SINGAPORE AIRLINES LTD. versus C.I.T., DELHI on 14 November 2022

[2022] 9 S.C.R. 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 Sourceon Commission and brokerage – Interpretation of s. 194H – Onfacts, assessee airlines selling their flight tickets through the travelagents – Arrangement between the airlines and the travel agentsgoverned by Passenger Sales Agency Agreements, wherein agentsare entitled for 7% of the Base Fare as the Standard Commission,however, they were at liberty to set a price higher than the Net Faredemanded by the airline and the additional amount that the travelagents charged over and above the Net Fare that was quoted by theairlines as the agent’s own income – Issue pertaining to thecharacterization of the income earned by the agent besides theStandard Commission of 7% and if this additional portion would besubject to TDS requirements u/s. 194H – High Court held thatassessees were required to deduct TDS u/s.194H, on theSupplementary Commission accrued to travel agents entrusted bythe assesses to sell airline tickets, as a result of the assessees’ failureto carry out the subtraction of the requisite amount of TDS, theywere declared “assessees in default” u/s.201 for not deducting theTDS from the supplementary commission of the travel agent otherthan the designated standard commission @ 7% and would thus,be subject to payment of interest and penalties u/s. 201(1A) and271C – On appeal, held: Intentions as manifested in the terms ofthe contract between the parties indicate the existence of a principal-agent relationship as defined u/s.182 of the Contract Act, thedefinition of ‘Commission’ u/s. 194H stands attracted and therequirement to deduct TDS arises – Lack of control that the airlineshave over the Actual Fare charged by the travel agents over andabove the Net Fare, cannot form the legal basis for the Assessees toavoid their lability – Accretion of the Supplementary Commission tothe travel agents is an accessory to the actual principal-agentrelationship under the PSA – Incidental benefit gained by an agent

A

B

C

DEF

GH

Awhich has a reasonably close nexus with the responsibilities thatwere entrusted to it by the principal must come under the ambit ofthe relationship – Thus, the agents additional amount that the travelagents charged over and above the Net Fare comes under the ambitof Supplementary commission is liable for the deduction of TDS –However, the travel agents have already paid income tax on theBSupplementary Commission, there can be no further recovery ofthe shortfall in TDS owed by the assessees – However, interest maybe levied u/s. 201(1A) from the date of default by them in terms offailure to deduct TDS till the date of payment of income tax by thetravel agents – ss. 201, 201(1A), 271C – Contract Act, 1872 – s.C182.

Partly allowing the appeals, the Court

Conclusion

Partly allowing the appeals, the Court

HELD: 1.1 Explanation (i) of Section 194H of the IncomeTax Act, 1961 highlights the nature of the legal relationship thatexists between two entities for payments between them to qualifyDas a “commission”. Consequently, the endeavour must be todetermine whether the travel agents were “acting on behalf of”the airlines during the process of selling flight tickets. Theassessees do not dispute that a principal-agent relationshipexisted during the payment of the Standard Commission. TheEpoint on which the air carriers differ from the Revenue is thepurported second part of the transaction i.e. when the ticketswere sold to the customer and for which the travel agents earnedcertain amounts over and above the Net Fare set by theAssessees. [Para 20][20-G-H; 21-A-B]F1.2 On taking a closer look at the Passenger Sales AgencyAgreement-PSA, there are numerous portions which crystallizethe intentions of the parties when entering into theagreement.Several elements of a contract of agency are satisfiedby these clauses, and the recitals. Every action taken by the travelagents is on behalf of the air carriers and the services they provideGis with express prior authorization. The airline also indemnifiesthe travel agent for any shortcoming in the actual services oftransportation, and any connected ancillary services, as it is theformer that actually retains title over the travel documents andis responsible for the actual services provided to the finalHcustomer. Furthermore, the airline has the responsibility to provide full and final compensation to the travel agent for theacts it carries out under the PSA. [Para 29, 31][26-F-G]

1.3 The irresistible conclusion is that the contract is one ofagency that does not distinguish in terms of stages of thetransaction involved in selling flight tickets. While assessees hadreadily accepted the existence of the principal-agent relationship,their consternation had been directed at the so-called secondlimb of the deal that is exclusively between the agent and thecustomer. However, the submissions advanced are clearly notsupported by the bare wording of the PSA itself. The High Courtwas correct in its holding that the arrangement between the agentand the purchaser is not a separate and distinct arrangement butis merely part of the package of activities undertaken pursuantto the PSA. [Para 32][26-H; 27-A-B]

1.4 Section 194H of the IT Act does not distinguish betweendirect and indirect payments. Both fall under Explanation (i) tothe provision in classifying what may be called a “Commission”.Therefore, if the ambit of Section 194H is seen in an expansivemanner, the factum of the exact source of the payment would beof no consequence to the requirement of deducting TDS. Evenon an indirect payment stemming from the consumer, theassessees would remain liable under the IT Act. Consequently,the contention of the airlines regarding the point of originationfor the amounts does not impair the applicability of Section 194Hof the IT Act. The next point raised was regarding the practicalityand feasibility of making the deductions, regardless of whetherSection 194H may, in principle, cover the indirect payment tothe travel agent. The assessees have pointed out that the travelagent acts on its own volition in setting the Actual Fare for whichthe flight tickets are sold, and as a symptom of this, the airlineitself has no knowledge whatsoever regarding how muchSupplementary Commission it has drawn for itself. [Para 34-36][27-D-E; 28-B-E]

1.5 The mechanics of how the airlines may utilize the Billingand the Settlement Plan-BSP to discern the amounts earned asSupplementary Commission and deduct TDS accordingly is aninternal mechanism that facilitates the implementation of Section AB

C

D

EF

G

A194H of the IT Act. Further, the lack of control that the airlineshave over the Actual Fare charged by the travel agents over andabove the Net Fare, cannot form the legal basis for the Assesseesto avoid their liability. A contract of agency does not entail controlover the minutiae of the agent’s actions. Such a level of oversightwould more closely resemble a master-servant relationship. In aBprincipal-agent relationship, it is sufficient for the latter to beinformed of the responsibilities and duties under the contractand certain guidelines on how to satisfy them. An agentundoubtedly retains a sizeable level of discretion on how toachieve the desired results. The fact that the travel agent hasCdiscretion to set an Actual Fare which is above the Net Fare hasno effect on the nature of the relationship between the parties. Acontract of agency permits an agent to carry out acts on its ownvolition provided it does not contravene the purpose of the agencycontract and the interests of the principal. The accretion of theSupplementary Commission to the travel agents is an accessoryDto the actual principal-agent relationship under the PSA. In sucha commercial arrangement, the benefit gained by an agent isincidental to and has a reasonably close nexus with theresponsibilities that were entrusted to it by the principal aircarrier. Such incidental benefits or actions must come under theEambit of the relationship, subject to any express limitationsarticulated in the contract itself or under the Contract Act. Apartfrom this, Clause 7.2 of the PSA sets out that any paymentscollected by an agent pursuant to sale of air transportation andancillary services are held in a fiduciary capacity for the Carrieruntil a proper accounting is made. Notwithstanding the lack ofFcontrol over the Actual Fare, the contract definitively states that“all monies” received by the agent are held as the property ofthe air carrier until they have been recorded on the BSP andproperly gauged. The BSP demarcates “SupplementaryCommission” under a separate heading. Hence, once the IATAGmakes the payment of the accumulated amounts shown on theBSP, it would be feasible for the Assessees to deduct TDS onthis additional income earned by the agent, and whatever remainsafter the subtraction under Section 194H would count as incomefor the agents themselves. It is at this point that settlement ismade fully and finally, in line with Clause 7.2 of the PSA. [ParaH43-47][31-G-H; 32-B-C; 33-C-E, G-H]

1.6 In any case, given that information regarding theSupplementary Commission was available to the airlines, thereis no doubt that the airlines could not have absolved themselvesof liabilities under the IT Act attached to the accrual of thatadditional portion of income by the agent. These amounts wereincidental to the transaction by which the flight tickets were soldon behalf of the air carriers and was for their benefit. The oldadage that a party to a contract cannot “both approbate andreprobate” is apt for this factual scenario. [Para 50][35-B]

1.7 From the exposition of law on the ambit of a contract ofagency and its resultant effect on the classification of the differencebetween the Actual Fare and Net Fare as being a “Commission”liable to deduction of TDS, this Court is left unmoved by thesubmissions of the Assessees. The interpretation of the PSA,through the prism of Section 182 of the Contract Act and Section194H of the IT Act, provided by the Revenue appears to be thecorrect position. Thus, the conclusion by the High Court in theimpugned judgment on the nature of the relationship betweenthe airlines and the travel agents, and the liability that is attachedto 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 beendeducted, even though it was liable to such deduction under theIT Act, has already included that amount in its income and paidtaxes on the same, the Assessee can no longer be proceededagainst for recovery of the short fall in TDS. However, it wouldbe open to the Revenue to seek payment of interest under Section201(1A) for the period between the date of default in deductionof TDS and the date on which the recipient actually paid incometax on the amount for which there had been a shortfall in suchdeduction. The Counsels for the parties were ad idem on the factthat the travel agents had already paid taxes on the amountsearned by them. The Revenue submitted that the default inpayment of TDS could not be excused purely on this ground.However, the decisions in Hindustan Coca Cola’s case and EliLilly & Co.’s case clearly bar their ability to pursue the assesseeairlines for recovery of the shortfall in TDS and restricts them to AB

