Full Judgment Text
REPORTABLE
IN THE SUPREME COURT OF INDIA
2024 INSC 148
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 7257 OF 2011
BHARTI CELLULAR LIMITED
(NOW BHARTI AIRTEL LIMITED)
.....
APPELLANT
VERSUS
ASSISTANT COMMISSIONER OF INCOME
TAX, CIRCLE 57, KOLKATA AND ANOTHER
.....
RESPONDENTS
W I T H
CIVIL APPEAL NOS. 2652-2653, 4949-4950 AND 4947-4948 OF 2015;
7455 OF 2018; 111 AND 2860 OF 2021; 8902 OF 2022; 7729, 7735,
7736, 7737, 7738, 7739, 7740, 7741, 7742, 7743, 7679, 7680, 7681,
7682, 7744, 7745, 7746, 7747, 7748, 7848, 7849, 7852, 7853, 7854,
7855, 7856, 7857 AND 7859 OF 2023; AND 3514, 3515, 3516 AND 3517
OF 2024
J U D G M E N T
SANJIV KHANNA, J.
This common judgment decides the aforestated appeals
preferred by the Revenue and the assessees, who are cellular
mobile telephone service providers. The issue relates to the liability
to deduct tax at source under Section 194-H of the Income Tax Act,
Signature Not Verified
Digitally signed by
babita pandey
Date: 2024.02.28
17:51:32 IST
Reason:
1
1961 on the amount which, as per the Revenue, is a commission
1
“The Act”, for short.
Civil Appeal No. 7257 of 2011 & Ors. Page 1 of 44
payable to an agent by the assessees under the franchise/
distributorship agreement between the assessees and the
franchisees/distributors. As per the assessees, neither are they
paying a commission or brokerage to the franchisees/distributors,
nor are the franchisees/distributors their agents. The High Courts
of Delhi and Calcutta have held that the assessees were liable to
deduct tax at source under Section 194-H of the Act, whereas the
High Courts of Rajasthan, Karnataka and Bombay have held that
Section 194-H of the Act is not attracted to the circumstances under
consideration.
2. To avoid prolixity and repetition, we are not referring to the facts
and arguments in the beginning, and will preface our judgment by
reproducing Section 194-H of the Act and explaining its contours.
The relevant portion of Section 194-H reads as under:
“ 194-H. Commission or brokerage.— Any person, not being
an individual or a Hindu undivided family, who is responsible
for paying, on or after the 1st day of June, 2001, to a resident,
any income by way of commission (not being insurance
commission referred to in Section 194-D) or brokerage, shall,
at the time of credit of such income to the account of the payee
or at the time of payment of such income in cash or by the
issue of a cheque or draft or by any other mode, whichever is
earlier, deduct income tax thereon at the rate of five per cent:
Provided that no deduction shall be made under this section in
a case where the amount of such income or, as the case may
be, the aggregate of the amounts of such income credited or
paid or likely to be credited or paid during the financial year to
the account of, or to, the payee, does not exceed fifteen
thousand rupees:
Civil Appeal No. 7257 of 2011 & Ors. Page 2 of 44
Provided further that an individual or a Hindu undivided family,
whose total sales, gross receipts or turnover from the business
or profession carried on by him exceed one crore rupees in
case of business or fifty lakh rupees in case of profession
during the financial year immediately preceding the financial
year in which such commission or brokerage is credited or
paid, shall be liable to deduct income tax under this section.
Provided also that no deduction shall be made under this
section on any commission or brokerage payable by Bharat
Sanchar Nigam Limited or Mahanagar Telephone Nigam
Limited to their public call office franchisees.
xx xx xx"
3. Section 194-H of the Act imposes the obligation to deduct tax at
source, states that any person responsible for paying at the time of
credit or at the time of payment, whichever is earlier, to a resident
any income by way of commission or brokerage, shall deduct
income tax at the prescribed rate The expression “any person (...)
2
responsible for paying” is a term of art, defined vide Section 204 of
2
204. Meaning of “person responsible for paying” .—For the purposes of the foregoing provisions
of this chapter and Section 285, the expression “person responsible for paying” means—
( i ) in the case of payments of income chargeable under the head “Salaries” other than payments by
the Central Government or the Government of a State, the employer himself or, if the employer is a
company, the company itself, including the principal officer thereof;
( ii ) in the case of payments of income chargeable under the head “Interest on securities” other than
payments made by or on behalf of the Central Government or the Government of a State, the local
authority, corporation or company, including the principal officer thereof;
( ii - a ) in the case of any sum payable to a non-resident Indian, being any sum representing
consideration for the transfer by him of any foreign exchange asset, which is not a short-term capital
asset, the authorised person responsible for remitting such sum to the non-resident Indian or for
crediting such sum of his Non-resident (External) Account maintained in accordance with the Foreign
Exchange Management Act, 1999 (42 of 1999)], and any rules made thereunder;
( ii-b ) in the case of furnishing of information relating to payment to a non-resident, not being a company,
or to a foreign company, of any sum, whether or not chargeable under the provisions of this Act, the
payer himself, or, if the payer is a company, the company itself including the principal officer thereof;
( iii ) in the case of credit or, as the case may be, payment of any other sum chargeable under the
provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the
principal officer thereof.
( iv ) in the case of credit, or as the case may be, payment of any sum chargeable under the provisions
of this Act made by or on behalf of the Central Government or the Government of a State, the drawing
Civil Appeal No. 7257 of 2011 & Ors. Page 3 of 44
the Act. As per the clause (iii) of Section 204, in the case of credit
or in the case of payment in cases not covered by clauses (i), (ii),
(ii)(a), (ii)(b), “the person responsible for paying” is the payer
himself, or if the payer is a company, the company itself and the
principal officer thereof.
3
4. Explanation (i) to Section 194-H of the Act defines the expressions
‘commission’ or ‘brokerage’, as:
“Explanation. — For the purposes of this section, —
(i) “commission or brokerage” includes any payment received
or receivable, directly or indirectly, by a person acting on
behalf of another person for services rendered (not being
professional services) or for any services in the course of
buying or selling of goods or in relation to any transaction
relating to any asset, valuable article or thing, not being
securities;”
and disbursing officer or any other person, by whatever name called, responsible for crediting, or as
the case may be, paying such sum.
