Supreme Court Changes Tax Relationship Between Airlines And Their Agents
One ruling, two tax consequences. Supplementary commissions come under TDS net, leading to outcomes under GST as well.
Airlines will now have to deduct tax on the supplementary commission earned by their agents who sell tickets to passengers, according to a recent Supreme Court ruling in a case concerning Singapore Airlines Ltd., KLM Royal Dutch Airlines, and British Airways.
This is an important ruling that puts the controversy around supplementary commissions to rest, Sumit Singhania, a partner at Deloitte India, said. It means that airlines would have to do extra work to ensure that data about the supplemental income of their agents is collected, he said.
A process would have to be set for the same. Decisions around where the data will be sourced—whether it should be from IATA, a clearing agency, or each and every travel agent—must also be made.Sumit Singhania, Partner, Deloitte India
The ruling will also have goods and services tax consequences, experts told BQ Prime. GST is levied on transactions between principal and agent for the supply of goods, according to the existing law.
Now, the apex court has expanded the definition of agency, which would mean that the principal would be liable to tax on the indirect income of the agent under such transactions, says Asish Philip, a partner at Lakshmikumaran and Sridharan Attorneys.
The "Extra" Tax
In this case, the airlines had entered into agreements with travel agents for the sale of their tickets.
These agents can get two types of commissions: standard commissions—fixed by the International Air Transport Association—and supplementary commissions.
The amount of supplementary commission can be between the base fare as set by IATA and the net fare set by the airline. For instance, if the base fare is Rs 1000, the net fare is Rs 500, and the agent sells the ticket for Rs 800, the extra Rs 300 is the supplementary commission.
The airlines deduct tax on standard commission but fail to do so for supplementary commission, prompting a notice from the income tax department.
The amount in excess of net fare earned by the agents is in the nature of supplementary commission and attracts tax deducted at source liability, the department argued.
But in the airlines' case, the transaction consists of two limbs. The first limb of the transaction between the airlines and the agent falls within the purview of the principal-agent relationship, which will attract TDS liability.
The second limb is an independent transaction between the travel agents and passengers. This is a principal-principal relationship that will not attract withholding tax obligations under the income tax law, according to the airlines.
The airlines have no information about the price at which the ticket is sold to the passenger as it flows directly from the customer to the travel agent, the companies said.
Supreme Court's Three-Part Test
The apex court dismissed the airlines' view that the supplementary commission is an independent transaction by applying 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 or not,
Whether the liability of a breach falls on the airline or agent.
The apex court pointed out that flight tickets were sold by the travel agents on behalf of the airlines, the title continued with the airlines, and they indemnified the travel agents for any breach of service.
The court noted that the travel agents are providing "agency" services on behalf of the airlines, which are also liable for TDS on the supplementary commission.
The ruling effectively overrules the law laid down by the Bombay high court in the Qatar Airways case and extends the "agency" relationship between airlines and agents until the final sale is made to the passenger, says Philip.
What's The GST Angle?
The GST consequences arise from the way "agency" has been viewed by the Supreme Court.
As long as the travel agents are acting on behalf of the principal and the responsibility for breach falls on the principal, there exists a relationship of agency, according to the apex court. Here, the "principal" would be the airlines.
The GST law says that tax at 18% shall be levied on transactions between principals and agents regardless of the fact that there is a consideration.
This current ruling, by bringing income indirectly accrued to the agent under the purview of commission, could impact the value at which GST is levied. The supplier, that is, the airlines, will be required to pay GST on the "value of supply," which is inclusive of such supplementary commissions.Asish Philip, Partner, Lakshmikumaran and Sridharan Attorneys
This ruling could have implications for the SIM card recharge coupon cases pending before the Supreme Court, Philip pointed out. The apex court has to decide on the nature of discounts provided by telecom companies to distributors and whether they would be subject to TDS, he said.