2024 (7) TMI 587 - HC - Income Tax

TDS u/s 194H - commission payable to an agent by the assessee under the franchise/distributorship agreement between the assessee and the franchisee/distributors - As per the assessee, neither are they paying a commission or brokerage to the franchisees/distributors, nor are the franchisees/distributors their agents HELD THAT - High Courts of Delhi and Calcutta have held that the assessees were liable to deduct tax at source u/s 194H of the Act, whereas the High Courts of Rajasthan, Karnataka and Bombay have held that Section 194H of the Act is not attracted to the circumstances under consideration. Some of the assessees had approached the Apex Court in Bharti Cellular Ltd 2024 (3) TMI 41 - SUPREME COURT to 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 194H 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 High Courts of Delhi and Calcutta are allowed and these judgments are set aside. The appeals filed by the Revenue challenging the judgments of High Courts of Rajasthan, Karnataka and Bombay are dismissed - Decided against revenue.

Summary

Issues Involved:
Liability to deduct tax at source under Section 194H of the Income Tax Act, 1961 on commission payable to agents under franchise/distributorship agreements.

Detailed Analysis:

1. Issue of Liability to Deduct Tax at Source:
The main issue in this appeal under Section 260-A of the Income Tax Act, 1961 pertains to the liability to deduct tax at source under Section 194H on commission payable to agents under franchise/distributorship agreements. The assessee argued that they are not paying commission or brokerage to the franchisees/distributors, nor do they consider the franchisees/distributors as their agents. This issue had conflicting decisions from different High Courts, with Delhi and Calcutta holding the assessees liable to deduct tax at source under Section 194H, while Rajasthan, Karnataka, and Bombay High Courts ruling otherwise.

2. Previous Court Decisions and Apex Court Ruling:
Some assessees had previously approached the Apex Court in a related case (Civil Appeal No. 7257/2011). The Apex Court, in its judgment dated 28.02.2024, concluded that the assessees are not legally obligated to deduct tax at source on the income/profit component in payments received by distributors/franchisees from third parties/customers. The Court clarified that Section 194H is not applicable to the circumstances of the case. Consequently, the appeals filed by the assessees challenging the judgments of Delhi and Calcutta High Courts were allowed, and those filed by the Revenue challenging the judgments of Rajasthan, Karnataka, and Bombay High Courts were dismissed.

3. Final Disposition:
As a result of the Apex Court's ruling, the High Court found that nothing remained for adjudication in the appeal filed by the Revenue. Therefore, the appeal was disposed of accordingly, in line with the Apex Court's decision, bringing an end to the matter under consideration.