Section 194H TDS on Standard & Supplementary commission to travel agents

Supreme Court Changes Tax Relationship Between Airlines And Their Agents

Case Details : Singapore Airlines Ltd. Vs C.I.T (Supreme Court of India); Civil Appeal No. 6964¬6965 of 2015; Dated: 14/11/2022

Section 194H- 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.

The Explanation appended to Section 194H defines the expression “commission or brokerage”. It is an inclusive definition and includes therein 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 assets, valuable Article or thing not being securities.

Facts of the case

1. Travel agents are receiving commission in 2 ways.

i. Standard Commission- 7% commission is paid to travel agent for its services as standard commission based on the price bar set by the IATA (International Air Transport Association).

ii. Supplementary Commission – Additional Amount charged by the travel agent on the net fare is retained by the agent as its own income.

2. The airlines have no control over the actual fare at which the travel agent would sell the tickets. While the ceiling price could not be breached, the agents would be at liberty to set a price lower than the base fare fixed by the IATA, but still higher than the net fare demanded by the airlines itself. Hence the additional amount that the travel agent charged over and above the net fare was quoted by the airlines would be retained by the agent as its own income.

3. Illustration:-

4. With the Introduction of Section 194H Standard Commission directly falls under the ambit of section 194H.

5. the dispute between the Assessee airlines and the Revenue in this case lies in the characterization of the income earned by the agent by way of Supplementary Commission i.e. would be subject to TDS requirements under Section 194H.

Assessee Submitted

• Supplementary commission falls outside the ambit of the principal- agent relationship.
• Supplementary commission goes from the hands of the consumer and into the pockets of the travel agents without any intervention from the assessees and it does not fall under the definition of commission
• They further pointed out that the travel agent acts on its own volition in setting the Actual Fare for which the flight tickets are sold and as a symptom of this, the airline itself has no knowledge regarding how much supplementary commission it has drawn for itself.

Supreme Court Held

• The Supreme Court held that the supplementary commission is an independent transaction and falls under the principal –agent relationship by applying a three-part test:Firstly, Whether the title on tickets passed from airlines to travel agents,Secondly, Whether the sale of tickets was done at the behest of airlines or not Thirdly, Whether the liability of a breach falls on the airline or agent.
• The Supreme court pointed out that flight tickets were sold by the travel agents on behalf of the airlines, the title continued with the airlines, and they indemnified the travel agents for any breach of service.
• The court further noted that the travel agents are providing “agency” services on behalf of the airlines, which are also liable for TDS on the supplementary commission.
• Section 194H does not distinguish between direct and indirect payments as explanation to section 194 H clearly mentions that includes therein any payment received or receivable, directly or indirectly by a person acting on behalf of another person for services rendered
• 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 assessees to avoid their liability

Final Decision

• The ambit of a contract of agency and its resultant effect on the classification of the difference between the Actual Fare and Net Fare as being a “Commission” liable to deduction of TDS.
• The ruling effectively overrules the law laid down by the Bombay high court in the Qatar Airways case and extends the “agency” relationship between airlines and agents until the final sale is made to the passenger.