Income Tax Act, 1961: s. 194H – Tax Deduction at the Source on Commission and brokerage – Interpretation of s. 194H – On facts, assessee airlines selling their flight tickets through the travel agents – Arrangement between the airlines and the travel agents governed by Passenger Sales Agency Agreements, wherein agents are entitled for 7% of the Base Fare as the Standard Commission, however, they were at liberty to set a price higher than the Net Fare demanded by the airline and the additional amount that the travel agents charged over and above the Net Fare that was quoted by the airlines as the agent’s own income – Issue pertaining to the characterization of the income earned by the agent besides the Standard Commission of 7% and if this additional portion would be subject to TDS requirements u/s. 194H – High Court held that assessees were required to deduct TDS u/s.194H, on the Supplementary Commission accrued to travel agents entrusted by the assesses to sell airline tickets, as a result of the assessees’ failure to carry out the subtraction of the requisite amount of TDS, they were declared “assessees in default” u/s.201 for not deducting the TDS from the supplementary commission of the travel agent other than the designated standard commission @ 7% and would thus, be subject to payment of interest and penalties u/s. 201(1A) and 271C – On appeal, held: Intentions as manifested in the terms of the contract between the parties indicate the existence of a principalagent relationship as defined u/s.182 of the Contract Act, the definition of ‘Commission’ u/s. 194H stands attracted and the requirement to deduct TDS arises – 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 lability – Accretion of the Supplementary Commission to the travel agents is an accessory to the actual principal-agent relationship under the PSA – Incidental benefit gained by an agent which has a reasonably close nexus with the responsibilities that were entrusted to it by the principal must come under the ambit of the relationship – Thus, the agents additional amount that the travel agents charged over and above the Net Fare comes under the ambit of Supplementary commission is liable for the deduction of TDS – However, the travel agents have already paid income tax on the Supplementary Commission, there can be no further recovery of the shortfall in TDS owed by the assessees – However, interest may be levied u/s. 201(1A) from the date of default by them in terms of failure to deduct TDS till the date of payment of income tax by the travel agents – ss. 201, 201(1A), 271C – Contract Act, 1872 – s.
182. Partly allowing the appeals, the Court
HELD: 1.1 Explanation (i) of Section 194H of the Income Tax Act, 1961 highlights the nature of the legal relationship that exists between two entities for payments between them to qualify as a “commission”. Consequently, the endeavour must be to determine whether the travel agents were “acting on behalf of” the airlines during the process of selling flight tickets. The assessees do not dispute that a principal-agent relationship existed during the payment of the Standard Commission. The point on which the air carriers differ from the Revenue is the purported second part of the transaction i.e. when the tickets were sold to the customer and for which the travel agents earned certain amounts over and above the Net Fare set by the Assessees. [Para 20][20-G-H; 21-A-B]
1.2 On taking a closer look at the Passenger Sales Agency Agreement-PSA, there are numerous portions which crystallize the intentions of the parties when entering into the agreement.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 is 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 actually retains title over the travel documents and is responsible for the actual services provided to the final customer. Furthermore, the airline has the responsibility to provide full and final compensation to the travel agent for the acts it carries out under the PSA. [Para 29, 31][26-F-G]
1.3 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. While assessees had readily accepted the existence of the principal-agent relationship, their consternation had been directed at the so-called second limb of the deal that is exclusively between the agent and the customer. However, the submissions advanced are clearly not supported by the bare wording of the PSA itself. 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. [Para 32][26-H; 27-A-B]
1.4 Section 194H of the IT Act does not distinguish between direct and indirect payments. Both fall under Explanation (i) to the provision in classifying what may be called a “Commission”. Therefore, if the ambit of Section 194H is seen in an expansive manner, 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. Consequently, the contention of the airlines regarding the point of origination for the amounts does not impair the applicability of Section 194H of the IT Act. The next point raised was regarding the practicality and feasibility of making the deductions, regardless of whether Section 194H may, in principle, cover the indirect payment to the travel agent. The assessees have 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 whatsoever regarding how much Supplementary Commission it has drawn for itself. [Para 3436][27-D-E; 28-B-E]
1.5 The mechanics of how the airlines may utilize the Billing and the Settlement Plan-BSP to discern the amounts earned as Supplementary Commission and deduct TDS accordingly is an internal mechanism that facilitates the implementation of Section 194H of the IT Act. Further, 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. A contract of agency does not entail control over the minutiae of the agent’s actions. Such a level of oversight would more closely resemble a master-servant relationship. In a principal-agent relationship, it is sufficient for the latter to be informed of the responsibilities and duties under the contract and certain guidelines on how to satisfy them. An agent undoubtedly retains a sizeable level of discretion on how to achieve the desired results. 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. 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. Apart from this, Clause 7.2 of the PSA sets out that any payments collected by an agent pursuant to sale of air transportation and ancillary services are held in a fiduciary capacity for the Carrier until a proper accounting is made. 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 BSP and properly gauged. The BSP demarcates “Supplementary Commission” under a separate heading. Hence, once the IATA 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 194H would count as income for the agents themselves. It is at this point that settlement is made fully and finally, in line with Clause 7.2 of the PSA. [Para 43-47][31-G-H; 32-B-C; 33-C-E, G-H]
1.6 In any case, given that information regarding the Supplementary Commission was available to the airlines, there is no doubt that the airlines could not have absolved themselves of liabilities under the IT Act attached to the accrual of that additional portion of income by the agent. These amounts were incidental to the transaction by which the flight tickets were sold on behalf of the air carriers and was for their benefit. The old adage that a party to a contract cannot “both approbate and reprobate” is apt for this factual scenario. [Para 50][35-B]
1.7 From the exposition of law on 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, this Court is left unmoved by the submissions of the Assessees. The interpretation of the PSA, through the prism of Section 182 of the Contract Act and Section 194H of the IT Act, provided by the Revenue appears to be the correct position. Thus, the conclusion 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 is upheld. [Para 51][35-C-E]
1.8 If the recipient of income on which TDS has not been deducted, even though it was liable to such deduction under the IT Act, has already included that amount in its income and paid taxes on the same, the Assessee can no longer be proceeded against for recovery of the short fall in TDS. However, it would be open to the Revenue to seek payment of interest under Section 201(1A) for the period between the date of default in deduction of TDS and the date on which the recipient actually paid income tax on the amount for which there had been a shortfall in such deduction. The Counsels for the parties were ad idem on the fact that the travel agents had already paid taxes on the amounts earned by them. The Revenue submitted that the default in payment of TDS could not be excused purely on this ground. However, the decisions in Hindustan Coca Cola’s case and Eli Lilly & Co.’s case clearly bar their ability to pursue the assessee airlines for recovery of the shortfall in TDS and restricts them to imposing interest for the default. In this context, the assessees did not provide with the specifics of when the travel agents paid their taxes on the Supplementary Commission. Furthermore, the CBDT Circular of 29.01.1997, invoked in Hindustan Coca Cola’s case was not placed before this Court either. It would be necessary to fill in these missing details and determine the amount of interest that the assessees are liable to pay before this matter can be closed. Thus, it is deemed appropriate to remand the matter back to the assessing officer to flesh out these points in terms of the interest payments due for the period from the date of default to the date of payment of taxes by the agents. The denouement of the examination of these issues concerns the levy of penalties under Section 271C IT Act. The Assessing Officer had initially directed that penalty proceedings be commenced against the Assessees for the default in subtraction of TDS but this process was put in cold storage while the airlines and the revenue were contesting the primary issue of the applicability of Section 194H before various appellate forums. Section 271C provides for imposition of penalties for failure to adhere to any of the provisions in Chapter XVII-B, which includes Section 194H. This provision must be read with Section 273B which excuses an otherwise defaulting Assessee from levy of penalties under certain circumstances. The ambit of “reasonable cause” under Section 273B requires scrutiny before the conclusion is reached that the Assessing Officer is required to also calculate potential penalties to be levied against the Assessees. [Para 56-60][37-F-G; 38-A-F; 39-F]
1.9 The liability of an airline to deduct TDS on Supplementary Commission had admittedly not been adjudicated upon by this Court when the controversy first arose in AY 200102. While the counsel for the Revenue has notified that various airlines were deducting TDS under Section 194H at that time, this does not necessarily mean that the position of law was settled. Rather, it appears that while one set of air carriers acted under the assumption that the Supplementary Commission would come within the ambit of the provisions of the IT Act, another set held the opposite view. The Assessees belong to the latter category. Furthermore, there were contradictory pronouncements by different High Courts in the ensuing years which clearly highlights the genuine and bona fide legal conundrum that was raised by the prospect of Section 194H being applied to the Supplementary Commission. [Para 61][40-E-G]
1.10 In terms of 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. The realities of how the airline industry functioned during the period in question bolsters the conclusion that it was practical and feasible for the assessees to utilize the information provided by the BSP and the payment machinery employed by the IATA to make a consolidated deduction of TDS from the Supplementary Commission to satisfy their mandatory duties under Chapter XVII-B of the IT Act. [Para 63][41-B-D]
1.11 In light of the consensus between the parties that the travel agents have already paid income tax on the Supplementary Commission, there can be no further recovery of the shortfall in TDS owed by the Assessees. However, interest may be levied under Section 201(1A) of the IT Act. As an epilogue to this aspect of the matter, the Assessing Officer is directed to compute the interest payable by the Assessees for the period from the date of default by them in terms of failure to deduct TDS, till the date of payment of income tax by the travel agents. It would be open to the Assessing Officer to look into any details that are necessary for completion of this exercise, including verification of whether tax was actually paid at all by the agents on the amounts from which TDS was supposed to be subtracted. Given that no documentary evidence was placed, there may be certain anomalies which the Assessing Officer is best positioned to iron out. In the eventuality that any of the agents have not yet paid taxes on the Supplementary Commission, the Revenue would be at liberty to proceed in accordance with law under the IT Act for recover of shortfall in TDS from the airlines. However, the ability to levy penalties against the Assessees in light of Section 273B of the IT Act is limited. While the arguments of the assessees is rejected on merits in terms of their liability under Section 194H of the IT Act, it is held in their favour on the count of the matter having been rendered revenue neutral due to the apparent payment of income taxes on the amounts in question by the travel agents. The Assessing Officer is directed to expeditiously complete the assignment of determining the interest payable in accordance with the guidelines laid down. [Para 64-66][41-E-H; 42-A-C] CIT v. Qatar Airways 2009 SCC OnLine Bom 2179 – disapproved.
Hindustan Coca Cola Beverages Pvt. Ltd. v.
Commissioner of Income Tax (2007) 8 SCC 463 : [2007]
8 SCR 1046; Ahmedabad Stamp Vendors Ass. v. Union of India 2002 SCC OnLine Guj 135; Director, Prasar Bharati v. CIT (2018) 7 SCC 800 : [2018] 3 SCR 287; Lakshminarayan Ram Gopal and Sons Ltd. vs. The Government of Hyderabad (1955) 1 SCR 393; Gordon Woodroffe & Co. v. Sheikh M.A. Majid & Co. [1966] Suppl. SCR 1; Khedut Sahakari Ginning and Pressing Society v. State of Gujarat (1971) 3 SCC 480 : [1972]
1 SCR 714; Bhopal Sugar Industries Ltd. v. STO, Bhopal (1977) 3 SCC 147 : [1977] 3 SCR 578; Around the World Travel and Tours P. Ltd. v. Union of India 2003 SCC OnLine Mad 1027; Qamar Shaffi Tyabji v. The Commissioner, Excess Profits Tax, Hyderabad (1960) 3 SCR 546; Nagubai Ammal & Ors. v. B. Shama Rao & Ors. [1956] 1 SCR 451; Commissioner of Income Tax v. Eli Lilly & Co. (India) (2009) 15 SCC 1 : [2009] 5 SCR 20 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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