2024 INSC 148

Civil Appeal No. 7257 of 2011 & Ors. Page 1 of 44

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7257 OF 2011

BHARTI CELLULAR LIMITED

(NOW BHARTI AIRTEL LIMITED)

.....

APPELLANT

VERSUS

ASSISTANT COMMISSIONER OF INCOME

TAX, CIRCLE 57, KOLKATA AND ANOTHER

.....

RESPONDENTS

W I T H

CIVIL APPEAL NOS. 2652-2653, 4949-4950 AND 4947-4948 OF 2015;

7455 OF 2018; 111 AND 2860 OF 2021; 8902 OF 2022; 7729, 7735,

7736, 7737, 7738, 7739, 7740, 7741, 7742, 7743, 7679, 7680, 7681,

7682, 7744, 7745, 7746, 7747, 7748, 7848, 7849, 7852, 7853, 7854,

7855, 7856, 7857 AND 7859 OF 2023; AND 3514, 3515, 3516 AND 3517

OF 2024

J U D G M E N T

SANJIV KHANNA, J.

This common judgment decides the aforestated appeals

preferred by the Revenue and the assessees, who are cellular

mobile telephone service providers. The issue relates to the liability

to deduct tax at source under Section 194-H of the Income Tax Act,

1961

1

on the amount which, as per the Revenue, is a commission

1

“The Act”, for short.

Civil Appeal No. 7257 of 2011 & Ors. Page 2 of 44

payable to an agent by the assessees under the franchise/

distributorship agreement between the assessees and the

franchisees/distributors. As per the assessees, neither are they

paying a commission or brokerage to the franchisees/distributors,

nor are the franchisees/distributors their agents. The High Courts

of Delhi and Calcutta have held that the assessees were liable to

deduct tax at source under Section 194-H of the Act, whereas the

High Courts of Rajasthan, Karnataka and Bombay have held that

Section 194-H of the Act is not attracted to the circumstances under

consideration.

2. To avoid prolixity and repetition, we are not referring to the facts

and arguments in the beginning, and will preface our judgment by

reproducing Section 194-H of the Act and explaining its contours.

The relevant portion of Section 194-H reads as under:

“194-H. Commission or brokerage.— Any person, not being

an individual or a Hindu undivided family, who is responsible

for paying, on or after the 1st day of June, 2001, to a resident,

any income by way of commission (not being insurance

commission referred to in Section 194-D) or brokerage, shall,

at the time of credit of such income to the account of the payee

or at the time of payment of such income in cash or by the

issue of a cheque or draft or by any other mode, whichever is

earlier, deduct income tax thereon at the rate of five per cent:

Provided that no deduction shall be made under this section in

a case where the amount of such income or, as the case may

be, the aggregate of the amounts of such income credited or

paid or likely to be credited or paid during the financial year to

the account of, or to, the payee, does not exceed fifteen

thousand rupees:

Civil Appeal No. 7257 of 2011 & Ors. Page 3 of 44

Provided further that an individual or a Hindu undivided family,

whose total sales, gross receipts or turnover from the business

or profession carried on by him exceed one crore rupees in

case of business or fifty lakh rupees in case of profession

during the financial year immediately preceding the financial

year in which such commission or brokerage is credited or

paid, shall be liable to deduct income tax under this section.

Provided also that no deduction shall be made under this

section on any commission or brokerage payable by Bharat

Sanchar Nigam Limited or Mahanagar Telephone Nigam

Limited to their public call office franchisees.

xx xx xx"

3. Section 194-H of the Act imposes the obligation to deduct tax at

source, states that any person responsible for paying at the time of

credit or at the time of payment, whichever is earlier, to a resident

any income by way of commission or brokerage, shall deduct

income tax at the prescribed rate The expression “any person (...)

responsible for paying” is a term of art, defined vide Section 204

2

of

2

204. Meaning of “person responsible for paying”.—For the purposes of the foregoing provisions

of this chapter and Section 285, the expression “person responsible for paying” means—

(i) in the case of payments of income chargeable under the head “Salaries” other than payments by

the Central Government or the Government of a State, the employer himself or, if the employer is a

company, the company itself, including the principal officer thereof;

(ii) in the case of payments of income chargeable under the head “Interest on securities” other than

payments made by or on behalf of the Central Government or the Government of a State, the local

authority, corporation or company, including the principal officer thereof;