C

D

E

F

G

H

Aimposing interest for the default. In this context, the assesseesdid not provide with the specifics of when the travel agents paidtheir taxes on the Supplementary Commission. Furthermore, theCBDT Circular of 29.01.1997, invoked in Hindustan Coca Cola’scase was not placed before this Court either. It would benecessary to fill in these missing details and determine theBamount of interest that the assessees are liable to pay beforethis matter can be closed. Thus, it is deemed appropriate toremand the matter back to the assessing officer to flesh out thesepoints in terms of the interest payments due for the period fromthe date of default to the date of payment of taxes by the agents.CThe denouement of the examination of these issues concernsthe levy of penalties under Section 271C IT Act. The AssessingOfficer had initially directed that penalty proceedings becommenced against the Assessees for the default in subtractionof TDS but this process was put in cold storage while the airlinesand the revenue were contesting the primary issue of theDapplicability of Section 194H before various appellate forums.Section 271C provides for imposition of penalties for failure toadhere to any of the provisions in Chapter XVII-B, which includesSection 194H. This provision must be read with Section 273Bwhich excuses an otherwise defaulting Assessee from levy ofEpenalties under certain circumstances. The ambit of “reasonablecause” under Section 273B requires scrutiny before theconclusion is reached that the Assessing Officer is required toalso calculate potential penalties to be levied against theAssessees. [Para 56-60][37-F-G; 38-A-F; 39-F]F1.9 The liability of an airline to deduct TDS onSupplementary Commission had admittedly not been adjudicatedupon by this Court when the controversy first arose in AY 2001-02. While the counsel for the Revenue has notified that variousairlines were deducting TDS under Section 194H at that time, this does not necessarily mean that the position of law was settled.GRather, it appears that while one set of air carriers acted underthe assumption that the Supplementary Commission would comewithin the ambit of the provisions of the IT Act, another set heldthe opposite view. The Assessees belong to the latter category.Furthermore, there were contradictory pronouncements byHdifferent High Courts in the ensuing years which clearly highlights the genuine and bona fide legal conundrum that was raised bythe prospect of Section 194H being applied to the SupplementaryCommission. [Para 61][40-E-G]

1.10 In terms of the application of Section 194H of the ITAct to the Supplementary Commission amounts earned by thetravel agent is unequivocally in favour of the Revenue. Section194H is to be read with Section 182 of the Contract Act. If arelationship between two parties as culled out from theirintentions as manifested in the terms of the contract betweenthem indicate the existence of a principal-agent relationship asdefined under Section 182 of the Contract Act, then the definitionof “Commission” under Section 194H of the IT Act standsattracted and the requirement to deduct TDS arises. The realitiesof how the airline industry functioned during the period in questionbolsters the conclusion that it was practical and feasible for theassessees to utilize the information provided by the BSP and thepayment machinery employed by the IATA to make a consolidateddeduction of TDS from the Supplementary Commission to satisfytheir mandatory duties under Chapter XVII-B of the IT Act. [Para63][41-B-D]

1.11 In light of the consensus between the parties that thetravel agents have already paid income tax on the SupplementaryCommission, there can be no further recovery of the shortfall inTDS owed by the Assessees. However, interest may be leviedunder Section 201(1A) of the IT Act. As an epilogue to this aspectof the matter, the Assessing Officer is directed to compute theinterest payable by the Assessees for the period from the date ofdefault by them in terms of failure to deduct TDS, till the date ofpayment of income tax by the travel agents. It would be open tothe Assessing Officer to look into any details that are necessaryfor completion of this exercise, including verification of whethertax was actually paid at all by the agents on the amounts fromwhich TDS was supposed to be subtracted. Given that nodocumentary evidence was placed, there may be certain anomalieswhich the Assessing Officer is best positioned to iron out. In theeventuality that any of the agents have not yet paid taxes on theSupplementary Commission, the Revenue would be at liberty toproceed in accordance with law under the IT Act for recover of ABC

D

EF

G

H

Ashortfall in TDS from the airlines. However, the ability to levypenalties against the Assessees in light of Section 273B of theIT Act is limited. While the arguments of the assessees is rejectedon merits in terms of their liability under Section 194H of the ITAct, it is held in their favour on the count of the matter havingbeen rendered revenue neutral due to the apparent payment ofBincome taxes on the amounts in question by the travel agents.The Assessing Officer is directed to expeditiously complete theassignment of determining the interest payable in accordancewith the guidelines laid down. [Para 64-66][41-E-H; 42-A-C]

CIT v. Qatar Airways 2009 SCC OnLine Bom 2179 –Cdisapproved.

Hindustan Coca Cola Beverages Pvt. Ltd. v.Commissioner of Income Tax (2007) 8 SCC 463 : [2007]8 SCR 1046; Ahmedabad Stamp Vendors Ass. v. Unionof India 2002 SCC OnLine Guj 135; Director, PrasarDBharati v. CIT (2018) 7 SCC 800 : [2018] 3 SCR 287;Lakshminarayan Ram Gopal and Sons Ltd. vs. TheGovernment of Hyderabad (1955) 1 SCR 393; GordonWoodroffe & Co. v. Sheikh M.A. Majid & Co. [1966]Suppl. SCR 1; Khedut Sahakari Ginning and PressingESociety 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 theWorld Travel and Tours P. Ltd. v. Union of India 2003SCC OnLine Mad 1027; Qamar Shaffi Tyabji v. TheCommissioner, Excess Profits Tax, Hyderabad (1960) 3FSCR 546; Nagubai Ammal & Ors. v. B. Shama Rao &Ors. [1956] 1 SCR 451; Commissioner of Income Taxv. Eli Lilly & Co. (India) (2009) 15 SCC 1 : [2009] 5SCR 20 – referred to.

Case Law Reference

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 6964-6965 of 2015.

From the Judgment and Order dated 13.04.2009 of the High Courtof Delhi at New Delhi in ITA No.306 of 2005 and ITA No. 123 of 2006.

C

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, UdaiKhanna, Santosh Kumar, Prashant Singh, Sidddhartha Sinha, TathagatSharma, Shivam Singhania, Raman Yadav, Raj Bahadur Yadav,Mrs. Anil Katiyar, Vishal Kalra, Saumyendra Tomar, Ms. SnigdhaGautam, Shekhar Prit Jha, Vinay Garg, Advs for the appearing parties.

D

E

The Judgment of the Court was delivered by SURYA KANT, J.

1. The question that arises for our consideration pertains to theinterpretation 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% plussurcharge from payments falling under the definition of “Commission”or “Brokerage” under the Section.

F

A. THEAIRLINEINDUSTRY

2. Within the aviation industry during the relevant period, the basefare[1] for air tickets was set by the International Air Transport Association(“IATA”) with discretion provided to airlines to sell their tickets for a netfare lower than the Base Fare, but not higher.[2] In essence, the IATA set G

1 “Base Fare”

2 “Net Fare”

H

Athe ceiling price for how much airlines may charge their customers.This formed part of the IATA’s overall responsibility of overseeing thefunctioning of the industry.

3. The air carriers were also required to provide a fare list to theDirector General of Civil Aviation (“DGCA”) for approval. The pricesBthat were rubber stamped by the DGCA may be equivalent to or lowerthan the Base Fare set by the IATA. Alongside setting the standardpecuniary amount for tickets, the IATA would provide blank tickets tothe travel agents acting on behalf of the airlines to market and sell thetravel documents. The arrangement between the airlines and the travelagents would be governed by Passenger Sales Agency AgreementsC(“PSA”). The draft templates for these contracts are drawn up by theIATA and entered into by various travel agents operating in the sector,with the IATA which signs on behalf of the air carriers. The PSAs setthe conditions under which the travel agents carry out the aforementionedsale of flight tickets, along with other ancillary services, and theDremuneration they are entitled to for these activities.

4. Once these tickets were sold, a 7% commission designated bythe IATA would, be paid to the travel agent for its services as “StandardCommission” based on the price bar set by the IATA.[3] This would beindependent of the Net Fare quoted by the air carriers themselves. TheE7% commission on the Base Fare consequently triggered a requirementon the part of the airline to deduct TDS under Section 194H at 10% plussurcharge. The details of the amounts at which the tickets were soldwould be transmitted by the travel agents to an organization known asthe Billing and Settlement Plan (“BSP”). The BSP functions under theaegis of the IATA and manages inter alia logistics vis-à-vis paymentsFand acts as a forum for the agents and airlines to examine details pertainingto the sale of flight tickets.

5. The BSP stores a plethora of financial information includingthe net amount payable to the aviation companies, discounts, andcommission payable to the agents. The system consolidated the amountsGowed by each agent to various airlines following the sale of the ticketsby the former. The aggregate amount accumulated in the BSP wouldthen be transmitted to each air carrier by the IATA in a single financialtransaction to smoothen the process and prevent the need to make multiplepayments over time.H3 Prior to 01.01.2002, the Standard Commission was paid at the rate of 9%.