( v ) in the case of a person not resident in India, the person himself or any person authorised by such
person or the agent of such person in India including any person treated as an agent under Section
163.]
Explanation . —For the purposes of this section, —
( a ) “non-resident Indian” and “foreign exchange asset” shall have the meanings assigned to them in
Chapter XII-A;
( b ) “authorised person” shall have the meaning assigned to it in clause ( c ) of Section 2 of the Foreign
Exchange Management Act, 1999 (42 of 1999).
3
Sub-section 1 to Section 194-H of the Act can be interpreted as requiring deduction of tax at source
on commission and brokerage, even when the principal and agent relationship does not exist between
the parties. Explanation (i) to Section 194-H of the Act can be read as expanding and widening the
scope of the provision of sub-section (1) to include in the ambit of brokerage and commission,
payments made by the principal to the agent, when covered under the four corners of the said
explanation. We would not like to pronounce on this aspect as it has not been argued by the Revenue,
and it appears that the requirement of relationship of principal and agent has been read into the main
section. Further, applying common or commercial parlance meaning to the terms ‘brokerage’ or
‘commission’, given the wide divergence in which it is understood, would lead to confusion and has
pitfalls. Deduction of Tax provisions should be pragmatically and realistically construed, and not as
enmeshes or by adopting catch-as-catch-can approach. When doubts exist, the Central Board of Direct
Taxes may examine this question and may issue appropriate instructions/circular after ascertaining the
views of assessees and other stakeholders. The decision should be clear, and we trust and hope that
an obligation, if imposed, will be prospective. (See paragraph 34 of the judgment.)
Civil Appeal No. 7257 of 2011 & Ors. Page 4 of 44
Payment is received when it is actually received or paid. The
payment is receivable when the amount is actually credited in the
books of the payer to the account of the payee, though the actual
payment may take place in future. The payment received or
receivable should be to a person acting on behalf of another
person. The words “another person” refers to “the person
responsible for paying”. The words “direct” or “indirect” in
Explanation (i) to Section 194-H of the Act are with reference to the
act of payment. Without doubt, the legislative intent to include
“indirect” payment ensures that the net cast by the section is
plugged and not avoided or escaped, albeit it does not dilute the
requirement that the payment must be on behalf “the person
responsible for paying”. This means that the payment/credit in the
account should arise from the obligation of “the person responsible
for paying”. The payee should be the person who has the right to
receive the payment from “the person responsible for paying”.
When this condition is satisfied, it does not matter if the payment is
4
made “indirectly”.
4
We are unable to visualize ‘indirect’ credit in the books of the payer to the account of the payee.
Credit entry is required even in cases of set-off. Nevertheless, this judgment should not be read as
laying down that ‘indirect’ credit in the books shall not require deduction of tax under Section 194-H of
the Act.
Civil Appeal No. 7257 of 2011 & Ors. Page 5 of 44
5. The services rendered by the agent to the principal, according to
the latter portion of Explanation (i) to Section 194-H of the Act,
should not be in the nature of professional services. Further,
Explanation (i) to Section 194-H of the Act restricts application of
Section 194-H of the Act to the services rendered by the agent to
the principal in the course of buying and selling of goods, or in
relation to any transaction relating to any asset, valuable article, or
thing, not being securities. The latter portion of the Explanation (i)
to Section 194-H of the Act is a requirement and a pre-condition. It
should not be read as diminishing or derogating the requirement of
the principal and agent relationship between the payer and the
recipient/payee.
6. It is settled by a series of judgments of this Court that the
expression ‘acting on behalf of another person’ postulates the
existence of a legal relationship of principal and agent, between the
5
payer and the recipient/payee. The law of agency is technical.
Whether in law the relationship between the parties is that of
principal-agent is answered by applying Section 182 of the Contract
6
Act, 1872 . Therefore, the obligation to deduct tax at source in terms
of Section 194-H of the Act arises when the legal relationship of
5
Singapore Airlines Ltd. and Another v. Commissioner of Income Tax , (2023) 1 SCC 497, ¶¶ 23-29.
6
“Contract Act”, for short.
Civil Appeal No. 7257 of 2011 & Ors. Page 6 of 44
principal-agent is established. It is necessary to clarify this position,
as in day to day life, the expression ‘agency’ is used to include a
vast number of relationships, which are strictly, not relationships
between a principal and agent.
7. Section 182 of the Contract Act, defines the words ‘agent’ and
‘principal’ and reads as under:
“182. “Agent” and “principal” defined.— An “agent” is a person
employed to do any act for another, or to represent another in
dealings with third persons. The person for whom such act is
done, or who is so represented, is called the “principal”.”
Agency in terms of Section 182 exists when the principal
employs another person, who is not his employee, to act or
represent him in dealings with a third person. An agent renders
services to the principal. The agent does what has been entrusted
to him by the principal to do. It is the principal he represents before
third parties, and not himself. As the transaction by the agent is on
behalf of the principal whom the agent represents, the contract is
between the principal and the third party. Accordingly the agent,
except in some circumstances, is not liable to the third party.
8. Agency is therefore a triangular relationship between the principal,
agent and the third party. In order to understand this relationship,
one has to examine the inter se relationship between the principal
and the third party and the agent and the third party. When we
Civil Appeal No. 7257 of 2011 & Ors. Page 7 of 44
examine whether a legal relationship of a principal and agent exists,
the following factors/aspects should be taken into consideration:
(a) The essential characteristic of an agent is the legal power
vested with the agent to alter his principal’s legal relationship
with a third party and the principal’s co-relative liability to have
7
his relations altered.
(b) As the agent acts on behalf of the principal, one of the prime
elements of the relationship is the exercise of a degree of
control by the principal over the conduct of the activities of the
agent. This degree of control is less than the control exercised
by the master on the servant, and is different from the rights
and obligations in case of principal to principal and
independent contractor relationship.
(c) The task entrusted by the principal to the agent should result
in a fiduciary relationship. The fiduciary relationship is the
manifestation of consent by one person to another to act on
his or her behalf and subject to his or her control, and the
8
reciprocal consent by the other to do so.
