TMI Blog2022 (11) TMI 783X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Our conclusion 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 our conclusion that it was practical and feasible for the Assessees to utilize the information provided by the BSP and the payment machinery employed by the IATA to make a consolidated deduction of TDS from the Supplementary Commission to satisfy their mandatory duties under Chapter XVIIB of the IT Act. In light of the consensus between th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section. A. THE AIRLINE INDUSTRY 2. Within the aviation industry during the relevant period, the base fare Base Fare 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. Net Fare In essence, the IATA set 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 agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Singapore Delhi (Set by the IATA) Net Fare (Set by the Airline) Actual Fare (Set by the Travel Agent) Standard Commission (7% of the Base Fare) Supplementary Commission (Actual Fare Net Fare) Rs. 1 Lakh Rs. 60,000 Rs. 80,000 7% of Rs. 1 Lakh = Rs. 7,000 Rs. 80,00060,000 = Rs. 20,000 Ceiling Price Income of the Assessee Rs. 20,000 left after payment of Net Fare to the Assessee Income of the travel agent Additional Income of the travel agent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arriers. 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: Assessee (Liability) Surcharge + Interest Aggregate Amount Singapore Airlines (Rs. 2,93,49,770) Rs. 58,700 + Rs. 21,13,224 Rs. 3,19,21,694 KLM Royal Dutch Airlines (Rs. 18,25,85,040) Rs. 2,24,26,580 (Interest Only) Rs. 20,50,11,620 British Airways (Rs. 4,71,67,688) Rs. 60,08,391 (Interest Only) Rs. 5,31,76,079 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 Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d when interpreting the application of Section 194H of the IT Act are: a. The existence of a principalagent 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 course of services provided for sale or purchase of goods; d. The income received by the travel agent from the 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 principalagent 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 principalagent 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te 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 principalagent 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; (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 agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata maintained by the BSP to delineate the Supplementary Commission amount from the Standard Commission. Moreover, there was no requirement for TDS to be deducted after every transaction. It was completely practical and permissible for the airlines to assemble the amounts together and make a comprehensive 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, there was no need for the payment to be made directly by the Assessees to the travel agents in order for it to fall under the ambit of Commission and be subject to TDS. Reliance was placed on a decision of this Court in Director, Prasar Bharati v. CIT (2018) 7 SCC 800; (vi) The taxing of the auxiliary amounts in the hands of the travel agents as income, did not cure the default by the airlines in deduction of TDS. We will now proceed to examine the rival submissions. D. ANALYSIS D.1 INTERPRETATION OF SECTION 194H OF THE IT ACT 19. The central point for our consideration lies in the interpretation of what amounts to a Commission under Section 194H of the IT Act. The Assessees and the Revenue emphasized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided under Section 182 of the Contract Act. The provision states: 182. Agent and principal defined.-An agent is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the principal . 22. Due to the interlinked nature of Section 194H of the IT Act and Section 182 of the Contract Act, our examination will axiomatically focus upon both provisions. The ambit of a contract of agency has been elaborated upon lucidly by this Court on various occasions. In Lakshminarayan Ram Gopal and Sons Ltd. vs. The Government of Hyderabad (1955) 1 SCR 393 several treatises in English Law on the ambit of a contract of agency and its distinction from a relationship of servant and master, were listed: 10. The distinction between a servant and an agent is thus indicated in Powell's Law of Agency, at page 16 : (a) Generally a master can tell his servant what to do and how to do it. (b) Generally a principal cannot tell his agent how to carry out his instructions. (c) A servant is under more complete control than an agent, and also at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1966 Supp SCR 1 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 goods for price paid or to be paid. The transferee in such case becomes liable to the transferor of the goods as a debtor for the price to be paid and not as agent for the proceeds of the sale. On the other hand, the essence of agency to sell is the delivery of the goods to a person who is to sell them, not as his own property but as the property of the principal who continues to be the owner of the goods and who is therefore liable to account for the proceeds. 