ITA NO 306/2005 Page 1 of 53 * THE HIGH COURT OF DELHI AT NEW DELHI % Judgment delivered on : 13.04.2009 ITA Nos. 306/2005 & 123/2006, COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Mr R.D. Jolly, Sr. Standing Counsel with Mr Paras Chaudhary, Jr. Standing Counsel. versus SINGAPORE AIRLINES LTD ..... Respondent Through: Mr C.S. Aggarwal, Sr. Advocate with Mr Prakash Kumar, Advocate ITA Nos. 121/2006 & 432/2006 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Mr R.D. Jolly, Sr. Standing Counsel with Mr Paras Chaudhary, Jr. Standing Counsel. versus KLM ROYAL DUTCH AIRLINES ..... Respondent Through: Mr C.S. Aggarwal, Sr. Advocate with Mr Prakash Kumar, Advocate ITA No. 124/2006 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Mr R.D. Jolly, Sr. Standing Counsel with Mr Paras Chaudhary, Jr. Standing Counsel. versus PAKISTAN INTERNATIONAL AIRLINES CORP. ..... Respondent Through: Mr C.S. Aggarwal, Sr. Advocate with Mr Prakash Kumar, Advocate ITA NO 306/2005 Page 2 of 53 ITA No. 116/2006 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Mr R.D. Jolly, Sr. Standing Counsel with Mr Paras Chaudhary, Jr. Standing Counsel. versus KUWAIT AIRWAYS CORPORATION ..... Respondent Through: Mr C.S. Aggarwal, Sr. Advocate with Mr Prakash Kumar, Advocate ITA Nos. 952/2008 & 964/2008 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Ms Prem Lata Bansal & Ms Anshul Sharma, Advocates versus AIR FRANCE ..... Respondent Through: Mr C.S. Aggarwal, Sr. Advocate with Mr Prakash Kumar, Advocate. ITA Nos. 51/2006, 119/2006 & 120/2006 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Ms Prem Lata Bansal & Ms Anshul Sharma, Advocates in ITA No. 51/2006 Mr R.D. Jolly, Sr. Standing Counsel with Mr Paras Chaudhary, Jr. Standing Counsel in ITA No. 119/2006 & 120/2006 versus THAI AIRWAYS INTERNATIONAL PUBLIC CO. LTD. ..... Respondent Through: Mr M.S. Syali, Sr. Advocate with Ms Mahua C. Kalram, Mr Saubhagya Aggarwal & Mr Aseem Mowar, Advocates. ITA NO 306/2005 Page 3 of 53 ITA Nos. 256/2006, 969/2008 & 897/2008 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Ms Prem Lata Bansal & Ms Anshul Sharma, Advocates versus BRITISH AIRWAYS PLC ..... Respondent Through: Mr M.S. Syali, Sr. Advocate with Ms Mahua C. Kalra, Mr Saubhagya Aggarwal & Mr Aseem Mowar, Advocates. ITA No. 1501/2006 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Ms Prem Lata Bansal & Ms Anshul Sharma, Advocates versus M/S AIR INDIA LTD ..... Respondent Through: Mr Sandeep Sethi, Sr. Advocate with Ms Padma Priya, Advocate. ITA No. 1269/2007 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Ms Rashmi Chopra, Advocate versus LUFTHANSA GERMAN AIRLINES ..... Respondent Through: Mr P.H. Parekh, Sr. Advocate with Mr D.P. Mohanty, Advocate ITA NO 306/2005 Page 4 of 53 ITA No. 1139/2005 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Ms Prem Lata Bansal& Ms Anshul Sharma, Advocates versus AIR FRANCE ..... Respondent Through: Mr O.P. Sapra, Mr Sandeep Sapra & Mr Kalyan Abraham, Advocates ITA No. 108/2007 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Mr R.D. Jolly, Sr. Standing Counsel with Mr Paras Chaudhary, Jr. Standing Counsel. versus KUWAIT AIRWAYS CORPORATION ..... Respondent Through: Mr Satyen Sethi & Mr Johnson Bara, Advocates ITA Nos. 105/2008 & 336/2008 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant Through: Ms Prem Pram Lata Bansal& Ms Anshul Sharma, Advocates versus BELAIR TRAVELS & CARGO P. LTD ..... Respondent Through: Mr Kuldeep Singh, Advocate ITA Nos. 117/2006 & 118/2006 COMMISSIONER OF INCOME TAX NEW DELHI ..... Appellant ITA NO 306/2005 Page 5 of 53 Through: Mr R.D. Jolly, Sr. Standing Counsel with Mr Paras Chaudhary, Jr. Standing Counsel. versus UNITED AIRLINES ..... Respondent Through: Mr Ajay Vohra & Ms Kavita Jha, Advocates CORAM :- HON'BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR JUSTICE RAJIV SHAKDHER 1. Whether the Reporters of local papers may be allowed to see the judgment ? Yes 2. To be referred to Reporters or not ? Yes 3. Whether the judgment should be reported in the Digest ? Yes RAJIV SHAKDHER, J 1. In these batch of appeals, which have been preferred by the Revenue, there are three issues which require consideration of this Court. (i) In the first batch of appeals; the issue which arises is whether supplementary commission received by travel agents of assessee- airlines is a „commission‟ within the meaning of Section 194H of the Income Tax Act, 1961 (hereinafter referred to as the „Act‟). If that be so, the failure on the part of the assessee-airlines would render them liable for consequences under Section 201(1) and 201(1A) of the Act. (ii) In the second set of appeals, the issue for consideration is whether certificates issued by the Assessing Officer to the assessee-airlines ITA NO 306/2005 