TMI Blog2024 (3) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... ex. They may relate to distribution franchises, service franchises and production franchises. Notwithstanding the strict restrictions placed on the franchisees which may require the franchisee to sell only the franchised goods, operate in a specific location, maintain premises which are required to comply with certain requirements, and even sell according to specified prices the relationship may in a given case be that of an independent contractor. Facts of each case and the authority given by principal to the franchisees matter and are determinative. An independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract. But an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent are fiduciary. As contract with an independent agent depends upon the terms of the contract, sometimes an independent contractor looks like an agent from the point of view of the control exercisable over him, but on an overview of the entire relationship the tests specified in clauses (a) to (d) in paragraph 8 may not be satisfied. The distinction is that independent contractors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AND 3517 OF 2024 SANJIV KHANNA And S. V. N. BHATTI , JJ. For the Appellant : Mr. Praveen Kumar, AOR Mr. N Venkatraman, A.S.G. Mr. Arijit Prasad, Sr. Adv. Mr. Rupesh Kumar, Sr. Adv. Mr. Raj Bahadur Yadav, AOR Mrs. Alka Agarwal, Adv. Mr. Digvijay Dam, Adv. Mr. V C Bharathi, Adv. Mr. Santosh Kumar, Adv. Mr. Prahlad Singh, Adv. For the Respondent : Mr. Raj Bahadur Yadav, AOR Mr. Mahesh Agarwal, Adv. Mr. Rishi Agrawala, Adv. Ms. Sayree Basu Mullick, Adv. Mr. M.s. Ananth, Adv. Ms. Syree Basu Mullick, Adv. Ms. Madhvi Agarwal, Adv. Ms. Madhavi Agarwal, Adv. Ms. Sayaree Basu Mallik, Adv. Ms. Madhavi Agrawal, Adv. Mr. Abhinabh Garg, Adv. Mr. E. C. Agrawala, AOR Mr. Harish Pandey, AOR Mr. Kavin Gulati, Sr. Adv. Mr. Sachit Jolly, Adv. Ms. Anuradha Dutt, Adv. Ms. Disha Jham, Adv. Ms. Soumya Singh, Adv. Ms. B. Vijayalakshmi Menon, AOR Mr. Arvind P. Datar, Sr. Adv. Mr. Ajay Vohra, Sr. Adv. Mr. Kumar Visalaksh, Adv. Mr. Udit Jain, Adv. Mr. Archit Gupta, Adv. Mr. Arihant Tater, Adv. Mr. Ajitesh Dayal Sisngh, Adv. Mr. Ajitesh Dayal Singh, Adv. Mr. Praveen Kumar, Adv. Mr. Harish Pandey, Adv. Mr. Abhishek Vikas, AOR JUDGMENT SANJIV KHANNA , J. This common judgment decides the aforestated appeals prefe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax under this section. Provided also that no deduction shall be made under this section on any commission or brokerage payable by Bharat Sanchar Nigam Limited or Mahanagar Telephone Nigam Limited to their public call office franchisees. xx xx xx 3. Section 194-H of the Act imposes the obligation to deduct tax at source, 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 expression any person (...) responsible for paying is a term of art, defined vide Section 204 2 204. Meaning of person responsible for paying . For the purposes of the foregoing provisions of this chapter and Section 285, the expression person responsible for paying means (i) in the case of payments of income chargeable under the head Salaries other than payments by the Central Government or the Government of a State, the employer himself or, if the employer is a company, the company itself, including the principal officer thereof; (ii) in the case of payments of income chargeable under the head Interest on securities other than payments ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act can be interpreted as requiring deduction of tax at source on commission and brokerage, even when the principal and agent relationship does not exist between the parties. Explanation (i) to Section 194-H of the Act can be read as expanding and widening the scope of the provision of sub-section (1) to include in the ambit of brokerage and commission, payments made by the principal to the agent, when covered under the four corners of the said explanation. We would not like to pronounce on this aspect as it has not been argued by the Revenue, and it appears that the requirement of relationship of principal and agent has been read into the main section. Further, applying common or commercial parlance meaning to the terms brokerage or commission , given the wide divergence in which it is understood, would lead to confusion and has pitfalls. Deduction of Tax provisions should be pragmatically and realistically construed, and not as enmeshes or by adopting catch-as-catch-can approach. When doubts exist, the Central Board of Direct Taxes may examine this question and may issue appropriate instructions/circular after ascertaining the views of assessees and other stakeholders. The decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of goods, or in relation to any transaction relating to any asset, valuable article, or thing, not being securities. The latter portion of the Explanation (i) to Section 194-H of the Act is a requirement and a pre-condition. It should not be read as diminishing or derogating the requirement of the principal and agent relationship between the payer and the recipient/payee. 6. It is settled by a series of judgments of this Court that the expression acting on behalf of another person postulates the existence of a legal relationship of principal and agent, between the payer and the recipient/payee. Singapore Airlines Ltd. and Another v. Commissioner of Income Tax, (2023) 1 SCC 497, 23-29 The law of agency is technical. Whether in law the relationship between the parties is that of principal-agent is answered by applying Section 182 of the Contract Act, 1872 Contract Act , for short . Therefore, the obligation to deduct tax at source in terms of Section 194-H of the Act arises when the legal relationship of principal-agent is established. It is necessary to clarify this position, as in day to day life, the expression agency is used to include a vast number of relationships, which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... THIRD) OF AGENCY (AMERICAN LAW INSTITUTE PUBLISHERS 2007) (d) As the business done by the agent is on the principal s account, the agent is liable to render accounts thereof to the principal. An agent is entitled to remuneration from the principal for the work he performs for the principal. 