2024 (5) TMI 229 - HC - Income Tax

TDS u/s 194H - assessee is a cellular mobile service providers - discount offered by assessee to its distributors on the payment made by the distributors towards pre-paid sim-cards/recharge coupons - - whether appellant assessee and its distributors enjoy legal relationship of principal and agent and not of principal to principal basis? - HELD THAT - As decided in 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. 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. 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. This can be ascertained by referring to and examining the indicia mentioned in clauses (a) to (d) in paragraph 8 of this judgment. It is in the restricted sense in which the term agent is used in Explanation (i) to Section 194-H of the Act. 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 is not applicable to the facts and circumstances of this case . Decided in favour of assessee.

Summary

Issues Involved:
1. Legal relationship between the appellant assessee and its distributors.
2. Nature of discount offered by the appellant assessee to its distributors and tax deduction at source u/s 194H of the Income Tax Act, 1961.

Summary:

Issue 1: Legal Relationship Between Appellant Assessee and Distributors
The High Court examined whether the relationship between the appellant assessee and its distributors was that of principal and agent or principal to principal. The court referenced the Supreme Court's decision, which detailed the franchisee/distributor agreements, emphasizing that the franchisees/distributors were independently responsible for marketing and promoting prepaid services, maintaining establishments, and adhering to statutory and regulatory compliances. The agreements explicitly stated that the franchisees/distributors were independent contractors, not agents or employees of the assessee. The Supreme Court concluded that the relationship was not fiduciary in nature and was more akin to that of independent contractors.

Issue 2: Nature of Discount and Tax Deduction at Source u/s 194H
The court addressed whether the discount offered by the appellant assessee to its distributors on prepaid sim-cards/recharge coupons constituted "commission" under Section 194H of the Income Tax Act, 1961, necessitating tax deduction at source. The Supreme Court clarified that the franchisees/distributors purchased the prepaid products at a discounted price and sold them at a price determined by themselves, making their income the difference between the sale price and the discounted price. The court emphasized that the assessee did not pay or credit any income to the franchisees/distributors in the form of commission or brokerage. Consequently, the obligation to deduct tax at source u/s 194H did not arise as the payments were not made by the assessee but were the income earned by the franchisees/distributors from third parties.

Conclusion:
The High Court allowed the appeal in favor of the appellant, holding that the relationship between the appellant assessee and its distributors was on a principal-to-principal basis, and the discount offered did not constitute commission requiring tax deduction at source u/s 194H. The appeal was disposed of in accordance with the Supreme Court's decision.