6. Within this framework, the airlines would have no control overthe Actual Fare at which the travel agents would sell the tickets.[4] Whilethe ceiling price could not be breached, as mentioned earlier, the agentswould be at liberty to set a price lower than the Base Fare pegged by theIATA, but still higher than the Net Fare demanded by the airline itself.Hence, the additional amount that the travel agents charged over andabove the Net Fare that was quoted by the airline would be retained bythe agent as its own income.

7. An illustration of how such a transaction would be carried outand the monetary gains made by the respective parties is shown below:

8. This auxiliary amount charged on top of the Net Fare wasportrayed on the BSP as a “Supplementary Commission” in the hands ofthe travel agent. Thus, the heart of the dispute between the Assesseeairlines and the Revenue in this case lies in the characterization of theincome earned by the agent besides the Standard Commission of 7%and whether this additional portion would be subject to TDS requirementsunder Section 194H.

B. FACTUALBACKGROUND

9. This batch of Civil Appeals arises from a judgement passed on13.04.2009 by the High Court of Delhi whereby the High Court allowedthe appeal by the Respondents/Revenue and held that Appellants/Assessees were required to deduct TDS under Section 194H of the 4 ‘‘Actual Fare’’

A

B

D

E

F

G

AIncome Tax Act, 1961 (“IT Act”), on the Supplementary Commissionaccrued to travel agents entrusted by the Appellants to sell airline tickets.As a consequence of the Assessees’ failure to carry out the subtractionof the requisite amount of TDS, they were declared “assessees in default”under Section 201 and would accordingly be subject to payment of interestand penalties under Sections 201(1A) and 271C of the IT Act.

B

10. The relevant Assessment Year is 2001-02. Spurred by thereintroduction of Section 194H in the IT Act by the Finance Act, 2001[5],the Revenue sent out notices to the air carriers operating in the countryto adhere to the requirements for deduction of TDS. Upon suspectingdeficiencies on the part of certain airlines in their compliance withCstatutory requirements under the IT Act, the Revenue carried out surveysunder Section 133A of the IT Act.[6] Following the investigation, theAssessee airlines were allegedly found to have paid their respectivetravel agents certain amounts as Supplementary Commission on whichthe purported TDS that the carriers had failed to deduct was as follows:

D

E

F5 73. Insertion of a new provision for deduction of tax at source from payments inthe nature of commission or brokerage 73.1 An effective method of widening the tax base is to enlarge the scope of deductionof income tax at source. Apart from bringing in more persons in the tax net, it alsohelps in the reporting of correct income. An item of income which needs to be coveredwithin the scope of deduction of income tax at source is the income by way of commissionG(not being insurance commission referred to in section 194D) and brokerage. The Acthas, therefore, inserted a new section 194H relating to deduction of tax at source fromincome by way of commission (not being insurance commission referred to in section194D) and brokerage.6[133A. Power of survey.—(1) Notwithstanding anything contained in any other provision of this Act, an income-taxauthority may enter—H(a) any place within the limits of the area assigned to him, or

11. The Revenue contended that the travel agents operating onbehalf of the Appellants during AY 2001-02 had accrued theaforementioned amounts to themselves as Supplementary Commissionon which, as per Section 194H read with Circular No. 619 of 04.12.1991issued by the Central Board of Direct Taxes (“CBDT”), TDS was to bededucted by the Assessee airlines. Show Cause notices for the recoveryof the short fall in TDS were sent to each of the air carriers. Subsequently,successive Assessment Orders were passed holding that the airlineswere assessees in default under Section 201 of the IT Act[7] for theirfailure to deduct TDS from the Supplementary Commission, and thedemands raised by the Revenue in respect of each of them wereconfirmed.

12. Following addition of surcharge, and interest under Section201(1A), the aggregate amount calculated as being owed to the Revenuewas:

(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 bysuch income-tax authority, who is assigned the area within which such place is situatedor 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 ofsuch activity for charitable purpose, and require any proprietor, trustee, employee orany other person who may at that time and place be attending in any manner to, orhelping in, the carrying on of such business or profession or such activity for charitablepurpose—]…

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, asrequired by or under this Act, then, such person, shall, without prejudice to any otherconsequences which he may incur, be deemed to be an assessee in default in respect ofsuch tax…

A

B

C

D

E

F

G

H

A13. Penalty proceedings were directed to be initiated against allthe Assessees under Section 271C of the IT Act. The Assesseesproceeded to file their respective appeals before the Commissioner ofIncome Tax (Appeals) against the Assessment Orders. TheCommissioner (Appeals) passed a common order, rejecting the appealson merits but directing that any transactions dated prior to 01.06.2001,Bthe date on which Section 194H came into effect, would be excludedfrom the demand for TDS.

14. The Assessees subsequently approached the Income TaxAppellate Tribunal, Delhi (“ITAT”). In CA No. 6964-6965 of 2015concerning Singapore Airlines, the ITAT accepted the contentions of theCAssessee and set aside the Assessment Order passed against it, whileholding that:-

(i) The amount realized by the travel agent over and abovethe Net Fare owed to the air carrier is income in its ownhands and is payable by the customer purchasing the ticketDrather than the airline;

(ii) The “Supplementary Commission”, therefore, was incomeearned via proceeds from the sale of the tickets, and not acommission received from the Assessee airline; E(iii)The airline itself would have no way of knowing the priceat which the travel agent eventually sold the flight tickets;

(iv) Section 194H referred to “service rendered” as the guidingprinciple for determining whether a payment fell within theambit of a “Commission”. In this case, the amounts earnedFby the agent in addition to the Net Fare are not connectedto any service rendered to the Assessee;

(v) The Revenue had erroneously and baselessly assumed thatthe travel agent had, in every dealing, realized the entiredifference between the Net Fare and the IATA Base Fareand characterized the entire differential as a SupplementaryGCommission. Section 194H could not be pressed intooperation on the basis of such surmises and without actualfigures being proved.

15. The ITAT followed the same reasoning and allowed the appealsby the Assessees in the remaining Civil Appeals. Aggrieved by theH

quashing of the Assessment Orders, the Revenue brought separateappeals before the Delhi High Court. A Division Bench of the HighCourt clubbed together various Income Tax Appeals all of whichconcerned tax liability for the airline industry. In the context of theapplicability of Section 194H of the IT Act, the Division Bench reversedthe findings of the ITAT and restored the Assessment Orders. Therelevant part of the High Court judgement may be summerised as follows:- A

B

(i) The principles to be kept in mind when interpreting theapplication of Section 194H of the IT Act are:

a.The existence of a principal-agent relationshipbetween the Assessee airlines and the travel agents; C

b.Payments made to the travel agents in the nature ofa commission;

c.The payments must be in the courseof servicesprovided for sale or purchase of goods; D

d.The income received by the travel agent from t h eAssessees may be direct or indirect, given expansivewording of Section 194H; e.The stage at which TDS is to be deducted is whenthe amounts are rendered to the accounts of the travelEagents;

(ii) All the Assessees had accepted that a principal-agentrelationship subsisted between them and the travel agents.The terms of the PSAs also indicated that the actions ofthe agents in procuring customers was done on behalf ofthe airlines and not independently; F

(iii) Hence, the additional income garnered by the agents wasinextricably linked with the overall principal-agentrelationship and the responsibilities that they were entrustedwith by the Assessees; G

(iv) There was no transfer in terms of title in the tickets andthey remained the property of the airline companiesthroughout the transaction;

(v) The Assessees were only required to make the deductionsunder Section 194H of the IT Act when the total amounts H

Awere 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 underSection 201(1A) on the Assessees.[8] The aggrieved Assessees are nowbefore this Court in this batch of appeals.

