Supreme Court clarifies Tax Deduction at Source (TDS) on Airline Ticket Commissions: Singapore Airlines vs. CIT (2022)

Introduction

Date of the Judgment: 14 November 2022

Citation: (2022) INSC 1147

Judges: Surya Kant, J; M.M. Sundresh, J.

Can airlines be held responsible for deducting tax at source (TDS) on the extra income earned by travel agents when they sell flight tickets? The Supreme Court of India recently addressed this question, focusing on the interpretation of Section 194H of the Income Tax Act, 1961. This section deals with the deduction of tax on commission or brokerage payments. The core issue revolves around whether the additional amount that travel agents make, beyond the base fare set by airlines, qualifies as a ‘commission’ under the law, thus requiring the airlines to deduct TDS.

Case Background

The airline industry, during the relevant period, operated with a system where the International Air Transport Association (IATA) set the base fare for air tickets. Airlines had the flexibility to sell tickets at a net fare lower than the base fare, but not higher. Travel agents, acting on behalf of airlines, would sell these tickets. The agreement between airlines and travel agents was governed by Passenger Sales Agency Agreements (PSAs), with templates provided by IATA.

Travel agents would receive a standard commission, typically 7% of the base fare, for their services. However, agents often sold tickets at a price higher than the net fare but lower than the base fare, keeping the difference as their income. This additional amount was termed “Supplementary Commission” in the Billing and Settlement Plan (BSP), a system managed by IATA for managing payments between airlines and agents. The dispute arose when the Income Tax Department claimed that airlines were liable to deduct TDS on this supplementary commission under Section 194H of the Income Tax Act.

The core issue was whether this “Supplementary Commission” was a commission earned by the agent for services rendered to the airline, thus attracting TDS, or if it was income earned independently by the agent.

Timeline

Course of Proceedings

The Revenue Department, suspecting non-compliance with TDS requirements, conducted surveys and found that several airlines had not deducted TDS on the supplementary commission paid to their travel agents. Show cause notices were issued, and the airlines were declared as ‘assessees in default’ under Section 201 of the Income Tax Act. The Commissioner of Income Tax (Appeals) upheld the assessment orders, excluding transactions before 01.06.2001. The Income Tax Appellate Tribunal (ITAT) ruled in favor of the airlines, stating that the supplementary commission was not a commission paid by the airlines but income earned by the agents.

The Delhi High Court overturned the ITAT’s decision, stating that a principal-agent relationship existed between airlines and travel agents. The High Court held that the additional income was linked to this relationship and that the airlines were liable to deduct TDS on the supplementary commission. Aggrieved by this, the airlines appealed to the Supreme Court.

Legal Framework

The core legal provision in question is Section 194H of the Income Tax Act, 1961, which mandates the deduction of tax at source on “commission or brokerage.” The explanation to this section defines commission or brokerage as:

“any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities;”

The court also considered Section 182 of the Indian Contract Act, 1872, which defines an “agent” as a person employed to do any act for another or to represent another in dealings with third persons, and a “principal” as the person for whom such act is done.

Arguments

Airlines’ Arguments:

• No Control Over Price: Airlines argued that they have no control over the price at which travel agents sell tickets. The supplementary commission is a result of dealings between the agent and the customer, not a payment from the airline.
• Two Separate Transactions: They contended that there are two distinct transactions: one between the airline and the agent (for which standard commission is paid) and another between the agent and the customer.
• No Payment by Airline: The airlines stated that the supplementary commission is not paid by them but directly by the customer to the agent. Thus, there is no payment by the assessee to begin with.
• Factual Errors by High Court: The airlines pointed out factual errors in the High Court’s judgment, such as the PSA being signed by IATA on behalf of airlines and not by the airlines themselves.
• No Service to Airline: They argued that the supplementary commission is not for any service rendered to the airline.
• Agent Acting on Own Account: The airlines submitted that the travel agents act on their own account, without the knowledge of the principal, under Section 216 of the Contract Act.
• Tax Already Paid: The travel agents had already filed tax returns including the supplementary commission, making the matter revenue neutral.

Revenue’s Arguments:

• Principal-Agent Relationship: The Revenue argued that the relationship between airlines and travel agents is that of principal-agent. The agents act on behalf of the airlines.
• PSA Terms: The PSAs clearly show that the agents’ activities are on behalf of the airlines, further cementing the principal-agent relationship.
• No Transfer of Title: Title of the tickets remains with the airlines throughout the transaction.
• Access to BSP Data: Airlines have access to data maintained by the BSP to delineate the supplementary commission.
• Inclusive Language of Section 194H: Section 194H covers any “direct or indirect” payments to the agent.
• Taxing of Auxiliary Amounts: The taxing of the supplementary amounts in the hands of the travel agents does not cure the default by the airlines in deduction of TDS.