24. To understand whether or not such transfer of title had taken place, this Court in Khedut Sahakari Ginning and Pressing Society v. State of Gujarat (1971) 3 SCC 480 had placed emphasis on the need to closely scrutinize the contract between the parties and opined that: 5. Whether a particular agreement is an agency agreement or an agreement of sale depends upon the terms of the agreement. For deciding that question, the terms of the agreement have got to be examined. The true nature of a transaction evidenced by a written agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ches of the terms and conditions in the tickets, and for failure to fulfil the contractual rights that accrued to the consumer who purchased them. 27. Our examination of the nature of the arrangement between the parties will be premised on a reading of the PSA. Learned Senior Counsel for the Assessees has gone to great lengths to show us that there isn t even a whisper in the PSA regarding the transaction between the travel agents and the customer. According to him, this shows that the second part of the transaction falls outside the ambit of the principalagent 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 that title in the goods i.e. the tickets, transfers from the air carrier to the agent. Clause 6.1 of the PSA states in clear terms that the travel documents are and remain the sole property of the Carrier until duly issued and delivered pursuant to a transaction under this Agreement. No rebuttal on this averment was forthcoming from learned Senior Counsel for the Assessees, and hence, we have no hesitation in agreeing with Mr. Kumar s submission that the tickets remained t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the failure of the Carrier to provide such transportation or services, except to the extent that such less, injury, or damage is caused or contributed to by the Agent, its officers, employees or any other person acting on the Agent's behalf. 31. Several elements of a contract of agency are satisfied by these clauses, and the recitals. Every action taken by the travel agents is on behalf of the air carriers and the services they provide is with express prior authorization. The airline also indemnifies the travel agent for any shortcoming in the actual services of transportation, and any connected ancillary services, as it is the former that actually retains title over the travel documents and is responsible for the actual services provided to the final customer. Furthermore, the airline has the responsibility to provide full and final compensation to the travel agent for the acts it carries out under the PSA. 32. 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 principalagent relationship, their co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of attracting rigor of Section194H of the Act. 35. Therefore, if we view the ambit of Section 194H in an expansive manner, the factum of the exact source of the payment would be of no consequence to the requirement of deducting TDS. Even on an indirect payment stemming from the consumer, the Assessees would remain liable under the IT Act. Consequently, the contention of the airlines regarding the point of origination for the amounts does not impair the applicability of Section 194H of the IT Act. 36. 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. 37. Before delving into this aspect of the matter, it would be remiss of us to not mention that this issue has seen contradictory stands taken among different High Courts. Learned Senior Couns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt of money by the travel agent over and above the net fare is answered really by the second submission of the assesseeairline which is that they become aware of the monies received by the travel agent only when the billing analysis is placed on record by the BSP. Therefore, to say that the revenue is seeking to cast the liability on the assesseeairline to deduct tax when there is no evidence of income received by the travel agent is factually an incorrect submission. It should be remembered that what is relevant is whether the Section 194H casts an obligation on the assessee to deduct tax at source. Once an obligation is cast it is for the assesseeairline to retrieve the necessary information from the travel agent who works under its supervision and put itself in a position to deduct tax on the actual income received by the travel agent on sale of each of such traffic documents/air tickets sold on behalf of the assesseeairline. Since the best evidence in respect of the sale of Traffic Documents/Air Tickets is available with the assesse airline or its agents it cannot in our view take up the stand that the machinery for deduction of tax has failed. The very fact that this infor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeared to be susceptible to TDS deduction under Section 194H. In this background, the landscape in regard to Section 194H and its applicability to the auxiliary amounts earned by a travel agent on top of the Net Fare demonstrates a lack of uniformity among High Courts. 41. The contrary opinions by the High Courts necessitates a definitive ruling from us to bring clarity on this point. We may now return to the specific argument by learned Senior Counsel for the Assessees on the issue of the airline s lack of knowledge regarding the Actual Fare and resultant impracticality of expecting it to deduct TDS on amounts that it isn t even aware of. 42. Learned Counsel for the Revenue has rebutted this by highlighting the manner of operation of the BSP where financial data regarding the sale of tickets is stored. According to him, the BSP agglomerates the data from multiple transactions and transmits it twice a month, or bimonthly. The expectation from the Revenue is not that the Assessees make TDS deductions in real time as the sale of tickets by the agents is recorded on the BSP. Rather, a more reasonable approach is taken whereby the air carriers must simply calculate the accumul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the Trustees was that of principal and agent; but he contends that as between the Trustees and the appellant the relation was one of master