B

C. SUBMISSIONS

17. Mr. C.S. Agarwal, learned Senior Counsel, appearing for theAssessees in CA Nos. 6964-6965 of 2015, and Nos. 6966-6967 of 2015,has vehemently urged us to appreciate the incorrectness of the impugnedjudgment, on the following grounds:- C

(i) After the tickets are provided to the travel agent to sell, theAssessees no longer have any control over the price at whichthe agent finally sells them. Thus, the SupplementaryCommission that accrues to the travel agent is due todealings between the agent and the customer. The airlineDis not involved in this leg of the transaction;

(ii) There are two separate transactions via two distinct legalrelationships that are spawned during the process of sellingthe tickets. The first is between the air carrier and the travelagent for which the Standard Commission is paid. The secondErelationship is between the agent and the customer in courseof which the agent attempts to sell the ticket for the highestprice possible to maximize its income;

(iii) The airline is oblivious to the final price at which the agentsells the travel documents to the customer. The portion inFaddition to the Net Fare which the agent retains is not paidby 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 thewhole or any part of the tax or after deducting fails to pay the tax as required by orGunder 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 fromthe 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 ofsuch tax from the date on which such tax was deducted to the date on which such tax isactually paid, and such interest shall be paid before furnishing the statement inHaccordance with the provisions of subsection (3) of section 200…

by the purchaser of the ticket. Hence, the question ofdeducting TDS cannot feasibly arise as there is no paymentby the Assessee to begin with. Reliance was placed on adecision of the Bombay High Court in CIT v. QatarAirways.[9]

(iv) The High Court has made various factual errors in termsof how the industry functions:-

a. The PSA is signed by the IATA on behalf of the airlinesand not by the airline itself, as stated by the DivisionBench;

b. The High Court opined that the Assessees would haveaccess to information regarding the price at which thetravel agent sells the tickets via the BSP. However, theHigh Court failed to note that the BSP is under the controlof the IATA which aggregates the amounts and sendsthe final bill to the airline at fixed times, rather than aftereach transaction between the agent and the customer;

c. The High Court has failed to consider the PSA whichclearly does not govern the dealings between the agentand the customer. Section 211 of the Contract Act, 1872,requires agents to act in accordance with their dutiesand obligations under the relevant agreement.[10] However,if the PSA itself does not address certain aspects of theagent’s functioning, these facets cannot fall under theambit of the principal-agent relationship, as defined underSection 182 of the Contract Act;

(v) Section 194H of the IT Act refers to a “Commission” asbeing payment in the course of “services rendered”. In thesecond segment of the transaction, there is evidently noservice 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 directionsgiven by the principal, or, in the absence of any such directions, according to thecustom which prevails in doing business of the same kind at the place where the agentconducts such business. When the agent acts otherwise, if any loss be sustained, hemust make it good to his principal, and if any profit accrues, he must account for it.

A

B

C

D

E

F

G

H

A(vi)The usage of the “Supplementary Commission”nomenclature by the BSP when aggregating the amountsinvolved in the transaction is of no legal consequence asthis terminology is employed purely for convenience. Thisdoes not cloak the amount earned by the agent from thecustomer as a “Commission” within the meaning of SectionB194H;

(vii) The actions undertaken by the agents are of their own accordand do not fall under the terms of the PSA. Such a scenariois most appropriately characterized as an agent acting onhis own account without the knowledge of the principal underCSection 216 of the Contract Act.

(viii) The travel agents had already filed tax returns which wereinclusive of the amounts earned by them from the sale oftickets over and above the Net Fare. Hence, income taxhad already been imposed on this additional portion ofDincome and the matter was revenue neutral. Consequently,no TDS was liable to be deducted at this stage as it wouldbe akin to taxing the same amount twice. A judgement ofthis Court in Hindustan Coca Cola Beverages Pvt. Ltd.v. Commissioner of Income Tax[11]was cited in this regard.

ELearned Counsel appearing for the Assessee in CA No. 6968 of2015 broadly adopted the submissions made by learned Senior Counsel,Mr. Agarwal, in full.

18. On the Revenue’s side, we have benefitted from the ableassistance of Mr. Vikramjit Banerjee, learned Additional Solicitor General,Fas well as learned Counsel, Mr. Rupesh Kumar. They rebuffed thecontentions of the Assessees in the following terms:

(i) The distinction that the Assessees have attempted to drawbetween the two purported legs of the ticket selling processis artificial and irrelevant. The overall relationship that existsGbetween the airline and the travel agents is that ofprincipal-agent, and having admitted this position before theHigh Court, no contrary stands were possible at this stage; H11 (2007) 8 SCC 463

ACT

(ii) The PSAs between the Assessees and the travel agentsAclearly showed that every activity carried out by the latterin 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 theagents to transform the relationship into one between twoBprincipals. The distinction between a principal-agentrelationship, and that between two principals, in the contextof Section 194H was expounded upon by the Gujarat HighCourt in Ahmedabad Stamp Vendors Ass. v. Union ofIndia[12]and was later affirmed by this Court[13]; C

(iv) The Assessees would have access to the data maintainedby the BSP to delineate the Supplementary Commissionamount from the Standard Commission. Moreover, therewas no requirement for TDS to be deducted after everytransaction. It was completely practical and permissible forDthe airlines to assemble the amounts together and make acomprehensive TDS deduction at the end of the month;

(v) The language of Section 194H is inclusive and covers any“direct or indirect” payments to the agent. Hence, therewas no need for the payment to be made directly by theAssessees to the travel agents in order for it to fall underEthe ambit of “Commission” and be subject to TDS. Reliancewas placed on a decision of this Court in Director, PrasarBharati v. CIT[14];

(vi) The taxing of the auxiliary amounts in the hands of thetravel agents as income, did not cure the default by theFairlines in deduction of TDS.

We will now proceed to examine the rival submissions.

D. ANALYSIS

D.1 INTERPRETATIONOFSECTION194HOFTHEIT

G

12 2002 SCC OnLine Guj 13513 (2014) 16 SCC 11414 (2018) 7 SCC 800

A19.The central point for our consideration lies in the interpretationof what amounts to a “Commission” under Section 194H of the IT Act.The Assessees and the Revenue emphasized upon the nature of therelationship between an airline and a travel agent under the frameworkof the PSA that governs their arrangement. Before analysing thecompeting interpretations placed before us, the relevant part of SectionB194H requires examined and reads as follows:

A

194H. Commission or brokerage.

Any person, not being an individual or a Hindu undividedfamily, who is responsible for paying, on or after the 1st dayCof June, 2001, to a resident, any income by way of commission(not being insurance commission referred to in section 194D)or brokerage, shall, at the time of credit of such income to theaccount of the payee or at the time of payment of such incomein cash or by the issue of a cheque or draft or by any othermode, whichever is earlier, deduct income-tax thereon at theDrate of five per cent:

Provided that no deduction shall be made under this sectionin a case where the amount of such income or, as the casemay be, the aggregate of the amounts of such income creditedor paid or likely to be credited or paid during the financialEyear to the account of, or to, the payee, does not exceed fifteenthousand rupees:

…

Explanation.—For the purposes of this section,—

F

F(i) “commission or brokerage” includes any payment receivedor receivable, directly or indirectly, by a person acting onbehalf of another person for services rendered (not beingprofessional services) or for any services in the course ofbuying or selling of goods or in relation to any transactionrelating to any asset, valuable article or thing, not beingGsecurities;

20. Explanation (i) of Section 194H highlights the nature of thelegal relationship that exists between two entities for payments betweenthem to qualify as a “commission”. Consequently, our endeavour mustbe to determine whether the travel agents were “acting on behalf of”H

the airlines during the process of selling flight tickets. As elaboratedupon earlier, the Assessees do not dispute that a principal-agentrelationship existed during the payment of the Standard Commission.The point on which the air carriers differ from the Revenue is thepurported second part of the transaction i.e. when the tickets were soldto the customer and for which the travel agents earned certain amountsover and above the Net Fare set by the Assessees.

21. The definition of a “principal” and an “agent” is provided underSection 182 of the Contract Act. The provision states:

182. “Agent” and “principal” defined.—An “agent” is aperson employed to do any act for another, or to representanother in dealings with third persons. The person for whomsuch act is done, or who is so represented, is called the“principal”.

22. Due to the interlinked nature of Section 194H of the IT Actand Section 182 of the Contract Act, our examination will axiomaticallyfocus upon both provisions. The ambit of a contract of agency has beenelaborated upon lucidly by this Court on various occasions. InLakshminarayan Ram Gopal and Sons Ltd. vs. The Government ofHyderabad[15]several treatises in English Law on the ambit of a contractof agency and its distinction from a relationship of servant and master,were listed:

“10. The distinction between a servant and an agent is thusindicated in Powell’s Law of Agency, at page 16 :- (a) Generally a master can tell his servant what to do andhow to do it.

(b) Generally a principal cannot tell his agent how to carryout his instructions.

(c) A servant is under more complete control than an agent, and also at page 20 :-

(a) Generally, a servant is a person who not only receivesinstructions from his master but is subject to his master’s rightto control the manner in which he carries out those instructions.An agent receives his principal’s instructions but is generally A

B

C

D

E

F

G

H

[2022] 9 S.C.R.

Afree to carry out those instructions according to his owndiscretion.

(b) Generally, a servant, qua servant, has noauthority to make contracts on behalf of his master. Generally,the purpose of employing an agent is to authorise him toBmake contracts on behalf of his principal.

(c) Generally, an agent is paid by commission uponeffecting the result which he has been instructed by hisprincipal to achieve. Generally, a servant is paid by wages orsalary.

C

11. The statement of the law contained in Halsbury’s Laws ofEngland - Hailsham Edition - Volume 22, page 113,paragraph 192 may be referred to in this connection :- “The difference between the relations of master and servantand of principal and agent may be said to be this : a principalDhas the right to direct what work the agent agent has to do :but a master has the further right to direct how the work is tobe done.”

