DCIT-CC 5(2), MUMBAI vs. JETAIR PRIVATE LIMITED, NEW DELHI

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 M/s. Jetair Private Limited it requires adjustment for difference without actually establishing any such differences

Whereas in the Cross Objection, the assessee has raised the following grounds:-

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.

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 M/s. Jetair Private Limited 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:-

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:-

In response, assessee filed detailed reply which has been dealt and incorporated in the assessment order. In sum and substance, assessee submissions were as under:-  The transaction with Jet Airways (India) Limited with respect to the GSA agreement is at Arm's Length Price. The same had been proved by relying on the assessment order of Jet Airways (India) Limited for AY 2015-16 wherein the ORC Rate was the same as in AY 2018-19.

The ld. AO however, rejected all the explanations of the assessee about the commercial expediency and the factual matrix of the case and he only referred to the statement and made the addition of Rs.1,41,69,12,770/- holding that, firstly, assessee was adopted mechanism which is a colourable device to reduce profits; and secondly, the tax liability of Jet Airways (India) Ltd and the amount of cash which ought to have been received by the assessee company should be @2.5%.

Before the ld. CIT (A) assessee submitted that before the ld. AO assessee at various aspects has given detailed explanation stating that, firstly, transaction was at arm’s length between the assessee and Jet Airways (India) Ltd., secondly, statement made by Smt. Vidyagauri Samant is factual and there is nothing contained therein which can be used by the assessee; thirdly, there was a commercial expediency; and lastly; only the real income can be taxed. Another point which was raised that the passenger turnover of Jet Airways (India) Private Limited for the captioned assessment year is Rs. 74,57,43,56,402 and the combined passenger turnover of all the other airlines excluding Jet Airways (India) Private Limited for the captioned assessment year is Rs. 1,38,83,90,325. From this, it can be seen that the turnover of Jet Airways (India) Private Limited is 53.71 times the M/s. Jetair Private Limited combined turnover of all the other airlines with whom the assessee has executed a GSA Agreement.

Further, it was pointed out that the commission rate in case of GSA agreements generally decreases when the turnover increases and this is because the cost incurred by the agent does not increase proportionately to the increase in turnover rather the agent achieves a cost advantage. Keeping this in mind, the assessee had entered into GSA agreement with Jet Airways (India) Private Limited, wherein both the parties had agreed that the ORC Rate would not exceed 1%. For the captioned assessment year Jot Airways (India) Private Limited has paid ORC @0.6% to the assessee which is well within the limits of 1%.

Further, it shall also be pertinent to note that Jet Airways (India) Limited has been consistently bringing in a major source of revenue to the assessee owing to its high volume passenger turnover A comparison of the passenger turnover of Jet Airways (India) Limited vis-à-vis the passenger turnover of other airlines has been tabulated as under:-

Before us ld. DR submitted his written submissions as stated as under:- 3. The main issue involved in the case relates to Online Reservation commission(ORC) received by assessee from its “related party” i.e. Jet Airways (India) Ltd. which was relatively low as compared to other “unrelated parties”. The Ld. AO applied CUP method to determine the Arm‟s Length Price and ORC rate at the rate of 2.5% to work out the amount of commission. 4. There is no dispute that both Jet Airways (India) Ltd and Jetair Pvt. Ltd are related parties and the rather low rates of 0.2% to 0.9% as ORC for M/s Jet Airways (India) Ltd. are indicative of mechanism deliberately employed to lower the payment of commission to M/s Jetair pvt. Ltd. supported by the fact that M/s Jet Airways is a loss making enterprises, its liability to pay tax may not get affected as much as the payment of ORC to M/s Jet air at lower rates would affect the revenues, and consequently the tax liability of Jet Air which incidentally is a profit-making company. Further, in the case of assessee, the statement of Smt Vidyagauri was recorded u/s 131 of the IT Act in her statement she had stated that the rate of ORC commission from Jet Airways (India] Ltd. was reduced for FY M/s. Jetair Private Limited 2011-12 and 2012-13 and it was reduced to assist Jet Airways (India) Ltd which was in financial crisis.

Before us ld. Counsel for the assessee submitted that firstly this issue is fully covered by the judgment of the Hon’ble Bombay High Court in assessee’s own case for A.Y.2013-14 to 2017-18. Apart from that he made various submissions which can be summarised as under: –  Statement of Smt. Vidyagauri Samant, heavily relied upon by the Assessing Officer, is not relevant as it pertains to AY 2012-13 and 2013-14  The Department has to appreciate the commercial expediency behind the transaction  Only real income can be taxed and there is no provision to notional income under the Income-tax Act tax - India Finance and Construction Co P Ltd. [200 ITR 710 (Bom)] - CIT v Shivakami Co P Ltd [159 ITR 71/25 Taxman 80 (SC)]  Transfer pricing provisions are not applicable to the facts of the case  In any case, the transactions are not comparable as: (a) The passenger turnover with Jetairways (Rs. 7,457 crores) is 53.71 times of the combined passenger turnover of all other airlines (Rs. 138 crores); (b) The assessee earns 98.17% of its commission from Jetairways as against 1.83% from all other airlines; (c) It is extremely difficult to generate business for foreign airlines from India as against generation of business from India for the domestic airlines; and (d) In respect of few airlines the assessee has agreed to cost plus method which is not comparable with that of Jetairways.

