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The issue revolving around this judgement is relating to the liability to deduct tax at source under Section 194-H of the Income Tax Act, 1961, which provides that the payer (in the present case assessee) responsible for making the payment must deduct tax from the amount paid to another person.

In the case of Bharti Cellular Limited (now Bharti Airtel Limited) versus Assistant Commissioner of Income, the Cellular mobile telephone service providers referred to as the Assesses (Appellants) contend that the discounted amount neither qualify as commission or brokerage to the franchisees/distributors, nor are the franchisees/distributors their agents.

The Revenue (Respondents) contends that the discounted amount is commission under the purview of Section 194-H which is payable to an agent by the Assesses under the franchise/ distributorship agreement between the Assesses and the franchisees/distributors.

This matter was brought before different High Courts which led to conflicting decisions. The Assesses challenged the decision of the Delhi and Calcutta High Courts which held that the assesses were liable to deduct tax at source under Section 194-H of the Act. On a contrary, the Revenue challenged the decisions of Rajasthan, Karnataka and Bombay High Courts which held that Section 194-H of the Act is not attracted under the circumstances of this case.

Subsequently, both the parties challenging the above decisions of the High Courts, appealed before the Supreme Court of India. The key issue before the Court was to interpret the Section 194-H and determine the liability of the cellular mobile service providers to deduct tax at source on the income/profit component received by their distributors/franchisees from third parties/customers.

The court fundamentally dealt with the questions of interpretation Section 194-H which further necessitated in determining the Principal-Agent relationship. Delving into the provisions of the Section the Court stated that the Section 194-H imposes the liability to deduct tax at source on “the person responsible for paying”. The provision provides that such a liability arises when income is credited or paid by the person responsible for paying. Further, the term “direct and indirect” in Explanation (i) states that the obligation vests even when the payment is made indirectly by the payer to the payee.

The Court while interpreting the term ‘acting on behalf of another person’ states that such a phrase entails the existence of a legal relationship of principal and agent, between the payer and the payee. The legal relationship of principal and agent is hence, necessary to impose the liability to deduct tax at source under Section 194-H.

The court lays down five important criteria to be considered for determining the Principal-Agent Relationship.

The Agent’s legal power to alter his principal’s legal relationship with a third party and the Principal’s co-relative liability to have his relations altered.

• The degree of control by the principal over the conduct of the activities of the agent.
• The task entrusted by the principal to the agent should result in a fiduciary relationship.
• The Agent’s liability to render accounts of the Principal and his entitlement to remuneration for the work he performs for the principal.

Further the Courts relied on two decisions to determine what constitutes ‘commission’. In the case of Director, Prasar Bharati v. Commissioner of Income Tax, Thiruvananthapuram, the Court held that the expression ‘commission or brokerage’ is an inclusive definition and hence, must be interpreted widely.

Further, the court highlights 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, leading to its finality. 

Further, the court rejected the contention of the Revenue relying upon the decision of this Court in Singapore Airlines Limited (supra) that assesses would be liable to deduct tax at source even if the assesses are not making payment or crediting the income to the account of the franchisee/distributor.

The court stated that in the instant case, the relationship between the Assesses and the Distributors is not a fiduciary relationship but instead is an activity carried out by an Independent Contractor. Moreover, it highlighted that the facts of each case and the authority given by ‘principal’ to the distributors must be considered while determining the relationship.

Therefore, with regard to the above observations, the Court held that the business operations of the Assesses which amounts to ‘discounted payments’, does not qualify for ‘commission’ under Section194-H of the Act. Accordingly, the appeals filed by the assesses – cellular mobile service providers, challenging the judgments of the High Courts of Delhi and Calcutta were allowed and the Assesses were not liable to deduct the tax at source under the said section.

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Judgement Reviewed By – Keerthi K

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