# SINGAPORE AIRLINES LTD v. C.I.T., DELHI

- **Citation:** [2022] 9 S.C.R. 1
- **Court:** Supreme Court of India
- **Decided:** 2022-11-14
- **Case number:** Civil Appeal No. 6964-6965 of 2015
- **Bench:** Surya Kant, M. M. Sundresh
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/singapore-airlines-ltd-v-c-i-t-delhi-36573
- **Pages:** 42

## Headnote

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
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[2022] 9 S.C.R.
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 wit

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[2022] 9 S.C.R. 1
1
SINGAPORE AIRLINES LTD.
v.
C.I.T., DELHI
(Civil Appeal No. 6964-6965 of 2015)
NOVEMBER 14, 2022
[SURYA KANT AND M. M. SUNDRESH, JJ.]
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
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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
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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
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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]
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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
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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
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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
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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.
Case Law Reference
[2007] 8 SCR 1046
referred to
Para 17 (viii)
[2018] 3 SCR 287
referred to
Para 18 (v)
[1955] 1 SCR 393
referred to
Para 22
[1966] Suppl. SCR 1
referred to
Para 23
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[1972] 1 SCR 714
referred to
Para 24
[1977] 3 SCR 578
referred to
Para 25
[1960] 3 SCR 546
referred to
Para 44
[1956] 1 SCR 451
referred to
Para 50
[2009] 5 SCR 20
referred to
Para 55
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 69646965 of 2015.
From the Judgment and Order dated 13.04.2009 of the High Court
of Delhi at New Delhi in ITA No.306 of 2005 and ITA No. 123 of 2006.
With
Civil Appeal Nos. 6966-6967 and 6968 of 2015.
Vikramjit Banerjee, ASG, C. S. Agarwal, Arijit Prasad, Sr. Adv.,
Bhargava V. Desai, Anil Makhija, Ms. Charu Modi, Umashankar,
Jagmohan, Rupesh Kumar, Ms. Gargi Khanna, Shashank Bajpai, Udai
Khanna, Santosh Kumar, Prashant Singh, Sidddhartha Sinha, Tathagat
Sharma, Shivam Singhania, Raman Yadav, Raj Bahadur Yadav,
Mrs. Anil Katiyar, Vishal Kalra, Saumyendra Tomar, Ms. Snigdha
Gautam, Shekhar Prit Jha, Vinay Garg, Advs for the appearing parties.
The Judgment of the Court was delivered by
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
1 "Base Fare"
2 "Net Fare"
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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 vis-à-vis 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.
3 Prior to 01.01.2002, the Standard Commission was paid at the rate of 9%.
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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:
8. This auxiliary amount charged on top of the Net Fare was
portrayed on the BSP as a "Supplementary Commission" in the hands of
the travel agent. Thus, the heart of the dispute between the Assessee
airlines and the Revenue in this case lies in the characterization of the
income earned by the agent besides the Standard Commission of 7%
and whether this additional portion would be subject to TDS requirements
under Section 194H.
B. FACTUAL BACKGROUND
9. This batch of Civil Appeals arises from a judgement passed on
13.04.2009 by the High Court of Delhi whereby the High Court allowed
the appeal by the Respondents/Revenue and held that Appellants/
Assessees were required to deduct TDS under Section 194H of the
4 ''Actual Fare''
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Income Tax Act, 1961 ("IT Act"), on the Supplementary Commission
accrued to travel agents entrusted by the Appellants to sell airline tickets.
As a consequence of the Assessees' failure to carry out the subtraction
of the requisite amount of TDS, they were declared "assessees in default"
under Section 201 and would accordingly be subject to payment of interest
and penalties under Sections 201(1A) and 271C of the IT Act.
