2024 (6) TMI 1433 - AT - Income Tax

TDS u/s 194H - discount/margins granted on account of sale of SIM cards/recharge vouchers/talk time - HELD THAT - As decided in Bharti Cellular Ltd. 2024 (3) TMI 41 - SUPREME COURT the 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. 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. 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. Decided in favor of assessee.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment were:

1. Whether the assessee was liable to deduct tax at source under Section 194H of the Income Tax Act, 1961, on discounts/margins granted on the sale of SIM cards, recharge vouchers, and talk time.

2. Whether the assessee was liable to deduct tax under Section 194J of the Act on expenditure incurred under the head: 'IUC/roaming charges.'

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Deduction of TDS under Section 194H on Discounts/Margins

Relevant legal framework and precedents: Section 194H of the Income Tax Act requires deduction of tax at source on commission or brokerage. The dispute centered on whether the discounts/margins on SIM cards and recharge vouchers could be considered commission or brokerage.

Court's interpretation and reasoning: The Court relied on the judgment of the Hon'ble Supreme Court in Bharti Cellular Ltd. vs. ACIT, which clarified that the relationship between the assessee and the distributors/franchisees was not that of a principal and agent. Instead, it was a principal-to-principal relationship, which does not attract the provisions of Section 194H.

Key evidence and findings: The Court examined the franchisee/distributor agreements, which indicated that the franchisees/distributors operated independently, determining their profits and prices. The agreements did not confer any agency relationship that would necessitate TDS under Section 194H.

Application of law to facts: The Court applied the Supreme Court's interpretation, noting that the income of the franchisees/distributors was the difference between the sale price and the discounted price, which the assessee did not control. Therefore, no TDS was required.

Treatment of competing arguments: The Revenue argued that the discounts/margins were akin to commission, requiring TDS deduction. However, the Court rejected this, emphasizing the absence of a principal-agent relationship.

Conclusions: The Court concluded that Section 194H did not apply, and the assessee was not liable to deduct TDS on discounts/margins.

Issue 2: Deduction of TDS under Section 194J on IUC/Roaming Charges

Relevant legal framework and precedents: Section 194J pertains to TDS on fees for professional or technical services. The issue was whether IUC/roaming charges fell under this category.

Court's interpretation and reasoning: The Court referred to the judgment of the Hon'ble Delhi High Court in CIT vs. Tata Teleservices Ltd., which followed the Karnataka High Court's decision in CIT, TDS, Bangalore vs. Vodafone South Ltd., determining that IUC/roaming charges did not involve technical services requiring human intervention.

Key evidence and findings: The Court noted that the process of call carriage during roaming was automated and did not involve human intervention, thus not qualifying as technical services under Section 194J.

Application of law to facts: The Court applied the legal precedents, concluding that the nature of IUC/roaming charges did not necessitate TDS under Section 194J.

Treatment of competing arguments: The Revenue contended that human intervention was necessary for roaming services, but the Court found no substance in this claim, relying on existing judicial pronouncements.

Conclusions: The Court upheld the CIT(A)'s decision to delete the addition made for non-deduction of TDS under Section 194J, affirming that IUC/roaming charges did not fall within its ambit.

SIGNIFICANT HOLDINGS

The Court's significant holdings included:

- The relationship between the assessee and its franchisees/distributors was not one of principal and agent, but rather a principal-to-principal relationship. This distinction was crucial in determining the applicability of Section 194H.

- The interpretation of Section 194H was clarified, emphasizing that it applies only when there is a principal-agent relationship, which was not present in this case.

- The Court reiterated that IUC/roaming charges do not involve technical services requiring human intervention, thus not attracting TDS under Section 194J.

- The Court dismissed the Revenue's appeals and allowed the assessee's appeals, aligning with the Supreme Court's findings and the precedents set by the Delhi and Karnataka High Courts.

- The judgment emphasized the importance of clear statutory obligations and the non-extension of TDS provisions beyond their intended scope.