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Synopsis

The Supreme Court on Wednesday ruled that telecom companies are not liable to deduct tax at source on income or profit in the payments received for selling discounted pre-paid SIM cards from their distributors. 

"We hold that the assessees (telecom companies here) 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," a bench of Justices Sanjiv Khanna and S V N Bhatti said.

The court allowed appeal filed by Cellular Mobile Service Providers, Bharti Airtel Limited and others and set aside judgements by Delhi and Calcutta high courts.

It dismissed the appeals by the revenue department challenging the judgements of Rajasthan, Karnataka and Bombay.

In the judgment, the bench said that Section 194H of the Income Tax Act, 1961, was not applicable to the facts and circumstances of this case. 

"The obligation to deduct tax at source in terms of Section 194H of the Act arises when the legal relationship of principal-agent is established," the bench said.

Section 194-H of the Act imposes the obligation to deduct tax at source, and states that any person responsible for paying at the time of credit or at the time of payment, whichever is earlier, to a resident any income by way of commission or brokerage, shall deduct income tax at the prescribed rate.

The bench said the revenue department's argument that assessees should periodically ask for the information/data and thereupon deduct tax at source should be rejected as far-fetched, imposing unfair obligation and inconveniencing the assesses, beyond the statutory mandate.

“Further, it will be willy-nilly impossible to deduct, as well as make payment of the tax deducted, within the timelines prescribed by law, as these begin when the amount is credited in the account of the payee by the payer or when payment is received by the payee, whichever is earlier. The 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 bench said.

“The distributor/franchisee is not the trustee who is to account for this payment to the assessee as the principal. The payment received is the gross income or profit earned by the distributor/franchisee. It is the income earned by distributor/ franchisee as a result of its efforts and work, and not a remuneration paid by the assessee as a cellular mobile telephone service provider,” the bench added.

The revenue department said that the relationship between the telecom firms and distributors was like a principal to an agent. It further contended that the lower price at which the distributors get the SIM card starter-pack is to be treated as commission for the purpose of taxation. 

The telecom companies, on the contrary, said that they are not paying a commission or brokerage to the distributors, and the distributors are not their agents. The lower price offered should be treated as a discount and not a commission.

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, the bench said.