We have heard rival submissions and perused the relevant finding given in the impugned order as well as material referred to before us. The entire case of the department is that assessee has been charging lower rate of ORC from Jet Airways India Ltd / Jet Air Pvt. Ltd. which is ranging between 0.2% to 0.9%, whereas from the other entities assessee has been charging commission @ 2.5% and therefore, AO held that amount which should have been paid by M/s. Jet Airways India Ltd. and Jet Air Pvt. Ltd. @ 2.5% and has calculated the average ORC and worked out the addition of Rs.141.69 Crores. It is relevant to mention that this issue had already been decided by the Hon’ble Bombay High Court in the Writ Petition Nos.3446 of 2022, 1901 of 2022, 1996 of 2022, 2393 of 2022 & 2828 of 2022 vide judgment dated 08/03/2023. This was in respect to writ petition filed against notice u/s.148 for the a.Yrs.2013-14 to 2017-18. In those years, similar reasons were recorded by the ld. AO based on same statement of oath of Smt. Vidyagauri Samant and assessee has been receiving commission on the ORC from group M/s. Jetair Private Limited entities at a lesser rate as compared to the other entities. The submissions on behalf of the assessee as well as the department are reproduced hereunder:- “10. He submitted that the main reason for the reassessment is that, as per survey findings, the range of commission received by the petitioner in respect of passengers was 0.2% to 0.99% averaging to about 0.6%, while for other unrelated airlines it averages to around 2.5%. Consequently, a huge variation between the average rates for the related party and the unrelated party was discovered. He submitted that merely on the basis that the petitioner is charging less commission for rendering services as sales agent from Jet Airways (related party) than from others cannot be a basis for a belief that income chargeable to tax has escaped assessment. He submitted that the rates of commission cannot be compared without considering the surrounding circumstances under which the rate has been agreed between the parties. He submitted that the passenger turnover of Jet Airways was 61.74 times the combined passenger turnover of all other airlines with whom the petitioner had executed General Sales Agreement (GSA). He submitted that considering the turnover given by Jet Airways, the lower rate charged by the petitioner for providing service as the sole selling agent was justified and cannot be compared with the rate charged to the other airlines which gave a very small fractions to the work to the petitioner.

He submitted that only real income is chargeable to tax. The respondent had not alleged that the petitioner had disclosed lesser income than what was actually earned by the petitioner. The allegation is that the petitioner has earned less income than what the petitioner ought to have earned. It is submitted that even if it is suggested that the petitioner ought to have earned more income than what the petitioner has actually earned, no income can be said to have escaped assessment so as to justify the impugned notice as there are no provisions in the Act for taxing such alleged income. He submitted that notional income can be assessed to tax only when the case of an assessee falls under the provision which provides for taxing deemed income in the hands of an assessee such as u/s 50C of the Act transfer pricing provision. It is M/s. Jetair Private Limited submitted that transfer pricing provision prescribes for deeming income in the hands of an assessee when an assessee has entered into an international transaction, or a specified domestic transaction and such transactions are not at arm's length price which the present transaction does not attract. He submitted that there is no other provision which requires the petitioner to determine the income of the petitioner on the basis of arm's length price. He submitted that the agreement between the petitioner and Jet Airways has been approved by the Central Government u/s 297 (1) of the Companies Act, 1956 and consequently it is not open to the AO to allege that Jet Airways has paid a lesser commission than required as per law as it would amount to one department of Government taking a contrary stand to another department of the Government.

He submitted that there was also no failure to disclose in as much as all material facts necessary for the assessment were disclosed during the course of original assessment proceedings. He submitted based on all documents the AO had passed assessment order u/s. 143(3) of the Act after considering all the petitioner's submissions. He submitted that the statement of the employee of the petitioner cannot be said to be any tangible material to justify the reopening in as much as it does not contain any information which could be regarded as new material to justify reopening. It was lastly submitted that since no approval was provided to the petitioner, it must be presumed that no approval was obtained by respondent no. 1 from respondent no. 2 so as to justify reopening of petitioner's assessment. He submitted that the Petition be made absolute.