The position is further clarified in Halsbury’s Laws of England- Hailsham Edition - Volume 1, at page 193, article 345 whereEthe positions of an agent, a servant and independent contractorare thus distinguished :- “ An agent is to be distinguished on the one hand from aservant, and on the other from an independent contractor. Aservant acts under the direct control and supervision of hisFmaster, and is bound to conform to all reasonable orders givenhim in the course of his work; an independent contractor, onthe other hand, is entirely independent of any control or interference and merelyundertakes to produce a specified result, employing his ownGmeans to produce that result. An agent, though bound toexercise his authority in accordance with all lawful instructionswhich may be given to him from time to time by his principal,is not subject in its exercise to the direct control or supervisionof the principal. An agent, as such is not a servant, but aservant is generally for some purposes his master’s implied H

agent, the extent of the agency depending upon the duties orposition of the servant.”

23. This Court in Gordon Woodroffe & Co. v. Sheikh M.A. Majid& Co.[16]also drew the distinction between a ‘contract of agency’ and a‘contract of sale’, on the following basis:

“The essence of sale is the transfer of the title to the goodsfor price paid or to be paid. The transferee in such casebecomes liable to the transferor of the goods as a debtor forthe price to be paid and not as agent for the proceeds of thesale. On the other hand, the essence of agency to sell is thedelivery of the goods to a person who is to sell them, not ashis own property but as the property of the principal whocontinues to be the owner of the goods and who is thereforeliable to account for the proceeds.”

24. To understand whether or not such transfer of title had takenplace, this Court in Khedut Sahakari Ginning and Pressing Society v.State of Gujarat[17]had placed emphasis on the need to closely scrutinizethe contract between the parties and opined that:

“5. Whether a particular agreement is an agency agreementor an agreement of sale depends upon the terms of theagreement. For deciding that question, the terms of theagreement have got to be examined. The true nature of atransaction evidenced by a writ- ten agreement has to beascertained from the covenants and not merely from whatthe parties choose to call it. The terms of the agreement mustbe carefully scrutinised in the light of the surroundingcircumstances.”

25. This was reiterated in Bhopal Sugar Industries Ltd. v. STO,Bhopal[18]by a 3-judge bench which held:

“5…Thus the essence of the matter is that in a contract ofsale, title to the property passes on to the buyer on delivery ofthe goods for a price paid or promised. Once this happens thebuyer becomes the owner of the property and the seller has 16 1966 Supp SCR 1

17 (1971) 3 SCC 480

18 (1977) 3 SCC 147

A

B

C

D

EF

G

H

Ano vestige of title left in the property. The concept of a salehas, however, undergone a revolutionary change, havingregard to the complexities of the modern times and theexpanding needs of the society, which has made a departurefrom the doctrine of laissez faire by including a transactionwithin the fold of a sale even though the seller may by virtueBof an agreement impose a number of restrictions on the buyer,e. g., fixation of price, submission of accounts, selling in aparticular area or territory and so on. These restrictions perse would not convert a contract of sale into one of agency,because in spite of these restrictions the transaction wouldCstill be a sale and subject to all the incidents of a sale. A contractof agency, however, differs essentially from a contract of saleinasmuch as an agent after taking delivery of the propertydoes not sell it as his own property but sells the same as theproperty of the principal and under his instructions anddirections. Furthermore, since the agent is not the owner ofDthe goods, if any loss is suffered by the agent he is to beindemnified by the principal. This is yet another dominantfactor which distinguishes an agent from a buyer-pure andsimple.”

26. From the catena of cases elaborating on the characteristics ofEa contract of agency, the following indicators can be used to determinewhether there is some merit in the Assessees’ contentions on thebifurcation of the transaction into two parts: Firstly, whether title in thetickets, at any point, passed from the Assessees to the travel agents;Secondly, whether the sale of the flight documents by the latter wasFdone under the pretext of them being the property of the agents themselves,or of the airlines; Thirdly, whether the airline or the travel agent wasliable for any breaches of the terms and conditions in the tickets, and forfailure to fulfil the contractual rights that accrued to the consumer whopurchased them.

G27. Our examination of the nature of the arrangement betweenthe parties will be premised on a reading of the PSA. Learned SeniorCounsel for the Assessees has gone to great lengths to show us thatthere isn’t even a whisper in the PSA regarding the transaction betweenthe travel agents and the customer. According to him, this shows thatthe second part of the transaction falls outside the ambit of theHprincipal-agent relationship.

28. On the contrary, Mr. Kumar, learned Counsel for the Revenue,has emphasized on the point that at no stage does the PSA indicate thattitle in the goods i.e. the tickets, transfers from the air carrier to theagent. Clause 6.1 of the PSA states in clear terms that the traveldocuments “…are and remain the sole property of the Carrier…untilduly issued and delivered pursuant to a transaction under thisAgreement.” No rebuttal on this averment was forthcoming from learnedSenior Counsel for the Assessees, and hence, we have no hesitation inagreeing with Mr. Kumar’s submission that the tickets remained theproperty of the airline. No contract of sale between two principals wasever in existence between the Assessees and the travel agent as perthe criteria laid down in Bhopal Sugar Industries (Supra) and GordonWoodroffe & Co. (Supra).

29. When we take a closer look at the PSA, there are numerousportions which crystallize the intentions of the parties when entering intothe agreement. The recitals of the PSA state:

Each IATA Member (hereinafter called “Carrier”) whichappoints the Agent, represented by the Director General ofIATA actingforandonbehalfofsuchIATAMember.

30. In the same vein, Clauses 3, 9 & 15 also indicate that:

3.1 TheAgentisauthorizedtosellairpassengertransportation on the services of the Carrier and on theservices of other are carriersasauthorizedby the Carrier.The sale of air passenger transportation means all activitiesnecessary to provide a passenger with a valid contract ofcarriage including but not limited to the issuance of a validTraffic Documents and the collection of monies therefore.The Agent is also authorized to sell such ancillary and otherservices us the Carrier may authorize; 3.2 Allservicessoldpursuant to this Agreement shall be soldon behalf of Carrier andin compliance withCarrier’s tariffs,conditionsofcarriageandthewritteninstructionsof theCarrier as providedtothe Agent. The Agent shall not in anyway vary or modify the terms and conditions set forth in anyTrafficDocument used for services provided by the Carrier,and the Agent shall complete these documents in the mannerprescribed by the Carrier.

A

B

C

D

E

F

G

H

x------------------------------------------------------x------------------------------------------- A

x

9. Remuneration

For the sale of air transportation and ancillary services bythe Agent under this Agreement the Carrier shall remuneratethe Agent in a manner and amount as may be stated from timeto time and communicated to the Agent by the Carrier. SuchremunerationshallconstitutefullcompensationfortheservicesrenderedtotheCarrier.

B

x-----------------------------------------------------x---------------------------------------------- C

x

15. Indemnitiesand Waiver

15.1 The Carrier agrees to indemnify and hold harmless theAgent, its officers and employees from and against liabilityDfor any loss, injury, or damage, whether direct, indirect orconsequential,arisinginthecourseoftransportationorotherancillary services provided by the Carrier pursuant to a salemade ty the Agent hereunder or arising from the failure of theCarrier to provide such transportation or services, except toEthe extent that such less, injury, or damage is caused orcontributed to by the Agent, its officers, employees or anyother person acting on the Agent’s behalf.

D

D

31. Several elements of a contract of agency are satisfied by theseclauses, and the recitals. Every action taken by the travel agents is onFbehalf of the air carriers and the services they provide is with expressprior authorization. The airline also indemnifies the travel agent for anyshortcoming in the actual services of transportation, and any connectedancillary services, as it is the former that actually retains title over thetravel documents and is responsible for the actual services provided tothe final customer. Furthermore, the airline has the responsibility to provideGfull and final compensation to the travel agent for the acts it carries outunder the PSA.

32. The irresistible conclusion is that the contract is one of agencythat does not distinguish in terms of stages of the transaction involved inselling flight tickets. While Assessees had readily accepted the existenceH

of the principal-agent relationship, their consternation had been directedat the so-called second limb of the deal that is exclusively between theagent and the customer. However, the submissions advanced in this regardare clearly not supported by the bare wording of the PSA itself. TheHigh Court in the impugned judgment is correct in its holding that thearrangement between the agent and the purchaser is not a separate anddistinct arrangement but is merely part of the package of activitiesundertaken pursuant to the PSA.

33. Regardless, learned Senior Counsel, Mr. Agarwal, remainedresolute in his submission that the principal-agent relationship does notcover the Supplementary Commission on the basis of arguments thatare independent of the PSA. We shall now turn to a discussion of those.Primarily, he contended that Supplementary Commission goes from thehands of the consumer and into the pockets of the travel agents withoutany intervention from the Assessees. Hence, the prerequisite of a paymenton which TDS can be deducted in the first place is not fulfilled.

34. Section 194H of the IT Act, as noted earlier, does not distinguishbetween direct and indirect payments. Both fall under Explanation (i) tothe provision in classifying what may be called a “Commission”. Assubmitted by learned Additional Solicitor General, Mr. Banerjee, thisCourt in Prasar Bharati (Supra) had expounded on the ambit ofSection 194H by ruling that:

“28. The Explanation appended to Section 194H defines theexpression “commission or brokerage”. It is an inclusivedefinition and includes therein any payment received orreceivable, directly or indirectly by a person acting on behalfof another person for services rendered (not being professionalservices) or for any services in the course of buying or sellingof goods or in relation to any transaction relating to assets,valuable Article or thing not being securities. Clause (ii) definesprofessional services; Clause (iii) defines securities; andClause (iv) provides a deeming fiction for treating any incomeso as to attract the rigor of the Section for ensuring itscompliance.