9. At this stage, three other relevant aspects/considerations should be noted. First is the difference between power and authority . The two terms though connected, are not synonymous. Authority refers to a factual position, that is, the terms of contract between the two parties. The power of the agent however, is not, strictly speaking, conferred by the contract or by the principal but by the law of agency. When a person gives authority to another person to do the acts which bring the law of agency into play, then, the law vests power with the agent to affect the principal s legal relationship with the third parties. The extent and existence of the power with the agent is determined by public policy. The authority, as observed above, refers to the factual situation. The second consideration is that the primary task of an agent is to enter into contracts on behalf of his principal, or to dispose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so on. These restrictions per se would not convert a contract of sale into one of agency, because in spite of these restrictions the transaction would still be a sale and subject to all the incidents of a sale. A contract of agency, however, differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer pure and simple. In Halsbury's Laws of England, Vol. 1, 4th Edn., in para 807 at p. 485, the following observations are made: 807. Rights of agent. The relation of principal and agent raises by implication a contract on the part of the principal to reimburse the agent in respect of all expenses, and to indemnify him against all liabilities, incurred in the reasonable performance of the agency, provided that such implication is not excluded by the express terms of the contract between them, and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r principal-principal relationship. A singular contract may create different legal relationships and obligations. Independent contractors on occasion act for themselves, and at other times may be creating legal relations between their employers and third persons. For example, a solicitor may start by giving advice (independent contractor), and then as a consequence make a contract for his employer with another person (agent). 15. In Labreche v. Harasymiw (1992) 89 DLR (4th) 95 at 107 , Valin J. delineated the question of what an agency involves, stating that: (i) it refers to the power of the agent to affect the principal s position. However, this is not the sole test, though it still remains one of the main criteria in determining whether someone is an agent. There are several features in the definition of an agent See 8 of the judgment . There can be several situations where one person represents or acts for another, but this does not create the relationship of principal and agent. It is only when the representation or action on another s behalf affects the latter s legal position, that is to say his rights against, or his liability towards, other people, that the law of agency a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant to avoid confusion, by applying the legal tests, that may arise where the functions of the buyer described as an agent is really as that of a middleman , and the necessary elements for creation of principal and an agent relationship are absent. Two level commercial transaction can result in an tripartite arrangement/agreement with respective rights and obligations, without any of the two parties having principal-agent relationship. 17. Clause (d) in paragraph 8 observes that the agent is liable to render accounts to the principal as the business done by the agent is on principal s account. The agent is entitled to remuneration from the principal for the work he performs. To decide whether a contracting party acts for himself as an independent contractor, we may examine whether in the course of work, he intends to make profits for himself, or is entitled to receive prearranged remuneration. If the party is concerned about acting for himself and making the maximum profits possible, he is usually regarded as a buyer, or an independent contractor and not as an agent of the principal. This would be true even when certain terms and conditions have been fixed relating to the manner i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessees and the franchisee/distributor is in the nature of principal and agent, and therefore, the assesses are liable to deduct tax at source under Section 194-H of the Act. 21. In order to decide the dispute in question, we would like to refer to some of the relevant clauses of the franchisee/distributor agreement between Bharti Airtel Limited and the franchisee/distributors, which read as under Agreements in the case of assessees Vodafone Idea Limited (formerly known as Vodafone Mobile Services Limited) and Idea Cellular Limited (now known as Vodafone Idea Limited) are somewhat different. To avoid repetition or prolixity, we are not reproducing the said clauses. : Bharti Airtel Limited WHEREAS THE FRANCHISEE has approached BML and have expressed their keen desire to be one of the FRANCHISEE s to undertake the job of promoting and marketing of Pre Paid and also other related services all under the brand name of MAGIC to the potential subscribers, under the terms of this Agreement. The FRANCHISEE has also represented that they have infrastructure, manpower and experience in the above area and they possess the financial to perform the above functions and such other functions as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les or regulations in the running, operation and conduct of its business and business establishment, more particularly with respect to the conduct of its business provided for in this Agreement. xx xx xx 4.1 The FRANCHISEE shall maintain a suitable establishment for the conduct of its business and the performance of its obligations