The innovative argument by the airlines was that the supplementary commission was not a payment by the airlines, but by the customer to the agent.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court considered the following issue:

1. Whether the airlines were required to deduct TDS under Section 194H of the Income Tax Act, 1961, on the supplementary commission accrued to travel agents entrusted by the Appellants to sell airline tickets.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon:

• Lakshminarayan Ram Gopal and Sons Ltd. vs. The Government of Hyderabad [1955] 1 SCR 393 – Explained the distinction between a servant and an agent. (Supreme Court of India)
• Gordon Woodroffe & Co. v. Sheikh M.A. Majid & Co. 1966 Supp SCR 1 – Differentiated between a contract of agency and a contract of sale. (Supreme Court of India)
• Khedut Sahakari Ginning and Pressing Society v. State of Gujarat (1971) 3 SCC 480 – Emphasized the need to scrutinize the contract between parties to determine the nature of the agreement. (Supreme Court of India)
• Bhopal Sugar Industries Ltd. v. STO, Bhopal (1977) 3 SCC 147 – Reiterated the distinction between a contract of sale and a contract of agency. (Supreme Court of India)
• Qamar Shaffi Tyabji v. The Commissioner, Excess Profits Tax, Hyderabad (1960) 3 SCR 546 – Clarified the extent of control in a principal-agent relationship. (Supreme Court of India)
• CIT v. Qatar Airways 2009 SCC OnLine Bom 2179 – Held that airlines would have no information about the exact rate at which tickets were sold by their agents. (Bombay High Court) – Overruled
• Ahmedabad Stamp Vendors Ass. v. Union of India 2002 SCC OnLine Guj 135 – Expounded on the distinction between a principal-agent relationship and that between two principals. (Gujarat High Court)
• Director, Prasar Bharati v. CIT (2018) 7 SCC 800 – Explained the inclusive nature of Section 194H. (Supreme Court of India)
• Hindustan Coca Cola Beverages Pvt. Ltd. v. Commissioner of Income Tax (2007) 8 SCC 463 – Held that no recovery of tax can be made from the tax deductor if the payee has already paid the taxes. (Supreme Court of India)
• Commissioner of Income Tax v. Eli Lilly & Co. (India) (2009) 15 SCC 1 – Discussed the applicability of Section 273B of the IT Act and the concept of “reasonable cause”. (Supreme Court of India)
• Around the World Travel and Tours P. Ltd. v. Union of India 2003 SCC OnLine Mad 1027 – Held that the supplementary commission was liable to TDS deduction under Section 194H. (Madras High Court)
• Nagubai Ammal & Ors. v. B. Shama Rao & Ors. [1956] 1 SCR 451 – Held that a party to a contract cannot both “approbate and reprobate”. (Supreme Court of India)

Legal Provisions Considered:

• Section 194H of the Income Tax Act, 1961
• Section 182 of the Indian Contract Act, 1872
• Section 201 of the Income Tax Act, 1961
• Section 201(1A) of the Income Tax Act, 1961
• Section 211 of the Indian Contract Act, 1872
• Section 215 of the Indian Contract Act, 1872
• Section 216 of the Indian Contract Act, 1872
• Section 271C of the Income Tax Act, 1961
• Section 273B of the Income Tax Act, 1961

Judgment

How each authority was viewed by the Court?

• Lakshminarayan Ram Gopal and Sons Ltd. vs. The Government of Hyderabad [1955] 1 SCR 393* – Used to explain the distinction between a servant and an agent.
• Gordon Woodroffe & Co. v. Sheikh M.A. Majid & Co. 1966 Supp SCR 1* – Used to distinguish between a contract of agency and a contract of sale.
• Khedut Sahakari Ginning and Pressing Society v. State of Gujarat (1971) 3 SCC 480* – Used to emphasize the need to scrutinize the contract between parties.
• Bhopal Sugar Industries Ltd. v. STO, Bhopal (1977) 3 SCC 147* – Used to reiterate the distinction between a contract of sale and a contract of agency.
• Qamar Shaffi Tyabji v. The Commissioner, Excess Profits Tax, Hyderabad (1960) 3 SCR 546* – Used to clarify the extent of control in a principal-agent relationship.
• CIT v. Qatar Airways 2009 SCC OnLine Bom 2179* – Overruled. The court disagreed with the Bombay High Court’s view that airlines would have no information about the exact rate at which tickets were sold by their agents.
• Ahmedabad Stamp Vendors Ass. v. Union of India 2002 SCC OnLine Guj 135* – Used to expound on the distinction between a principal-agent relationship and that between two principals.
• Director, Prasar Bharati v. CIT (2018) 7 SCC 800* – Used to explain the inclusive nature of Section 194H.
• Hindustan Coca Cola Beverages Pvt. Ltd. v. Commissioner of Income Tax (2007) 8 SCC 463* – Used to hold that no recovery of tax can be made from the tax deductor if the payee has already paid the taxes.
• Commissioner of Income Tax v. Eli Lilly & Co. (India) (2009) 15 SCC 1* – Used to discuss the applicability of Section 273B of the IT Act and the concept of “reasonable cause”.
• Around the World Travel and Tours P. Ltd. v. Union of India 2003 SCC OnLine Mad 1027* – Used to support the view that the supplementary commission was liable to TDS deduction under Section 194H.
• Nagubai Ammal & Ors. v. B. Shama Rao & Ors. [1956] 1 SCR 451* – Used to support the view that a party to a contract cannot both “approbate and reprobate”.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the interpretation of the legal relationship between airlines and travel agents as a principal-agent relationship. The court emphasized that the supplementary commission, though not directly paid by the airlines, was still a payment for services rendered by the agents on behalf of the airlines. The court also considered the practical aspects of the airline industry, noting that the airlines had access to the data required to calculate the supplementary commission through the BSP. The court further emphasized that the inclusive nature of Section 194H covers both direct and indirect payments.