Page 6 of 53 under Section 197 of the Act permitting the assessee-airlines to deduct tax at source at a lower rate or even „nil‟ rate would also cover the supplementary commission. (iii) The third set of appeals raise the issue as to whether tickets issued by assessee-airlines to its travel agents at a concessional price would result in bringing the transaction within the ambit of Section 194H of the Act. If that be so, would the assessee-airlines be liable for the ensuing consequences under Sections 201(1) and 201(1A) of the Act. 2. The lead case in these batch of appeals is ITA No. 306/2005 entitled “CIT vs Singapore Airlines”. The judgment of the Income Tax Appellate Tribunal (hereinafter referred to as the „Tribunal‟) dated 19.10.2004 passed in TDSA No. 58/Del/302 pertains to assessment year 2001-02. It is a common ground that all other appeals have been disposed of based on the aforesaid judgment of the Tribunal. The counsel for the assessees-airlines who have appeared before us have submitted that the facts, in issue, are common. Therefore, except for a few submissions the submissions are more or less common. Wherever counsel have laid stress on a particular point or made a submission different from one already made - we shall refer to the same as we go along with the narration of the facts and submissions in our judgment. 3. Therefore, in order to decide these appeals, it would suffice except for the eventuality articulated hereinabove, if we were to note the facts set out and submissions made in the records of the authorities below in ITA NO 306/2005 Page 7 of 53 ITA No. 306/2005. Keeping this ground rule in mind, let us examine the issues at hand. 4. The provision which is the subject matter of the debate, that is Section 194H, was first brought on to the statute book by the Finance (2) Act, 1991 w.e.f. 01.10.1991. The Section was amended by the Finance Act, 1992 w.e.f. 01.06.1992. The Section was omitted from the statute book by the Finance Act, 1999 w.e.f. 01.04.2000. The said Section 194H was reintroduced in the statute book in its present avatar by the Finance Act, 2001 w.e.f. 01.06.2001. We are concerned with the provisions of Section 194H as it stood after its introduction by virtue of the Finance Act, 2001. Therefore, the period in issue during which the assessee(s)-airline(s) received what the Revenue terms as supplementary commission is: 01.06.2001 to 15.02.2002. It is the Revenue‟s case that the assessee-airline received by way of supplementary commission during the period in issue a sum of Rs 29,34,97,709/- on which it failed to deduct tax at source equivalent to Rs 2,93,49,770/-. The department was thus deprived of not only the said short-deducted tax at source but also of surcharge. 5. It is the Revenue‟s case that immediately after the reintroduction of Section 194H on the statute book, the Department wrote letters to the airlines to adhere to the provisions of the newly introduced Section. As a matter of fact, the Central Board of Direct Taxes (hereinafter referred to as the „CBDT‟) issued a Circular No. 619 dated 04.12.1991 wherein ITA NO 306/2005 Page 8 of 53 it clarified that any retention of commission by a consignee or an agent would amount to constructive payment by the principal and hence Tax Deduction at Source (in short „TDS‟) was required to be deducted under the provisions of Section 194H of the Act. The Revenue has stated that despite such instructions and communication the assessee(s)-airline(s) did not pay heed to the directives of the Department. The Department having been left with no choice conducted a survey under the provisions of Section 133A of the Act. The survey was conducted on 18.02.2002. During the course of survey, it came to light that the assessee(s)- airline(s) would supply blank tickets to the travel agent. The travel agent, after sale, would send the details to an organization by the name of Billing Settlement Plan (hereinafter referred to as „BSP‟); which is an organization approved by the International Air Transport Association (hereinafter referred to as the „IATA‟). The travel agent would send sale details to BSP every two weeks. Based on this information, the BSP would send a billing analysis to the assessee(s)-airline(s). The billing analysis conducted by the BSP would invariably refer to the transaction value, the tax amount, the standard IATA approved commission, which to begin with, was 9% and was reduced to 7% w.e.f. 01.01.2002, and lastly, if the transaction pertained to what was termed as a „deal‟ ticket, it would also indicate the supplementary commission. Thus the billing analysis would show the net amount payable, after deductions had been made from the transaction value, on account of, ITA NO 306/2005 Page 9 of 53 commission and supplementary commission wherever paid. The billing analysis statement prepared by BSP invariably in most cases referred to the deal code wherever there was reference to supplementary commission. 