(d) As the business done by the agent is on the principal’s
account, the agent is liable to render accounts thereof to the
7
F.E. Dowrick, The Relationship of Principal and Agent, 17 MLR 24, 37 (1954).
8
R ESTATEMENT (T HIRD ) OF A GENCY (A MERICAN L AW I NSTITUTE P UBLISHERS 2007).
Civil Appeal No. 7257 of 2011 & Ors. Page 8 of 44
principal. An agent is entitled to remuneration from the
principal for the work he performs for the principal.
9. At this stage, three other relevant aspects/considerations should be
noted. First is the difference between ‘power’ and ‘authority’. The
two terms though connected, are not synonymous. Authority refers
to a factual position, that is, the terms of contract between the two
parties. The power of the agent however, is not, strictly speaking,
conferred by the contract or by the principal but by the law of
agency. When a person gives authority to another person to do the
acts which bring the law of agency into play, then, the law vests
power with the agent to affect the principal’s legal relationship with
the third parties. The extent and existence of the power with the
agent is determined by public policy. The authority, as observed
above, refers to the factual situation. The second consideration is
that the primary task of an agent is to enter into contracts on behalf
of his principal, or to dispose of his principal’s property. The factors
mentioned in clauses (b) to (d) in paragraph 8 above flow, and are
indicia of this primary task. Clauses (b) to (d) of paragraph 8 are
useful as tests or standards to examine the true nature or character
of the relationship. Lastly, the substance of the relationship
between the parties, notwithstanding the nomenclature given by the
parties to the relationship, is of primary importance. The true nature
Civil Appeal No. 7257 of 2011 & Ors. Page 9 of 44
of the relationship is examined by reference to the functions,
responsibility and obligations of the so-called agent to the principal
and to the third parties.
10. An agent is distinct from a servant, in that an agent is subject to less
control than a servant, and has complete, or almost complete
discretion as to how to perform an undertaking. As Seavey said, ‘‘a
servant (...) is an agent under more complete control than is a non-
9
servant’’. The difference is “in the degree of control rather than in
the acts performed. The servant sells primarily his services
10
measured by time; the agent his ability to produce results.” This
distinction can be criticised, for servants may have very wide
discretion, and may not really be subject to control at all in practice,
while agents may have their power to act circumscribed by detailed
11
instructions.
11. This Court in Bhopal Sugar Industries Limited v. Sales Tax
12
Officer, Bhopal , has expounded the difference between
principal-agent and principal-principal relationship, in the following
words:-
“5. … the essence of the matter is that in a contract of sale,
title to the property passes on to the buyer on delivery of the
9
Warren A. Seavey, The Rationale of Agency, 29 YALE L.J. 859, 866 (1920).
10
Ibid.
11
G.H.L. F RIDMAN , T HE L AW O F A GENCY 33 (Butterworths, 7 ed. 1996).
12
(1977) 3 SCC 147.
Civil Appeal No. 7257 of 2011 & Ors. Page 10 of 44
goods for a price paid or promised. Once this happens the
buyer becomes the owner of the property and the seller has
no vestige of title left in the property. The concept of a sale
has, however, undergone a revolutionary change, having
regard to the complexities of the modern times and the
expanding needs of the society, which has made a departure
from the doctrine of laissez faire by including a transaction
within the fold of a sale even though the seller may by virtue of
an agreement impose a number of restrictions on the buyer,
e.g. fixation of price, submission of accounts, selling in a
particular area or territory and so on. These restrictions per se
would not convert a contract of sale into one of agency,
because in spite of these restrictions the transaction would still
be a sale and subject to all the incidents of a sale. A contract
of agency, however, differs essentially from a contract of sale
inasmuch as an agent after taking delivery of the property does
not sell it as his own property but sells the same as the
property of the principal and under his instructions and
directions. Furthermore, since the agent is not the owner of the
goods, if any loss is suffered by the agent he is to be
indemnified by the principal. This is yet another dominant
factor which distinguishes an agent from a buyer—pure and
simple. In Halsbury's Laws of England, Vol. 1, 4th Edn., in para
807 at p. 485, the following observations are made:
“807. Rights of agent. —The relation of principal and
agent raises by implication a contract on the part of the
principal to reimburse the agent in respect of all
expenses, and to indemnify him against all liabilities,
incurred in the reasonable performance of the agency,
provided that such implication is not excluded by the
express terms of the contract between them, and
provided that such expenses and liabilities are in fact
occasioned by his employment.”
12. The aforesaid judgment in the context of distinction between a
contract of sale and contract of agency observes that the agent is
authorised to sell or buy on behalf of the principal, whereas the
essence of contract of sale is the transfer of title of goods for the
price paid or promised to be paid. In case of an agency to sell, the
agent who sells them to the third parties, sells them not as his own
Civil Appeal No. 7257 of 2011 & Ors. Page 11 of 44
property, but as a property of the principal, who continues to be the
owner of the goods till the sale. The transferee is the debtor and
liable to account for the price to be paid to the principal, and not to
the agent for the proceeds of the sale. An agent is entitled to his fee
or commission from the principal.
13. This distinction and test was referred to by this Court in
Commissioner of Income Tax, Ahmedabad and Others v.
13
Ahmedabad Stamp Vendors Association , which is a case
relating to Section 194-H of the Act. This Court had approved the
decision of the High Court in Ahmedabad Stamp Vendors
14
Association v. Union of India . We may also refer to two more
decisions of this Court. In the case of Director, Prasar Bharati v.
15
Commissioner of Income Tax, Thiruvananthapuram , this
Court has observed that the explanation appended to Section 194-
H of the Act defining the expression ‘commission or brokerage’ is
an inclusive definition giving wide meaning to the expression
‘commission’. The second decision is in the case of Singapore
16
Airlines Limited v. Commissioner of Income Tax, Delhi , which
we shall refer to subsequently in some detail as to its exact purport
13
(2014) 16 SCC 114.
14
(2002) 257 ITR 202 (Guj.).
15
(2018) 7 SCC 800.
16
(2023) 1 SCC 497.
Civil Appeal No. 7257 of 2011 & Ors. Page 12 of 44
and ratio. However, at this stage, we would like to examine in some
detail commercial relationships in the nature of an independent
contractor, that are legally, principal to principal dealings.
