1. Introduction

The principles governing principal-agent relationship are now firmly established and well known, so much so that the law of agency has unequivocally ingrained itself in the commercial world. The axiomatic principles emanating therefrom are pivotal to ascertain legal consequences in wide-ranging tripartite situations, overwhelmingly extending their influence to entail tax implications as well. A recent decision of the Supreme Court has revisited the consequences of agency relationship qua the transactions between agent and third parties in the context of income tax law. It addresses an interesting issue; whether an agent can claim that the transaction (or a part of it) between it and the third party is an independent transaction even if it is occasioned on account of its agency relationship with the principal? This article dissects this decision to set in context the crucial interlinkage between agency law and tax law.

2. Dispute before the Supreme Court

The dispute before the Supreme Court arose in Singapore Airlines Ltd. v. CIT1. The relationship between travel agents and airlines was the centre-stage of dispute before the Supreme Court. The issue arose in view of the income tax obligation of the airlines to deduct tax at source (TDS) under Section 194-H2 on the commission payable by them to the travel agents towards booking of tickets. In view of the peculiar position of the airline industry, there was two commissions received by the travel agent, which are referred to as “standard commission” and “supplementary commission”.

The occasion for these commissions arose owing to the airline setting up a base price for sale of tickets and permitting the travel agent to sell the tickets at a higher price. The standard commission was paid by the airlines for each ticket sold by the travel agent, calculated at 7% of the ticket base price. The excess of amount collected by the travel agent from the customer (i.e. amount in excess of the base ticket price) was permitted to be retained by the travel agent in terms of the airline policy. This excess amount is referred as the supplementary commission. The transaction flow can be illustrated as under:

Base fare for Singapore — Delhi (set by the IATA)

Rs 1,00,000

This is the upper ceiling price of the ticket fixed by the regulator beyond which price cannot be charged from the customer.

Net fare (set by the airline)

Rs 60,000

This is the amount received by the airline and hence is the income of the airline.

Actual fare (set by the travel agent)

Rs 80,000

This is the amount on which ticket is actually sold by the travel agent. Hence, Rs 20,000 is left with the travel agent after payment of net fare to the airline.

Standard commission (7% of the base fare)

Rs 7,000

(7% of Rs 1,00,000)

This is the standard commission income of the travel agent on which TDS has been applied by the airline.

Supplementary commission (actual fare — net fare)

Rs 20,000

(Rs 80,000-60,000)

This is additional income of the travel agent on which airline is contesting that no TDS is applicable.

The airline was affecting TDS on the standard commission it paid to the travel agents. However, it was argued that supplementary commission was not subject to TDS as inter alia the supplementary commission was not paid by the airline and was the travel agents’ own income. There was a cleavage of judicial opinion amongst the High Courts as to supplementary commission being subject to TDS. The Delhi High Court3 and Madras High Court4 had opined against the airlines whereas the Bombay High Court5 concluded in its favour holding that TDS was not applicable on the supplementary commission. In this background, the issue came up for consideration before the Supreme Court.

3. Decision of the Supreme Court

The Supreme Court in its decision in Singapore Airlines6 has extensively examined the industry practice prevailing in the airline industry and the manner in which travel agents earned their remuneration. It is interesting to note that in order to delineate the legal positioning of the travel agents within the airline industry, the decision opined upon the purport of relationship set out in Section 194-H to observe that it is principally concerned with principal-agency relationship. Taking cue from the expression “acting on behalf of” in the provision, the Supreme Court concluded that the nature of the relationship envisaged in Section 194-H was “interlinked” with the law of agency as expounded in the Law of Contract.7 Thus, to address the controversy, it was required to determine “whether the travel agents were ‘acting on behalf of’ the airlines during the process of selling flight tickets”, which question would in turn have a substantial bearing on the nature of the supplementary commission.

