increase the expenses of the sister concern, the fact that Jet India Private Limited is a loss making company is not a valid criteria.
Held that it is neither the international transaction nor a specified domestic transaction therefore, transfer pricing provisions do not apply. The assessee had a major passenger ticket booking from Jet Airways India Ltd and it is also evident from the fact that more than 98% of the commission has been received from Jet Airways (India) Ltd as compared to other airlines which was at 1.83%. When assessee is receiving a huge volume of business from one particular entity and that to be for domestic airlines, then we do not find any reason as to why such a comparison should be made with other airlines operating on international flight with such a less volume. Thus, there is no reason as to why any kind of CUP method can be applied, as it is applicable while analyzing arm’s length price under transfer pricing provision which is not the case here.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The aforesaid appeal has been filed by the Revenue and Cross Objection by the assessee against the order dated 05/09/2022 passed by CIT(A)-53, Mumbai for the quantum of assessment passed u/s.143(3) for A.Y.2018-19.
2. In the grounds of appeal, Revenue has raised the following grounds:-
1.”Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in deleting the addition made ignoring the fact that paying higher rate of commission/ORC to other or non-related companies by M/s Jet Air (India) Ltd and at same time paying lower rate to assessee (related party), is clearly a colourable device for tax evasion, which cannot be permitted by law”
2.”Whether on the facts and circumstances of the case and in law, Ld. CIT(A) has erred in ignoring the fact that the A.O. passed the order based on various factors which include the statements of Smt Vidyagauri Samant, General Manager (Finance) of M/s Jetair Pvt. Ltd. recorded u/s 131 of the Act though the Ld. CIT(A) agreed that statement of Smt. Vidyagauri Samant recorded during survey proceedings has evidentiary value and it could be utilized as an important piece of evidence during the assessment proceedings”.
3.”Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is correct in deleting the adjustment made on the basis of the arm’s length principle without appreciating the fact that for internal comparison, CUP is one of the best methods”
4.”Whether on the facts and circumstances of the case and in law, Ld. CIT(A) is correct in deleting the addition on the fact that it requires adjustment for difference without actually establishing any such differences
3. Whereas in the Cross Objection, the assessee has raised the following grounds:-
1. The Ld. CIT(A) ought to have held that the Assessing Officer has erred in making addition of notional income of Rs. 141,69,12,770/-. The CIT(A) ought to have appreciated that even as per the Assessing Officer the said income has not been earned but ought to have been earned.
2. The Ld. CIT(A) ought to have held that the Assessing Officer has erred in applying the arm’s length principle of transfer pricing in respect of the domestic transaction under consideration, which is not liable for such adjustments under transfer pricing provisions prescribed under the Income-tax Act.
3 The Ld CIT(A) ought to have held that the transaction under consideration was normal business transaction driven by the commercial expediency and, hence, could not have been disturbed by the Assessing Officer.
4 The Ld. CIT(A) ought to have held that the Assessing Officer has erred in not following the principle of consistency by ignoring the fact that the transaction of receipt of commission has been accepted in other years.
5. The Ld CIT(A) has erred in holding that the retraction of Smt Vidyagauni Samant was not valid, the contents are afterthought and the affidavit has not been validly executed.
6. The appellant craves leave to add to, amend or alter, the foregoing grounds of cross objection.
4. The brief facts are that Assessee Company is engaged in business as General Sales Agent for international and domestic airlines offering marketing, sales and accounting services. A survey u/s.133A was conducted in the case of the assessee on 19/09/2018. During the course of survey proceedings, statement of Smt. Vidyagauri Samant, General Manager (Finance) of the assessee company was recorded u/s.131 in which she stated that, M/s. Jet Airways (India) Ltd had paid ORC commission to other entities at a higher rate than what was received to the assessee company, a group concern. The ld. AO in the show-cause notice to the assessee asked the assessee as to why charging less commission rate from group concern should not be added as compared to the commission paid from other entities, which he worked out at Rs.1,41,69,12,770/-. He noted that in respect of Online Reservation Commission for passengers 0.2% to 0.99% for the related party Jet Airways / Jet Air averaging about 0.6% while for other unrelated airlines it averages to around 2.5%. He also referred to the statement recorded during the course of search of Smt. Vidyagauri Samant. Relevant question referred by the ld. AO reads as under:-
Q:15. From details fumished by you, it is seen that there is huge variation in commission fee received by M/s Jetair Pvt Ltd from M/s jet Airways Ltd over various FYS Please comment
Ans. Most of the commission earned by M/s. Jetair Pvt. Ltd from passenger ticket booking Further, with most of the non-related airlines, commission at passenger ticket booking is charged either @3% of basic ticket fare or cost plus 15% From jet Airways, commission at passenger ticket booking is charged @ up to 1% of basic ticket fare. Further. during FY 2011-12 and 2012-13. M/s. Jetair Pvt. Ltd agreed to limit commission earning from Jet Airways to assist the Jet Airways (annexure-3 ( page 1 to 3)- letters). Therefore there was further drop in commission earned from Jet Airways during FY 2011-12 and 2012-13
Q.16. As per answer given by you above, M/s. Jetair Pvt. Ltd commission from M/s. jet Airways Ltd at lower rate in comparison to rate at which it charges commission from non-related entities. This rate was further lowered during FY 201112 and 2012-13. This has reduced taxable profit of M/s Jetair Ltd Please comment. Also give rate at which commission was charged from top 5 airlines including Jet Airways during FY 2011-12 to 2017-18
Ans 1) All airlines contracts are individually negotiated and terms/remuneration vary per Airline.
2) You will notice that some of the airline have fixed fee (cost plus agreements), if we work out % of fee to sales generated by us, it is less than 3%. Please note services offered in all airlines are similar, however few airlines instead of giving lesser commission, negotiate on changed model of cost plus thereby in actually reducing our effective %
3) I have attached letter received from ANA in January 2012 (similar period to that of Jetairway letter) asking reduction in fee which we had agreed.
Therefore, commission or cost plus i.e. our remuneration models are decided based on individual client and are negotiated on case to case basis commercials teams. We offer all our override commissions net of expenses to tax.
5. The ld. AO further deduced that, since both Jet Airways (India) Ltd. and Jetair Pvt. Ltd. are private parties in charging of lower rate of commission are indicative of mechanism deliberately employed to lower the payment of commission without any ostensible reasons which is in violation of arm’s length principle. Accordingly, he tabulated the average ORC to be received by the assessee from group concerns were in the following manner:-