(ii-a) in the case of any sum payable to a non-resident Indian, being any sum representing

consideration for the transfer by him of any foreign exchange asset, which is not a short-term capital

asset, the authorised person responsible for remitting such sum to the non-resident Indian or for

crediting such sum of his Non-resident (External) Account maintained in accordance with the Foreign

Exchange Management Act, 1999 (42 of 1999)], and any rules made thereunder;

(ii-b) in the case of furnishing of information relating to payment to a non-resident, not being a company,

or to a foreign company, of any sum, whether or not chargeable under the provisions of this Act, the

payer himself, or, if the payer is a company, the company itself including the principal officer thereof;

(iii) in the case of credit or, as the case may be, payment of any other sum chargeable under the

provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the

principal officer thereof.

(iv) in the case of credit, or as the case may be, payment of any sum chargeable under the provisions

of this Act made by or on behalf of the Central Government or the Government of a State, the drawing

Civil Appeal No. 7257 of 2011 & Ors. Page 4 of 44

the Act. As per the clause (iii) of Section 204, in the case of credit

or in the case of payment in cases not covered by clauses (i), (ii),

(ii)(a), (ii)(b), “the person responsible for paying” is the payer

himself, or if the payer is a company, the company itself and the

principal officer thereof.

4. Explanation (i) to Section 194-H

3

of the Act defines the expressions

‘commission’ or ‘brokerage’, as:

“Explanation. — For the purposes of this section, —

(i) “commission or brokerage” includes any payment received

or receivable, directly or indirectly, by a person acting on

behalf of another person for services rendered (not being

professional services) or for any services in the course of

buying or selling of goods or in relation to any transaction

relating to any asset, valuable article or thing, not being

securities;”

and disbursing officer or any other person, by whatever name called, responsible for crediting, or as

the case may be, paying such sum.

(v) in the case of a person not resident in India, the person himself or any person authorised by such

person or the agent of such person in India including any person treated as an agent under Section

163.]

Explanation. —For the purposes of this section, —

(a) “non-resident Indian” and “foreign exchange asset” shall have the meanings assigned to them in

Chapter XII-A;

(b) “authorised person” shall have the meaning assigned to it in clause (c) of Section 2 of the Foreign

Exchange Management Act, 1999 (42 of 1999).

3

Sub-section 1 to Section 194-H of the Act can be interpreted as requiring deduction of tax at source

on commission and brokerage, even when the principal and agent relationship does not exist between

the parties. Explanation (i) to Section 194-H of the Act can be read as expanding and widening the

scope of the provision of sub-section (1) to include in the ambit of brokerage and commission,

payments made by the principal to the agent, when covered under the four corners of the said

explanation. We would not like to pronounce on this aspect as it has not been argued by the Revenue,

and it appears that the requirement of relationship of principal and agent has been read into the main

section. Further, applying common or commercial parlance meaning to the terms ‘brokerage’ or

‘commission’, given the wide divergence in which it is understood, would lead to confusion and has

pitfalls. Deduction of Tax provisions should be pragmatically and realistically construed, and not as

enmeshes or by adopting catch-as-catch-can approach. When doubts exist, the Central Board of Direct

Taxes may examine this question and may issue appropriate instructions/circular after ascertaining the

views of assessees and other stakeholders. The decision should be clear, and we trust and hope that

an obligation, if imposed, will be prospective. (See paragraph 34 of the judgment.)

Civil Appeal No. 7257 of 2011 & Ors. Page 5 of 44

Payment is received when it is actually received or paid. The

payment is receivable when the amount is actually credited in the

books of the payer to the account of the payee, though the actual

payment may take place in future. The payment received or

receivable should be to a person acting on behalf of another

person. The words “another person” refers to “the person

responsible for paying”. The words “direct” or “indirect” in

Explanation (i) to Section 194-H of the Act are with reference to the

act of payment. Without doubt, 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”.

When this condition is satisfied, it does not matter if the payment is

made “indirectly”.

4

4

We are unable to visualize ‘indirect’ credit in the books of the payer to the account of the payee.

Credit entry is required even in cases of set-off. Nevertheless, this judgment should not be read as

laying down that ‘indirect’ credit in the books shall not require deduction of tax under Section 194-H of

the Act.