14. The passage from Bhopal Sugar Industries Limited (supra)
highlights the principles and the complexities involved in
determining the correct nature of the legal relationship between a
principal and an agent. Law permits individuals to enter into
complex contracts incorporating multiple rights and obligations. The
relationships between contacting parties have become
multi-dimensional, which may not strictly fall within an
employer-employee, principal-agent or principal-principal
relationship. A singular contract may create different legal
relationships and obligations. Independent contractors on occasion
act for themselves, and at other times may be creating legal
relations between their employers and third persons. For example,
a solicitor may start by giving advice (independent contractor), and
then as a consequence make a contract for his employer with
another person (agent).
17
15. In Labreche v. Harasymiw , Valin J. delineated the question of
what an agency involves, stating that: (i) it refers to the power of the
17 th
(1992) 89 DLR (4 ) 95 at 107.
Civil Appeal No. 7257 of 2011 & Ors. Page 13 of 44
agent to affect the principal’s position. However, this is not the sole
test, though it still remains one of the main criteria in determining
whether someone is an agent. There are several features in the
18
definition of an agent . There can be several situations where one
person represents or acts for another, but this does not create the
relationship of principal and agent. It is only when the
representation or action on another’s behalf affects the latter’s legal
position, that is to say his rights against, or his liability towards,
other people, that the law of agency applies; (ii) the second feature
is the importance of the way in which law regards the relationship
which is created. The effect of the law is that it regulates the way in
which parties conduct themselves. The conduct of the parties is
considered in terms of law, regardless of the language or
nomenclature used by the parties. The true factual position must be
investigated to determine whether a relationship of agency has
come into existence between a set of parties or individuals.
16. The significant observation in the aforesaid judgment is that all
kinds of interactions with third parties or interested parties, resulting
from the introduction of the third parties with one who wishes a
particular undertaking to be performed, may not be a result of an
agency. For instance, a retail dealer or supplier of goods, obtains
18
See ¶8 of the judgment.
Civil Appeal No. 7257 of 2011 & Ors. Page 14 of 44
goods from a wholesale supplier or a manufacturer for subsequent
resale to retail customers or suppliers who, in turn, deals with retail
dealers or shopkeepers. Such ‘middlemen’ are sometimes referred
to as ‘agents’, when in fact they are franchisees of the manufacturer
or supplier, or are distributors of the manufactures’ goods, perhaps
with a ‘sole agency’ or special dealership for his goods. Such
‘agents’ can be real buyers, acting as principals on their own behalf.
Consequently, they are not liable to the manufacturer or supplier in
the way an agent might be for failure of duty, nor do their contracts
with other parties – whether it be suppliers, retail dealers or
individual customers – hold the party who sold to them, liable, for
any breach including misrepresentation or sale of defective goods.
The seller’s contractual or tortious liability is different from the
manufacturer’s liability on account of warranty/guarantee, statutory
liability or even obligation to a third party who purchases the goods
or avails services from/through the independent contractor. An
agent renders service to the principal, who he/she represents, and
therefore the principal, and not the agent, is liable to the third
parties. Further, the money received by an independent contractor
from his customers will belong to the independent contractor and
not to the party who sold to him. The money will be a part of such
independent contractor’s property in the event of his bankruptcy or
Civil Appeal No. 7257 of 2011 & Ors. Page 15 of 44
liquidation. This may be the case even if the contract of sale is one
of ‘sale or return’. It is important to avoid confusion, by applying the
legal tests, that may arise where the functions of the
‘buyer’ – described as an ‘agent’ – is really as that of a ‘middleman’,
and the necessary elements for creation of principal and an agent
relationship are absent. Two level commercial transaction can
result in an tripartite arrangement/agreement with respective rights
and obligations, without any of the two parties having
principal-agent relationship.
17. Clause (d) in paragraph 8 observes that the agent is liable to render
accounts to the principal as the business done by the agent is on
principal’s account. The agent is entitled to remuneration from the
principal for the work he performs. To decide whether a contracting
party acts for himself as an independent contractor, we may
examine whether in the course of work, he intends to make profits
for himself, or is entitled to receive prearranged remuneration. If the
party is concerned about acting for himself and making the
maximum profits possible, he is usually regarded as a buyer, or an
independent contractor and not as an agent of the principal. This
would be true even when certain terms and conditions have been
fixed relating to the manner in which the seller conducts his
business. We shall subsequently further elucidate on the
Civil Appeal No. 7257 of 2011 & Ors. Page 16 of 44
characteristics of an independent contractor, and differentiate them
from the principal-agent relationship.
18. We now turn to the facts of the present case. The assessees, as
noticed above, are cellular mobile telephone service providers in
different circles as per the licence granted to them under Section 4
19
of the Indian Telegraph Act, 1885 by the Department of
20
Telecommunications , Government of India. To carry on business,
the assessees have to comply with the licence conditions and the
rules and regulations of the DoT and the Telecom Regulatory
21
Authority of India. Cellular mobile telephone service providers
have wide latitude to select the business model they wish to adopt
in their dealings with third parties, subject to statutory compliances
being made by the operators. As per the business model adopted
by the telecom companies, the users can avail post-paid and
prepaid connections. In the present case, we are only concerned
with the business operations under the prepaid model.
19. Under the prepaid business model, the end-users or customers are
required to pay for services in advance, which can be done by
purchasing recharge vouchers or top-up cards from the retailers.
19
The ‘1885 Act’, for short.
20
‘DoT’, for short.
21
‘TRAI’, for short.
Civil Appeal No. 7257 of 2011 & Ors. Page 17 of 44
For a new prepaid connection, the customers or end-users
purchase a kit, called a start-up pack, which contains a Subscriber
22
Identification Mobile card , commonly known as SIM card, and a
coupon of the specified value as advance payment to avail the
telecom services.
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.
22
‘SIM card’, for short.
