2024 (3) TMI 1322 - HC - Income Tax

TDS u/s 194H - non deduction of TDS on transaction between the Appellant and the distributors in respect of sale of the SIM Card/Recharge Voucher - scope of expression acting on behalf of another person - relationship between the Appellant and distributors is that of principal and agent OR principal and principal - HELD THAT - As decided in Bharti Cellular Limited 2024 (3) TMI 41 - SUPREME COURT he term agent denotes a relationship that is very different from that existing between a master and his servant or between a principal and principal or between an employer and his independent contractor. Although servants and independent contractors are parties to relationships in which one person acts for another and thereby possesses the capacity to involve them in liability yet the nature of the relationship and the kind of acts in question are sufficiently different to justify the exclusion of servants and independent contractors from the law relating to agency. 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. We hold that the assessees 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. Section 194-H of the Act is not applicable to the facts and circumstances of this case. Accordingly the appeals filed by the assessee - cellular mobile service providers challenging the judgments of the High Courts of Delhi and Calcutta are allowed and these judgments are set aside. As a consequence of our finding that the appellant could not have been treated as an assessee in default bearing - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of the decision in CIT vs Idea Cellular Ltd to the present case.
2. Assessee-in-default status for non-deduction of tax u/s 194H.
3. Applicability of Section 194H to transactions between the Appellant and distributors.
4. Relationship characterization between Appellant and distributors.
5. Nature of the discount allowed to distributors.
6. Liability for recovery of tax and interest u/s 201(1A).

Summary:

1. Applicability of the decision in CIT vs Idea Cellular Ltd to the present case:
The Tribunal erred in disregarding the contentions of the Appellant and solely relying on the decision in CIT vs Idea Cellular Ltd for AY 2003-04 and 2004-05 without appreciating that the facts in the present case are completely distinct.

2. Assessee-in-default status for non-deduction of tax u/s 194H:
The solitary question for consideration was whether the ITAT was correct in holding the assessee to be in default for non-deduction of tax u/s 194H of the Income Tax Act. The Supreme Court in Bharti Cellular Limited vs. Assistant Commissioner of Income Tax clarified that the obligation to deduct tax at source arises when the legal relationship of principal-agent is established.

3. Applicability of Section 194H to transactions between the Appellant and distributors:
The Supreme Court held that Section 194H is not applicable to the transactions between the Appellant and the distributors in respect of the sale of SIM Cards/Recharge Vouchers. The income of the franchisee/distributor is determined by the sale price received from the retailer/end-user/customer, and the assessee does not pay or credit the income by way of commission or brokerage.

4. Relationship characterization between Appellant and distributors:
The relationship between the Appellant and distributors is not that of principal and agent. The distributor buys goods on his account and sells them in his territory, acting as an independent contractor rather than an agent. The Supreme Court emphasized that the term "agent" denotes a relationship different from that of an independent contractor.

5. Nature of the discount allowed to distributors:
The discount allowed to distributors was not in the nature of commission out of which tax was deductible u/s 194H. The Supreme Court clarified that the obligation to deduct tax at source does not extend to true/genuine business transactions where the assessee is not responsible for paying or crediting income.

6. Liability for recovery of tax and interest u/s 201(1A):
The appellant could not have been treated as an assessee in default, and thus, the orders for recovery of tax and interest u/s 201(1A) were set aside. The Supreme Court's decision in Bharti Cellular was pivotal in this determination.

Conclusion:
The High Court allowed the appeal, setting aside the impugned order dated 30 October 2018, and the orders dated 28 March 2013 and 18 May 2015 passed by the AO and CIT(A) respectively, based on the Supreme Court's decision in Bharti Cellular.