Fact:Law Ratio

Logical Reasoning

Issue: Whether airlines are liable to deduct TDS on supplementary commission.

Judgment

The Supreme Court ruled in favor of the Revenue, holding that airlines are liable to deduct TDS on the supplementary commission earned by travel agents.

The Court reasoned that the relationship between airlines and travel agents is a principal-agent relationship, and the supplementary commission is a form of payment for services rendered by the agent on behalf of the airline. The court also emphasized that Section 194H of the Income Tax Act covers both direct and indirect payments.

The Court stated, “The irresistible conclusion is that the contract is one of agency that does not distinguish in terms of stages of the transaction involved in selling flight tickets.”

The Court further added, “The fact that the travel agent has discretion to set an Actual Fare which is above the Net Fare has no effect on the nature of the relationship between the parties.”

The Court also noted, “Even on an indirect payment stemming from the consumer, the Assessees would remain liable under the IT Act.”

The Court, however, held that no recovery of the shortfall in TDS could be made from the airlines if the travel agents had already paid income tax on the supplementary commission. The airlines were, however, liable to pay interest under Section 201(1A) of the Income Tax Act. The court also quashed the penalty proceedings against the airlines under Section 271C of the Income Tax Act, stating that there was a “reasonable cause” for the airlines to not deduct TDS.

The Supreme Court overruled the Bombay High Court’s decision in CIT v. Qatar Airways [2009 SCC OnLine Bom 2179], which had held a contrary view.

Key Takeaways

✓ Airlines are responsible for deducting TDS on the supplementary commission earned by travel agents.

✓ The principal-agent relationship between airlines and travel agents extends to all aspects of ticket sales.

✓ Airlines can use the BSP data to calculate the supplementary commission and deduct TDS accordingly.

✓ Airlines cannot be pursued for recovery of the shortfall in TDS if the travel agents have already paid income tax on the supplementary commission.

✓ Airlines are liable to pay interest for the period of default in deducting TDS until the travel agents pay their taxes.

✓ Penalty proceedings against the airlines under Section 271C of the IT Act are quashed due to “reasonable cause.”

Directions

The Supreme Court directed the Assessing Officer to compute the interest payable by the airlines for the period from the date of default in deducting TDS until the date of payment of income tax by the travel agents. The Assessing Officer was also given the liberty to look into any details that are necessary for completion of this exercise, including verification of whether tax was actually paid by the agents.

Development of Law

The ratio decidendi of this case is that if a principal-agent relationship exists, as defined under Section 182 of the Contract Act, then the definition of “Commission” under Section 194H of the IT Act stands attracted. The Supreme Court clarified that Section 194H covers both direct and indirect payments and that airlines are liable to deduct TDS on the supplementary commission earned by travel agents. This judgment overruled the Bombay High Court’s decision in CIT v. Qatar Airways, establishing a clear legal position on this issue.

Conclusion

The Supreme Court’s judgment in Singapore Airlines vs. CIT (2022) clarified the applicability of Section 194H of the Income Tax Act to supplementary commissions earned by travel agents. The court ruled that airlines are liable to deduct TDS on these commissions, emphasizing the principal-agent relationship between airlines and travel agents. While the airlines were held liable for the TDS, the court provided relief by stating that no recovery of the shortfall in TDS can be made if the travel agents have already paid income tax on the supplementary commission. This judgment provides clarity on the tax obligations of airlines and travel agents in India.