Per Contra, Mr. Kumar, learned counsel for the respondent submitted that Jet Airways (India) Limited and Jetair Private Limited are related party's under the Act. He submitted that considering the size and financial standing, Jet Airways has considerable weight for fixing ORC rate to its own benefit thereby lowering the tax liability and to the benefit of the whole group thereby lowering the tax liability of the entire group. The lower rates charged by the petitioner are indicative of a mechanism deliberately employed to lower the payment of commission to Jetair Private Limited coupled with the fact that Jet Airways is a loss-making enterprise and its liability to pay tax may not get M/s. Jetair Private Limited affected as much as payment of ORC to Jetair at lower rate would affect the revenues, and consequently the tax liability of the petitioner which is a profit-making company. He submitted that the transaction in the nature of commission payment between the related entities appear to be an arranged one and to conclude that there has been deviation from the usual practice of commission payment, which reduces the overall tax liability of the petitioner which is a group entity of Jetair Private Limited. He submitted that this arrangement of charging lower rates has reduced the tax burden of the petitioner which is related party. Learned counsel submitted that based on the information gathered during the survey and post survey and upon careful perusal and examination of the agreements with 'related' and 'unrelated' parties and after having considered the statements of various senior management executives and also study of the comparative chart of ORC have with various airlines, it was concluded that such variation in ORC rates between related and unrelated entities have ostensible reasons that would tantamount to violation of arms' length principles. He submitted that the petitioner was regularly and consistently being underpaid by its sister concern Jet Airways thereby resulting in lesser revenues and leading to its lower profits and thereby resulting into lower tax liability. It was accordingly concluded that there was no reasonable justification, and it appears to be a device for evasion of taxes in complete deviation of the arm's length principle. He submits that had Jet Airways India Limited paid higher rate of commission to the petitioner, the total amount of commission that would have been received by the petitioner would be Rs. 1,66,27,37,461/-. In support of his submission, he relied upon the decision in the case of Mc. Dowell & Co. Ltd. v. Commercial Tax Officer [1985] 22 Taxman 11/154 ITR 148 (SC) which held as under:- "… colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are not concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it."

The Hon’ble High Court on these facts, quashed the notice u/s. 148 on various grounds, however, on merits the Hon’ble High Court has made the following observations:- 23. We are of the view that the petitioner was right in charging lower commission rates to its sister concern/related party jet airways India Limited on account of it being a sole selling agent as well as client giving more than 98% of its total turnover.

In our view, it is business call/decision for a party and is certainly not colourable device/mechanism as contended by the respondents. In fact, if the sister concern/related party 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 to determine escapement of income.

Since this transaction is neither an international transaction nor a specified domestic transaction, the transfer provisions do not apply.

Thus, the Hon’ble High Court has very categorically decided this issue on exactly similar set of facts and reasoning of the M/s. Jetair Private Limited department has held that “The assessee was right in charging lower commission rates to its sister concern / related party on account of it being a sole selling agent as well as client giving more than 98% of its total turnover”. Thus, it is purely a business decision and not colourable device as contended by the respondents. 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.

Lastly, the Hon’ble High Court held that it is neither the international transaction nor a specified domestic transaction therefore, transfer pricing provisions do not apply. The aforesaid judgment of the Hon’ble High Court clearly clinches the issue in favour of the assessee that there is no scope for applying in arm’s length principle and assuming that assessee should have received commission at higher rate. In any case, if the ld. CIT (A) has analysed each and every GSA agreement with such entities as well as with the Jet Airways India Ltd and categorically recorded finding that despite nature of services were similar but other condition such as territorial operations within India, provision of the bank guarantee, method of computation of commission etc. varied from airlines to airlines within the territory jurisdiction of India. The assessee had a major M/s. Jetair Private Limited 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. Apart from that ld. CIT (A) as incorporated above, has noted various differences and fixation of ORC rates with other airlines operating in international traffic which was un-comparable to the Jet Airways (India) Ltd. 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. Otherwise also, what is to be seen is the business prudence and commercial expediency and if assessee has got more financial benefits and more business from a particular entity or a party and there is nothing on record which has come that it has some kind of a ‘make belief arrangement’, then ld. AO cannot question as to how much commission should have been charged.

In so far as reliance placed on statement of Manager (finance), Smt. Vidyagauri Samant, firstly, is not relevant for the present assessment year as it pertains to A.Yrs. 2012-13 and 2013-14 and such a statement cannot be applied for deciding the issue in A.Y.2018-19. Moreover, nowhere the statement is incriminating. It just mentions the factum that assessee has M/s. Jetair Private Limited been charging different commission rates from domestic airlines i.e. Jet Airways (India) Ltd. and foreign airlines and such statement is nowhere incriminating and has not been demonstrated by the department that any adverse inference could have been drawn from the statement sans any incriminating documents found. Apart from that, this issue is squarely covered by the decision of the Hon’ble High Court in similar set of facts and also we do not find any infirmity on the analysis done by the ld. CIT (A) and the finding recorded by him as enumerated in detail in the foregoing paragraphs. Accordingly, we hold that addition has rightly been deleted and the order of the ld. CIT (A) is confirmed and grounds taken by the Revenue are dismissed.

In so far as cross objection is concerned, it is merely on various aspects on which Ld.CIT(A) ought to have given certain findings while giving relief, therefore they are purely academic and are accordingly dismissed as infructuous.

In the result, appeal of the Revenue is dismissed and Cross Objection of the assessee is dismissed as infructuous.