5.1 In view of this information having come to light, the Assessing Officer issued summons under Section 131 to the assessee-airline. The assessee-airline on 22.02.2000 filed its reply to the queries raised by the Assessing Officer. In short the assessee-airline submitted that the provisions of Section 194H were not applicable to it as what was retained by the travel agent was in the nature of discount and not commission as contemplated under the said provision. Reliance was placed on the judgment of the Kerala High Court in the case of M.S. Hameed & Ors. vs Director of State Lottories; (2001) 249 ITR 186. 6. On the other hand, the Department‟s case was that a survey was conducted on 07.03.2002 with respect to certain travel agents. As a matter of fact, a reference has been made in the order of the Assessing Officer of two such travel agents viz. Ashok Travel and Tours and Balmer and Lawrie & Co. Ltd. Both the travel agents confirmed that even though they received special commission from the airline, the same was not passed on to the customers. Balmer and Lawrie & Co. Ltd which is an approved travel agent for public sector undertakings, however, adverted to the fact that they had obtained exemption from the Income Tax authority vide communication dated 29.05.2001 and hence ITA NO 306/2005 Page 10 of 53 tax at source had not been deducted on commission received by them. It, however, informed the Department that in the said sector incentive/commission which it received was retained and not passed on to any agency or any of their clients. As regards concessional/free tickets Balmer and Lawrie & Co. Ltd informed the Department that they were being utilized for the in-house travel and by the officers of the company who are required to travel for official work by air as per their entitlement. 7. The Assessing Officer after examining the stand came to the conclusion that the provisions of Section 194H of the Act were attracted in the instant case. The brief reasons which impelled the Assessing Officer to come to the said conclusion were as follows:- (i) the assessee-airline supply blank tickets to the travel agent in bulk. These tickets are the property of the assessee-airline and hence at no stage form the stock-in-trade of the travel agent, as there is no out-right purchase of the tickets by the travel agent; (ii) the relationship between the assessee-airline and the travel agent was that of a principal and agent. The assessee-airline did not bring any evidence on record to show that the supplementary commission retained by the travel agent was passed on to the customers; (iii) there is no difference between the standard commission paid (as approved by IATA) by the assessee-airline to the travel agent on which the tax at source is deducted and the supplementary commission. The ITA NO 306/2005 Page 11 of 53 mode of accounting both for standard commission and the supplementary commission is the same; (iv) the Bureau of Airlines Representatives Association as well as the Travel Agent Association of India had approached the Department whereupon a circular dated 13.11.2002 was issued which clarified the position that supplementary commission was commission within the meaning of Section 194H; (v) the word „indirectly‟ used in Section 194H of the Act was wide enough to bring within its ambit even the retention of monies in the form of supplementary commission by the travel agent; and (vi) lastly, the transaction between the assessee-airline and the travel agent was of the nature of a principal and agent whereby the agent was selling tickets of a fixed amount on commission either in the form of standard commission (as approved by IATA) or special/supplementary commission. 7.1 On the aspect of issuance of a certificate under Section 197 of the Act permitting the deduction of tax at a lower rate or even „nil‟ rate, the Assessing Officer came to the conclusion that these certificates had been obtained based on applications wherein travel agents had made a mention only with respect to the standard commission. There was no mention of special/supplementary commission. The Assessing Officer was, therefore, of the view that the Section 197 certificate issued by the Department would not extend to exemption from TDS on ITA NO 306/2005 Page 12 of 53 special/supplementary commission. The supplementary commission could not be categorized as discount since there was no obligation on the travel agent to pass on the special/supplementary commission to the customer. The BSP billing analysis has classified the commission in issue as supplementary commission. Most of the airlines in their books of account have divided the commission into two parts, the first is the standard commission and the other is the supplementary commission. The standard commission is calculated at the rate of 9% or 7% (w.e.f. 01.01.2002) on which tax at source is deducted. In the assessee- airline‟s books of account the supplementary commission is either shown by using the same nomenclature or is shown under the head deals/incentives. Lastly, w.e.f. 01.04.2002 the entire procedure has undergone a change in as much as all airlines have started selling their tickets at net value. This according to the Assessing Officer proved the stand of the Department as being correct. 