No TDS Liability on Cellular Service Providers for Distributor Margins under Section 194-H, Endorses Principal-to-Principal Relationship: Supreme Court

The Supreme Court of India delivered a landmark judgement clarifying the applicability of Section 194-H of the Income Tax Act, 1961. The central issue revolved around whether cellular service providers are required to deduct tax at source (TDS) under Section 194-H on the discounts offered to their distributors/franchisees.

The case arose from divergent opinions among various High Courts on whether the relationship between telecom companies and their distributors/franchisees attracts the provisions of Section 194-H, which mandates TDS on commission or brokerage payments. The cellular service providers argued that the discount given to distributors does not constitute a commission or brokerage, while the Revenue contended that these discounts are in the nature of commission or brokerage, necessitating TDS.

Justice Sanjiv Khanna, leading the bench, provided an extensive analysis of Section 194-H and related legal provisions. The Court delved into the definition of ‘agent’ and ‘principal’ under the Contract Act, emphasizing that the obligation to deduct tax at source arises only when a legal principal-agent relationship is established.

The Court observed, “The essential characteristic of an agent is the legal power to alter his principal’s legal relationship with a third party… The distinction between an agent and an independent contractor hinges on the degree of control and the nature of the relationship.”

The judgement also referred to the nature of franchise agreements, noting that such agreements, despite strict regulations, do not necessarily establish a principal-agent relationship. The Court clarified, “Franchise agreements… may in a given case be that of an independent contractor.”

The Supreme Court held that cellular service providers are not obliged to deduct tax at source under Section 194-H on the discounts offered to their distributors/franchisees. This is because such discounts do not amount to commission or brokerage, and the relationship between telecom companies and their distributors/franchisees does not constitute a principal-agent relationship under the Act.

Date of Decision: 28^th February 2024

Bharti Cellular Limited (Now Bharti Airtel Limited) vs Assistant Commissioner of Income Tax.