and servant. We consider that this contention is wholly unsound. We have examined the original agreement between the Mills and the Trustees dated April 12, 1934. Clause 9 of that agreement said that the agents may regulate and conduct their proceedings in such manner as they may from time to time determine and may delegate all or any of their powers, authorities and discretions as secretaries, treasurers and agents of the company to such person or persons and on such terms and conditions as they may think fit, subject to the approval of the Board of Directors of the company. The delegation in favour of the appellant was made under this clause. The position was therefore this: the Trustees as agents had express authority to name another person to act for the principal in the business of the agency, and they named the appellant with the approval of the Board of Directors. Therefore, the appellant, was neither a servant nor a mere subagent. He was an agent of the principal for such part of the business of the agency as was entrusted to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the Assessees concerns Section 216 of the Contract Act. To appropriately appreciate the scope of the provision, a combined reading of both Sections 215 216 is necessary. Both these provisions are reproduced below for ease of reference: 215. Right of principal when agent deals, on his own account, in business of agency without principal s consent.- If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows, either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him. xxx 216. Principal s right to benefit gained by agent dealing on his own account in business of agency.- If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid income tax on these sums. 53. Learned Senior Counsel for the Assessees, Mr. Agarwal, has contended that there has been no loss to the Revenue on this count. Learned Counsel for the Revenue, Mr. Kumar, admitted the payment of income tax by the travel agents but has argued that this does not absolve the airlines of their infraction in terms of the mandate under Section 194H of the IT Act. 54. This Court in Hindustan Coca Cola Beverage Pvt. Ltd. v. Commissioner of Income Tax (Supra) was confronted with a similar situation where the recipient of income on which the Assessee had failed to deduct TDS under Section 194C of the IT Act, had already paid income taxes on that amount. The Court held: 6. The Tribunal upon rehearing the appeal held that though the appellant assessee was rightly held to be an 'assessee in default', there could be no recovery of the tax alleged to be in default once again from the appellant considering that Pradeep Oil Corporation had already paid taxes on the amount received from the appellant. It is required to note that the department conceded before the Tribunal that the recovery could not once again be made from the tax deductor where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich tax was deductible till the date on which the tax was actually paid. If, in any case, interest accrues for the aforestated period and if it is not paid then the Adjudicating Authority shall take steps to recover interest for the aforestated period under Section 201(1A). 56. It appears to us that 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. 57. As noted earlier, learned 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 had contended that the default in payment of TDS could not be excused purely on this ground. However, the decisions in Hindustan Coca Cola (Supra) an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding anything contained in the provisions of clause (b) of Subsection (1) of Section 271, Section 271A, Section 271AA, Section 271B, Section 271BA, Section 271BB, Section 271C, Section 271CA, Section 271D, Section 271E, Section 271F, Section 271FA, Section 271FB, Section 271G, clause (c) or clause (d) of Subsection (1) or Subsection (2) of Section 272A, Subsection (1) of Section 272AA, or Subsection (1) of Section 272BB or Subsection (1A) of Section 272BB or Subsection (1) of Section 272BBB or clause (b) of Sub - section (1) or clause (b) or clause (c) of Subsection (2) of Section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure. 60. The ambit of reasonable cause under Section 273B requires our scrutiny before we reach the conclusion that the Assessing Officer is required to also calculate potential penalties to be levied against the Assessees. This Court in Eli Lilly Co. (Supra) had elaborated, in the passage extracted below, on the context in which Section 273B may be utilized: 94 Section 273B states that notwiths ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62. Hence, there is nothing on record to show that the Assessees have not fulfilled the criteria under Section 273B of the IT Act. Though we are not inclined to accept their contentions, there was clearly an arguable and nascent legal issue that required resolution by this Court and, hence, there was reasonable cause for the air carriers to have not deducted TDS at the relevant period. The logical deduction from this reasoning is that penalty proceedings against the airlines under Section 271C of the IT Act stand quashed. E. CONCLUSION 63. Our conclusion 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part. 68. Pending applications , if any , consequently stand disposed of. Foot Note 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 incometax authority may enter- (a) any place within the limits of the area assigned to him, or (b) any place occupied by any person in respect of whom he exercises jurisdiction, [or] [(c) any place in re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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