Dissecting the relationship, at a conceptual level, the Supreme Court found it incongruent that the airlines did “not dispute that a principal-agent relationship existed during the payment of the standard commission” and yet they contended against a principal-agent relationship for the “second part of the transaction i.e. when the tickets were sold to the customer and for which the travel agents earned certain amounts over and above the net fare set by the” airlines. To address the dichotomy, the Supreme Court took recourse to its earlier precedents delineating the distinction between principal-agent versus master-servant relationship8 and contract of agency versus contract of sale9 to declare that the determination of the relationship was hinged upon determining the manner in which the title to the tickets passed from the airline and reached the customers. To this end, the Supreme Court framed the following three mixed questions of law and facts which required advertence;

“From the catena of cases elaborating on the characteristics of a contract of agency, the following indicators can be used to determine whether there is some merit in the (airlines) contentions on the bifurcation of the transaction into two parts:

Firstly, whether title in the tickets, at any point, passed from the (airline) to the travel agents;

Secondly, whether the sale of the flight documents by the latter was done under the pretext of them being the property of the agents themselves, or of the airlines;

Thirdly, whether the airline or the travel agent was liable for any breaches of the terms and conditions in the tickets, and for failure to fulfil the contractual rights that accrued to the consumer who purchased them.”

In effect, therefore, as evident from the aforesaid questions, the Supreme Court applied the test of transfer of title to determine the nature of relationship between the airlines and travel agents. It is evident that the travel agent would have been acting in the capacity of principal if the title in the tickets passed from the airlines to the travel agent and thereafter from travel agent to the customers whereas the travel agent would be acting in agency capacity if the title directly pass from the airline to the customers.

Upon a perusal of the contract between the airlines and the travel agent, the Supreme Court inter alia took note of an undisputed stipulations in the agreement between the airlines and the travel agents that the travel documents “… are and remain the sole property of the carrier … until duly issued and delivered pursuant to a transaction under this agreement”, which unequivocally clinched the matter as it implied that at no stage the title in the tickets, transferred from the airlines to the travel agent and the tickets remained the property of the airline. On this premise, the Supreme Court unhesitatingly concluded that “[n]o contract of sale between two principals was ever in existence” between the airlines and the travel agent. This effectively foreclosed the contention that the travel agent was acting as a principal with the customer qua the supplementary commission.

However, the Supreme Court did not rest it conclusion only on this ground. In its decision it further went on to exemplify from other contractual stipulations that several elements of a contract of agency stood satisfied. It inter alia highlighted the following: (A) “Every action taken by the travel agents is on behalf of the air carriers and the services they provide is with express prior authorisation. The airline also indemnifies the travel agent for any shortcoming in the actual services of transportation, and any connected ancillary services, as it is the former that actually retains title over the travel documents and is responsible for the actual services provided to the final customer.” (B) “Furthermore, the airline has the responsibility to provide full and final compensation to the travel agent for the acts it carries out under the” agreement. Thus, the Supreme Court found enough substance in the agreement that the travel agent acted on behalf of the airlines at all times, rendering the airlines liable for all their acts and thereby firmly establishing the agency relationship between them on all counts without exception of the supplementary commission.

As regards the application of the TDS provisions on the supplementary commission, the following observations of the Supreme Court are pertinent;

  1. Section 194-H “does not distinguish between direct and indirect payments. Both fall under Explanation (i) to the provision in classifying what may be called a ‘commission'”.

  2. In this wake of the statutory scheme, “the factum of the exact source of the payment would be of no consequence to the requirement of deducting TDS. Even on an indirect payment stemming from the consumer, the (airlines) would remain liable under the IT Act. Consequently, the contention of the airlines regarding the point of origination for the amounts does not impair the applicability of Section 194-H of the IT Act”.

  3. How the airline would appraise itself of the exact quantum of supplementary commission earned by the travel agent from the customer, so as to determine the quantum of TDS, is a question of “mechanics” which must be figured out by the airline in order to discharge its TDS obligation.

  4. “Further, the lack of control that the airlines have over the actual fare charged by the travel agents over and above the net fare, cannot form the legal basis for the (airlines) to avoid their liability” because “an agent undoubtedly retains a sizeable level of discretion on how to achieve the desired results”.10

For the aforesaid reasons, the Supreme Court confirmed the decision of the Delhi High Court to the effect that the airlines were obliged to apply TDS even on the supplementary commission earned by the travel agents by way of retaining the amounts directly from the customers.

4. Implications of the decision qua scope of TDS provisions

There is a clear finding by the Supreme Court linking the TDS obligation under Section 194-H to the law of agency.11 This has substantial bearing on large number of pending disputes. It would be interesting to observe the application of this decision wherein it has been inter alia contended that there is no payment by the alleged principal, even if there is payment, it is not in the nature of the commission. An indiscriminate application of the principle12 that Section 194-H is based on agency relationship (and other related observations in this decision) is likely to render academic all such contentions.

