Deduction of tax at source from income has been one of the most crucial part of compliance for every set of persons as prescribed by law. Provisions of Deduction of Tax at source are attracted upon fulfilment of certain conditions where one person has to deduct tax at source from income of another person. As per judgement dated 28th February, 2024; Supreme court of India upon hearing the matter in Civil Appeal No. 7257 of 2011 & Ors. between revenue and assessee(Bharti Airtel Ltd.) decided and ordered that there is no requirement of deduction of TDS u/s 194H, where assessee had given discounts to its distributors or franchisees and such distributors and franchisees sold the product to third parties at a price which was higher than the price at which they received due to the discount component.
Issues Involved:
There were agreements between assessee and distributors/franchisees where assessee provided products to these distributors/franchisees at a discounted price. As per revenue, this amounts to commission when these distributor/franchisees sell these products to third partie/final consumers. Therefore, assessee is liable to deduct TDS u/s 194H.
Whereas as per assessee i.e. (Bharti Cellular Limited now Bharti Airtel Limited) a cellular mobile services provider, neither they are paying a commission or brokerage to the franchisees/distributors, nor are the franchisees/distributors their agents. Whether assessee is required to deduct TDS for 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?
What does section 194H says?
Section 194H of the Income Tax Act deals with TDS deduction on the payment of commission or brokerage. It mandates tax deduction by the person (other than individual/HUF) responsible for paying commission or brokerage to resident persons at the rate of 5% when the amount exceeds Rs.15,000 during a financial year. TDS under section 194H of the Income Tax Act shall also be deducted by all the individuals and HUFs (Hindu Undivided Family) who are required to get their accounts audited under section 44AB. However, it does not include insurance commission, as provided in section 194D.
Explanation given in the order of Supreme Court:
The assessees, (Bharti Airtel Limited) – A cellular mobile service providers, had entered into franchise/distribution agreements related to their prepaid connections, selling start-up kits and recharge vouchers at a discounted price to franchisee/distributors. The dispute arose regarding whether the assessees should deduct tax at source on the income/profit component in payments received by franchisees/distributors from third parties/customers.
The assessees explained that they were not paying commission or brokerage to franchisees/distributors and that they were not acting as agents for them. In order to increase their marketing and customer base they were merely giving discounts to franchisees/distributors. On the other hand, the Revenue argued that the difference between the discounted price and sale price constituted income for franchisees/distributors, making them agents eligible for tax deduction under Section 194-H.
The court emphasized on the Section 182 of Indian Contract Act, 1872 to determine the nature of relation, i.e., whether it constitutes a Principal- Agent relationship. Deduction of Tax at source in this situation arises only when the Principal-Agent relationship exists.
The income of franchisee/distributor in the form of discounts is not credited by the assessees, and they are not liable to oversee transactions taking place between distributors/franchisees and third parties/customers.
Contrary opinions among various High Courts existed. Delhi and Calcutta High ruled in favour of Tax Deduction whereas HC of Rajasthan, Bombay and Karnataka ruled otherwise.
Conclusion:
The Supreme Court held that Section 194-H is not applicable in this case. It was observed that although the discounted price is determined by contract and negotiated between the assessees and franchisee/distributor, the sale price or the final price in the form of sale consideration received by the franchisee/distributor is at their sole discretion, and the assessees could not have any authority over regulating such prices.
Accordingly, appeals filed by assessee, challenging judgements of Delhi and Calcutta HC are allowed and the judgements set aside. Appeals filed by Revenue challenging judgements of HC of Rajasthan, Karnataka and Bombay were dismissed.