| Content Provider | Supreme Court of India |
|---|---|
| e-ISSN | 30484839 |
| Language | English |
| Access Restriction | NDLI |
| Subject Keyword | Liability to deduct tax at source |
| Content Type | Text |
| Resource Type | Law Judgement |
| Jurisdiction | India |
| Act(s) Referred | Indian Telegraph Act, 1885 (13 of 1885) Income Tax Act, 1961 (43 of 1961) Indian Contract Act, 1872 (9 of 1872) |
| Case(s) Referred | Referred Case 0 Referred Case 1 Referred Case 2 Referred Case 3 |
| Case Type | Appeal |
| Court | Supreme Court of India |
| Disposal Nature | Others |
| Headnote | Income Tax Act, 1961 – s.194-H – When not attracted – Assessees entered into franchise or distribution agreements and sold start-up kits, recharge vouchers at a discounted price to the franchisee/distributors – As per Revenue, the difference between ‘discounted price’ and ‘sale price’ in the hands of the franchisee/distributors being in the nature of ‘commission or brokerage’ was the income of the franchisee/ distributors, the relationship between the assessees and the franchisee/distributor was in the nature of principal and agent, and thus, the assesses were liable to deduct tax at source u/s.194-H – As per the assessees, neither the discount was a ‘commission or brokerage’ u/Explanation (i) to s.194-H nor were the franchisees/distributors their agents: Held: Whether in law the relationship between the parties is that of principal-agent is answered by applying s.182, Contract Act, 1872 – The obligation to deduct tax at source in terms of s.194-H arises when the legal relationship of principal-agent is established – Contractual obligations of the distributors/franchisees, do not reflect a fiduciary character of the relationship, or the business being done on the principal’s account – Franchisees/distributors earn their income when they sell the prepaid products to the retailer or the end-user/customer – Their profit consists of the difference between the sale price received by them from the retailer/end-user/customer and the discounted price at which they ‘acquired’ the product – Though the discounted price is fixed or negotiated between the assessee and the franchisee/ distributor, the sale price received by the franchisee/distributor is within their sole discretion – Assessee has no say in this matter – Assessee does not at any stage either pay or credit the account of the franchisee/distributor with the income by way of commission or brokerage on which tax at source u/s.194-H is to be deducted – Expression “direct or indirect” used in s.194-H Explanation (i) is no doubt 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 s.194-H 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– Assessees neither pay nor credit any income to the person with whom he has contracted and are not privy to the transactions between distributors/franchisees and third parties– It is impossible for the assessees to deduct tax at source and comply with s.194-H, 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 – Payee receives payment when the third party makes the payment – This payment is not the payment received or payable by the assessee as the principal – The distributor/franchisee is not the trustee who is to account for this payment to the assessee as the principal – Assessees not under 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, or while selling/transferring the pre-paid coupons or starter-kits to the distributors – s.194-H not applicable to the facts and circumstances of this case – Judgments of High Courts of Delhi and Calcutta set aside. [Paras 6, 29, 31, 34, 36, 37 and 42] Contract Act, 1872 – s.182 – ‘agent’ and ‘principal’ – Whether a legal relationship of a principal and agent exists, factors to be taken into consideration: Held: (a) The essential characteristic of an agent is the legal power vested with the agent to alter his principal’s legal relationship with a third party and the principal’s co-relative liability to have his relations altered – (b) As the agent acts on behalf of the principal, one of the prime elements of the relationship is the exercise of a degree of control by the principal over the conduct of the activities of the agent – This degree of control is less than the control exercised by the master on the servant, and is different from the rights and obligations in case of principal to principal and independent contractor relationship – (c) The task entrusted by the principal to the agent should result in a fiduciary relationship – The fiduciary relationship is the manifestation of consent by one person to another to act on his or her behalf and subject to his or her control, and the reciprocal consent by the other to do so – (d) As the business done by the agent is on the principal’s account, the agent is liable to render accounts thereof to the principal – An agent is entitled to remuneration from the principal for the work he performs for the principal – Other relevant aspects/considerations, discussed. [Paras 8, 9] Income Tax Act, 1961 – Explanation (i) to s.194-H: Held: The words “direct” or “indirect” in Explanation (i) to s.194-H are with reference to the act of payment – The legislative intent to include “indirect” payment ensures that the net cast by the section is plugged and not avoided or escaped, albeit it does not dilute the requirement that the payment must be on behalf “the person responsible for paying”– This means that the payment/ credit in the account should arise from the obligation of “the person responsible for paying” – The payee should be the person who has the right to receive the payment from “the person responsible for paying” – Further, explanation (i) to s.194-H, by using the word “indirectly”, does not regulate or curtail the manner in which the assessee can conduct business and enter into commercial relationships – Neither does the word “indirectly” create an obligation where the main provision does not apply – The tax legislation recognises diverse relationships and modes in which