Query No. 10

Subject:

Accounting for revenue and costs related to ‘Internet- ticketing’.1

A. Facts of the Case

1. A company has been set up as a public limited company by the Ministry of Railways with a view to strengthen its marketing and service capabilities in the areas of rail catering, tourism, and passenger amenities.In order to improve passenger amenities/services, the company is providing internet-based advance train reservation booking facilities.

2. The company has set up its infrastructure for booking of rail tickets through internet. Investment for setting up of such infrastructure has been made by the company from its own resources. It has set up an office at New Delhi Railway Station premises. Necessary infrastructure includes computers, servers, printers, manpower, etc., deployed by the company.In order to carry on the business of ticket bookings by the company, Railways has allowed access to its ‘Passenger Reservation System’ (PRS) for advance reservation.

3. The querist has stated that any customer requiring booking of a railway ticket is required to register himself/herself with the company at its website and thereafter the customer can send his request for booking of the ticket through internet. The company collects cost of the tickets and its service charges from the customer through credit card or direct debit to the customer’s bank account through its payment gateways. Tickets issued to the customers are either hand-delivered from its office or sent by courier at the address given by the customer.

4. Payment to Indian Railways for the tickets booked by the company is being made by way of adjustment against the amount being maintained as ‘Advance Deposit’ with the Railways. Deposit is being recouped by the company from time to time. Statement for the cost of the tickets booked by the company is generated every day and the amount against those tickets is charged by the Railways from the deposit maintained with it.

5. As per the querist, Indian Railways is not paying any commission to the company. The company is levying service charges on its customers and the same is recovered in addition to the cost of the tickets. The quantum of the service charge is exclusively decided by the company. Indian Railways does not interfere in any manner to decide the service charges made by the company from the customers.

6. In case of default, repudiation of transaction or non-recovery of cost of ticket, etc., the company is responsible for the same and not the Railways. Thus, according to the querist, the company assumes significant risks and rewards of transactions, such as, risk of loss in collection, loss on account of delay in delivery or return, etc. Indian Railways does not assume any responsibility or risk. In case of cancellation of tickets also, refund is allowed only by the company. Though the concerned customer can also cancel the tickets at the PRS counter of the Indian Railways, no refund is, however, allowed by the Railways. Only a cancellation advice is given by the Railways to the customer. Refund on the cancelled ticket is received by the customer from the company by way of direct credit into his credit card account / bank account. In short, while the company is responsible to Indian Railways for payment of the cost of tickets, it has to recover the cost of the tickets from the customers and also to pay refunds to the customers.

7. The company is maintaining complete record and details of the transactions effected through internet.

8. With regard to the whole procedure regarding internet booking by the company, the Ministry of Railways (Railway Board) has issued a Circular No. 41, dated 24.5.2002, which has been separately provided by the querist for the perusal of the Committee. In the Annexure to the said Circular, the Ministry of Railways has prescribed in detail the procedure to be followed, the following paragraphs of which have been specifically referred by the querist:

— Paragraph 2: The company shall be allowed access to the Indian Railway PRS System for advance reservation on behalf of its customers and the Indian Railways shall provide all necessary assistance to the company as is being extended to a new PRS center/user.

 

— Paragraph 3: The company shall provide service at such terms and conditions as prescribed and can impose such restrictions as are considered necessary.

 

— Paragraph 4: The company shall bear the cost of computer peripherals.

 

— Paragraph 20: Payment for tickets booked by the company shall be made against a lumpsum deposit in advance.

 

— Paragraph 21: The company shall devise its own system for recovery of ticket fare, service charges, etc. System for delivery of tickets will also be devised by the company.

 

— Paragraph 27: Ticket rolls of a distinct colour shall be handed over by the Railways to an authorised official of the company and thereafter it would be the responsibility of the company to maintain them and use for printing the tickets.

 

— Paragraph 30: At the end of each day, a statement of transactions for bookings through the company shall be generated and this statement would show distinctly the fare recoverable from the company, excluding commission / service charges of the company.

9. The company, while preparing its accounts for the year ended 31st March, 2003, considering the relevant factors and its responsibility regarding carrying out its business of booking of tickets through internet, accounted for gross receipts from booking as sale consideration. Payment made to the Railways on account of cost of tickets booked was shown as expenditure in the profit and loss account. In the notes to accounts, the company has duly disclosed its accounting policy regarding income as well as expenditure on internet booking and has stated as under:

(i) Income from Internet-ticketing: Income from Internet- ticketing is recognised on the basis of value of the tickets sold through corporation’s web-enabled payment gateway including service charges.

 

(ii) Expenditure on Internet-ticketing: The cost of tickets booked through the Passenger Reservation System of Indian Railways is recognised as expenditure on accrual basis.

10. According to the querist, the company has followed the accounting policy of crediting gross receipts from Internet-ticketing and debiting the expenditure incurred on the same to the profit and loss account, taking into consideration the following factors:

(i) Part II of Schedule VI to the Companies Act, 1956, does not contain any specific provision regarding preparation of accounts in the given circumstances in a particular manner.

(ii) There is no direction in any Accounting Standard or any Guidance Note issued by the Institute of Chartered Accountants of India (ICAI), on accounting treatment, in the facts and circumstances of the case of the company. It is not a case of mere agency relationship as envisaged in paragraph 4.1 of AS 9 and, therefore, it is not appropriate to consider only the service charges as its income.

