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SUPREME COURT OF INDIA
SANJIV KHANNA, S.V.N. BHATTI, JJ.
Bharti Cellular Limited (Now Bharti Airtel Limited) – Appellant
Versus
Assistant Commissioner Of Income Tax, Circle 57, Kolkata And Another – Respondents
Civil Appeal No.7257 of 2011 with 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
Decided on : 28-02-2024
(A) Contract Act, 1872 – Section 182 – Agency – Law of agency is technical – Expression ‘acting on behalf of another person’ postulates existence of a legal relationship of principal and agent between payer and recipient/payee – An agent renders services to principal – As transaction by agent is on behalf of principal whom agent represents, contract is between principal and third party – Accordingly, agent, except in some circumstances, is not liable to third party – Agency is a triangular relationship between principal, agent and third party – Task entrusted by principal to agent should result in a fiduciary relationship – Essential characteristic of an agent is legal power vested with agent to alter his principal’s legal relationship with a third party and principal’s co-relative liability to have his relations altered – An agent is entitled to remuneration from principal for work he performs for principal. (Paras 6, 7 and 8)
(B) Contract Act, 1872 – Section 182 – Power of Agent – Power of agent not conferred by contract or by principal but by law of agency – Extent and existence of power with agent is determined by public policy – Substance of relationship between parties, notwithstanding nomenclature given by parties to relationship, is of primary importance – True nature of relationship is examined by reference to functions, responsibility and obligations of so-called agent to principal and to third parties – Law permits individuals to enter into complex contracts incorporating multiple rights and obligations – 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 – True factual position must be investigated to determine whether a relationship of agency has come into existence between a set of parties or individuals – However, all kinds of interactions with third parties or interested parties, resulting from introduction of third parties with one who wishes a particular undertaking to be performed, may not be a result of an agency – Two level commercial transaction can result in an tripartite arrangement/agreement with respective rights and obligations, without any of two parties having principal-agent relationship. (Paras 9, 12, 14, 15 and 16)
(C) Income Tax Act, 1961 – Section 194-H – Liability to deduct tax at source – Obligation to deduct tax at source in terms of Section 194-H of Act arises when legal relationship of principal-agent is established – Assessees are cellular mobile telephone service providers – Cellular mobile telephone service providers have wide latitude to select business model they wish to adopt in their dealings with third parties, subject to statutory compliances being made by operators – As per agreement, franchisee/distributor is appointed for marketing of prepaid services and for appointing retailer or outlets for sale promotion – Retailers or outlets for sale promotion are appointed by franchisee/distributor and not assessee – Revenue cannot insist that franchisee/distributor must sell products at printed price and not at a figure or price below printed price – Assessee does not, at any stage, either pay or credit account of franchisee/distributor with income by way of commission or brokerage on which tax at source under Section 194-H of Act is to be deducted – When obligation and time and manner in which tax is mandated by law to be deducted at source, is fixed by statute, same cannot be shifted/altered/modified or postponed on a concession in court by Revenue – Assessees would not be under a legal obligation to deduct tax at source on income/profit component in payments received by distributors/franchisees from third parties/customers, or while selling/transferring pre-paid coupons or starter-kits to distributors – Section 194-H of Act is not applicable to facts and circumstances of this case. (Paras 6, 18, 22, 31, 38 and 42)
Facts of the case:
The issue relates to liability to deduct tax at source under Section 194-H of Income Tax Act, 1961 on the amount which, as per Revenue, is a commission payable to an agent by assessees under franchise/distributorship agreement between assessees and franchisees/distributors. As per assessees, neither are they paying a commission or brokerage to franchisees/distributors, nor are franchisees/distributors their agents. High Courts of Delhi and Calcutta have held that assessees were liable to deduct tax at source under Section 194-H of the Act, whereas High Courts of Rajasthan, Karnataka and Bombay have held that Section 194-H of the Act is not attracted to the circumstances under consideration.
Findings of Court:
Appeals filed by assessee – cellular mobile service providers, challenging Judgments of the High Courts of Delhi and Calcutta are allowed and these Judgments are set aside. Appeals filed by Revenue challenging Judgments of High Courts of Rajasthan, Karnataka and Bombay are dismissed.
Result : Appeals partly allowed.
JUDGMENT :
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, 19611[“The Act”, for short.] on the amount which, as per the Revenue, is a commission 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:
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:
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 (...) responsible for paying” is a term of art, defined vide Section 2042[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 excha
(1) Liability to deduct tax at source – Assessees (cellular mobile telephone service providers) would not be under a legal obligation to deduct tax at source on income/profit component in payments re....
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