Civil Appeal No. 7257 of 2011 & Ors. Page 6 of 44

5. The services rendered by the agent to the principal, according to

the latter portion of Explanation (i) to Section 194-H of the Act,

should not be in the nature of professional services. Further,

Explanation (i) to Section 194-H of the Act restricts application of

Section 194-H of the Act to the services rendered by the agent to

the principal in the course of buying and selling of goods, or in

relation to any transaction relating to any asset, valuable article, or

thing, not being securities. The latter portion of the Explanation (i)

to Section 194-H of the Act 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.

6. It is settled by a series of judgments of this Court that the

expression ‘acting on behalf of another person’ postulates the

existence of a legal relationship of principal and agent, between the

payer and the recipient/payee.

5

The law of agency is technical.

Whether in law the relationship between the parties is that of

principal-agent is answered by applying Section 182 of the Contract

Act, 1872

6

. Therefore, the obligation to deduct tax at source in terms

of Section 194-H of the Act arises when the legal relationship of

5

Singapore Airlines Ltd. and Another v. Commissioner of Income Tax, (2023) 1 SCC 497, ¶¶ 23-29.

6

“Contract Act”, for short.

Civil Appeal No. 7257 of 2011 & Ors. Page 7 of 44

principal-agent is established. It is necessary to clarify this position,

as in day to day life, the expression ‘agency’ is used to include a

vast number of relationships, which are strictly, not relationships

between a principal and agent.

7. Section 182 of the Contract Act, defines the words ‘agent’ and

‘principal’ and reads as under:

“182. “Agent” and “principal” defined.— An “agent” is a person

employed to do any act for another, or to represent another in

dealings with third persons. The person for whom such act is

done, or who is so represented, is called the “principal”.”

Agency in terms of Section 182 exists when the principal

employs another person, who is not his employee, to act or

represent him in dealings with a third person. An agent renders

services to the principal. The agent does what has been entrusted

to him by the principal to do. It is the principal he represents before

third parties, and not himself. As the transaction by the agent is on

behalf of the principal whom the agent represents, the contract is

between the principal and the third party. Accordingly the agent,

except in some circumstances, is not liable to the third party.

8. Agency is therefore a triangular relationship between the principal,

agent and the third party. In order to understand this relationship,

one has to examine the inter se relationship between the principal

and the third party and the agent and the third party. When we

Civil Appeal No. 7257 of 2011 & Ors. Page 8 of 44

examine whether a legal relationship of a principal and agent exists,

the following factors/aspects should be taken into consideration:

(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.

7

(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.

8

(d) As the business done by the agent is on the principal’s

account, the agent is liable to render accounts thereof to the

7

F.E. Dowrick, The Relationship of Principal and Agent, 17 MLR 24, 37 (1954).

8

RESTATEMENT (THIRD) OF AGENCY (AMERICAN LAW INSTITUTE PUBLISHERS 2007).

Civil Appeal No. 7257 of 2011 & Ors. Page 9 of 44

principal. An agent is entitled to remuneration from the

principal for the work he performs for the principal.

9. At this stage, three other relevant aspects/considerations should be

noted. First is the difference between ‘power’ and ‘authority’. The

two terms though connected, are not synonymous. Authority refers

to a factual position, that is, the terms of contract between the two

parties. The power of the agent however, is not, strictly speaking,

conferred by the contract or by the principal but by the law of

agency. When a person gives authority to another person to do the

acts which bring the law of agency into play, then, the law vests

power with the agent to affect the principal’s legal relationship with

the third parties. The extent and existence of the power with the

agent is determined by public policy. The authority, as observed

above, refers to the factual situation. The second consideration is

that the primary task of an agent is to enter into contracts on behalf

of his principal, or to dispose of his principal’s property. The factors

mentioned in clauses (b) to (d) in paragraph 8 above flow, and are

indicia of this primary task. Clauses (b) to (d) of paragraph 8 are

useful as tests or standards to examine the true nature or character

of the relationship. Lastly, the substance of the relationship

between the parties, notwithstanding the nomenclature given by the

parties to the relationship, is of primary importance. The true nature

Civil Appeal No. 7257 of 2011 & Ors. Page 10 of 44

of the relationship is examined by reference to the functions,

responsibility and obligations of the so-called agent to the principal

and to the third parties.

10. An agent is distinct from a servant, in that an agent is subject to less

control than a servant, and has complete, or almost complete

discretion as to how to perform an undertaking. As Seavey said, ‘‘a

servant (...) is an agent under more complete control than is a non-

servant’’.

