Supreme Court Changes Tax Relationship Between Airlines And Their Agents


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.

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.

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.


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