LexBHARTI CELLULAR LIMITED (NOW BHARTI AIRTEL LIMITED) versus ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 57, KOLKATA AND ANOTHER
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* Author [2024] 2 S.C.R. 1001 : 2024 INSC 148 Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant Commissioner of Income Tax, Circle 57, Kolkata and Another (Civil Appeal No. 7257 of 2011) 28 February 2024 [Sanjiv Khanna* and S.V.N. Bhatti, JJ.] Issue for Consideration The liability to deduct tax at source u/s.194-H, Income Tax Act, 1961 on the amount which, as per the Revenue, is a commission payable to an agent by the assessees-cellular mobile telephone service providers under the franchise/distributorship agreement between the assessees and the franchisees/distributors. Headnotes Income Tax Act, 1961 – s.194-H – When not attracted – Assessees entered into franchise or distribution agreements and sold start-up kits, recharge vouchers at a discounted price to the franchisee/distributors – As per Revenue, the difference between ‘discounted price’ and ‘sale price’ in the hands of the franchisee/distributors being in the nature of ‘commission or brokerage’ was the income of the franchisee/ distributors, the relationship between the assessees and the franchisee/distributor was in the nature of principal and agent, and thus, the assesses were liable to deduct tax at source u/s.194-H – As per the assessees, neither the discount was a ‘commission or brokerage’ u/Explanation (i) to s.194-H nor were the franchisees/distributors their agents: Held: Whether in law the relationship between the parties is that of principal-agent is answered by applying s.182, Contract Act, 1872 – The obligation to deduct tax at source in terms of s.194-H arises when the legal relationship of principal-agent is established – Contractual obligations of the distributors/franchisees, do not reflect a fiduciary character of the relationship, or the business being done on the principal’s account – Franchisees/distributors earn their income when they sell the prepaid products to the retailer or the end-user/customer – Their profit consists of the difference between the sale price received by them from the 1002 [2024] 2 S.C.R. Digital Supreme Court Reports retailer/end-user/customer and the discounted price at which they ‘acquired’ the product – Though the discounted price is fixed or negotiated between the assessee and the franchisee/ distributor, the sale price received by the franchisee/distributor is within their sole discretion – Assessee has no say in this matter – Assessee does not at any stage either pay or credit the account of the franchisee/distributor with the income by way of commission or brokerage on which tax at source u/s.194-H is to be deducted – Expression “direct or indirect” used in s.194-H Explanation (i) 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 s.194-H is not to be extended and widened in ambit to apply to true/genuine business transactions, where the assessee is not the person responsible for paying or crediting income– Assessees neither pay nor credit any income to the person with whom he has contracted and are not privy to the transactions between distributors/franchisees and third parties– It is impossible for the assessees to deduct tax at source and comply with s.194-H, on the difference between the total/sum consideration received by the distributors/ franchisees from third parties and the amount paid by the distributors/franchisees to them – Payee receives payment when the third party makes the payment – This payment is not the payment received or payable by the assessee as the principal – The distributor/franchisee is not the trustee who is to account for this payment to the assessee as the principal – Assessees not under 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 – s.194-H not applicable to the facts and circumstances of this case – Judgments of High Courts of Delhi and Calcutta set aside. [Paras 6, 29, 31, 34, 36, 37 and 42] Contract Act, 1872 – s.182 – ‘agent’ and ‘principal’ – Whether a legal relationship of a principal and agent exists, factors to be taken into consideration: Held: (a) The essential characteristic of an agent i
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