2021 (9) TMI 1273 - HC - Income Tax

TDS u/s 194H - Principal-Agent relationship - discount given on sale of prepaid services, SIM and recharge vouchers by the cellular operator (assessee) to its distributors - whether definition of Commission or brokerage does not make the principal- Agent relationship sine qua non for the application of Section 194H? - HELD THAT - As decided in BHARTI AIRTEL LTD. 2014 (12) TMI 642 - KARNATAKA HIGH COURT the order passed by the authorities holding that section 194H of the Act is attracted to the facts of the case is unsustainable. Therefore, the substantial question of law is answered in favour of the assessee.

Summary

Issues:
Interpretation of Section 194H of the Income Tax Act regarding the treatment of discounts given by a cellular operator to its distributors as commission.

Analysis:
The judgment pertains to the interpretation of Section 194H of the Income Tax Act in the context of discounts given by a cellular operator to its distributors. The case involved a cellular telecom company that sold SIM cards to distributors without deducting tax at source on the commission. The High Court framed substantial questions of law regarding the treatment of discounts as commission and the applicability of Section 194H. The Court referred to a previous judgment in Bharti Airtel Limited, where it was held that the relationship between the cellular operator and distributor is that of principal to principal, not principal-agent. The Court emphasized that for Section 194H to apply, income must be payable by the assessee to the distributor, which was not the case with the discounts given. The judgment highlighted that the distributor did not earn any income at the time of the sale, and the discount did not represent income in the distributor's hands.

The Court further discussed that the obligation to deduct tax at source arises only when the distributor is in possession of income chargeable to tax, which was not the situation in this case. The judgment emphasized that the relationship between the cellular operator and distributor was based on the sale of the right to service, not on commission. Refunds of tax deductions were also addressed, stating that if the distributor is not liable for tax, the deduction of tax at source is not valid. The Court concluded that the order holding Section 194H applicable was unsustainable, and the substantial questions of law were answered in favor of the assessee. Consequently, the appeal by the revenue was dismissed, following the precedent set in the Bharti Airtel Limited case.

In light of the detailed analysis and precedent, the High Court upheld the Tribunal's decision to dismiss the appeal by the revenue. The judgment clarified the nature of the relationship between the cellular operator and distributor, emphasizing the absence of commission and income at the time of sale. The Court's decision was based on the interpretation of Section 194H and the specific circumstances of the case, ultimately ruling in favor of the assessee and against the revenue.