Understanding Supreme Court’s Ruling on Section 194H and Supplementary Commission:

Background:

• Section 194H of the Income Tax Act mandates the deduction of TDS at a rate of 10% plus surcharge from payments falling under the definition of “Commission” or “Brokerage.”
• The Explanation to Section 194H provides an inclusive definition of “commission or brokerage,” encompassing any payment received directly or indirectly by a person acting on behalf of another person for services rendered (excluding professional services) or for services related to buying or selling of goods.

Facts of the Case:

1. Travel Agent Commissions:

   • Travel agents receive commissions in two ways: Standard Commission and Supplementary Commission.
   • Standard Commission: A fixed percentage (7%) paid based on the price bar set by IATA.
   • Supplementary Commission: Additional amount charged by the agent on the net fare, retained by the agent as its own income.

2. Dispute:

   • Dispute arises in characterizing the income earned by the agent through Supplementary Commission and whether it falls under the TDS requirements of Section 194H.

Illustration:

• Example provided with Base Fare, Net Fare, Standard Commission, Supplementary Commission, and resulting income for the travel agent.

Arguments by the Assessee:

1. Supplementary commission falls outside the principal-agent relationship.
2. It goes from the hands of the consumer to the travel agent without intervention from the airlines.
3. It does not fall under the definition of commission.

Supreme Court’s Decision:

1. Three-Part Test:

   • The court applied a three-part test:
     • Whether the title on tickets passed from airlines to travel agents.
     • Whether the sale of tickets was done at the behest of airlines.
     • Whether the liability of a breach falls on the airline or agent.

2. Principal-Agent Relationship:

   • The court held that the supplementary commission is an independent transaction but falls under the principal-agent relationship.
   • The title on tickets continues with the airlines.
   • Airlines indemnify the travel agents for any breach of service.
   • Travel agents act as agents on behalf of airlines.

3. Liability for TDS:

   • The court noted that travel agents are providing “agency” services on behalf of the airlines.
   • Both airlines and agents are liable for TDS on supplementary commission.
   • Section 194H does not distinguish between direct and indirect payments.

4. Lack of Control by Airlines:

   • The lack of control by airlines over the actual fare charged by travel agents does not absolve them of TDS liability.
   • The ruling overrules the law laid down by the Bombay High Court in the Qatar Airways case.

Final Decision:

• The ruling extends the “agency” relationship between airlines and agents until the final sale to the passenger.
• The classification of the difference between the Actual Fare and Net Fare as “Commission” is liable to deduction of TDS under Section 194H.
• The decision sets a precedent regarding the tax treatment of supplementary commission in the context of the principal-agent relationship in the travel industry.