10. The relevant Assessment Year is 2001-02. Spurred by the
reintroduction of Section 194H in the IT Act by the Finance Act, 20015,
the Revenue sent out notices to the air carriers operating in the country
to adhere to the requirements for deduction of TDS. Upon suspecting
deficiencies on the part of certain airlines in their compliance with
statutory requirements under the IT Act, the Revenue carried out surveys
under Section 133A of the IT Act.6 Following the investigation, the
Assessee airlines were allegedly found to have paid their respective
travel agents certain amounts as Supplementary Commission on which
the purported TDS that the carriers had failed to deduct was as follows:
5 73. Insertion of a new provision for deduction of tax at source from payments in
the nature of commission or brokerage
73.1 An effective method of widening the tax base is to enlarge the scope of deduction
of income tax at source. Apart from bringing in more persons in the tax net, it also
helps in the reporting of correct income. An item of income which needs to be covered
within the scope of deduction of income tax at source is the income by way of commission
(not being insurance commission referred to in section 194D) and brokerage. The Act
has, therefore, inserted a new section 194H relating to deduction of tax at source from
income by way of commission (not being insurance commission referred to in section
194D) and brokerage.
6[133A. Power of survey.-
(1) Notwithstanding anything contained in any other provision of this Act, an income-tax
authority may enter-
(a) any place within the limits of the area assigned to him, or
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11. The Revenue contended that the travel agents operating on
behalf of the Appellants during AY 2001-02 had accrued the
aforementioned amounts to themselves as Supplementary Commission
on which, as per Section 194H read with Circular No. 619 of 04.12.1991
issued by the Central Board of Direct Taxes ("CBDT"), TDS was to be
deducted by the Assessee airlines. Show Cause notices for the recovery
of the short fall in TDS were sent to each of the air carriers. Subsequently,
successive Assessment Orders were passed holding that the airlines
were assessees in default under Section 201 of the IT Act7 for their
failure to deduct TDS from the Supplementary Commission, and the
demands raised by the Revenue in respect of each of them were
confirmed.
12. Following addition of surcharge, and interest under Section
201(1A), the aggregate amount calculated as being owed to the Revenue
was:
(b) any place occupied by any person in respect of whom he exercises jurisdiction, [or]
[(c) any place in respect of which he is authorised for the purposes of this section by
such income-tax authority, who is assigned the area within which such place is situated
or who exercises jurisdiction in respect of any person occupying such place,]
[at which a business or profession or an activity for charitable purpose is carried on,
whether such place be the principal place or not of such business or profession or of
such activity for charitable purpose, and require any proprietor, trustee, employee or
any other person who may at that time and place be attending in any manner to, or
helping in, the carrying on of such business or profession or such activity for charitable
purpose-]...
7 201. Consequences of failure to deduct or pay.-
[(1) Where any person, including the principal officer of a company,-
(a) who is required to deduct any sum in accordance with the provisions of this Act;
or
(b) referred to in sub-section (1A) of section 192, being an employer, does not deduct,
or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as
required by or under this Act, then, such person, shall, without prejudice to any other
consequences which he may incur, be deemed to be an assessee in default in respect of
such tax...
SINGAPORE AIRLINES LTD. v. C.I.T., DELHI
[SURYA KANT, J.]
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13. 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
Commissioner (Appeals) passed a common order, rejecting the appeals
on merits but directing that any transactions dated prior to 01.06.2001,
the date on which Section 194H came into effect, would be excluded
from the demand for TDS.
14. The Assessees subsequently approached the Income Tax
Appellate Tribunal, Delhi ("ITAT"). In CA No. 6964-6965 of 2015
concerning Singapore Airlines, the ITAT accepted the contentions of the
Assessee and set aside the Assessment Order passed against it, while
holding that:-
(i)
The amount realized by the travel agent over and above
the Net Fare owed to the air carrier is income in its own
hands and is payable by the customer purchasing the ticket
rather than the airline;
(ii)
The "Supplementary Commission", therefore, was income
earned via proceeds from the sale of the tickets, and not a
commission received from the Assessee airline;
(iii)
The airline itself would have no way of knowing the price
at which the travel agent eventually sold the flight tickets;
(iv)
Section 194H referred to "service rendered" as the guiding
principle for determining whether a payment fell within the
ambit of a "Commission". In this case, the amounts earned
by the agent in addition to the Net Fare are not connected
to any service rendered to the Assessee;
(v)
The Revenue had erroneously and baselessly assumed that
the travel agent had, in every dealing, realized the entire
difference between the Net Fare and the IATA Base Fare
and characterized the entire differential as a Supplementary
Commission. Section 194H could not be pressed into
operation on the basis of such surmises and without actual
figures being proved.