7.2 Based on the aforesaid the Assessing Officer while holding the assessee-airline as assessee in default directed calculation of interest under Section 201(1A) of the Act to the extent of Rs 21,13,224/-. The Assessing Officer of other airlines and Commissioner of Income Tax, Delhi passed orders under Section 201(1) and 201(1A) of the Act in the case of other airlines. 8. Aggrieved by the same, 12 airlines preferred appeals to the Commissioner of Income Tax (Appeals) – XXX, New Delhi ITA NO 306/2005 Page 13 of 53 [hereinafter referred to as the „CIT(A)‟]. A reference to the airlines which preferred appeal to the CIT(A) is made in paragraph 2 of his order. The CIT(A) in his order also notes the fact that the Pakistan Airlines has not contested the issue of treatment of supplementary commission being in th nature of commission as held by the Assesing Officer. He notes that the main ground taken by the Pakistan Airlines is that the tax ought to be recovered from the payee and not from the payer. 8.1 The CIT(A) after hearing the submissions of both sides summed up his conclusion in para 16 & 17 of the impugned judgment. The conclusions being relevant are extracted hereinbelow:- “i. The relationship between the airlines and travel agents is of principal and agent only. ii. The amount of supplementary commission mentioned in the billing analysis or BSP is in the nature of commission and supplementary commission. iii. There are sufficient reasons to hold that all airlines were knowing the stand of the Income Tax Department on interpretation of provisions of Section 194H that these were applicable to supplementary commission also. In fact in the remand report one AO has mentioned that some airlines were already applying these provisions to supplementary commission. iv. The certificates u/s 197 were issued by AOs to some agents in respect of commission only and there was no distinction made by AOs between standard IATA commission and supplementary commission. Accordingly the credit for such certificates will have to be given while calculating short deduction of tax. v. The recovery of tax not deducted has to be made from the airlines only. vi. Levy of interest u/s 201(1A) is absolute and there is no relief in this respect. ITA NO 306/2005 Page 14 of 53 vii. The transaction prior to 1.6.01 will be excluded for applying section 194H to the supplementary commission. 17. The main ground relating to applicability of provisions of Section 194H to supplementary commission (or incentive or discount) fails. However, appellants would get relief in respect of certificates u/s 197 given to some agents and transaction prior to 1.6.2001.” 9. The assessee-airline, being aggrieved, preferred an appeal to the Tribunal. The Tribunal reversed the decision of the CIT(A) and held that the provisions of Section 194H were not attracted in the instant case. Briefly, the Tribunal came to this conclusion by holding that the assessee-airline only receives the net fare. The assessee-airline does not have any means of knowing the price at which the travel agent has ultimately sold the ticket to the customer. The travel agent is required to pay the net fare to the assessee-airline even though he may end up selling the ticket at a price which is less than the net fare. The price which the travel agent obtains over and above the net fare is due to the travel agent‟s own efforts in respect of which it does not render any service to the assessee-company. It is entirely open to the travel agent to make endeavours to obtain and realize the best price. The price that the travel agent obtains over and above the net fare does not emanate from the assessee-airline . The excess fare that is the price over the net fare which the travel agent earns may have been earned by virtue of the agency with the assessee-airline. The excess remuneration earned, however, could not be regarded as one which the travel agent realized ITA NO 306/2005 Page 15 of 53 on account of any services rendered by the travel agent to the assessee- airline. The fact that the assessee-airline comes to know the price at which the travel agent ultimately sold the ticket by referring to the BSP billing analysis statement is of no consequences in view of the fact that the assessee-airline comes to know of this state of affairs only when the statement is received from BSP and not at the time when the tickets are sold and the price is realized by the travel agent. 