From another angle, the implications of the decision are far beyond Section 194-H. From a TDS perspective, the key takeaway from this decision is that it is not necessary for the TDS provisions to apply that the funds flow directly from the pay or to the receiver; the TDS obligation nonetheless continues to exist even if the flow of funds to the receiver is from third parties if the flow can be traced to the transaction which is subjected to TDS. On this account, it would be difficult to restrain the ratio of this decision as being confined to Section 194-H alone and arguably the Tax Department can be expected to stretch the proposition emanating from this case to all TDS situations.

5. Reflections on agent’s authority to act independently

Notwithstanding the fact that the decision is the context of tax law, it has wide ramifications even within the realm of the law of agency. One can contend that the decision establishes the proposition that the law of agency does not accommodate dissection of agent’s acts so as to classify some of its actions as if on principal-to-principal basis with third parties while continuing to act as an agent of the main principal. The reference by the Supreme Court to the decision in Bhopal Sugar Industries13 and opining that there were no two principals is clearly testament to the fact that the first transaction (i.e. between the airline and the travel agent) qualifying as an agency would, as if by default, rule out the principal-to-principal status of the second transaction and the second transaction would invariably be an extension of the principal-agency relationship under the first transaction. Put differently, this decision of the Supreme Court arguably institutes the proposition that an agent cannot generally be considered as acting on a principal basis himself with third parties once his dealing with such parties are in pursuance of an agency relationship with the principal.

A lot also turns of the following observations of the Supreme Court are instructive;

47. The fact that the travel agent has discretion to set an actual fare which is above the net fare has no effect on the nature of the relationship between the parties. A contract of agency permits an agent to carry out acts on its own volition provided it does not contravene the purpose of the agency contract and the interests of the principal. The accretion of the supplementary commission to the travel agents is an accessory to the actual principal-agent relationship under the PSA. In such a commercial arrangement, the benefit gained by an agent is incidental to and has a reasonably close nexus with the responsibilities that were entrusted to it by the principal air carrier. Such incidental benefits or actions must come under the ambit of the relationship, subject to any express limitations articulated in the contract itself or under the Contract Act.

The aforesaid observations go a long way in establishing the scope of agency itself. The fact that consideration for agency can flow from third parties directly the agent (as the supplementary commission reveals) is now firmly established. The decision also establishes that once the obligation of the principal continues qua third parties, it would be difficult to conclude that agency relationship does not exist notwithstanding the incidental aspects. Indeed, the Supreme Court referred to the provisions of the Contract Act which deal with “right of principal when agent deals, on his own account, in business of agency without principal’s consent”14 and “principal’s right to benefit gained by agent dealing on his own account in business of agency”15. However, the Supreme Court found these provisions inapplicable in the factual premise as the agreement between the airline and the travel agents “does not explicitly address the issue of supplementary commission at all”. More critically, the Supreme Court observed, “an agent acting of its own account does not, in principle, alter the nature of a contract of agency and only gives rise to the consequences mentioned under Sections 215 and 216 of the Contract Act if the conditions contained within them exist”.

Taken to their logical end, this decision endorses the legal position that the fact that the agent reserves for himself sufficient latitude to determine the terms of engagement with third parties does not transform the nature of its relationship with the principal. The legal difference between the authority of an agent vis-à-vis a servant clearly expounds that agent’s dealings with third parties accommodate an agent to carry out “acts on its own volition”. A caveat does exist that such acts should “not contravene the purpose of the agency contract and the interests of the principal”. However, pragmatically, such caveat would play out only where the principal refuses to “condone” the alleged transgressions of the agent. Thus, in practical terms, the following legal position can be considered to arise from the decision:

  • So long as the principal accommodates/ratifies the acts of the agent, it would be difficult to conclude that the transactions of the agent with third parties are beyond the scope of agency notwithstanding that the agent has not been expressly authorised to certain ends or the fact, as in this case, that the agent has negotiated the price with the customer and retained a part of the price for itself;

  • Even if the principal disagrees with the acts of the agents, in view of Sections 215 and 216, at best the principal can sue the agent for share in the additional benefit of the agent (Section 216) or get the agency agreement terminated (Section 215). However, even in wake of such empowerment of the principal, there is nothing in the law which “alter the nature of a contract of agency” in situations of an agent acting of its own account.

