ABC Telecom Ltd. has entered into agreements with various distributors to sell its prepaid products. According to the agreement, the distributors…

The same issue came up before the Supreme Court in the case of Bharti Cellular Ltd. vs. ACIT [2024] 462 ITR 247, wherein the Apex Court noted that 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. Based on perusal of agreement between assessee and distributors / franchisee, the franchisee/distributor paid the discounted price regardless of, and even before, the pre-paid 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. 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. The expression "direct or indirect" used in Explanation (i) to section 194H is 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 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, the ABC Telecom Ltd., being an assessee neither pays nor credit any income to the person with whom he has contracted. ABC Telecom Ltd. is not privy to the transactions between distributors/franchisees and third parties. It is, therefore, impossible for ABC Telecom Ltd. 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. In the present case, the contractual obligations of the franchises or distributors did not reflect a fiduciary character of the relationship, or the business being done on the principal's account. Applying the rationale of the Apex Court ruling in the case on hand, section 194H is not applicable in the hands of ABC Telecom Ltd. 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.