Civil Appeal No. 7257 of 2011 & Ors. Page 18 of 44
21. In order to decide the dispute in question, we would like to refer to
some of the relevant clauses of the franchisee/distributor
agreement between Bharti Airtel Limited and the
23
franchisee/distributors, which read as under :
Bharti Airtel Limited
“WHEREAS THE FRANCHISEE has approached BML and
have expressed their keen desire to be one of the
FRANCHISEE’s to undertake the job of promoting and
marketing of Pre Paid and also other related services all
under the brand name of “MAGIC” to the potential
subscribers, under the terms of this Agreement. The
FRANCHISEE has also represented that they have
infrastructure, manpower and experience in the above area
and they possess the financial to perform the above functions
and such other functions as may be assigned to them by BML
from time to time.
xx xx xx
A. It is expressly understood that the Agreement does not
confer any exclusive right to the FRANCHISEE to market the
Services nor does the Agreement gives any territorial right to
the FRANCHISEE. The BML expressly reserves its right to
enter into similar arrangements with other party(ies) to
market and promote the Services and to market the Services
directly to the customers if considered appropriate in terms of
business exigency and market requirements.
xx xx xx
2.1 Subject to the terms and conditions of this Agreement,
BML hereby appoints Central Supply Corporation, as its
FRANCHISEE to promote and market the Pre Paid Services
of BML and more particularly in terms of the policies of BML
as shall be informed by BML from time to time and the
FRANCHISEE hereby accepts the appointment as the
FRANCHISEE of BML.
23
Agreements in the case of assessees Vodafone Idea Limited (formerly known as Vodafone Mobile
Services Limited) and Idea Cellular Limited (now known as Vodafone Idea Limited) are somewhat
different. To avoid repetition or prolixity, we are not reproducing the said clauses.
Civil Appeal No. 7257 of 2011 & Ors. Page 19 of 44
xx xx xx
2.3 The parties recognize that it is commercially prudent and
desirable for the FRANCHISEE in the performance of the
obligations under this Agreement to appointment (sic)
Retailers/outlets for the retail promotion and marketing of Pre
Paid services. In such an event the FRANCHISEE shall
obtain the prior approval of BML for appointment(s) of
Retailers/outlets, and also to the terms and conditions of such
appointment.
2.4 The FRANCHISEE acknowledges that the business of
cellular mobile services is extremely competitive and exists
in an ever expanding market. The FRANCHISEE agrees and
acknowledges that during the term of this Agreement it shall
not undertake the activities under this Agreement for any
other provider of Cellular Mobile Telephone Services or any
similar competitive business.
xx xx xx
3.1 The FRANCHISEE warrants and represents that:
(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
Civil Appeal No. 7257 of 2011 & Ors. Page 20 of 44
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
subscribers to the Services of BML.
4.2 As covenanted for in clause 2.4, the FRANCHISEE
shall not involve himself in any manner either directly or
indirectly in any business or activity which is competitive with
the business of activities of BML. The FRANCHISEE
acknowledges that the adherence to this provision is a
material obligation of the FRANCHISEE under this
Agreement.
xx xx xx
4.4 The FRANCHISEE shall, in the conduct of its business
and performing its obligations under this Agreement, conform
and adhere to the policies of BML communicated to the
FRANCHISEE from time to time. The FRANCHISEE shall not
charge the customers of BML for the services anything more
than the rates specified by the BML from time to time.
4.5 The FRANCHISEE shall employ adequate
employees for performing its obligations under this
Agreement and in the promoting and marketing of the Pre
Paid Services. All contractual and statutory payments,
including wages and salaries to the employees of the
FRANCHISEE, shall be the sole liability and responsibility of
the FRANCHISEE.
4.6 The FRANCHISEE in respect of its business
establishment shall, if so desired by BML, in order to
effectively project the Franchisee, make alterations,
modifications in and install such furniture, fixture and air
conditioning equipment, fax, computer, with internet
connection as required necessary and mutually agreed upon
and the cost of such alterations, renovation shall be borne
exclusively by the FRANCHISEE.
4.7 The FRANCHISEE agrees and undertakes to
maintain proper and sufficient quantities of the prepaid start
up packs and recharge coupons in respect of the Pre Paid
service in order to meet the market requirements at all times
and in accordance with the guidelines and instructions issued
by BML from time to time.
Civil Appeal No. 7257 of 2011 & Ors. Page 21 of 44
4.8 The FRANCHISEE shall use its best efforts and
endeavours to market and promote the Pre Paid Services to
meet the growing demands of the Subscribers. At no point of
time shall any right, title or interest pass to the FRANCHISEE
in respect of the Pre-Paid Cards for the Pre Paid Services
given to the subscribers for connection to the Service and all
right, title, ownership and property rights in such cards shall
at all times vest with BML.
4.9 The FRANCHISEE shall seek prior written approval
from BML for its promotional literature campaign (including
promotional material which bears 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 forms and other related
forms, and for obtaining the signature of the customer on
these forms. The FRANCHISEE shall forward all such forms,
duly completed in all respects and signed by customers to
BML for its verification and records.
xx xx xx
Civil Appeal No. 7257 of 2011 & Ors. Page 22 of 44
5.1 From time to time, BML will review with the FRANCHISEE
minimum subscription, targets for the Pre Paid Services,
taking into account the market development and market
potential and other relevant factors. The achievements of
these prescribed targets by the FRANCHISEE is a material
obligation of the FRANCHISEE under this Agreement.
xx xx xx
6.2 The FRANCISEE shall employ a fully trained service staff
whose training has been completed in accordance with the
standards set out by BML.
xx xx xx
8.1 The FRANCHISEE’s price and payment for services will
be specified by BML from time to time. The rates are subject
to variation during the terms of this Agreement at the sole
discretion of BML and shall be intimated to the Distributor
from time to time.
xx xx xx
8.3 All other tax liabilities arising in connection with or out
of the agreement transactions pertaining to the
FRANCHISEE shall be the responsibility of the
FRANCHISEE.
xx xx xx
10.1 The FRANCHISEE accepts for all purposes that all
trademarks, logos, trade names or identifying marks and
slogans used by BML in respect of the Service and the Pre
Paid Services, whether registered or not, constitute the
exclusive property of BML or their affiliated companies as the
case may be, and cannot be used by the FRNCHISEE except
in connection with the promotion and marketing of the
Services of BML and that too with the express written consent
of BML. The FRANCHISEE shall not contest, at any time, the
right of the BML or its affiliated companies to any such
Trademark or trade name used or claimed by BML or such
affiliated companies in respect of the Service or Pre Paid
Services.
