Supreme Court: In an appeal filed by Singapore airlines against the judgment passed by the Delhi High Court holding that the airlines is required to deduct tax at source (‘TDS’) under Section 194-H of the Income Tax Act, 1961 (‘IT Act’), on the supplementary commission accrued to travel agents by the airlines to sell airline tickets, the division bench of Surya Kant* and MM Sundresh, JJ. held that 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 194-H of the IT Act stands attracted and the requirement to deduct TDS arises. Further, it overruled Commissioner of Income-Tax v. Qatar Airways, 2009 SCC OnLine Bom 2179.
The question that arises for consideration pertains to the interpretation of Section 194-H of the Income Tax Act, 1961 (‘IT Act’) as introduced by the Finance Act, 2001 that requires deduction of tax at source (‘TDS’) at 10% plus surcharge from payments falling under the definition of “Commission” or “Brokerage” under the provision. The Court interpreted the term “commission” under Section 194-H IT Act and said that Explanation (i) of Section 194-H highlights the nature of the legal relationship that exists between two entities for payments between them to qualify as a “commission”, stating that “commission or brokerage” includes 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 while buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities.
Due to the interlinked nature of Section 194-H of the IT Act and Section 182 of the Contract Act, the Court examined both the provisions and catena of cases elaborating on the characteristics of a contract of agency, and said that the following indicators can be used to determine whether there is some merit in the assessees’ contentions on the bifurcation of the transaction into two parts:
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Firstly, whether title in the tickets, at any point, passed from the assessees to the travel agents.
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Secondly, whether the sale of the flight documents by the latter was done under the pretext of them being the property of the agents themselves, or of the airlines.
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Thirdly, whether the airline or the travel agent was liable for any breaches of the terms and conditions in the tickets, and for failure to fulfil the contractual rights that accrued to the consumer who purchased them.
The Court, after examining the Passenger Sales Agency Agreements (‘PSA’), said that several elements of a contract of agency are satisfied by these clauses, and the recitals. Every action taken by the travel agents is on behalf of the air carriers and the services they provide are with express prior authorization. The airline also indemnifies the travel agent for any shortcoming in the actual services of transportation, and any connected ancillary services, as it is the former that retains title over the travel documents and is responsible for the actual services provided to the final customer. Further, the airline has the responsibility to provide full and final compensation to the travel agent for the acts it carries out under the PSA.
The Court said that the contract is of agency that does not distinguish in terms of stages of the transaction involved in selling flight tickets. Thus, it was held that the High Court was correct in its holding that the arrangement between the agent and the purchaser is not a separate and distinct arrangement but is merely part of the package of activities undertaken pursuant to the PSA.
Moreover, the Court viewed the ambit of Section 194-H in an expansive manner and said that the factum of the exact source of the payment would be of no consequence to the requirement of deducting TDS. Even on an indirect payment stemming from the consumer, the assessees would remain liable under the IT Act. Thus, the contention of the airlines regarding the point of origination for the amounts does not impair the applicability of Section 194-H of the IT Act.
The Court said that 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. A contract of agency permits an agent to carry out acts on its own volition provided it does not contravene the purpose of the agency contract and the interests of the principal. The accretion of the supplementary commission to the travel agents is an accessory to the actual principal agent relationship under the PSA and 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. Further, 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 Court took note of Clause 7.2 of the PSA and said that notwithstanding the lack of control over the actual fare, the contract definitively states that “all monies” received by the agent are held as the property of the air carrier until they have been recorded on the Billing and Settlement Plan (‘BSP’) and properly gauged. Further, the BSP demarcates “supplementary commission” under a separate heading. Hence, once the International Air Transport Association makes the payment of the accumulated amounts shown on the BSP, it would be feasible for the assessees to deduct TDS on this additional income earned by the agent, and whatever remains after the subtraction under Section 194-H would count as income for the agents themselves.
The Court said that the interpretation of the PSA through the prism of Section 182 of the Contract Act and Section 194-H of the IT Act, provided by the Revenue appears to be the correct position. Thus, it affirmed the conclusion reached by the High Court in the impugned judgment on the nature of the relationship between the airlines and the travel agents, and the liability that is attached to deduction of TDS on the supplementary commission.
Moreover, the Court while answering whether the matter has been rendered revenue neutral, held that the matter has been rendered revenue neutral due to the apparent payment of income taxes on the amounts in question by the travel agents and directed the assessing officer to expeditiously complete the assignment of determining the interest payable in accordance with the guidelines laid down.
[Singapore Airlines Ltd. v. CIT, 2022 SCC OnLine SC 1588, decided on 14-11-2022]
*Judgment by: Justice Surya Kant;
*Apoorva Goel, Editorial Assistant has reported this brief.