9.1 The Tribunal also rejected the submissions made on behalf of the Revenue that, what is retained by way of difference between the published fare and the net fare was a constructive payment on the ground that what the assessee-airline was entitled to was the net fare and not published fare even if the travel agent were to sell the ticket at the published fare. The Tribunal noted that since assessee-airline had no right to receive any amount received by the travel agent over and above the net fare then based on the theory of constructive payment, it cannot be assumed that the assessee-airline received excess payment from the agent which was paid back by the assessee-airline to the travel agent. The Tribunal noted that there was no material on record to show that the travel agent was required to disclose at the time of sale of ticket the price at which the ticket was actually sold. 9.2 The above findings were summarized by the Tribunal by holding that: (a) the amount realized by the travel agent in excess of net fare could not be considered as commission; (b) the assessee-airline cannot ITA NO 306/2005 Page 16 of 53 be said to be a person responsible for paying commission to the travel agent; (c) the difference between the net fair and the published fair was not credited to the account of the travel agent in the assessee‟s books; and (d) lastly, there was no payment of such excess amount by the assessee-airline to the travel agent in cash or cheque or by any other mode. In these circumstances, the Tribunal set aside the order of the Assessing Officer treating the assessee-airline as assessee in default under Section 201(1) of the Act and also the order passed under Section 201(1A) of the Act levying interest in the sum of Rs 21,13,224/-. It is important to note that the Tribunal did not decide the issue of jurisdiction raised by the assessee-airline on the ground that this was within the domain of the CBDT. In view of the fact that the Tribunal had quashed the order of the Assessing Officer under Section 201(1) of the Act the other issue with respect to the issuance of certificate under Section 197 of the Act and the deductibility of the tax with respect to transaction prior to 01.06.2001, one which was decided by the CIT(A), was not considered by the Tribunal. Submissions of counsel: Revenue 10. The Revenue was represented by Ms Prem Lata Bansal, learned Sr. Standing Counsel and Mr R.D. Jolly, learned Sr. Standing Counsel. The assessees were represented by Mr C.S. Aggarwal, Sr. Advocate assisted by Mr Prakash Kumar, Mr Aseem Mowar, Advocate, Mr ITA NO 306/2005 Page 17 of 53 Mukesh Kumar, Advocate, Mr Sandeep Sethi, Sr. Advocate assisted by Ms Padma Priya; Mr Ajay Vohra, Advocate assisted by Ms Kavita Jha, Advocate; Mr P.H. Parekh, Sr. Advocate assisted by Mr D.P. Mohanty. The submissions made on behalf of the Revenue were as follows:- (i) the relationship between the assessee-airline and the travel agent was that of a principal and agent and not one of principal to principal. At this point we must point out that except for Thai Airways and Belair Travel & Cargo Ltd all other airlines have accepted this position; (ii) the supplementary commission retained by the travel agent was not a discount as claimed by the assessee-airline since it was paid for services rendered by the travel agent in the course of buying and selling of tickets; (iii) the submission of the assessee-airline that they had a dual/hybrid relationship with their agent, that is, in so far as the transaction which involved payment of standard commission was that of agency, while that which involved the retention of supplementary commission by the travel agent, that is, price obtained over and above the net fare, was a result of a principal to principal relationship ought to be rejected, for the reason that no evidence whatsoever was placed by the assessee-airline to establish that there was such a dual relationship between the parties. The Standard Format Agreement (as approved by IATA), that is, the Passenger Sales Agency (PSA) Agreement executed by the assessee- ITA NO 306/2005 Page 18 of 53 airline was silent as regards any such dual relationship to which the assessee-airline had adverted to; (iv) a perusal of the billing analysis statement prepared by the BSP undoubtedly revealed that the assessee-airline received the balance amount that is the net fare after deductions made, from the gross fare