xx xx xx
Civil Appeal No. 7257 of 2011 & Ors. Page 23 of 44
11.2 During the term of this Agreement, the FRANCHISEE is
authorised to use BML’s trademarks, logos and trade names
only in connection with the FRANCHISEE’s use of such
trademarks, logos and trade names as set out in this
Agreement. The FRANCHISEE’s use of such trademarks,
logos and trade names shall be in accordance with the
guidelines issued by BML. Nothing herein shall give the
FRANCHISEE any right, title or interest in such trademarks,
logos or trade names, in the event 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 claim for
loss of profits or compensation or prospective profits or on
account of any expenditure, investments, leases, capital
improvements or any other commitments made by the
FRANCHISEE in connection with the business made in
reliance upon or by virtue of FRANCHISEE’s appointment
under this Agreement. It is expressly agreed that no
compensation whatsoever shall be payable by BML to the
FRANCHISEE upon the termination of this Agreement.
Civil Appeal No. 7257 of 2011 & Ors. Page 24 of 44
14.2 Upon receipt of any notice of termination of this
Agreement the FRANCHISEE shall conduct all its operations
until the effective date of termination mentioned in such
notice in the manner which is consistent with the obligation of
the FRANCHISEE hereunder and the FRANCHISEE shall
not prejudice the reputation or goodwill of BML and the
interests of the subscribers in any manner whatsoever.
14.3 Upon termination of this Agreement for any reason, the
FRANCHISEE shall cease to represent himself as the
authorised FRANCHISEE of BML and shall not act in a
manner, which is likely to cause confusion or to deceive the
public. The FRANCHISEE shall promptly remove all
Trademarks, signs, words, trademarks (sic), logos and any
other representations connected with BML. In the event the
FRANCHISEE fails to comply with the above, BML shall have
the right to enter upon the FRANCHISEE’s premises and
remove, without liability, all Trademarks, signs, logos,
trademarks (sic), materials written documents and any other
representations connected with BML and the FRANCHISEE
shall reimburse to BML all costs and expenses incurred
thereof.
14.4 In the event of termination of this Agreement,
FRANCHISEE shall return to BML by the effective date of
termination all advertising and promotional materials,
marketing aids and other documents and materials received
and all Confidential Information received under this
Agreement.
14.5 Both parties agree that goodwill created with respect to
Service and Pre Paid Services is the exclusive property of
BML. Any expenditure for promotion, advertising and other
efforts by FRANCHISEE is made with the knowledge that this
Agreement may be terminated pursuant to Article 13 hereof.
Under no circumstance shall BML be obliged to pay to the
FRANCHISEE upon termination of this Agreement any
termination pay or compensation for subscriber acquisition,
special indemnification, or any other termination
compensation.
xx xx 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
Civil Appeal No. 7257 of 2011 & Ors. Page 25 of 44
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 shall not obtain/offer the pre paid
cards and/or recharge coupons for the Pre Paid Service from
any other source other than BML unless such permission is
granted in writing by BML in order to meet the specific needs
of the market and subscribers as determined by BML.
xx xx Xx”
22. As per the agreement, the franchisee/distributor is appointed for
marketing of prepaid services and for appointing the retailer or
outlets for sale promotion. It is pertinent to note that the retailers or
outlets for sale promotion are appointed by the franchisee/
distributor and not the assessee. The franchisees/distributors have
agreed not to undertake activities mentioned in the agreement for
any other competitive cellular mobile telephone service provider in
the business. The franchisees/distributors have to comply with
statutory, regulatory and municipal permissions while conducting
Civil Appeal No. 7257 of 2011 & Ors. Page 26 of 44
the business. The franchisees/distributors have agreed to
indemnify and keep indemnified the assessee against any and all
costs, expenses and charges imposed on the assessee because of
any action by a statutory, regulatory or municipal authority due to
non-compliance by the franchisee/distributor. The franchisee/
distributor has to maintain a suitable establishment for the conduct
of business and performance of obligations. While doing so, the
franchisee/distributor shall conform and adhere to the policies
communicated to it from time to time by the assessee. The
franchisee/distributor shall employ adequate employees for
performing its obligations, and all contractual and statutory
payments, including wages, are to be paid by the
franchisee/distributor. The assessee can, if it so desires, call upon
the franchisee/distributor to make alterations, modifications in
furniture, air conditioning equipment etc., as required and
necessary and mutually agreed. Costs of such alternations and
distributions are to be borne by the franchisee/distributor.
23. The franchisee/distributor has to maintain proper and sufficient
quantities of prepaid start-up packs and recharge coupons to meet
the market requirements. The franchisee/distributor shall follow the
guidelines and directions issued by the assessee from time to time.
At no point of time, the right, title, or interest in the prepaid cards
Civil Appeal No. 7257 of 2011 & Ors. Page 27 of 44
shall pass on to the franchisee/distributor. All rights, title ownership
and property rights in the cards shall rest with 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 into account market development and
potential and other relevant factors. The franchisee/distributor is to
Civil Appeal No. 7257 of 2011 & Ors. Page 28 of 44
employ a fully trained service staff, who have undergone training in
accordance to the standards set out by the assessee. The
franchisee/distributor will be responsible to collect all necessary
agreement/contract forms and other related forms, after obtaining
signatures of the customers on the said forms. These forms, duly
completed in all respects and signed by the customers, will be
forwarded to the assessee for its verification and record.
26. The franchisee’s/distributor’s price and payment for services will be
specified by the assessee from time to time. The rates can be varied
during the terms of the agreement at the discretion of the assessee
and such variation is to be intimated to the franchisee/distributor.
All tax liabilities in connection with, or arising out of, the transactions
pertaining to the agreement shall be the responsibility of the
franchisee/distributor.
