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TMI Blog2024 (5) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in the aforesaid decision decided the same issue by answering in favour of the appellant in the following terms: 20. The assessees have entered into franchise or distribution agreements with several parties, the terms and conditions of which we would refer to subsequently. It is the case of the assessees that they sell the start-up kits and recharge vouchers of the specified value at a discounted price to the franchisee/distributors. The discounts are given on the printed price of the packs. This discount, as per the assessees, is not a 'commission or brokerage' under Explanation (i) to Section 194-H of the Act. The Revenue, on the other hand, submits that the difference between 'discounted price' and 'sale price' in the hands of the franchisee/distributors being in the nature of 'commission or brokerage' is the income of the franchisee/ distributors, the relationship between the assessees and the franchisee/distributor is in the nature of principal and agent, and therefore, the assesses are liable to deduct tax at source under Section 194-H of the Act. 21. In order to decide the dispute in question, we would like to refer to some of the relevant clauses of the franch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) It has all necessary statutory, regulatory and municipal permissions, approvals and permits for the running and operation of its establishment and for the conduct of its business, more particularly for the business as provided for in this Agreement. (b) It is in compliance of all laws, regulars and rules in the conduct of its business and the running of its business establishment. 3.2 The FRANCHISEE shall indemnify and keep indemnified BML from and against all and any costs, expenses and charges imposed on BML as a result of any action by a statutory, regulatory or municipal authority arising out of non-compliance by the FRANCHISEE of laws, rules or regulations in the running, operation and conduct of its business and business establishment, more particularly with respect to the conduct of its business provided for in this Agreement. xx xx xx 4.1 The FRANCHISEE shall maintain a suitable establishment for the conduct of its business and the performance of its obligations under this Agreement. The FRANCHISEE shall use its best efforts to actively provide effective ways to market and promote the Pre-Paid Services and shall always act in the interest of both BML and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Trademarks, logos and trade names of BML) for the Pre-Paid Services. BML will not share the expenditure incurred by the FRANCHISEE for such advertising and publicity of the Services unless agreed to earlier in writing. Any share of the expenditure stated above and the ratio for the same shall be decided by BML from time to time at its sole discretion. 4.10 The FRANCHISEE shall be solely liable and responsible, at its business premises, for the safety and storage of all Pre-Paid start up kits, recharge cards and other material in respect of the Pre-Paid Services. BML shall not be liable for any loss, pilferage or damage to the items as stated here above and the FRANCHISEE shall indemnify BML from all loss caused to BML arising out of any loss, pilferage or damage to the items as stated here above. xx xx xx 4.12 The liability to insure and keep insured the items as stated in Clause 4.10 at the business establishment of the FRANCHISEE shall be of the FRANCHISEE and the liability for any loss or damage due to any fire, burglary, theft, etc. will be that of the FRANCHISEE. xx xx xx 4.14 The FRANCHISEE shall be responsible for collection of all necessary agreement/contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of termination of this Agreement, however caused, the FRANCHISEE'S right to use such Trademarks, logos or trade names shall cease forthwith. The FRANCHISEE agrees not to attach any additional trademarks, logos or trade designation to the Trademarks of BML. 11.3 For as long as this Agreement continues in force but not thereafter, the FRANCHISEE may identify itself as an authorised FRANCHISEE of BML, but shall not use the Trademarks, logos and trade names of BML as part of its proprietorship name/corporate/partnership name or otherwise indicate to the public that it is an affiliate of BML. xx xx xx 11.5 BML shall allow the FRANCHISEE to use its logo to be displayed on the sign board to be placed at the FRANCHISEE's outlet(s) and on the each memos and/or official business documents issued by the FRANCHISEE towards the services effected from the outlet(s). However, the intellectual property rights associated with Trademarks, logos and trade names are and shall remain the sole property of BML. xx xx xx 14.1 BML shall not be liable to the FRANCHISEE or any other party by virtue of the termination of this Agreement for any reason whatsoever, including but not limited to any cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x xx 16.1 The FRANCHISEE understands that it is an independently owned business entity and this Agreement does not make the FRANCHISEE, its employees, associates or agents as employees, agents or legal representatives of BML for any purpose whatsoever. The FRANCHISEE has no express or implied right or authority to assume or to undertake any obligation in respect of or on behalf of or in the name of BML, or to bind BML in any manner. In case, the FRANCHISEE, its employees, associates or agents hold out as employees, agents, or legal representatives of BML, the FRANCHISEE shall forthwith upon demand make good any/all loss, cost, damages, including consequential loss, suffered by BML on this account. 16.2 It is understood that the relationship between the parties is solely on principal-to-principal. FRANCHISEE shall not acquire, by virtue of any provision of this Agreement or otherwise, any right, power or capacity to act as an agent or commercial representative of BML for any purpose whatsoever. Nothing contained in the contract shall be deemed or construed as creating a joint venture relationship or legal partnership etc. between BML and the FRANCHISEE. 16.3 The FRANCHISEE sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the assessee. The franchisee/distributor shall be solely responsible and liable for safety and storage of prepaid start-up kits, recharge cards and other material. The assessee will not be liable for any loss, pilferage or damage to the pre-paid coupons/starter-kits. The franchisee/ distributor is to indemnify the assessee for any loss caused on this account. The franchisee/distributor is to insure the prepaid start-up kits/ recharge coupons. The liability for any loss or damage due to fire, burglary, theft etc. is that of the franchisee/distributor. 