IMPORTANT POINT
Tax Deduction at Source (“TDS”) – Section 194H of IT Act does not distinguish between direct and indirect payments – Factum of exact source of payment would be of no consequence to requirement of deducting TDS.

JUDGMENT :

SURYA KANT, J.

1. The question that arises for our consideration pertains to the interpretation of Section 194H of the Income Tax Act, 1961 (“IT Act”) as introduced by the Finance Act, 2001, with effect from 01.04.2000. The provision requires deduction of tax at source (“TDS”) at 10% plus surcharge from payments falling under the definition of “Commission” or “Brokerage” under the Section.

(A) THE AIRLINE INDUSTRY

2. Within the aviation industry during the relevant period, the base fare¹ [“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.² [“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 agents operating in the sector, with the IATA which signs on behalf of the air carriers. The PSAs set the conditions under which the travel agents carry out the aforementioned sale of flight tickets, along with other ancillary services, and the remuneration they are entitled to for these activities.

4. Once these tickets were sold, a 7% commission designated by the IATA would, be paid to the travel agent for its services as “Standard Commission” based on the price bar set by the IATA.³ [Prior to 01.01.2002, the Standard Commission was paid at the rate of 9%] This would be independent of the Net Fare quoted by the air carriers themselves. The 7% commission on the Base Fare consequently triggered a requirement on the part of the airline to deduct TDS under Section 194H at 10% plus surcharge. The details of the amounts at which the tickets were sold would be transmitted by the travel agents to an organization known as the Billing and Settlement Plan (“BSP”). The BSP functions under the aegis of the IATA and manages inter-alia logistics vis-a-vis payments and acts as a forum for the agents and airlines to examine details pertaining to the sale of flight tickets.

5. The BSP stores a plethora of financial information including the net amount payable to the aviation companies, discounts, and commission payable to the agents. The system consolidated the amounts owed by each agent to various airlines following the sale of the tickets by the former. The aggregate amount accumulated in the BSP would then be transmitted to each air carrier by the IATA in a single financial transaction to smoothen the process and prevent the need to make multiple payments over time.

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

7. An illustration of how such a transaction would be carried out and the monetary gains made