27. The trademarks, logos, trade names or identifying marks and
slogans used by the assessee, whether registered or not, are
exclusive property of the assessee or the affiliated companies. The
use of such marks, logos etc. will be in accordance with the
guidelines issued by the assessee. As long as the agreement is in
force, but not thereafter, the franchisee/distributor shall identify
itself as an authorised franchisee, but shall not use trademarks,
Civil Appeal No. 7257 of 2011 & Ors. Page 29 of 44
logos, tradenames, as part of its proprietorship name/corporate/
partnership name or otherwise. The franchisee/distributor is entitled
to use its logo on the side door at its outlets and on its memos and
official business documents towards the services effected from the
outlet.
28. On the question of actual business financial model adopted and
followed, it is an admitted position that the franchisees/distributors
were required to pay in advance the price of the welcome kit
containing the SIM card, recharge vouchers, top-up cards, e-tops,
etc. The abovementioned price was a discounted one. Such
discounts were given on the price printed on the pack of the prepaid
service products. The franchisee/distributor paid the discounted
price regardless of, and even before, the prepaid products being
sold and transferred to the retailers or the actual consumer. The
franchisee/distributor was free to sell the prepaid products at any
price below 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
Civil Appeal No. 7257 of 2011 & Ors. Page 30 of 44
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 the retailer or the end-user/customer. Their
profit consists of the difference between the sale price received by
them from the retailer/end-user/customer and the discounted price
at which they have ‘acquired’ the product. Though the discounted
price is fixed or negotiated between the assessee and the
franchisee/distributor, the sale price received by the franchisee/
distributor is within the sole discretion of the franchisee/distributor.
The assessee has no say in this matter.
Civil Appeal No. 7257 of 2011 & Ors. Page 31 of 44
31. It is not the case of the Revenue that the tax at source under
Section 194-H of the Act is to be deducted on the difference
between the printed price and the discounted price. This cannot be
the case as the Revenue cannot insist that the
franchisee/distributor must sell the products at the printed price and
not at a figure or price below the printed price. The obligation to
deduct tax at source is fixed by the statute itself, that is, on the date
of actual payment by any mode, or at the time when income is
credited to the account of the franchisee/distributor, whichever is
earlier. In the context of the present case, the income of the
franchisee/distributor, being the difference between the sale price
received by the franchisee/distributor and the discounted price, is
paid or credited to the account of the franchisee/distributor when he
sells the prepaid product to the retailer/end-user/customer. The
sale price and accordingly the income of the franchisee/distributor
is determined by the franchisee/distributor and the third parties.
Accordingly, the assessee does not, at any stage, either pay or
credit the account of the franchisee/distributor with the income by
way of commission or brokerage on which tax at source under
Section 194-H of the Act is to be deducted.
32. Faced with the above situation, the Revenue has relied upon the
use of the expression “payment received or receivable directly or
Civil Appeal No. 7257 of 2011 & Ors. Page 32 of 44
indirectly by a person acting on behalf of the other person”, that is,
‘the principal’. It is argued that even if the franchisee/distributor
receives payment in the form of income from the
retailer/end-user/customer, it would require deduction of tax at
source as payment received or receivable, directly or indirectly, is
to be subjected to deduction of tax. In support of the argument,
reliance is placed upon decision in the case of Singapore Airlines
Limited (supra).
33. The decision 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
24
Airport Transport Association . 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
25
Passenger Sales Agency Agreement , 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
24
‘IATA’, for short.
25
‘PSA’, for short.
Civil Appeal No. 7257 of 2011 & Ors. Page 33 of 44
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 the amount at which the
tickets were sold were computed by the travel agents and
transmitted to the billing and settlement plan (BSP). The BSP,
functioning under the aegis of the IATA, managed, inter alia ,
logistics vis-à-vis payments, and acted as a forum for agents and
airlines to examine details pertaining to the sale of the flight tickets.
33.1 This Court examined the operation of the BSP where the financial
data regarding sale of tickets was stored. The BSP agglomerated
the data from multiple transactions. Thereupon, this data was
transmitted either bimonthly or twice a month to the airlines. It is on
the basis of this data that the airlines/air carriers were required to
pay the additional commission to the travel agents. These are the
striking distinguishing features in Singapore Airlines Limited
(supra) case.
Civil Appeal No. 7257 of 2011 & Ors. Page 34 of 44
33.2 Having considered the aforesaid mechanism and the nature of
26
relationship between a principal and an agent , this Court found
considerable merit in the argument of the Revenue that the airlines/
air carriers utilised the BSP to discern the amount earned as
additional/supplementary commission and accordingly arrive at the
income earned by the agent to deduct tax at source, in accordance
with the provisions of Section 194-H of the Act. If the aforesaid
mechanism is understood, then it is not difficult to appreciate and
understand the conclusion arrived at by this Court in the said case.
33.3 Thus, the question whether there was relationship of principal and
agent was not in dispute, but nevertheless the assessees in the
said case disputed liability to deduct tax at source on the
additional/supplementary commission. However, the judgment
does refer to the difference between the legal relationship of master
and servant, principal and agent, and between principal and
principal. In this context, reference is made to the statement of law
27
in Halsbury’s Law of England , which reads:
“The difference between the relations of master and servant
and of principal and agent may be said to be this: a principal
has the right to direct what work the agent has to do: but a
master has the further right to direct how the work is to be
done.”
26
As stated above the airlines were deducting tax at source under Section 194-H on the 7%
commission (standard commission). The dispute only related to whether the airlines were liable to
deduct tax at source on the additional commission (supplementary commission).
27
Vol. 22, p. 113, ¶ 192 and Vol. 1, at p. 193, Article 345.
Civil Appeal No. 7257 of 2011 & Ors. Page 35 of 44
xx xx xx
“An agent is to be distinguished on the one hand from a
servant, and on the other from an independent contractor. A
servant acts under the direct control and supervision of his
master, and is bound to 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
28
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 “the person responsible for paying”
does not dodge the obligation to deduct tax at source, even when
the payment is indirectly made by the principal-payer to the agent-
payee. However, deduction of tax at source in terms of Section
194-H of the Act is not to be extended and widened in ambit to apply
to true/genuine business transactions, where the assessee is not
28
See ¶ 5 of the judgment.