under this Agreement. The FRANCHISEE shall use its best efforts to actively provide effective ways to market and promote the Pre Paid Services and shall always act in the interest of both BML and the subscribers to the Services of BML. 4.2 As covenanted for in clause 2.4, the FRANCHISEE shall not involve himself in any manner either directly or indirectly in any business or activity which is competitive with the business of activities of BML. The FRANCHISEE acknowledges that the adherence to this provision is a material obligation of the FRANCHISEE under this Agreement. xx xx xx 4.4 The FRANCHISEE shall, in the conduct of its business and performing its obligations under this Agreement, conform and adhere to the policies of BML communicated to the FRANCHISEE from time to time. The FRANCHISEE shall not charge the customers of BML for the services anything ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EE shall indemnify BML from all loss caused to BML arising out of any loss, pilferage or damage to the items as stated here above. xx xx xx 4.12 The liability to insure and keep insured the items as stated in Clause 4.10 at the business establishment of the FRANCHISEE shall be of the FRANCHISEE and the liability for any loss or damage due to any fire, burglary, theft, etc. will be that of the FRANCHISEE. xx xx xx 4.14 The FRANCHISEE shall be responsible for collection of all necessary agreement/contract forms and other related forms, and for obtaining the signature of the customer on these forms. The FRANCHISEE shall forward all such forms, duly completed in all respects and signed by customers to BML for its verification and records. xx xx xx 5.1 From time to time, BML will review with the FRANCHISEE minimum subscription, targets for the Pre Paid Services, taking into account the market development and market potential and other relevant factors. The achievements of these prescribed targets by the FRANCHISEE is a material obligation of the FRANCHISEE under this Agreement. xx xx xx 6.2 The FRANCISEE shall employ a fully trained service staff whose training has been completed in acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HISEE s outlet(s) and on the each memos and/or official business documents issued by the FRANCHISEE towards the services effected from the outlet(s). However, the intellectual property rights associated with Trademarks, logos and trade names are and shall remain the sole property of BML. xx xx xx 14.1 BML shall not be liable to the FRANCHISEE or any other party by virtue of the termination of this Agreement for any reason whatsoever, including but not limited to any claim for loss of profits or compensation or prospective profits or on account of any expenditure, investments, leases, capital improvements or any other commitments made by the FRANCHISEE in connection with the business made in reliance upon or by virtue of FRANCHISEE s appointment under this Agreement. It is expressly agreed that no compensation whatsoever shall be payable by BML to the FRANCHISEE upon the termination of this Agreement. 14.2 Upon receipt of any notice of termination of this Agreement the FRANCHISEE shall conduct all its operations until the effective date of termination mentioned in such notice in the manner which is consistent with the obligation of the FRANCHISEE hereunder and the FRANCHISEE shall n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relationship between the parties is solely on principal-to-principal. FRANCHISEE shall not acquire, by virtue of any provision of this Agreement or otherwise, any right, power or capacity to act as an agent or commercial representative of BML for any purpose whatsoever. Nothing contained in the contract shall be deemed or construed as creating a joint venture relationship or legal partnership etc. between BML and the FRANCHISEE. 16.3 The FRANCHISEE shall not obtain/offer the pre paid cards and/or recharge coupons for the Pre Paid Service from any other source other than BML unless such permission is granted in writing by BML in order to meet the specific needs of the market and subscribers as determined by BML. xx xx Xx 22. As per the agreement, the franchisee/distributor is appointed for marketing of prepaid services and for appointing the retailer or outlets for sale promotion. It is pertinent to note that the retailers or outlets for sale promotion are appointed by the franchisee/ distributor and not the assessee. The franchisees/distributors have agreed not to undertake activities mentioned in the agreement for any other competitive cellular mobile telephone service provider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e/distributor is required to return all advertising and promotional material, etc. to the assessee by the effective date of termination. Further, the assessee is not liable to the franchisee/distributor or any other party for any loss of profits or compensation or prospective profits or on account of any expenditure, etc. in the event of termination. 25. The assessee is to review the minimum subscriptions/targets for prepaid services taking into account market development and potential and other relevant factors. The franchisee/distributor is to employ a fully trained service staff, who have undergone training in accordance to the standards set out by the assessee. The franchisee/distributor will be responsible to collect all necessary agreement/contract forms and other related forms, after obtaining signatures of the customers on the said forms. These forms, duly completed in all respects and signed by the customers, will be forwarded to the assessee for its verification and record. 26. The franchisee s/distributor s price and payment for services will be specified by the assessee from time to time. The rates can be varied during the terms of the agreement at the discretion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e form as prescribed along with the documents which are given and submitted to the assessee. These are mandates prescribed by the licence issued by the DoT to the assessees. The contractual obligations of the distributors/franchisees, do not reflect a fiduciary character of the relationship, or the business being done on the principal s account. 