The Supreme Court while dealing with a civil appeal filed by Singapore Airlines Ltd. against the Commissioner of Income Tax (CIT), Delhi held that for every supplementary commission earned by the travel agents, Section 194H of the Income Tax Act is attracted and the airlines are liable to deduct TDS on the same.

The Court also held that if a relationship between the parties is of principal-agent under the Indian Contract Act, 1872 then the definition of "Commission" under Section 194H of the Income Tax Act, 1961 stands attracted.

The two-judge Bench comprising Justice Surya Kant and Justice M.M. Sundresh observed –

"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 our 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."

The Bench in this context further held –

"Having said this, 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."

In this case, the Delhi High Court allowed an appeal passed by the respondents and held that the appellants i.e., assessees 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. The appellants were declared as "assessees in default" under Section 201 due to failure to carry out the subtraction of the requisite amount of TDS. They were directed to pay the interest and penalties under Sections 201(1A) and 271C.

Senior Advocate C.S. Agarwal appeared for the appellants while Additional Solicitor General Vikramjit Banerjee and Advocate Rupesh Kumar represented the respondents.

Facts of the Case –

The assessment year being 2001-2002, the Revenue sent out notices to the air carriers operating in the country to adhere to the requirements for the deduction of TDS. The Revenue carried out surveys under Section 133A upon suspecting deficiencies on the part of certain airlines regarding their compliance with statutory requirements under the IT Act. The assessee Airlines were allegedly found to have paid their respective travel agents certain amounts following the investigation. Thereafter, successive Assessment Orders were passed holding that the airlines were assessees in default under the IT Act for their failure to deduct TDS from the Supplementary Commission. The demands raised by the Revenue in respect of each of them were confirmed. The Penalty proceedings were directed to be initiated against all the Assessees under Section 271C of the IT Act. The Assessees proceeded to file their respective appeals before the Commissioner of Income Tax (Appeals) against the Assessment Orders.

The CIT (Appeals) passed a common order rejecting the appeals. Hence, the assessees approached the Income Tax Appellate Tribunal (ITAT). The ITAT accepted the contentions of the airlines and set aside the Assessment Order passed against it. The Revenue being aggrieved with the decision of ITAT brought separate appeals before the Delhi High Court. The Court while clubbing together various Income Tax appeals concerning tax liability for the airline industry reversed the findings of the ITAT and restored the Assessment Orders.

The High Court reimposed the tag of "assessee in default" under Section 201 and the levy of interest on short fall of TDS on the assessees. The airlines i.e., assessees being aggrieved by the decision of the High Court moved to the Supreme Court in a batch of appeals.

The central point for the consideration before the Supreme Court was "what amounts to a "Commission" under Section 194H of the IT Act."

The Court while relying upon the cases of Bhopal Sugar Industries Ltd. v. STO, Bhopal (1977) 3 SCC 147 and Gordon Woodroffe & Co. v. Sheikh M.A. Majid & Co. 1966 Supp SCR 1 noted that no contract of sale between two principals was ever in existence between the Assessees and the travel agent.

The Apex Court while agreeing with the High Court held –

"The High Court in the impugned judgment is 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."

The Court further noted that "… if we view the ambit of Section 194H 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 Court while considering the contentions made by the respondent observed –

"Having analysed the rival contentions and keeping in mind the principal-agent relationship between the parties, we find significant merit in the arguments by the Revenue. The mechanics of how the airlines may utilize the 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. … 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. "

The Court in the above context further observed that "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."

The Court also adjudged that "we affirm the conclusion reached by the Delhi 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. As a consequence of our analysis, the view taken by the Bombay High Court in Qatar Airways (Supra) stands overruled."

The Court remanded the matter back to the Assessing Officer to flesh out the 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 Court while quashing the penalty proceedings against the airlines he that "… there is nothing on record to show that the Assessees have not fulfilled the criteria under Section 273B of the IT Act. Though we are not inclined to accept their contentions, there was clearly an arguable and "nascent" legal issue that required resolution by this Court and, hence, there was "reasonable cause" for the air carriers to have not deducted TDS at the relevant period. The logical deduction from this reasoning is that penalty proceedings against the airlines under Section 271C of the IT Act stand quashed."

The Court thereafter concluded –

"In the eventuality that any of the agents have not yet paid taxes on the Supplementary Commission, the Revenue will be at liberty to proceed in accordance with law under the IT Act for recover of shortfall in TDS from the airlines. However, we limit the ability to levy penalties against the Assessees in light of Section 273B of the IT Act. … we hope that closure has been brought to a legal controversy that has persisted for two decades. While we reject the arguments of the Assessees on merits in terms of their liability under Section 194H of the IT Act, we hold 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 above, so as to bring a quietus to the litigation."

Accordingly, the Apex Court partly allowed the appeals and disposed of the pending applications.

Cause Title – Singapore Airlines Ltd. v. C.I.T., Delhi

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Supreme CourtJustice Surya KantJustice MM SundreshIncome Tax ActAirlinesIndian Contract Act

Swasti Chaturvedi