15.The ITAT followed the same reasoning and allowed the appeals
by the Assessees in the remaining Civil Appeals. Aggrieved by the
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quashing of the Assessment Orders, the Revenue brought separate
appeals before the Delhi High Court. A Division Bench of the High
Court clubbed together various Income Tax Appeals all of which
concerned tax liability for the airline industry. In the context of the
applicability of Section 194H of the IT Act, the Division Bench reversed
the findings of the ITAT and restored the Assessment Orders. The
relevant part of the High Court judgement may be summerised as follows:-
(i)
The principles to be kept in mind when interpreting the
application of Section 194H of the IT Act are:
a.
The existence of a principal-agent relationship
between the Assessee airlines and the travel agents;
b.
Payments made to the travel agents in the nature of
a commission;
c.
The payments must be in the courseof services
provided for sale or purchase of goods;
d.
The income received by the travel agent from t h e
Assessees may be direct or indirect, given expansive
wording of Section 194H;
e.
The stage at which TDS is to be deducted is when
the amounts are rendered to the accounts of the travel
agents;
(ii)
All the Assessees had accepted that a principal-agent
relationship subsisted between them and the travel agents.
The terms of the PSAs also indicated that the actions of
the agents in procuring customers was done on behalf of
the airlines and not independently;
(iii)
Hence, the additional income garnered by the agents was
inextricably linked with the overall principal-agent
relationship and the responsibilities that they were entrusted
with by the Assessees;
(iv)
There was no transfer in terms of title in the tickets and
they remained the property of the airline companies
throughout the transaction;
(v)
The Assessees were only required to make the deductions
under Section 194H of the IT Act when the total amounts
SINGAPORE AIRLINES LTD. v. C.I.T., DELHI
[SURYA KANT, J.]
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were accumulated by the BSA.
16. The High Court reimposed the tag of "assessee in default"
under Section 201 and the levy of interest on short fall of TDS under
Section 201(1A) on the Assessees.8 The aggrieved Assessees are now
before this Court in this batch of appeals.
C. SUBMISSIONS
17. Mr. C.S. Agarwal, learned Senior Counsel, appearing for the
Assessees in CA Nos. 6964-6965 of 2015, and Nos. 6966-6967 of 2015,
has vehemently urged us to appreciate the incorrectness of the impugned
judgment, on the following grounds:-
(i)
After the tickets are provided to the travel agent to sell, the
Assessees no longer have any control over the price at which
the agent finally sells them. Thus, the Supplementary
Commission that accrues to the travel agent is due to
dealings between the agent and the customer. The airline
is not involved in this leg of the transaction;
(ii)
There are two separate transactions via two distinct legal
relationships that are spawned during the process of selling
the tickets. The first is between the air carrier and the travel
agent for which the Standard Commission is paid. The second
relationship is between the agent and the customer in course
of which the agent attempts to sell the ticket for the highest
price possible to maximize its income;
(iii)
The airline is oblivious to the final price at which the agent
sells the travel documents to the customer. The portion in
addition to the Net Fare which the agent retains is not paid
by the airline at all but is a payment to the agent directly
8 201. Consequences of failure to deduct or pay.-
[(1A) Without prejudice to the provisions of sub-section (1), if any such person,
principal officer or company as is referred to in that sub-section does not deduct the
whole or any part of the tax or after deducting fails to pay the tax as required by or
under this Act, he or it shall be liable to pay simple interest,-
(i) at one per cent for every month or part of a month on the amount of such tax from
the date on which such tax was deductible to the date on which such tax is deducted; and
(ii) at one and one-half per cent for every month or part of a month on the amount of
such tax from the date on which such tax was deducted to the date on which such tax is
actually paid, and such interest shall be paid before furnishing the statement in
accordance with the provisions of subsection (3) of section 200...