Civil Appeal No. 7257 of 2011 & Ors. Page 36 of 44
the person responsible for paying or crediting income. In the
present case, the assessees neither pay nor credit any income to
the person with whom he has contracted. Explanation (i) to Section
194-H of the Act, by using the word “indirectly”, does not regulate
or curtail the manner in which the assessee can conduct business
and enter into commercial relationships. Neither does the word
“indirectly” create an obligation where the main provision does not
apply. The tax legislation recognises diverse relationships and
modes in which commerce and trade are conducted, albeit
obligation to tax at source arises only if the conditions as mentioned
in Section 194-H of the Act are met and not otherwise. This principle
does not negate the compliance required by law.
35. Deduction of tax at source is a substantial source of the direct tax
revenue. The ease of collection and recovery is obvious. Deduction
and deposit of tax at source checks evasion and non-payment of
tax. It expands the tax base. However, the assessee as a deductor
is not paying tax on his/her income, and collects and pays tax
otherwise payable by the third party. Liability of the third party to
pay tax when not deducted remains unaffected. Failure to deduct
tax at source has serious and quasi-penal consequences for an
assessee. The deduction of tax provisions should be
programmatically and realistically construed, and not as enmeshes
Civil Appeal No. 7257 of 2011 & Ors. Page 37 of 44
or by adopting catch-as-catch-can approach. In case of a legal or
factual doubt in a given case, the assessee can rely on the doctrine
29
of presumption against doubtful penalisation. Whether or not the
30
said doctrine should be applied , will depend on facts and
circumstances of the case, including the past practice followed by
the assessee and accepted by the department. When there is
apparent divergence of opinion, to avoid litigation and pitfalls
associated, it may be advisable for the Central Board of Direct
Taxes to clarify doubts by issuing appropriate instruction/circular
31
after ascertaining view of the assesses and 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.
32
Singapore Airlines Ltd. had held that tax under Section 194-H
29
See Securities and Exchange Board of India v. Sunil Krishna Khaitan and Others , (2023) 2 SCC
643. However, in the present case doctrine of presumption against doubtful penalisation is not
applicable. The assessees were earlier deducting tax at source under Section 194-H of the Act, though
the amount on which tax was being deducted is unclear. On legal opinion they stopped deducting tax
at source.
30
This would include the question of prospective or retrospective application.
31
We do acknowledge that the Central Board of Direct Taxes has on several occasions quelled doubts
and issued instructions/circulars.
32
(2009) 319 ITR 29.
Civil Appeal No. 7257 of 2011 & Ors. Page 38 of 44
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 is, therefore, impossible for the assessees to deduct
tax at source and comply with Section 194-H of the Act, on the
difference between the total/sum consideration received by the
istributors/ franchisees from third parties and the amount paid by
the distributors/ franchisees to them.
37. The argument of the Revenue that assessees should periodically
ask for this information/data and thereupon deduct tax at source
should be rejected as far-fetched, imposing unfair obligation and
inconveniencing the assesses, beyond the statutory mandate.
Further, it will be willy-nilly impossible to deduct, as well as make
payment of the tax deducted, within the timelines prescribed by law,
Civil Appeal No. 7257 of 2011 & Ors. Page 39 of 44
as these begin when the amount is credited in the account of the
payee by the payer or when payment is received by the payee,
whichever is earlier. The payee receives payment when the third
party makes the payment. This payment is not the payment
received or payable by the assessee as the principal. The
distributor/franchisee is not the trustee who is to account for this
payment to the assessee as the principal. The payment received is
the gross income or profit earned by the distributor/franchisee. It is
the income earned by distributor/ franchisee as a result of its efforts
and work, and not a remuneration paid by the assessee as a cellular
mobile telephone service provider.
38. We must, therefore, reject the argument of the Revenue relying
upon the decision of this Court in Singapore Airlines Limited
(supra) that assessees would be liable to deduct tax at source even
if the assessees are not making payment or crediting the income to
the account of the franchisee/distributor. When the obligation, and
the time and manner in which the tax is mandated by law to be
deducted at source, is fixed by the statute, the same cannot be
shifted/altered/modified or postponed on a concession in the court
by the Revenue. The concession may be granted, when
permissible, by way of a circular issued in accordance with Section
119 of the Act. We do not think that the decision in Singapore
Civil Appeal No. 7257 of 2011 & Ors. Page 40 of 44
Airlines Limited (supra) can be read in the manner as suggested
by the Revenue.
39. Coming back to the legal position of a distributor, it is to be generally
regarded as different form that of an agent. The distributor buys
goods on his account and sells them in his territory. The profit made
is the margin of difference 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
Civil Appeal No. 7257 of 2011 & Ors. Page 41 of 44
franchises. Notwithstanding the strict restrictions placed on the
franchisees – which may require the franchisee to sell only the
franchised goods, operate in a specific location, maintain premises
which are required to comply with certain requirements, and even
sell according to specified prices – the relationship may in a given
case be that of an independent contractor. Facts of each case and
the authority given by ‘principal’ to the franchisees matter and are
determinative.
40. An independent contractor is free from control on the part of his
employer, and is only subject to the terms of his contract. But an
agent is not completely free from control, and the relationship to the
extent of tasks entrusted by the principal to the agent are fiduciary.
As contract with an independent agent depends upon the terms of
the contract, sometimes an independent contractor looks like an
agent from the point of view of the control exercisable over him, but
on an overview of the entire relationship the tests specified in
clauses (a) to (d) in paragraph 8 may not be satisfied. The
distinction is that independent contractors work for themselves,
even when they are employed for the purpose of creating
contractual relations with the third persons. An independent
contractor is not required to render accounts of the business, as it
belongs to him and not his employer.
Civil Appeal No. 7257 of 2011 & Ors. Page 42 of 44
41. Thus, 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. In
other words, 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.
42. In view of the aforesaid discussion, 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
Civil Appeal No. 7257 of 2011 & Ors. Page 43 of 44
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. The appeals filed by the Revenue
challenging the judgments of High Courts of Rajasthan, Karnataka
and Bombay are dismissed. There would be no orders as to cost.
Pending applications, if any, shall stand disposed of.
......................................J.
(SANJIV KHANNA)
......................................J.
(S.V.N. BHATTI)
NEW DELHI;
FEBRUARY 28, 2024.
Civil Appeal No. 7257 of 2011 & Ors. Page 44 of 44