Singapore Airlines Ltd. Vs CIT (Supreme Court)
Whether an airline is responsible for deducting tax at source in respect of supplementary commission which an agent is paid on the difference between the actual fare and the net fare- Section 194H of Income-tax Act, 1961 analyses including whether liability to deduct when the tax can be fastened when admittedly the deducted has discharged the tax liability.
The Supreme Court in this case was dealing with a case where the department saddled the airline with liability to deduct tax at source in respect of the amount which was over and above the actual fare which was charged to the consumer by the agent and the net fare which was the fare set by the airline for the travel agent.
The airline was already deducting tax on the commission paid on the net fare. What was disputed by the airline was the commission that was kept by the travel agent when he sold the ticket at a higher price over and above the net fare.
It was argued that there was no liability to deduct tax on such difference since this portion of the payment was from the consumer to the agent and not from airline to the agent.
The Supreme Court dealt with at length the principles of contract act in relation to the agent and principal and accepting the arguments of revenue that the ticket remained the property of the airline although and the lack of control that the airlines have over the Actual Fare charged by the travel agents over and above the Net Fare, cannot form the legal basis for the Assessee’s to avoid their liability.
The accretion of the Supplementary Commission to the travel agents is an accessory to the actual principal agent relationship under the PSA and thus the airline was liable to deduct tad’s. In such a commercial arrangement, the benefit gained by an agent is incidental to and has a reasonably close nexus with the responsibilities that were entrusted to it by the principal air carrier. Such incidental benefits or actions must come under the ambit of the relationship, subject to any express limitations articulated in the contract itself or under the Contract Act.
the application of Section 194H of the IT Act to the Supplementary Commission amounts earned by the travel agent is unequivocally in favour of the Revenue. Section 194H is to be read with Section 182 of the Contract Act. If a relationship between two parties as culled out from their intentions as manifested in the terms of the contract between them indicate the existence of a principal agent relationship as defined under Section 182 of the Contract Act, then the definition of “Commission” under Section 194H of the IT Act stands attracted and the requirement to deduct TDS arises.
However, as a matter of relief to the agents, the court relying on the decision in the case of Hindustan Coca Cola Beverage Pvt. Ltd. v. Commissioner of Income Tax held that as the agents have already discharged the tax liability, they should not be saddled with fresh tds liability and can be asked to pay only interest. Moreover, penalty was also held to not leviable in view of reasonable cause u/s 273B.
This judgments will have ramifications in respect of tax deductions u/s 194H in other industry also.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
Surya Kant, J:
1. The question that arises for our consideration pertains to the interpretation of Section 194H of the Income Tax Act, 1961 (“IT Act”) as introduced by the Finance Act, 2001, with effect from 01.04.2000. The provision requires deduction of tax at source (“TDS”) at 10% plus surcharge from payments falling under the definition of “Commission” or “Brokerage” under the Section.
A. THE AIRLINE INDUSTRY
2. Within the aviation industry during the relevant period, the base fare1 for air tickets was set by the International Air Transport Association (“IATA”) with discretion provided to airlines to sell their tickets for a net fare lower than the Base Fare, but not higher.2 In essence, the IATA set the ceiling price for how much airlines may charge their customers. This formed part of the IATA’s overall responsibility of overseeing the functioning of the industry.
3. The air carriers were also required to provide a fare list to the Director General of Civil Aviation (“DGCA”) for approval. The prices that were rubber stamped by the DGCA may be equivalent to or lower than the Base Fare set by the IATA. Alongside setting the standard pecuniary amount for tickets, the IATA would provide blank tickets to the travel agents acting on behalf of the airlines to market and sell the travel documents. The arrangement between the airlines and the travel agents would be governed by Passenger Sales Agency Agreements (“PSA”). The draft templates for these contracts are drawn up by the IATA and entered into by various travel agents operating in the sector, with the IATA which signs on behalf of the air carriers. The PSAs set the conditions under which the travel agents carry out the aforementioned sale of flight tickets, along with other ancillary services, and the remuneration they are entitled to for these activities.
4. Once these tickets were sold, a 7% commission designated by the IATA would, be paid to the travel agent for its services as “Standard Commission” based on the price bar set by the IATA.3 This would be independent of the Net Fare quoted by the air carriers themselves. The 7% commission on the Base Fare consequently triggered a requirement on the part of the airline to deduct TDS under Section 194H at 10% plus surcharge. The details of the amounts at which the tickets were sold would be transmitted by the travel agents to an organization known as the Billing and Settlement Plan (“BSP”). The BSP functions under the aegis of the IATA and manages inter alia logistics visàvis payments and acts as a forum for the agents and airlines to examine details pertaining to the sale of flight tickets.
5. The BSP stores a plethora of financial information including the net amount payable to the aviation companies, discounts, and commission payable to the agents. The system consolidated the amounts owed by each agent to various airlines following the sale of the tickets by the former. The aggregate amount accumulated in the BSP would then be transmitted to each air carrier by the IATA in a single financial transaction to smoothen the process and prevent the need to make multiple payments over time.
6. Within this framework, the airlines would have no control over the Actual Fare at which the travel agents would sell the tickets.4 While the ceiling price could not be breached, as mentioned earlier, the agents would be at liberty to set a price lower than the Base Fare pegged by the IATA, but still higher than the Net Fare demanded by the airline itself. Hence, the additional amount that the travel agents charged over and above the Net Fare that was quoted by the airline would be retained by the agent as its own income.
7. An illustration of how such a transaction would be carried out and the monetary gains made by the respective parties is shown below:
