Supreme Court

Bharti Cellular Limited Vs. Assistant Commissioner of Income Tax and Ors. (Neutral Citation: 2024 INSC 148)

MANU/SC/0144/2024

28.02.2024

Direct Taxation

Assessee would not be under a legal obligation to deduct tax at source on the income/profit component in payments received by distributors/franchisees from third parties/customers

The issue relates to the liability to deduct tax at source under Section 194-H of the Income Tax Act, 1961 on the amount which, as per the Revenue, is a commission payable to an agent by the Assessees under the franchise/ distributorship agreement between the Assessees and the franchisees/distributors. As per the Assessees, neither are they paying a commission or brokerage to the franchisees/distributors, nor are the franchisees/distributors their agents. The High Courts of Delhi and Calcutta have held that, the Assessees were liable to deduct tax at source Under Section 194-H of the Act, whereas the High Courts of Rajasthan, Karnataka and Bombay have held that Section 194-H of the Act is not attracted to the circumstances under consideration.

Section 194-H of the Act fixes the liability to deduct tax at source on the 'person responsible to pay' - and the liability to deduct tax at source arises when the income is credited or paid by the person responsible for paying. The expression "direct or indirect" used in Explanation (i) to Section 194-H of the Act is no doubt meant to ensure that "the person responsible for paying" does not dodge the obligation to deduct tax at source, even when the payment is indirectly made by the principal-payer to the agent- payee. However, deduction of tax at source in terms of Section 194-H of the Act is not to be extended and widened in ambit to apply to genuine business transactions, where the Assessee is not the person responsible for paying or crediting income.

In the present case, the Assessees neither pay nor credit any income to the person with whom he has contracted. Explanation (i) to Section 194-H of the Act, by using the word "indirectly", does not regulate or curtail the manner in which the Assessee can conduct business and enter into commercial relationships. Neither does the word "indirectly" create an obligation where the main provision does not apply.

An independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract. But an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent is fiduciary. Dependent contractors work for themselves, even when they are employed for the purpose of creating contractual relations with the third persons. An independent contractor is not required to render accounts of the business, as it belongs to him and not his employer.

The term 'agent' should be restricted to one who has the power of affecting the legal position of his principal by the making of contracts, or the disposition of the principal's property; viz. an independent contractor who may, incidentally, also affect the legal position of his principal in other ways. It is in the restricted sense in which the term agent is used in Explanation (i) to Section 194-H of the Act.

Assessees would not be under a legal obligation to deduct tax at source on the income/profit component in the payments received by the distributors/franchisees from the third parties/customers, or while selling/transferring the pre-paid coupons or starter-kits to the distributors. Section 194-H of the Act is not applicable to the facts and circumstances of this case. Accordingly, the appeals filed by the Assessee - cellular mobile service providers, challenging the judgments of the High Courts of Delhi and Calcutta are allowed and these judgments are set aside. The appeals filed by the Revenue challenging the judgments of High Courts of Rajasthan, Karnataka and Bombay are dismissed.

Tags : TDS Liability Payment

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