The decision, therefore, undoubtedly establishes a wide latitude for agents to act independently within the larger framework of the agency agreement with the principal. Viewed differently, the decision categorically expounds upon the agent’s ability to deal with third parties within the larger framework of the agency relationship.

6. Conclusion

There are few contemporary decisions of the Supreme Court addressing the scope of agent’s authority qua third parties. On this count, the decision is a welcome addition on the jurisprudence as it fine tunes the legal framework to address the pragmatic commercial realities by declaring that it is wide to subsume almost all acts of the agent and dealings with third parties subject perhaps only to the larger guiding factors of (a) purpose of agency, and (b) interests of the principal, and obviously, the overarching statutory framework. This decision of the Supreme Court, albeit in the context of tax law, thus, effectively delineates the wide empowerment of an agent and the contours of the agency relationship extending to his transactions with third parties.

The aforesaid summation of the decision, in the larger context of agency law, is admittedly in addition to the ratio of the decision which is to the effect that (i) an agent continues to act in the capacity of the agent even if he is empowered to negotiate the price with the customer and retain a portion of it for itself; (ii) and all remuneration received by the agent would be subject to tax deduction by the principal even if part of the remuneration does not directly flow from the principal to the agent and is instead received by the agent by retaining a part of the amount received from the customer.

† Tarun Jain, Advocate, Supreme Court of India; LLM (Taxation), London School of Economics

1. 2022 SCC Online SC 1588.

2. S. 194-H, Income Tax Act, 1961. The said provision inter alia obliges TDS by the payer on “any income by way of commission” wherein “commission or brokerage includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any 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”.

3. CIT v. Singapore Airlines Ltd., 2009 SCC OnLine Del 823.

4. Around the World Travel and Tours (P) Ltd. v. Union of India, 2003 SCC Online Mad 1027.

5. CIT v. Qatar Airways, 2009 SCC Online Bom 2179.

6. 2022 SCC Online SC 1588.

7. Contract Act, 1872, S. 182. It states, “an ‘agent’ is a person employed to do any act for another, or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented, is called the ‘principal’.”

8. Lakshminarayan Ram Gopal and Son Ltd. v. Govt. of Hyderabad, AIR 1954 SC 364.

9. Gordon Woodroffe and Co. (Madras) Ltd. v. Shaik M.A. Majid, AIR 1967 SC 181 : 1966 Supp SCR 1; Khedut Sahakari Ginning and Pressing Society Ltd. v. State of Gujarat, (1971) 3 SCC 480; Bhopal Sugar Industries Ltd. v. STO, (1977) 3 SCC 147.

10. Relying upon Lakshminarayan Ram Gopal, AIR 1954 SC 364 and Qamar Shaffi Tyabji v. Commr., Excess Profits Tax, AIR 1960 SC 1269 : (1960) 3 SCR 546.

11. “S. 194-H is to be read with S. 182 of the Contract Act. If a relationship between two parties as culled out from their intentions as manifested in the terms of the contract between them indicate the existence of a principal-agent relationship as defined under S. 182 of the Contract Act, then the definition of “commission” under S. 194-H of the IT Act stands attracted and the requirement to deduct TDS arises.”

12. Read alongside the earlier decision of the Supreme Court in Director, Prasar Bharati v. CIT, (2018) 7 SCC 800 which is cited with approval in this decision.

13. Bhopal Sugar Industries Ltd. v. STO, (1977) 3 SCC 147. It is relevant to note that the Supreme Court in this decision inter alia quoted with approval the following observations in Bhopal Sugar Industries decision; “A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer pure and simple.”

14. “215. Right of principal when agent deals, on his own account, in business of agency without principal’s consent. If an agent deals on his own account in the business of the agency, without first obtaining the consent of his principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction, if the case shows, either that any material fact has been dishonestly concealed from him by the agent, or that the dealings of the agent have been disadvantageous to him.”

15. “216. Principal’s right to benefit gained by agent dealing on his own account in business of agency. If an agent, without the knowledge of his principal, deals in the business of the agency on his own account instead of on account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction.”

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