The Supreme Court while upholding the principal-agent relationship between the airlines and agents, has unequivocally held that the airlines are liable to deduct TDS on the supplementary commissions that are earned by the agents. It has been opined that if the agents have already paid income tax on such income, then the airlines cannot be held liable for TDS, but the Revenue can charge interest for the period from the date of default to the date of payment of tax by the agents.
Background of the Case:
The Base Fare for the air tickets is set by the International Air Transport Association (hereinafter referred to as “IATA”) within which the airlines had the discretion to sell tickets at price lower than the base price but not higher. IATA is also involved in issuing blank tickets to the travel agents of airlines to market and sell travel documents. The relationship between the airlines and travel agents is governed by Passenger Sales Agency Agreement. The agreements are signed by the IATA on behalf of the air carriers.
After the tickets are sold by the travel agent, the IATA pays a 7% standard commission to the agents. This commission is independent of the net fare as quoted by the air carriers themselves. This 7% commission on the base fare triggers the airline to deduct TDS under Section 194H of ITA at 10% plus a surcharge.
All details about the selling amount of the tickets are transmitted to the Billing and Settlement Plan (hereinafter referred to as “BSP”), functioning under IATA. BSP consolidates the amounts owed by each agent to various airlines post the sale of tickets and then the aggregated amount is transmitted to each carrier by the IATA.
The framework is such that the airlines have no control over the actual fare at which the travel agents would sell the tickets. In simple terms, the agents could have charged lower than the base price as set by the IATA but higher than the net fare demanded by the airline itself. Therefore, the additional amount that is charged over and above the net fare would be retained by agents as their income. BSP displayed this additional income as “Supplementary Commission”.
Brief Facts:
The present dispute arose between the assessee airlines and the revenue over the income earned by the agents besides the 7% standard commission and whether such income would be subject to the TDS requirements under Section 194H of ITA.
The Revenue had sent notices to the air carriers concerning TDS requirements. However, since certain airlines did not comply with it, there was an investigation conducted in which the present Assessee airlines were allegedly not deducting TDS. Penalty proceedings were initiated against these airlines and an appeal was filed before the Commissioner of Income Tax (Appeals). However, the appeals were rejected but it was held that transactions before 01.06.2001 (Section 194H came into effect on this date) will be excluded from the demand of TDS.
Thereafter, appeals were preferred before the Income Tax Appellate Tribunal vide which the Assessment Order was set aside. Against this order, the Revenue filed appeals before the High Court of Delhi which clubbed together all the appeals concerning tax liability for the airline industry and reversed the findings of the Income Tax Appellate Tribunal. This is precisely why the present appeals before this court were filed.
Contentions of the Assessees:
It was contended that the transaction related to the supplementary commission did not involve the airlines as it was solely between the agent and the customer. The airline is unaware of the price at which the agent sells the tickets to the customer. The payment is received by the agent directly. Therefore, no TDS can be deducted as there is no payment by the Assessee, to begin with. It is argued that Section 194H refers to the commission in the course of services rendered, however, there are no services provided to the Assessee in case of supplementary commission. It was further argued that the agents already disclose this income in their returns and hence, the income tax had already been imposed on this additional portion of income.
Contentions of the Revenue:
The Revenue contended that the relationship between the airline and the travel agent is that of a principal-agent and this is furthered by the fact that agents sell tickets on behalf of the Assessees. the TDS could have been deducted comprehensively after assembling the amounts and not after every transaction. It was argued that Section 194H is broad enough to cover direct and indirect payments and hence, the payments didn’t need to be made directly by the Assessees to the agents to qualify as “commission”
Observations of the Court:
It was noted that the Assessee has not disputed that during the payment of the standard commission, the relationship of the principal-agent does exist between the Assessee and the agent. The principal-agent relationship is governed by Section 182 of the Indian Contract Act, 1872, and therefore, it was remarked that the focus of the Court would be on Section 182 and Section 194H of ITA.
To determine whether the transaction about the supplementary commission was only between the agent and the client, the Apex Court considered three questions. One, whether the title of the tickets passed from the assessee to the agents at any given point of time, second whether the sale was done under the pretext of the tickets being the property of the agents or the airlines and third whether in case of any breaches of the terms and conditions, the agent was liable or the airlines.
The Supreme Court observed that there was no sale between the assessee and the agent concerning the tickets and hence, it can be concluded that the tickets at any given point in time remained the property of the airline. It was pointed out that the agents acted on behalf of the airlines and the services provided were with express prior authorization. Since the airlines retain the title of the travel documents, they also indemnify the agents in case of any shortcomings in the services, etc. On basis of this, it was concluded that the arrangement between the agent and the purchase of the ticker was not a separate, distinct arrangement instead it was a part of the package of activities undertaken according to the Passenger Sales Agency Agreement.
As regards Section 194H, the Bench observed that as such there is no distinction between the payments as direct or indirect. Interpreting broadly, the source of the payment for the purposes of TDS deduction would be inconsequential. The Assessee is liable even if the payment from the customer was done indirectly.
On the point of airlines being oblivious to the amount charged by the agents, the Court firstly remarked that different High Courts have provided different interpretations and hence, a conclusive answer from the Supreme Court is required. Further, it opined that the mechanics of how the airlines may use BSP to ascertain the amounts earned as the supplementary commission is concerned with the internal mechanism that in the end would ensure legal compliance with Section 194H. The assertion that the price remains unknown to the Assessees cannot be accepted as the legal basis to avoid a statutory liability.
It was further expounded by the bench that merely because the price is fixed by the agent will have no bearing on the relationship of the principal-agent. The agent is free to do acts of their own volition if it does not contravene the purpose of the agency and the interests of the principal.
Based on the reasons, the Hon’ble Supreme Court ruled that the airlines are liable to deduct TDS on the supplementary commission.
For the income tax being paid by the agents on supplementary commission, the Court noted that if the taxes have been paid on such sum, then Assessee cannot be held liable for TDS. However, it is the discretion of the revenue to seek payment of interest for the period between the date of default in the deduction of TDS and the date on which income tax is paid by the agent.
Having said that, the Bench remanded the matter back to the Assessing Officer to ascertain the interest payments due for the period from the date of default to the date of payment of tax by the agents.
The decision of the Court:
The Apex Court concluded by ruling that Section 194H must be read with Section 182 of the Contract Act. The decision was unequivocally in favour of the Revenue except that the Supreme Court did remark that in case income tax has already been paid by the agents, then the Revenue cannot hold airlines to be liable.
With this, the matter that had been a controversy for 2 decades was finally put to rest.
Case Title: Singapore Airlines Ltd; KLM Royal Dutch Airlines; British Airways PLC V. C.I.T. Delhi
Citation: 20222 Latest Caselaw 903 SC
Coram: Hon’ble Mr. Justice Surya Kant; Hon’ble Mr. Justice M.M. Sundresh
Case No.: Civil Appeal No. 6964-6965, 6966-6967, 6968 of 2015
Advocates for Assessee: Adv. Bhargava V. Desai, Adv. Shekhar Prit Jha
Advocates for Revenue: Adv. Raj Bahadur Yadav
Read Judgment @LatestLaws.com
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