HC redifines extra commission retained by travel agents

In a ruling that could severely hit the revenues of international airlines, the Delhi High Court has said that supplementary commission retained by the travel agent is not commission within the meaning of section 194H and is liable for tax to be deducted at source (TDS).

The judgment delivered last month was in response to the appeals filed by 12 airlines — Singapore Airlines, KLM Royal Dutch, Pakistan International Airlines, Kuwait Airways, Air France, Thai Airways International Public Co Ltd, British Airways, Air India, Belair Travels and Cargo and United Airlines. Both Kuwait Airways and Air France had filed two appeals on a similar issue.

Supplementary commission is paid when the airline supplies blank tickets to travel agents in bulk for on-selling to customers. This is different from the standard commission received by travel agents from an airline, which is on the basis of the total volume of business.

Section 194H, which deals with commission or brokerage, and states that any person, who is responsible for paying, on or after the 1st day of 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 the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, deduct income-tax thereon at the rate of ten per cent.

Commission or brokerage for this section includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities. Securities for this section means shares and bonds which are tradable.

The twelve airline assessees argued that since the money realised by travel agents, over and above the net fare to the airlines, was solely on account of their efforts, the same cannot be considered as commission within the meaning of section 194 H of the Income Tax Act.

This is because, these airlines were not the source of money received by travel agents over and above the net fare, stated the airline assessees. In addition, they said that neither the difference between the published and the net fare was credited to the accounts of the travel agents, nor was the payment of difference between the two paid by the airline to its travel agents.

However, the court said that travel agents act on the behalf of airlines and established a relationship between the airline and a third party — the passenger. By entering into such a legal relationship on behalf of the airlines, the principal-agent relationship was confirmed, which was one of the basic requirements for attracting the provisions of section 194H, it said.

A similar petition was also filed by Lufthansa German Airlines but the airlines offered tickets to the travel agents at a concessional price. “The difference in real price and the concessional price of the tickets cannot be termed as commission since they are offered for personal use of travel agents and are non transferable,” the high court said.

Lufthansa was the only airline to have got a relief in the case. All others will have to pay tax in response to the notice sent to them for assessment years 2001-2, along with the interest due.