…..

31… lastly, the definition of expression “commission” in theExplanation appended to Section 194H being an inclusive AB

C

D

E

F

G

H

Adefinition giving wide meaning to the expression“commission”, the transaction in question did fall under thedefinition of expression “commission” for the purpose ofattracting rigor of Section194H of the Act.”

35. Therefore, if we view the ambit of Section 194H in an expansiveBmanner, the factum of the exact source of the payment would be of noconsequence to the requirement of deducting TDS. Even on an indirectpayment stemming from the consumer, the Assessees would remainliable under the IT Act. Consequently, the contention of the airlinesregarding the point of origination for the amounts does not impair theapplicability of Section 194H of the IT Act.C

36. The next point raised was regarding the practicality and feasibilityof making the deductions, regardless of whether Section 194H may, inprinciple, cover the indirect payment to the travel agent. The Assesseeshave pointed out that the travel agent acts on its own volition in settingthe Actual Fare for which the flight tickets are sold, and as a symptomDof this, the airline itself has no knowledge whatsoever regarding howmuch Supplementary Commission it has drawn for itself.

37. Before delving into this aspect of the matter, it would be remissof us to not mention that this issue has seen contradictory stands takenamong different High Courts. Learned Senior Counsel for the AssesseesEbrought to our notice a decision by the Bombay High Court in QatarAirways (Supra) during the course of his submissions. The DivisionBench in that case held:

3…For Section 194H to be attracted, the income being paidout by the Assessee must be in the nature of commission orFbrokerage. Counsel for the Revenue contended that it was notthe case of the Revenue that this difference between theprincipal price of the tickets and the minimum fixedcommercial price amounted to payment of brokerage. We findhowever, that in order to deduct tax at source the income beingGpaid out must necessarily be ascertainable in the hands ofthe Assessee. In the facts of the present case, it is seen thatthe airlines would have no information about the exact rate atwhich the tickets were ultimately sold by their agents sincethe agents had been given discretion to sell the tickets at anyrate between the fixed minimum commercial price and the H

published price and it would be impracticable andunreasonable to expect the Assessee to get a feed back fromtheir numerous agents in respect of each ticket sold. Further,if the airlines have discretion to sell the tickets at the pricelower than the published price then the permission grantedto the agent to sell it at a lower price, according to us, canneither amount to commission nor brokerage at the hands ofthe agent. We hasten to add any amount which the agent mayearn over and above the fixed minimum commercial pricewould naturally be income in the hands of the agent and willbe taxable as such in his hands. In this view of the matter,according to us, there is no error in the impugned order andthe question of law as framed does not arise. The appeal istherefore, dismissed in limini.

38. As may be evident, there is significant similarity between theconclusions reached by the Bombay High Court and the arguments raisedby the Assessees. Learned counsel for the Revenue, on the other hand,urged that the Delhi High Court’s stand in the impugned judgment is thecorrect position, both in terms of the law under Section 194H and apractical understanding of how the airline industry operates. It is prudentfor our analysis to extract the following relevant part of the impugnedjudgment which supports the Revenue’s case:

26. Insofar as the first submission is concerned that there isno evidence of receipt of money by the travel agent over andabove the net fare is answered really by the second submissionof the assessee-airline which is that they become aware ofthe monies received by the travel agent only when the billinganalysis is placed on record by the BSP. Therefore, to saythat the revenue is seeking to cast the liability on the assessee-airline to deduct tax when there is no evidence of incomereceived by the travel agent is factually an incorrectsubmission. It should be remembered that what is relevant iswhether the Section 194H casts an obligation on the assesseeto deduct tax at source. Once an obligation is cast it is forthe assessee-airline to retrieve the necessary information fromthe travel agent who works under its supervision and putitself in a position to deduct tax on the actual income receivedby the travel agent on sale of each of such traffic documents/

ABC

D

E

F

G

H

Aair tickets sold on behalf of the assessee-airline. Since thebest evidence in respect of the sale of Traffic Documents/AirTickets is available with the assessee-airline or its agents itcannot in our view take up the stand that the machinery fordeduction of tax has failed. The very fact that this informationis made available by the billing analysis made by BSP wouldBshow that it is possible to retrieve the information by theassessee-airline, therefore, we do not accept the view of theTribunal that there is no evidence of monies having beenreceived by the travel agent over and above the net fare orthat the said information is not available at the relevant pointCin time and, therefore, the assessee-airline cannot be held tobe an assessee-in-default.

39. For completeness, there is another decision of the MadrasHigh Court as well which takes the same stance as the Delhi High Courtin the impugned judgment (Supra). In Around the World Travel andDTours P. Ltd. v. Union of India[19]the Assessee was a travel agent thathad filed a Writ Petition before the High Court seeking a declarationthat TDS under Section 194H would be deducted only for the StandardCommission amount actually paid to it by the airlines it was operatingfor. The stay had initially been granted by the High Court but thensubsequently vacated, against which the Assessee had filed an appeal.EThe Madras High Court held:

8. The injunction sought by the appellants to restrain theairlines from deducting tax is not an injunction that can begranted. The liability for payment of tax arises, in terms ofthe statute and the perception of the appellants cannotFdetermine the true content of the statutory provision and cannotafford a sound basis for the court injuncting the person, whomay otherwise be liable to deduct tax, from deducting tax onpayment made to the agents.

9. We must also notice that the appellants have not placedGbefore the court the scheme under which the payments aremade or accounted. It is the definite stand of the caveatorairline that what is made available to the agents issupplementary commission, which amount the agents are free to deal with in any manner they like. The agents, accordingto the airlines, can pass on the entire amount of supplementarycommission to the passengers or may retain a part of it andpass on only a portion of that commission.

40. The striking aspect of the dispute in Around the World Travels(Supra) was the insistence by the airline that the amount retained bythe Assessee agent was Supplementary Commission. This contributedto the conclusion reached by the High Court that the amount earned bythe agent appeared to be susceptible to TDS deduction under Section194H. In this background, the landscape in regard to Section 194H andits applicability to the auxiliary amounts earned by a travel agent on topof the Net Fare demonstrates a lack of uniformity among High Courts.

41. The contrary opinions by the High Courts necessitates adefinitive ruling from us to bring clarity on this point. We may now returnto the specific argument by learned Senior Counsel for the Assesseeson the issue of the airline’s lack of knowledge regarding the Actual Fareand resultant impracticality of expecting it to deduct TDS on amountsthat it isn’t even aware of.

42. Learned Counsel for the Revenue has rebutted this byhighlighting the manner of operation of the BSP where financial dataregarding the sale of tickets is stored. According to him, the BSPagglomerates the data from multiple transactions and transmits it twicea month, or bimonthly. The expectation from the Revenue is not that theAssessees make TDS deductions in real time as the sale of tickets bythe agents is recorded on the BSP. Rather, a more reasonable approachis taken whereby the air carriers must simply calculate the accumulatedamount of TDS, at the end of each month after having received therequisite date from the IATA and the BSP and make a singlecomprehensive deduction. It was submitted that the Assessee cannot beabsolved from its statutory duties under Section 194H, irrespective ofthe viability of operating in this manner.

43. Having analysed the rival contentions and keeping in mind theprincipal-agent relationship between the parties, we find significant meritin the arguments by the Revenue. The mechanics of how the airlinesmay utilize the BSP to discern the amounts earned as SupplementaryCommission and deduct TDS accordingly is an internal mechanism thatfacilitates the implementation of Section 194H of the IT Act. The A

B

C

D

E

F

G

H

Aspecifics of this system were seemingly not placed before the BombayHigh Court in Qatar Airways (Supra).

44. Further, the lack of control that the airlines have over the ActualFare charged by the travel agents over and above the Net Fare, cannotform the legal basis for the Assessees to avoid their liability. As avertedBto in Lakshminarayan Ram Gopal & Son Ltd. (Supra) a contract ofagency does not entail control over the minutiae of the agent’s actions.Such a level of oversight would more closely resemble a master-servantrelationship. In a principal-agent relationship, it is sufficient for the latterto be informed of the responsibilities and duties under the contract andcertain guidelines on how to satisfy them. An agent undoubtedly retainsCa sizeable level of discretion on how to achieve the desired results. Thischaracteristic of a contract of agency was cemented by this Court inQamar Shaffi Tyabji v. The Commissioner, Excess Profits Tax,Hyderabad[20]in the following manner:

“7…An agent has to be distinguished on the one hand fromDa servant and on the other from an independent contractor. Aservant acts under the direct control and supervision of hismaster, and is bound to conform to all reasonable orders givenin the course of his work. An agent though bound to exercisehis authority in accordance with all lawful instructions whichEmay be given to him from time to time by his principal, is notsubject in its exercise to the direct control or supervision ofthe principal. Indeed, learned counsel for the appellantaccepts as correct the distinction made above and also acceptsthat the true relation between the Mills and the Trustees wasthat of principal and agent; but he contends that as betweenFthe Trustees and the appellant the relation was one of masterand servant. We consider that this contention is whollyunsound. We have examined the original agreement betweenthe Mills and the Trustees dated April 12, 1934. Clause 9 ofthat agreement said that “the agents may regulate and conductGtheir proceedings in such manner as they may from time totime determine and may delegate all or any of their powers,authorities and discretions as secretaries, treasurers andagents of the company to such person or persons and on suchterms and conditions as they may think fit, subject to the H20 (1960) 3 SCR 546

H20 (1960) 3 SCR 546

approval of the Board of Directors of the company.” Thedelegation in favour of the appellant was made under thisclause. The position was therefore this: the Trustees as agentshad express authority to name another person to act for theprincipal in the business of the agency, and they named theappellant with the approval of the Board of Directors.Therefore, the appellant, was neither a servant nor a meresub-agent. He was an agent of the principal for such part ofthe business of the agency as was entrusted to him.”

