IMPORTANT POINT
The main legal point established in the judgment is that the appellant was not under a legal obligation to deduct tax at source under Section 194-H of the Income Tax Act, 1961, based on the nature of its relationship with its distributors and the discount offered to them.

JUDGMENT :

Bhargav D. Karia, J.

1. Heard learned Senior Advocate Mr.shalin Mehta with learned advocate Ms.Aditi S.Raol for the appellant and learned Senior Standing Counsel Ms.Ms.Maithili Mehta for the respondent- Revenue.

2. This Court in (Coram:Hon’ble Mr.Justice Akil Kureshi and Hon’ble Ms.Justice Sonia Gokani) by order dated 03.12.2012 admitted the Tax Appeal on the following substantial questions of law:

“(1) Whether on facts and in law Income Tax Appellate Tribunal was correct in holding that the appellant assessee and its distributors enjoy legal relationship of principal and agent and not of principal to principal basis?

(2) Whether in facts and in law Income Tax Appellate Tribunal was right in holding that discount offered by the appellant assessee to its distributors on the payment made by the distributors towards pre-paid sim-cards/recharge coupons was in the nature of commission and that therefore the assessee had to deduct tax at source as provided under Section 194 of the Income Tax Act, 1961?”

3. At the outset, learned Senior Advocate Mr.Shalin Mehta appearing with learned advocate Ms.Aditi Raol for the appellant and learned Senior Standing Counsel Ms.Maithil Mehta for the respondent- Revenue submitted that both the questions are answered by the Honorable Supreme Court in the case of appellant in Civil Appeal No.7257 of 2011 by Judgment and Order dated 28.02.2024 and therefore this appeal is required to be allowed in favour of the appellant in terms of the decision of the Honorable Supreme Court.

4. The facts of the case are similar as to that before the Honorable Supreme Court. The appellant is a provider of cellular Mobile Telephone Service under the brand name ‘Airtel’ and it has deviced two schemes prepaid and postpaid for which franchisees are appointed by the appellant.

5. The Revenue raised dispute with regard to the deduction of tax at source under Section 194H of the Income Tax Act, 1961 (for short ‘the Act’), on the basis that the appellant has appointed the distributor as its agent and the amount of discount which is offered by the appellant to such distributor is in the nature of commission and therefore the appellant was asked to deduct the tax at source from the amount received from the distributor.

6. The Honorable Supreme 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 franchisee/distributor agreement between Bharti Airtel Limited and the 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