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The Tax Publishers Dy. CIT v. Fritidsresor Tours & Travels India (P.) Ltd. [ITA No. 1480 (Del) of 2011, dt. 13-11-2015] : 2016 TaxPub(DT) 1640 (Del-Trib) Pass through costs whether subject to ALP--Cost plus method is gross accounting or net accounting? *Facts:* Assessee was in the international tours and travel business. While benchmarking ALP of their transactions with their AE, assessee adopted Cost plus method where they had adopted NCP - Net profit as a % of total indirect costs. The direct costs of air ticket, hotel reservations etc. were all not shown on the profit and loss account and only the net commission or fee earnings out of tours were shown in the profit and loss account on net method. The assessing officer did not agree with the same and included the pass through costs as well in computing the net margin and thus made add back on ALP. Aggrieved assessee approached the Commissioner (Appeals) who set aside the order of the assessing officer. On further appeal: Held by the ITAT against the assessee by remanding the case for a correct re-assessment of the ALP. While computing cost plus method both direct and indirect costs should be taken into account. The assessee benchmarking excluding pass through costs was incorrect, while on the revenue he charged per customer a tariff on the expense side he cannot choose to net off and adopt net accounting by showing only the net profit made out of the whole tour. Though his role was a limited risk role, they had borne the responsibility and the risk of meeting the whole outbound tour sold by their AE, so their billing was their turnover and the pass through costs were all their costs and not only their indirect costs. When the assessee cherry queried picked two of the 14 samples to the Commissioner (Appeals) which was also incorrect. Cost plus method confirms adoption of both direct and indirect costs - pass through costs though might not have any mark-up will still need to be included in the ALP calculation. Note: The decision puts to rest at least at ITAT level as to whether freight pass through also in freight forwarding business is part of the ALP calculation. The actual end result of this is to be seen from the model of the assessee as to whether they intended to act as agents or as principal to principal. The strength of this emerges from fundamentals of revenue recognition where agents revenue is only his commission unlike that of a principal to principal where the entire sale minus cost is the margin. It does not make any difference on the profit number whether gross accounting is followed or net accounting is followed but when compared to peer groups for ALP it does makes a difference.

The Tax Publishers

Dy. CIT v. Fritidsresor Tours & Travels India (P.) Ltd. [ITA No. 1480 (Del) of 2011, dt. 13-11-2015] : 2016 TaxPub(DT) 1640 (Del-Trib)

Pass through costs whether subject to ALP--Cost plus method is gross accounting or net accounting?

Facts:

Assessee was in the international tours and travel business. While benchmarking ALP of their transactions with their AE, assessee adopted Cost plus method where they had adopted NCP - Net profit as a % of total indirect costs. The direct costs of air ticket, hotel reservations etc. were all not shown on the profit and loss account and only the net commission or fee earnings out of tours were shown in the profit and loss account on net method. The assessing officer did not agree with the same and included the pass through costs as well in computing the net margin and thus made add back on ALP. Aggrieved assessee approached the Commissioner (Appeals) who set aside the order of the assessing officer. On further appeal:

Held by the ITAT against the assessee by remanding the case for a correct re-assessment of the ALP.

While computing cost plus method both direct and indirect costs should be taken into account. The assessee benchmarking excluding pass through costs was incorrect, while on the revenue he charged per customer a tariff on the expense side he cannot choose to net off and adopt net accounting by showing only the net profit made out of the whole tour. Though his role was a limited risk role, they had borne the responsibility and the risk of meeting the whole outbound tour sold by their AE, so their billing was their turnover and the pass through costs were all their costs and not only their indirect costs. When the assessee cherry queried picked two of the 14 samples to the Commissioner (Appeals) which was also incorrect.

Cost plus method confirms adoption of both direct and indirect costs - pass through costs though might not have any mark-up will still need to be included in the ALP calculation.

Note: The decision puts to rest at least at ITAT level as to whether freight pass through also in freight forwarding business is part of the ALP calculation. The actual end result of this is to be seen from the model of the assessee as to whether they intended to act as agents or as principal to principal. The strength of this emerges from fundamentals of revenue recognition where agents revenue is only his commission unlike that of a principal to principal where the entire sale minus cost is the margin. It does not make any difference on the profit number whether gross accounting is followed or net accounting is followed but when compared to peer groups for ALP it does makes a difference.