45. The fact that the travel agent has discretion to set an ActualFare which is above the Net Fare has no effect on the nature of therelationship between the parties. A contract of agency permits an agentto carry out acts on its own volition provided it does not contravene thepurpose of the agency contract and the interests of the principal. Theaccretion of the Supplementary Commission to the travel agents is anaccessory to the actual principal-agent relationship under the PSA. Insuch a commercial arrangement, the benefit gained by an agent isincidental to and has a reasonably close nexus with the responsibilitiesthat were entrusted to it by the principal air carrier. Such incidentalbenefits or actions must come under the ambit of the relationship, subjectto any express limitations articulated in the contract itself or under theContract Act.

46. Apart from this, Clause 7.2 of the PSA sets out that any paymentscollected by an agent pursuant to sale of air transportation and ancillaryservices are held in a fiduciary capacity for the Carrier until a properaccounting is made. The Clause in question is reproduced below:

7.2 All monies collected by the Agent for transportation andancillary services sold under this Agreement, includingapplicable remuneration which the Agent is entitled to claimhereunder, are the property of the Carrier and must be heldby the Agent in trust for the Carrier or on behalf of the Carrieruntil satisfactorily accounted for to the Carrier and settlementmade.

47. Notwithstanding the lack of control over the Actual Fare, thecontract definitively states that “all monies” received by the agent areheld as the property of the air carrier until they have been recorded onthe BSP and properly gauged. As already mentioned by learned Counsel AB

C

D

E

F

G

H

Afor the Revenue, and accepted by learned Senior Counsel for the airlines,the BSP demarcates “Supplementary Commission” under a separateheading. Hence, once the IATA makes the payment of the accumulatedamounts shown on the BSP, it would be feasible for the Assessees todeduct TDS on this additional income earned by the agent, and whateverremains after the subtraction under Section 194H would count as incomeBfor the agents themselves. It is at this point that settlement is made fullyand finally, in line with Clause 7.2 of the PSA.

48. The only remaining objection from the Assessees concernsSection 216 of the Contract Act. To appropriately appreciate the scopeof the provision, a combined reading of both Sections 215 & 216 isCnecessary. Both these provisions are reproduced below for ease ofreference:

215. Right of principal when agent deals, on his own account,inbusinessofagencywithoutprincipal’s consent.—

DIf an agent deals on his own account in the business of theagency, without first obtaining the consent of his principaland acquainting him with all material circumstances whichhave come to his own knowledge on the subject, the principalmay repudiate the transaction, if the case shows, either thatany material fact has been dishonestly concealed from himEby the agent, or that the dealings of the agent have beendisadvantageous to him.

x-------------------------------------------x--------------------------------------------------x

216. Principal’srighttobenefitgainedbyagentdealingonFhisownaccountinbusinessofagency.—

If an agent, without the knowledge of his principal, deals inthe business of the agency on his own account instead of onaccount of his principal, the principal is entitled to claim fromthe agent any benefit which may have resulted to him fromthe transaction.G

49. In the facts before us, we find that Sections 215 and 216 ofthe Contract Act are of no assistance. We have already ascertained thatthe PSA does not explicitly address the issue of SupplementaryCommission at all. Further, an agent acting of its own account does not,in principle, alter the nature of a contract of agency and only gives rise toH

the consequences mentioned under Sections 215 and 216 of the ContractAct if the conditions contained within them exist. We do not consider ithelpful to dwell on this point.

50. In any case, given that information regarding the SupplementaryCommission was available to the airlines, we have no doubt that theairlines could not have absolved themselves of liabilities under the ITAct attached to the accrual of that additional portion of income by theagent. These amounts were incidental to the transaction by which theflight tickets were sold on behalf of the air carriers and was for theirbenefit. The old adage that a party to a contract cannot “both approbateand reprobate” is apt for this factual scenario.[21]

51. From the exposition of law on the ambit of a contract of agencyand its resultant effect on the classification of the difference betweenthe Actual Fare and Net Fare as being a “Commission” liable to deductionof TDS, we are left unmoved by the submissions of the Assessees. Theinterpretation of the PSA, through the prism of Section 182 of theContract Act and Section 194H of the IT Act, provided by the Revenueappears to be the correct position. Thus, we affirm the conclusion reachedby the Delhi High Court in the impugned judgment on the nature of therelationship between the airlines and the travel agents, and the liabilitythat is attached to deduction of TDS on the Supplementary Commission.As a consequence of our analysis, the view taken by the Bombay HighCourt in Qatar Airways (Supra) stands overruled.

D.2 REVENUENEUTRAL

52. Having held in favour of the Revenue in connection with theapplicability of Section 194H of the IT Act, the remaining issue for usto address is whether the matter has been rendered revenue neutral.Learned Counsels on both sides have agreed that the travel agents whoreceived the Supplementary Commission for AY 2001-02, have alreadyshown these amounts as their income. Subsequently, they have paidincome tax on these sums.

53. Learned Senior Counsel for the Assessees, Mr. Agarwal, hascontended that there has been no loss to the Revenue on this count.Learned Counsel for the Revenue, Mr. Kumar, admitted the payment ofincome tax by the travel agents but has argued that this does not absolve 21 Nagubai Ammal & Ors. v. B. Shama Rao & Ors., [1956] 1 SCR 451.

AB

C

D

E

F

G

H

Athe airlines of their infraction in terms of the mandate under Section194H of the IT Act.

54. This Court in Hindustan Coca Cola Beverage Pvt. Ltd. v.Commissioner of Income Tax (Supra) was confronted with a similarsituation where the recipient of income on which the Assessee had failedBto deduct TDS under Section 194C of the IT Act, had already paid incometaxes on that amount. The Court held:

“6. The Tribunal upon rehearing the appeal held that thoughthe appellant-assessee was rightly held to be an ‘assessee indefault’, there could be no recovery of the tax alleged to be inCdefault once again from the appellant considering thatPradeep Oil Corporation had already paid taxes on theamount received from the appellant. It is required to notethat the department conceded before the Tribunal that therecovery could not once again be made from the tax deductorwhere the payee included the income on which tax was allegedDto have been short deducted in its taxable income and paidtaxes thereon. There is no dispute whatsoever that PradeepOil Corporation had already paid the taxes due on its incomereceived from the appellant and had received refund fromthe tax department. The Tribunal came to the right conclusionEthat the tax once again could not be recovered from theappellant (dedicator- assessee) since the tax has already beenpaid by the recipient of income.

….

9. Be that as it may, the circular No. 275/201/95- IT(B) datedF29.1.1997 issued by the Central Board of Direct Taxes, inour considered opinion, should put an end to the controversy.The circular declares “no demand visualized under Section201(1) of the Income- tax Act should be enforced after the taxdeductor has satisfied the officer-in-charge of TDS, that taxesGdue have been paid by the deducted-assessee. However, thiswill not alter the liability to charge interest under Section201(1A) of the Act till the date of payment of taxes by thededucted-assessee or the liability for penalty under Section271C of the Income-tax Act.”

H

55. A similar principle was also advanced in the context of Section192 of the IT Act in Commissioner of Income Tax v. Eli Lilly & Co.(India)[22]:

“98…In our view, therefore, the tax-deductor- assessee(respondent(s)) were duty bound to deduct tax at source underSection 192(1) from the Home Salary/special allowance(s)paid abroad by the foreign company, particularly when nowork stood performed for the foreign company and the totalremuneration stood paid only on account of services renderedin India during the period in question.

99. As stated above, in this matter, we have before us 104 civilappeals. We are directing the AO to examine each case toascertain whether the employee-assessee (recipient) has paidthe tax due on the Home Salary/special allowance(s) receivedfrom the foreign company. In case taxes due on Home Salary/special allowance(s) stands paid off then the AO shall notproceed under Section 201(1). In cases where the tax has notbeen paid, the AO shall proceed under Section 201(1) torecover the shortfall in the payment of tax.

100. Similarly, in each of the 104 appeals, the AO shallexamine and find out whether interest has been paid/recovered for the period between the date on which tax wasdeductible till the date on which the tax was actually paid.If, in any case, interest accrues for the aforestated periodand if it is not paid then the Adjudicating Authority shall takesteps to recover interest for the aforestated period under Section201(1A).”

