M/s SBE Cellular Limited, a domestic company, had entered into franchisee agreement with various distributors for sale of its prepaid connections.…

CA Final · Direct Tax Laws and International Taxation · PYQS · November 2024
M/s SBE Cellular Limited, a domestic company, had entered into franchisee agreement with various distributors for sale of its prepaid connections. Under these agreements, they sold startup kits and recharge vouchers at discounted prices to distributors, who in turn sold them to customers. The Assessing Officer while going through the TDS return filed by the company found that the company had paid commission on startup kits and recharge vouchers to 10 parties herein called "Franchisees" and though the company had deducted TDS on commission and deposited the same during the period from April 2023 to July 2023, such deduction of tax at source however was discontinued by the company treating such payment to the franchisee not as commission but discount which was outside the ambit of TDS under section 194H. The revenue contended that the company should deduct tax under section 194H on the amounts which, as per Revenue, is a commission payable to an agent by the company under the franchise agreement between the company and the franchisees. However, as per M/s SBL Cellular Limited, neither are they paying a commission or brokerage to the franchisees/distributors, nor the franchisees/distributors are their agents. In the light of the latest Supreme Court rulings, discuss whether the contention of Revenue is correct or not?

Suggested Answer and Working Notes:

(iii) The obligation to deduct tax at source in terms of section 194H arises when the legal relationship of principal and agent is established. Agency is a triangular relationship between the principal, agent and the third party. The legal position of a distributor is generally regarded as different from that of an agent. Section 194H fixes the liability to deduct tax at source on the 'person responsible to pay' and the liability to deduct tax at source arises when the income is credited or paid by the person responsible for paying. However, deduction of tax at source in terms of section 194H is not to be extended and widened in ambit to apply to true/genuine business transactions, where the assessee is not the person responsible for paying or crediting income. In the present case, M/s SBL Cellular Limited, being an assessee, neither pays nor creditsany income to the person with whom he has contracted. M/s SBL Cellular Limited is not privy to the transactions between distributors/franchisees and third parties. It is, therefore, impossible for M/s SBL Cellular Limited to deduct tax at source and comply with section 194H, on the difference between the total/sum consideration received by the distributors/franchisees from third parties and the amount paid by the distributors/franchisees to them. Thus, in the case on hand, section 194H is not applicable in the hands of M/s SBL Cellular Limited and it 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. Accordingly, the contention of the Revenue that company should deduct tax under section 194H is not correct. Note – The facts given in the question are similar to the facts in Bharti Cellular Ltd. vs. ACIT [2024] 462 ITR 247(SC). The above answer is based on the rationale of the Supreme Court ruling in the said case.

Topics: Case Laws

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