commerce and trade are conducted, albeit obligation to tax at source arises only if the conditions as mentioned in s.194-H are met and not otherwise – This principle does not negate the compliance required by law – Latter portion of the Explanation (i) to s.194-H is a requirement and a pre-condition – It should not be read as diminishing or derogating the requirement of the principal and agent relationship between the payer and the recipient/payee. [Paras 4, 5 and 34] Income Tax Act, 1961 – Issue as regards the liability to deduct tax at source u/s.194-H 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 – Plea of the Revenue relying upon the decision of this Court in Singapore Airlines Ltd. and Another v. Commissioner of Income Tax [2022] 9 SCR 1 that assessees would be liable to deduct tax at source even if they are not making payment or crediting the income to the account of the franchisee/ distributor: Held: Rejected – When the obligation, and the time and manner in which the tax is mandated by law to be deducted at source, is fixed by the statute, the same cannot be shifted/altered/modified or postponed on a concession in the court by the Revenue – The concession may be granted, when permissible, by way of a circular issued in accordance with s.119 – Decision in Singapore Airlines Limited can not be read in the manner as suggested by the Revenue. [Para 38] Franchise agreement and distributorship agreement – Distinction – Legal position of a distributor different from agent – Distributor, an independent contractor: Held: Legal position of a distributor, it is to be generally regarded as different from that of an agent – The distributor buys goods on his account and sells them in his territory – In such cases, distributor is an independent contractor – Unlike an agent, he does not act as a communicator or creator of a relationship between the principal and a third party – Franchise agreements are normally considered as sui generis, though they have been in existence for some time – They provide a mechanism whereby goods and services may be distributed – In franchise agreements, the supplier or the manufacture, i.e. a franchisor, appoints an independent enterprise as a franchisee through whom the franchisor supplies certain goods or services – There is a close relationship between a franchisor and a franchisee because a franchisee’s operations are closely regulated, and this possibly is a distinction between a franchise agreement and a distributorship agreement – Franchise agreements are extremely detailed and complex – Notwithstanding the strict restrictions placed on the franchisees, the relationship may in a given case be that of an independent contractor – Facts of each case and the authority given by ‘principal’ to the franchisees matter and are determinative – Further, an independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract – But an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent are fiduciary – As contract with an independent agent depends upon the terms of the contract, sometimes an independent contractor looks like an agent from the point of view of the control exercisable over him, but on an overview of the entire relationship the tests specified in clauses (a) to (d) in paragraph 8 may not be satisfied – The distinction is that independent contractors work for themselves, even when they are employed for the purpose of creating contractual relations with the third persons – An independent contractor is not required to render accounts of the business, as it belongs to him and not his employer. [Paras 39, 40] Law relating to agency – Exclusion of servants and independent contractors: Held: ‘Agent’ denotes a relationship that is very different from that existing between a master and his servant, or between a principal and principal, or between an employer and his independent contractor – Although servants and independent contractors are parties to relationships in which one person acts for another, and thereby possesses the capacity to involve them in liability, yet the nature of the relationship and the kind of acts in question are sufficiently different to justify the exclusion of servants and independent contractors from the law relating to agency – Term ‘agent’ should be restricted to one who has the power of affecting the legal position of his principal by the making of contracts, or the disposition of the principal’s property; viz. an independent contractor who may, incidentally, also affect the legal position of his principal in other ways – This can be ascertained by referring to and examining the indicia mentioned in clauses (a) to (d) in paragraph 8 of this judgment – It is in the restricted sense in which the term agent is used in Explanation (i) to s.194-H of the Income Tax Act, 1961. [Para 41] Doctrine/Principles – Doctrine of presumption against doubtful penalisation: Held: The deduction of tax provisions should be programmatically and realistically construed – In case of a legal or factual doubt in a given case, the assessee can rely on the doctrine of presumption against doubtful penalisation – Whether or not the said doctrine should be applied will depend on facts and circumstances of the case, including the past practice followed by the assessee and accepted by the department – When there is apparent divergence of opinion, to avoid litigation and pitfalls associated, it may be advisable for the Central Board of Direct Taxes to clarify doubts by issuing appropriate instruction/circular after ascertaining view of the assesses and stakeholders. [Para 35] Words and expressions – ‘power’; ‘authority’. |
| Judge | Hon'ble Mr. Justice Sanjiv Khanna |
| Neutral Citation | 2024 INSC 148 |
| Petitioner | Bharti Cellular Limited (now Bharti Airtel Limited) |
| Respondent | Assistant Commissioner Of Income Tax, Circle 57, Kolkata And Another |
| SCR | [2024] 2 S.C.R. 1001 |
| Judgement Date | 2024-02-28 |
| Case Number | 7257 |
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