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by the purchaser of the ticket. Hence, the question of
deducting TDS cannot feasibly arise as there is no payment
by the Assessee to begin with. Reliance was placed on a
decision of the Bombay High Court in CIT v. Qatar
Airways.9
(iv)
The High Court has made various factual errors in terms
of how the industry functions:-
a. The PSA is signed by the IATA on behalf of the airlines
and not by the airline itself, as stated by the Division
Bench;
b. The High Court opined that the Assessees would have
access to information regarding the price at which the
travel agent sells the tickets via the BSP. However, the
High Court failed to note that the BSP is under the control
of the IATA which aggregates the amounts and sends
the final bill to the airline at fixed times, rather than after
each transaction between the agent and the customer;
c. The High Court has failed to consider the PSA which
clearly does not govern the dealings between the agent
and the customer. Section 211 of the Contract Act, 1872,
requires agents to act in accordance with their duties
and obligations under the relevant agreement.10 However,
if the PSA itself does not address certain aspects of the
agent's functioning, these facets cannot fall under the
ambit of the principal-agent relationship, as defined under
Section 182 of the Contract Act;
(v)
Section 194H of the IT Act refers to a "Commission" as
being payment in the course of "services rendered". In the
second segment of the transaction, there is evidently no
service being provided by the agent to the Assessee;
92009 SCC Online Bom 2179
10 211. Agent's duty in conducting principal's business.-
An agent is bound to conduct the business of his principal according to the directions
given by the principal, or, in the absence of any such directions, according to the
custom which prevails in doing business of the same kind at the place where the agent
conducts such business. When the agent acts otherwise, if any loss be sustained, he
must make it good to his principal, and if any profit accrues, he must account for it.
SINGAPORE AIRLINES LTD. v. C.I.T., DELHI
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(vi)
The usage of the "Supplementary Commission"
nomenclature by the BSP when aggregating the amounts
involved in the transaction is of no legal consequence as
this terminology is employed purely for convenience. This
does not cloak the amount earned by the agent from the
customer as a "Commission" within the meaning of Section
194H;
(vii)
The actions undertaken by the agents are of their own accord
and do not fall under the terms of the PSA. Such a scenario
is most appropriately characterized as an agent acting on
his own account without the knowledge of the principal under
Section 216 of the Contract Act.
(viii) The travel agents had already filed tax returns which were
inclusive of the amounts earned by them from the sale of
tickets over and above the Net Fare. Hence, income tax
had already been imposed on this additional portion of
income and the matter was revenue neutral. Consequently,
no TDS was liable to be deducted at this stage as it would
be akin to taxing the same amount twice. A judgement of
this Court in Hindustan Coca Cola Beverages Pvt. Ltd.
v. Commissioner of Income Tax11 was cited in this regard.
Learned Counsel appearing for the Assessee in CA No. 6968 of
2015 broadly adopted the submissions made by learned Senior Counsel,
Mr. Agarwal, in full.
18. On the Revenue's side, we have benefitted from the able
assistance of Mr. Vikramjit Banerjee, learned Additional Solicitor General,
as well as learned Counsel, Mr. Rupesh Kumar. They rebuffed the
contentions of the Assessees in the following terms:
(i)
The distinction that the Assessees have attempted to draw
between the two purported legs of the ticket selling process
is artificial and irrelevant. The overall relationship that exists
between the airline and the travel agents is that of
principal-agent, and having admitted this position before the
High Court, no contrary stands were possible at this stage;
11 (2007) 8 SCC 463
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(ii)
The PSAs between the Assessees and the travel agents
clearly showed that every activity carried out by the latter
in terms of selling the tickets was on behalf of the air carrier,
further cementing the principal-agent equation;
(iii)
At no point did title in the tickets pass from the airline to the
agents to transform the relationship into one between two
principals. The distinction between a principal-agent
relationship, and that between two principals, in the context
of Section 194H was expounded upon by the Gujarat High
Court in Ahmedabad Stamp Vendors Ass. v.