This Tax Alert summarizes recent Supreme Court (SC) ruling [1] in the case of Singapore Airlines Ltd., KLM Royal Dutch Airlines and British Airways (collectively called as Taxpayer). The issue before the SC was whether supplementary commission earned by travel agents of the Taxpayer will trigger withholding obligation for Taxpayer under the provisions of the Indian Tax Laws (ITL).
The Taxpayer, an airline operator, sells air tickets to customers through various travel agents. On sale of tickets, the travel agents are entitled to two types of commission viz., (a) standard commission as fixed by International Air Transport Association (IATA) and (b) supplementary commission. The Passenger Sales Agency Agreements (PSA) permits the agents to earn supplementary commission from the customers by selling the air tickets at any price between upper cap of “Base Fare” provided by IATA and “Net Fare” set by the Taxpayer.
To illustrate, Base Fare for air tickets provided by IATA is INR 100. Fare of air tickets charged to customers cannot exceed the Base Fare. The Taxpayer sets out a Net Fare price of INR 60 to travel agents and the travel agents, in turn, may sell the tickets to customers at price of say, INR 80. The excess consideration charged by travel agent (i.e., 80-60=INR 20) from customer over INR 60 is treated as supplementary commission.
The Taxpayer appropriately withheld taxes on standard commission and there was no dispute on this component. However, the Taxpayer did not withhold taxes on the supplementary commission on the ground that the same was not in the nature of commission income and was earned pursuant to independent transaction between travel agents and customer, where the Taxpayer had no control over and knowledge of actual fare charged by the travel agents to customers. However, the tax authority treated the Taxpayer as “assessee-in-default” for not withholding taxes on supplementary commission earned by travel agent and same was upheld by the High Court.
The SC ruled that the travel agents acted on behalf of the Taxpayer while selling the tickets and the principal-agent relationship between the Taxpayer and travel agents was undisputed. Further, the Taxpayer was responsible towards air transport services to the customers and there was no independent transaction between agent and the customer as the title in the air tickets did not pass to agents. Accordingly, supplementary commission income was incidental and had nexus with agency services rendered by travel agents to the Taxpayer. Furthermore, the definition of “commission” under the ITL is wide and also covers indirect payment of commission to agents. Hence, the Taxpayer was liable to be treated as “assessee-in-default” for not withholding tax on supplementary commission.
However, the SC further held that there can be no recovery of principal amount of tax if the travel agents had paid taxes on supplementary commission, although interest can be levied till the date of payment of taxes by the travel agents. Also, the Taxpayer cannot be penalized for not withholding tax since the issue of withholding on supplementary commission was clearly an arguable and “nascent” legal issue which required resolution by the SC.
[1] Singapore Airlines Ltd [TS-880-SC-2022]