24. On termination of the agreement, the franchisee/distributor shall continue its operation till the effective date of termination mentioned in the notice. Upon termination, the franchisee/distributor is required to return all advertising and promotional material, etc. to the assessee by the effective date of termination. Further, the assessee is not liable to the franchisee/distributor or any other party for any loss of profits or compensation or prospective profits or on account of any expenditure, etc. in the event of termination. 25. The assessee is to review the minimum subscriptions/targets for prepaid services taking in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the price printed on the pack. The franchisee/distributor determined his profits/income. 29. The Revenue has highlighted that the prepaid SIM cards were not the property of franchisee/distribution and no right, title or interest was transferred to them. These were always to remain the property of the assessee. This is correct, but it is equally true that this is a mandate and requirement of the licence issued to the assessee by the DoT. In actual practice, the right to use the SIM card and its possession is handed over and given to the end-user, that is, the customer who installs the SIM card in his phone to avail the telecommunication services. Similarly, the franchisees/distributors are to ensure that the post-paid customers/end-users fill up the form as prescribed along with the documents which are given and submitted to the assessee. These are mandates prescribed by the licence issued by the DoT to the assessees. The contractual obligations of the distributors/franchisees, do not reflect a fiduciary character of the relationship, or the business being done on the principal's account. 30. The franchisees/distributors earn their income when they sell the prepaid products to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in Singapore Airlines Limited (supra) is required to be understood in the context of the contract in the said case, which was in terms of the rules/agreement set up by the International Airport Transport Association 'IATA', IATA would fix a ceiling price, and the price an airline could charge from its customers with a discretion to the airlines to sell their tickets at a net fare lower than the base fare but not higher. The air carriers were required to furnish a fare list to the Director General of Civil Aviation. The arrangement between the airlines and travel agents was covered by the Passenger Sales Agency Agreement 'PSA', which would set out the conditions under which the travel agent carried out sale of tickets along with other ancillary services. The travel agents were entitled to 7% commission on sale of the tickets for its services as the standard commission based on the price bar set by the IATA. The airlines were deducting tax at source under Section 194-H of the Act on the 7% commission. In addition to the 7% commission, the travel agents were also entitled to additional/supplementary commission on the tickets sold by them. The additional/supplementary commission and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o conform to all reasonable orders given him in the course of his work; an independent contractor, on the other hand, is entirely independent of any control or interference and merely undertakes to produce a specified result, employing his own means to produce that result. An agent, though bound to exercise his authority in accordance with all lawful instructions which may be given to him from time to time by his principal, is not subject in its exercise to the direct control or supervision of the principal. An agent, as such is not a servant, but a servant is generally for some purposes his master's implied agent, the extent of the agency depending upon the duties or position of the servant." 34. We have already expounded on the main provision of Section 194-H of the Act, which fixes the liability to deduct tax at source on the 'person responsible to pay' - an expression which is a term of art - as defined in Section 204 of the Act and the liability to deduct tax at source arises when the income is credited or paid by the person responsible for paying. The expression "direct or indirect" used in Explanation (i) to Section 194-H of the Act is no doubt meant to ensure that "th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d stakeholders. In addition to enhancing revenue and ensuring tax compliance, an equally important aim/objective of the Revenue is to reduce litigation. The instructions/circular, if and when issued, should be clear, and when justified - require the obligation to be made prospective. 36. Notably, the Delhi High Court in Commissioner of Income Tax v. Singapore Airlines Ltd. (2009) 319 ITR 29 had held that tax under Section 194-H of the Act is not required to be deducted on the discounted tickets sold by the airlines/air carriers through travel agents. Revenue did not challenge the decision of the Delhi High Court to this extent and therefore, this dictum attained finality. As noted, it is not the case of the Revenue that tax is to be deducted when payment is made by the distributors/franchisees to the mobile service providers. It is also not the case of the revenue that tax is to be deducted under Section 194-H of the Act on the difference between the maximum retail price income of the distributors/ franchisees and the price paid by the distributors/franchisees to the assessees. The assessees are not privy to the transactions between distributors/franchisees and third parties. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence between the purchase price and the sale price. The reason is, that the distributor in such cases is an independent contractor. Unlike an agent, he does not act as a communicator or creator of a relationship between the principal and a third party. The distributor has rights of distribution and is akin to a franchisee. Franchise agreements are normally considered as sui generis, though they have been in existence for some time. Franchise agreements provide a mechanism whereby goods and services may be distributed. In franchise agreements, the supplier or the manufacture, i.e. a franchisor, appoints an independent enterprise as a franchisee through whom the franchisor supplies certain goods or services. There is a close relationship between a franchisor and a franchisee because a franchisee's operations are closely regulated, and this possibly is a distinction between a franchise agreement and a distributorship agreement. Franchise agreements are extremely detailed and complex. They may relate to distribution franchises, service franchises and production franchises. Notwithstanding the strict restrictions placed on the franchisees - which may require the franchisee to sell only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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