30. The franchisees/distributors earn their income when they sell the prepaid products to the retailer or the end-user/customer. Their profit consists of the difference between the sale price received by them from the retailer/end-user/customer and the discounted price at which they have acquired the product. Though the discounted price is fixed or negotiated between the assessee and the franchisee/distributor, the sale price received by the franchisee/ distributor is within the sole discretion of the franchisee/distributor. The assessee has no say in this matter. 31. It is not the case of the Revenue that the tax at source under Section 194-H of the Act is to be deducted on the difference between the printed price and the discounted price. This cannot be the case as the Revenue cannot insist that the franchisee/distributor must sell the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lary services. The travel agents were entitled to 7% commission on sale of the tickets for its services as the standard commission based on the price bar set by the IATA. The airlines were deducting tax at source under Section 194-H of the Act on the 7% commission. In addition to the 7% commission, the travel agents were also entitled to additional/supplementary commission on the tickets sold by them. The additional/supplementary commission and the amount at which the tickets were sold were computed by the travel agents and transmitted to the billing and settlement plan (BSP). The BSP, functioning under the aegis of the IATA, managed, inter alia, logistics vis- -vis payments, and acted as a forum for agents and airlines to examine details pertaining to the sale of the flight tickets. 33.1 This Court examined the operation of the BSP where the financial data regarding sale of tickets was stored. The BSP agglomerated the data from multiple transactions. Thereupon, this data was transmitted either bimonthly or twice a month to the airlines. It is on the basis of this data that the airlines/air carriers were required to pay the additional commission to the travel agents. These are the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercise to the direct control or supervision of the principal. An agent, as such is not a servant, but a servant is generally for some purposes his master's implied agent, the extent of the agency depending upon the duties or position of the servant. 34. We have already expounded on the main provision of Section 194-H of the Act, which fixes the liability to deduct tax at source on the person responsible to pay an expression which is a term of art as defined in Section 204 of the Act and the liability to deduct tax at source arises when the income is credited or paid by the person responsible for paying. See 5 of the judgment The expression direct or indirect used in Explanation (i) to Section 194-H of the Act is no doubt meant to ensure that the person responsible for paying does not dodge the obligation to deduct tax at source, even when the payment is indirectly made by the principal-payer to the agentpayee. However, deduction of tax at source in terms of Section 194-H of the Act is not to be extended and widened in ambit to apply to true/genuine business transactions, where the assessee is not the person responsible for paying or crediting income. In the present case, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing view of the assesses and stakeholders. We do acknowledge that the Central Board of Direct Taxes has on several occasions quelled doubts and issued instructions/circulars In addition to enhancing revenue and ensuring tax compliance, an equally important aim/objective of the Revenue is to reduce litigation. The instructions/circular, if and when issued, should be clear, and when justified require the obligation to be made prospective. 36. Notably, the Delhi High Court in Commissioner of Income Tax v. Singapore Airlines Ltd. (2009) 319 ITR 29 had held that tax under Section 194-H of the Act is not required to be deducted on the discounted tickets sold by the airlines/air carriers through travel agents. Revenue did not challenge the decision of the Delhi High Court to this extent and therefore, this dictum attained finality. As noted, it is not the case of the Revenue that tax is to be deducted when payment is made by the distributors/franchisees to the mobile service providers. It is also not the case of the revenue that tax is to be deducted under Section 194-H of the Act on the difference between the maximum retail price income of the distributors/ franchisees and the price paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different form that of an agent. The distributor buys goods on his account and sells them in his territory. The profit made is the margin of difference between the purchase price and the sale price. The reason is, that the distributor in such cases is an independent contractor. Unlike an agent, he does not act as a communicator or creator of a relationship between the principal and a third party. The distributor has rights of distribution and is akin to a franchisee. Franchise agreements are normally considered as sui generis, though they have been in existence for some time. Franchise agreements provide a mechanism whereby goods and services may be distributed. In franchise agreements, the supplier or the manufacture, i.e. a franchisor, appoints an independent enterprise as a franchisee through whom the franchisor supplies certain goods or services. There is a close relationship between a franchisor and a franchisee because a franchisee s operations are closely regulated, and this possibly is a distinction between a franchise agreement and a distributorship agreement. Franchise agreements are extremely detailed and complex. They may relate to distribution franchises, service fran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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