 

(iii) ICAI had given an opinion in the facts and circumstances of a travel agent vide query no. 2.8 contained in the Compendium of Opinions Vol. XI (page 199). The query related to application of section 44AB of the Income-tax Act, 1961, to a travel agent with reference to gross receipts or commission amount only. Facts of the query were identical to the facts in the present case. In this case of travel agent also, total consideration on account of tickets booked was credited to the profit and loss account and expenditure incurred on purchase of tickets was debited as expenditure. On the basis of above facts, an opinion was expressed that section 44AB of the Act was applicable, if total sale consideration of tickets and service charges exceeded Rs. 40 lakh. Though the opinion of the Expert Advisory Committee in the said case is not relevant in the present case, it establishes that, in the facts and circumstances of a travel agent, method of crediting gross receipts and debiting the expenditure on ticketing is appropriate. According to the querist, the facts of the present case, in fact, are more in favour of accounting the gross receipts, considering its responsibility in relation to booking activities.

 

(iv) CBDT Circular No. 452 dated 17.3.1986 has explained provisions of section 44AB of the Income-tax Act. CBDT in the above Circular has drawn a distinction between ‘Kachha Arhatias’ and ‘Pacca Arhatias’. It has been clarified that ‘Kachha Arhatias’ have no responsiblity other than bringing the parties together and for receiving service charges for the same. According to the querist, in the facts of the case, the company is not simply acting as an agent for bringing the two parties together. Hence, it does not fall strictly within the term ‘Kachha Arhatia’. Accordingly, total sale consideration is to be considered for the purpose of section 44AB of the Act.

 

(v) Since the responsibility for recovery of the cost of tickets is on the company, many a times it happens that it is not able to recover the cost for various reasons. In such cases, the company suffers loss and has to write off the amount not recoverable as bad debts. During the year ended March, 2003 also, it had to write-off an amount of Rs. 4,28,054 as bad debts on account of non-recovery of the cost of tickets. As per the provisions of section 36(1)(vii) read with section 36(2) of the Income-tax Act, 1961, deduction is available in respect of bad debts only if the amount has been considered as income in the same year or in an earlier year. Accordingly, in case gross receipts are not credited to the profit and loss account, deduction would not be available as bad debts. In that case, the company has to argue its case for allowability of loss, which may be a somewhat difficult proposition.

11. The Comptroller & Auditor General of India has made its comments under section 619(4) of the Companies Act, 1956, in respect of the method of accounting followed by the company in recognising revenue and expenditure for the year ended 31st March, 2003, vide its report dated 8.9.2003. It is of the opinion that the company has an agency relationship vis-à-vis the Railways for Internet-ticketing and the accounting for cost of tickets and revenue on gross basis has resulted in over-statement of the revenue and expenditure.

12. The directors of the company in their report to the shareholders commented on the observations of the Comptroller & Auditor General of India, referred to hereinabove, by stating therein that, considering the facts and circumstances of the case of the company and its responsibility in respect of the transactions, it has followed the accounting policy of crediting and debiting the revenue and expenditure, respectively, on gross basis. The directors also decided to make a reference to the Expert Advisory Committee of ICAI, for opinion on the accounting policy followed by the company.

B . Query

13. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(a) Whether the accounting policy adopted by the querist of crediting gross receipts on account of Internet-ticketing, including its service charges, and debiting cost incurred for the ticketing to the profit and loss account is in violation to any statutory requirement, Accounting Standard or Guidance Note issued by ICAI.

(b) In the facts and circumstances of the case, would it not be more appropriate to recognise revenue from issuing tickets and expenditure incurred thereon on gross basis and not after netting them off?

C. Points considered by the Committee

14. The Committee notes that the basic issue raised in the query relates to whether the accounting policy followed by the company of crediting gross receipts and debiting the costs incurred for Internet-ticketing to the profit and loss account is correct or not. Therefore, the Committee has considered only this issue and has not touched upon any other issue which may arise from the facts and circumstances of the query such as timing of recognition of costs and revenue, or treatment from the taxation point of view, etc.

15. The Committee notes that in the present case, the basic issue to be considered is whether Internet-based advance train reservation booking facility provided by the company is an act of ‘rendering of service’ or ‘sale of goods’ to its customers.

16. In this regard, the Committee notes that as a generally accepted commercial and accounting parlance, rendering of service typically involves performance by the entity of a contractually agreed task over an agreed period of time. Keeping in view the facts and circumstances of the case, the Committee is of the view that the company is performing the task of making reservation of tickets on internet for its customers through the Indian Railways PRS System as agreed with them. Therefore, getting the tickets booked on behalf of its customers is merely a service provided to them.

17. The Committee also notes that Accounting Standard (AS) 9, ‘Revenue Recognition’, issued by the Institute of Chartered Accountants of India, in the definition of the term ‘revenue’, states that "Revenue is measured by the charges made to customers or clients for …..services rendered to them".

18. On the basis of the above, the Committee is of the view that in a service transaction, revenue is the service charges collected from the customers and not the gross inflow of cash, receivables or other consideration. Therefore, in the present case, revenue is the amount of service charges collected by the company from its customers for advance booking of railway tickets and not the gross amount received from booking of tickets as a sale consideration as argued by the querist in paragraph 10 above.

D. Opinion

19. On the basis of the above, the Committee is of the following opinion on the issues raised by the querist in paragraph 13 above:

a) The accounting policy adopted by the querist of crediting gross receipts on account of Internet-ticketing, including its service charges, is in violation of AS 9. Accordingly, debiting cost incurred for the ticketing to the profit and loss account is also not correct.

(b) In the facts and circumstances of the case, it would not be appropriate to recognise revenue from issuing tickets and expenditure incurred thereon on gross basis. Revenue should be measured by service charges made to the customers for booking of tickets.

1 Opinion finalised by the Committee on 5.8.2004