56. It appears to us that if the recipient of income on which TDShas not been deducted, even though it was liable to such deduction underthe IT Act, has already included that amount in its income and paidtaxes on the same, the Assessee can no longer be proceeded against forrecovery of the short fall in TDS. However, it would be open to theRevenue to seek payment of interest under Section 201(1A) for theperiod between the date of default in deduction of TDS and the date onwhich the recipient actually paid income tax on the amount for whichthere had been a shortfall in such deduction.

AB

CD

E

F

G

H

A57. As noted earlier, learned Counsels for the parties were adidem on the fact that the travel agents had already paid taxes on theamounts earned by them. The Revenue had contended that the defaultin payment of TDS could not be excused purely on this ground. However,the decisions in Hindustan Coca Cola (Supra) and Eli Lilly & Co.(Supra) clearly bar their ability to pursue the Assessee airlines forBrecovery of the shortfall in TDS and restricts them to imposing interestfor the default.

A

58. In this context, the Assessees have not provided us with thespecifics of when the travel agents paid their taxes on the SupplementaryCommission. Furthermore, the CBDT Circular of 29.01.1997[23], invokedCin Hindustan Coca Cola (Supra) has not been placed before us either.It will be necessary to fill in these missing details and determine theamount of interest that the Assessees are liable to pay before this mattercan be closed. Thus, we deem it appropriate to remand the matter backto the Assessing Officer to flesh out these points in terms of the interestDpayments due for the period from the date of default to the date ofpayment of taxes by the agents.

59. The denouement of our examination of these issues concernsthe levy of penalties under Section 271C of the IT Act. The AssessingOfficer had initially directed that penalty proceedings be commencedEagainst the Assessees for the default in subtraction of TDS but we areinformed that this process was put in cold storage while the airlines andthe revenue were contesting the primary issue of the applicability ofSection 194H before various appellate forums. Section 271C providesfor imposition of penalties for failure to adhere to any of the provisions inChapter XVII-B, which includes Section 194H. This provision must beFread with Section 273B which excuses an otherwise defaulting Assesseefrom levy of penalties under certain circumstances. The twin provisionsread as follows:Section271C:PenaltyforFailuretoDeductTaxat Source:G(1) If any person fails to - (a) Deduct the whole or any part of the tax as required by orunder the provisions of Chapter XVII-B; or H23 Circular No. 275/201/95- IT(B)

(b) Pay the whole or any part of the tax as required by orunder, -

(i) Sub-section (2) of Section 115O; or

(ii) Second proviso to Section 194B, then, such person shallbe liable to pay, by way of penalty, a sum equal to the amountof tax which such person failed to deduct or pay as aforesaid.

(2) Any penalty imposable under Sub-section (1) shall beimposed by the Joint Commissioner.

x----------------------------------------------x----------------------------------------------------x Section273B:PenaltynottobeimposedinCertain Cases:

Notwithstanding anything contained in the provisions of clause(b) of Sub-section (1) of Section 271, Section 271A, Section271AA, Section 271B, Section 271BA, Section 271BB, Section271C, Section 271CA, Section 271D, Section 271E, Section271F, Section 271FA, Section 271FB, Section 271G, clause(c) or clause (d) of Sub-section (1) or Sub-section (2) of Section272A, Sub- section (1) of Section 272AA, or Sub-section(1) of Section 272BB or Sub-section (1A) of Section 272BB orSub-section (1) of Section 272BBB or clause (b) of Sub-section(1) or clause (b) or clause (c) of Sub-section (2) of Section273, no penalty shall be imposable on the person or theassessee, as the case may be, for any failure referred to in thesaid provisions if he proves that there was reasonable causefor the said failure.

60. The ambit of “reasonable cause” under Section 273B requiresour scrutiny before we reach the conclusion that the Assessing Officeris required to also calculate potential penalties to be levied against theAssessees. This Court in Eli Lilly & Co. (Supra) had elaborated, inthe passage extracted below, on the context in which Section 273B maybe utilized:

94…Section 273B states that notwithstanding anythingcontained in Section 271C, no penalty shall be imposed onthe person or the assessee for failure to deduct tax at sourceif such person or the assessee proves that there was areasonable cause for the said failure. Therefore, the liabilityto levy of penalty can be fastened only on the person who do A

B

C

DE

F

G

H

A

not have good and sufficient reason for not deducting tax atsource. Only those persons will be liable to penalty who do nothave good and sufficient reason for not deducting the tax.The burden, of course, is on the person to prove such goodand sufficient reason.

B95. In each of the 104 cases before us, we find thatnon-deduction of tax at source took place on account ofcontroversial addition. The concept of aggregation orconsolidation of the entire income chargeable under the head“Salaries” being exigible to deduction of tax at source underSection 192 was a nascent issue… The tax-deductor-assesseeCwas under a genuine and bona fide belief that it was not underany obligation to deduct tax at source from the home salarypaid by the foreign company/HO and, consequently, we areof the view that in none of the 104 cases penalty was leviableunder Section 271C as the respondent in each case hasDdischarged its burden of showing reasonable cause for failure to deduct tax at source.

61. We find some parallels between the facts of the present caseand the situation in Eli Lilly & Co. (Supra). The liability of an airline todeduct TDS on Supplementary Commission had admittedly not beenEadjudicated upon by this Court when the controversy first arose in AY2001-02. While learned Counsel for the Revenue, Mr. Kumar, has notifiedus that various airlines were deducting TDS under Section 194H at thattime, this does not necessarily mean that the position of law was settled.Rather, it appears to us that while one set of air carriers acted under theassumption that the Supplementary Commission would come within theFambit of the provisions of the IT Act, another set held the opposite view.The Assessees before us belong to the latter category. Furthermore, aswe have highlighted earlier, there were contradictory pronouncementsby different High Courts in the ensuing years which clearly highlights thegenuine and bona fide legal conundrum that was raised by the prospectGof Section 194H being applied to the Supplementary Commission.

62. Hence, there is nothing on record to show that the Assesseeshave not fulfilled the criteria under Section 273B of the IT Act. Thoughwe are not inclined to accept their contentions, there was clearly anarguable and “nascent” legal issue that required resolution by this CourtHand, hence, there was “reasonable cause” for the air carriers to have not deducted TDS at the relevant period. The logical deduction fromthis reasoning is that penalty proceedings against the airlines under Section271C of the IT Act stand quashed.

E. CONCLUSION

63. Our conclusion in terms of the application of Section 194H ofthe IT Act to the Supplementary Commission amounts earned by thetravel agent is unequivocally in favour of the Revenue. Section 194H isto be read with Section 182 of the Contract Act. If a relationship betweentwo parties as culled out from their intentions as manifested in the termsof the contract between them indicate the existence of a principal-agentrelationship as defined under Section 182 of the Contract Act, then thedefinition of “Commission” under Section 194H of the IT Act standsattracted and the requirement to deduct TDS arises. The realities of howthe airline industry functioned during the period in question bolsters ourconclusion that it was practical and feasible for the Assessees to utilizethe information provided by the BSP and the payment machinery employedby the IATA to make a consolidated deduction of TDS from theSupplementary Commission to satisfy their mandatory duties underChapter XVII-B of the IT Act.

64. Having said this, in light of the consensus between the partiesthat the travel agents have already paid income tax on the SupplementaryCommission, there can be no further recovery of the shortfall in TDSowed by the Assessees. However, interest may be levied under Section201(1A) of the IT Act. As an epilogue to this aspect of the matter, theAssessing Officer is directed to compute the interest payable by theAssessees for the period from the date of default by them in terms offailure to deduct TDS, till the date of payment of income tax by thetravel agents. It will be open to the Assessing Officer to look into anydetails that are necessary for completion of this exercise, includingverification of whether tax was actually paid at all by the agents on theamounts from which TDS was supposed to be subtracted. Given thatno documentary evidence was placed before us, we are conscious thatthere may be certain anomalies which the Assessing Officer is bestpositioned to iron out.

65. In the eventuality that any of the agents have not yet paidtaxes on the Supplementary Commission, the Revenue will be at libertyto proceed in accordance with law under the IT Act for recover of A

BC

D

E

F

G

H

Ashortfall in TDS from the airlines. However, we limit the ability to levypenalties against the Assessees in light of Section 273B of the IT Act.

66. Having concluded so, we hope that closure has been broughtto a legal controversy that has persisted for two decades. While wereject the arguments of the Assessees on merits in terms of their liabilityBunder Section 194H of the IT Act, we hold in their favour on the countof the matter having been rendered revenue neutral due to the apparentpayment of income taxes on the amounts in question by the travel agents.The Assessing Officer is directed to expeditiously complete the assignmentof determining the interest payable in accordance with the guidelineslaid down above, so as to bring a quietus to the litigation.C

67. In summation, we allow the appeals in part.

68. Pending applications, if any, consequently stand disposed of.

DNidhi Jain

(Assisted by : Shashwat Jain, LCRA)

Appeals partly allowed.

E

F

G

H