The key issue addressed in this judgment revolves around the interpretation and application of Section 194-H of the Income Tax Act, 1961, specifically concerning the liability to deduct tax at source on amounts considered as commission payable to agents. The case pertains to cellular mobile telephone service providers and involves the question of whether payments made under franchise/distributorship agreements should be subject to tax deduction at source under Section 194-H.
The case, Bharti cellular limited (now bharti airtel limited) versus assistant commissioner of income [CIVIL APPEAL NO. 7257 OF 2011 ] originated in various trial courts where cellular mobile telephone service providers, referred to as the assessees, entered into franchise or distributorship agreements with franchisees or distributors. The Revenue contended that the amounts paid under these agreements constituted commissions liable for tax deduction at source under Section 194-H of the Income Tax Act.
The dispute escalated as the assessees disagreed with the Revenue’s interpretation, asserting that the payments were not commissions or brokerage fees to agents. Consequently, the case moved to various High Courts across India, leading to conflicting decisions. The High Courts of Delhi and Calcutta ruled in favor of the Revenue, holding the assessees liable for tax deduction at source under Section 194-H. Conversely, the High Courts of Rajasthan, Karnataka, and Bombay ruled in favor of the assessees, stating that Section 194-H did not apply to the circumstances of the case.
As a result of the divergent decisions among the High Courts, the matter was brought before the Supreme Court of India through appeals filed by both the Revenue and the assessees. The appellants challenged the interpretation and application of Section 194-H in the context of franchise/distributorship agreements within the cellular mobile telephone service industry. They sought clarity and uniformity in determining the tax liability on payments made under such agreements, urging the Supreme Court to resolve the conflicting interpretations provided by the High Courts.
The court’s analysis revolves around the interpretation and application of Section 194-H of the Income Tax Act, which deals with the deduction of tax at source on commission or brokerage. The key issue before the court is whether the cellular mobile service providers (the assessees) are obligated to deduct tax at source on the income/profit component received by their distributors/franchisees from third parties/customers.
The court begins by acknowledging the relationship between principal and agent, emphasizing that the airlines utilized the BSP (Billing and Settlement Plan) to discern the additional commission earned by agents, which formed the basis for tax deduction under Section 194-H. The court cites legal principles from Halsbury’s Law of England to distinguish between a servant, an independent contractor, and an agent, highlighting the control and supervision aspect in the relationship.
Furthermore, the court delves into the provisions of Section 194-H, which fix the liability to deduct tax at source on the “person responsible to pay.” It clarifies that this liability arises when income is credited or paid by the person responsible for paying, and the expression “direct or indirect” in Explanation (i) ensures that the obligation remains even when payment is made indirectly by the principal-payer to the agent-payee.
However, the court asserts that the deduction of tax at source should not be extended to true/genuine business transactions where the assessee is not the person responsible for paying or crediting income. It emphasizes that the tax legislation recognizes diverse relationships and modes of commerce, and the obligation to deduct tax arises only if conditions specified in Section 194-H are met.
The court underscores the importance of tax deduction at source as a significant revenue source but clarifies that the assessees, as deductors, are not paying tax on their income but collecting and paying tax otherwise payable by the third party. Failure to deduct tax at source carries serious consequences for the assessee.
Moreover, the court discusses the Delhi High Court’s decision in Commissioner of Income Tax v. Singapore Airlines Ltd., which held that tax under Section 194-H is not required to be deducted on discounted tickets sold by airlines through travel agents. The court notes that the revenue did not challenge this decision, indicating its finality.
The court ultimately concludes that the assessees would not be legally obligated to deduct tax at source on the income/profit component received by distributors/franchisees from third parties/customers or while selling/transferring pre-paid coupons or starter-kits to distributors. Section 194-H is deemed inapplicable to the circumstances of the case. As a result, the court allows the appeals filed by the assessees and dismisses those filed by the Revenue.
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Written by- Aditi
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