The legal obligation to deduct tax at source under Section 194H of the Income Tax Act arises when the legal relationship of principal-agent is established, and it does not apply to true/genuine business transactions where the assessee is not the person responsible for paying or crediting income.

Headnote:
Tax Deduction - Income Tax Act - Legal obligation to deduct tax at source
Fact of the Case:

The assessee, Vodafone Idea Limited, challenged the judgment of the Income Tax Appellate Tribunal (ITAT) regarding the non-deduction of tax under Section 194H of the Income Tax Act.
Finding of the Court:

The court found that the ITAT had erred in holding the assessee to be in default for non-deduction of tax under Section 194H, based on a decision that had been overruled by the Supreme Court. The Supreme Court clarified the legal obligation to deduct tax at source and held that the assessees were not 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.
Issues: The main issue was whether the ITAT was correct in holding the assessee to be in default for non-deduction of tax under Section 194H of the Income Tax Act.
Ratio Decidendi: The Supreme Court clarified that the obligation to deduct tax at source arises when the legal relationship of principal-agent is established, and it does not apply to true/genuine business transactions where the assessee is not the person responsible for paying or crediting income. The court also distinguished between the relationship of principal and agent, and that of an independent contractor or distributor/franchisee.
Final Decision: The appeal was allowed, and the impugned order was set aside. The court held that the assessees were not 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. The orders passed by the AO and CIT(A) were also set aside.

ORDER

% 05.03.2024

1. The assessee, Vodafone Idea Limited assails the correctness of the judgment rendered by the Income Tax Appellate Tribunal [„ITAT‟] dated 30 October 2018 and has proposed the following questions for our consideration:-

“a) Whether on the facts and circumstances of the case, the Tribunal while passing the Impugned Judgment and Order, erred in disregarding the contentions of Appellant and solely relying on this Hon'ble Court's decision in appellant's own case titled CIT vs Idea Cellular Ltd reported in 189 Taxmann 118(Del) for AY 2003-04 and 2004-05, without appreciating that the facts in the present case being completely distinct from the case of the Assessee in AY 2003-04 and 2004-05, conclusion of such decision cannot be applied in the present case, in isolation of the relevant facts? b) Whether on the facts and circumstances of the case, the Tribunal erred in law in holding the Assessee to be an Assessee-in-default for non-deduction of tax under Section 194H of Act.

c) Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that Section 194 H of the Act is applicable to the transaction between the Appellant and the distributors in respect of sale of the SIM Card/Recharge Voucher? d) Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that the relationship between the Appellant and distributors is that of principal and agent, attracting the obligation of deduction of tax at source under section 194H of the Act? e) Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that the discount allowed to distributors was in the nature of commission out of which tax was deductible under section 194H of the Act? f) Whether on the facts and circumstances of the case, the Tribunal erred in law in holding the Appellant liable for recovery of amount of tax not deducted as also interest under section 201(1A) of the Act.”

2. Upon hearing Mr. Jolly, learned counsel appearing for the appellant, we note that the solitary question which appears to arise for consideration is whether the ITAT was correct in holding the assessee to be in default for non-deduction of tax under Section 194H of the Income Tax Act [„Act‟].

3. A reading of the impugned judgment would indicate that the ITAT had rested its conclusions on the decision rendered by the Court in Commissioner of Income Tax vs. Idea Cellular Ltd. [2010 SCC OnLine Del 757], which has since then been overruled by the Supreme Court in its decision rendered in Bharti Cellular Limited vs. Assistant Commissioner of Income Tax, Circle-57, Kolkata [2024 SCC OnLine SC 198].

4. Dealing with the question which stands posited, the Supreme Court had held as follows:-

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