9

The difference is “in the degree of control rather than in

the acts performed. The servant sells primarily his services

measured by time; the agent his ability to produce results.”

10

This

distinction can be criticised, for servants may have very wide

discretion, and may not really be subject to control at all in practice,

while agents may have their power to act circumscribed by detailed

instructions.

11

11. This Court in Bhopal Sugar Industries Limited v. Sales Tax

Officer, Bhopal

12

, has expounded the difference between

principal-agent and principal-principal relationship, in the following

words:-

“5. … the essence of the matter is that in a contract of sale,

title to the property passes on to the buyer on delivery of the

9

Warren A. Seavey, The Rationale of Agency, 29 YALE L.J. 859, 866 (1920).

10

Ibid.

11

G.H.L. FRIDMAN, THE LAW OF AGENCY 33 (Butterworths, 7 ed. 1996).

12

(1977) 3 SCC 147.

Civil Appeal No. 7257 of 2011 & Ors. Page 11 of 44

goods for a price paid or promised. Once this happens the

buyer becomes the owner of the property and the seller has

no vestige of title left in the property. The concept of a sale

has, however, undergone a revolutionary change, having

regard to the complexities of the modern times and the

expanding needs of the society, which has made a departure

from the doctrine of laissez faire by including a transaction

within the fold of a sale even though the seller may by virtue of

an agreement impose a number of restrictions on the buyer,

e.g. fixation of price, submission of accounts, selling in a

particular area or territory and so on. These restrictions per se

would not convert a contract of sale into one of agency,

because in spite of these restrictions the transaction would still

be a sale and subject to all the incidents of a sale. A contract

of agency, however, differs essentially from a contract of sale

inasmuch as an agent after taking delivery of the property does

not sell it as his own property but sells the same as the

property of the principal and under his instructions and

directions. Furthermore, since the agent is not the owner of the

goods, if any loss is suffered by the agent he is to be

indemnified by the principal. This is yet another dominant

factor which distinguishes an agent from a buyer—pure and

simple. In Halsbury's Laws of England, Vol. 1, 4th Edn., in para

807 at p. 485, the following observations are made:

“807. Rights of agent. —The relation of principal and

agent raises by implication a contract on the part of the

principal to reimburse the agent in respect of all

expenses, and to indemnify him against all liabilities,

incurred in the reasonable performance of the agency,

provided that such implication is not excluded by the

express terms of the contract between them, and

provided that such expenses and liabilities are in fact

occasioned by his employment.”

12. The aforesaid judgment in the context of distinction between a

contract of sale and contract of agency observes that the agent is

authorised to sell or buy on behalf of the principal, whereas the

essence of contract of sale is the transfer of title of goods for the

price paid or promised to be paid. In case of an agency to sell, the

agent who sells them to the third parties, sells them not as his own

Civil Appeal No. 7257 of 2011 & Ors. Page 12 of 44

property, but as a property of the principal, who continues to be the

owner of the goods till the sale. The transferee is the debtor and

liable to account for the price to be paid to the principal, and not to

the agent for the proceeds of the sale. An agent is entitled to his fee

or commission from the principal.

13. This distinction and test was referred to by this Court in

Commissioner of Income Tax, Ahmedabad and Others v.

Ahmedabad Stamp Vendors Associatio n

13

, which is a case

relating to Section 194-H of the Act. This Court had approved the

decision of the High Court in Ahmedabad Stamp Vendors

Association v. Union of India

14

. We may also refer to two more

decisions of this Court. In the case of Director, Prasar Bharati v.

Commissioner of Income Tax, Thiruvananthapuram

15

, this

Court has observed that the explanation appended to Section 194-

H of the Act defining the expression ‘commission or brokerage’ is

an inclusive definition giving wide meaning to the expression

‘commission’. The second decision is in the case of Singapore

Airlines Limited v. Commissioner of Income Tax, Delhi

16

, which

we shall refer to subsequently in some detail as to its exact purport

13

(2014) 16 SCC 114.

14

(2002) 257 ITR 202 (Guj.).

15

(2018) 7 SCC 800.

16

(2023) 1 SCC 497.

Civil Appeal No. 7257 of 2011 & Ors. Page 13 of 44

and ratio. However, at this stage, we would like to examine in some

detail commercial relationships in the nature of an independent

contractor, that are legally, principal to principal dealings.

14. The passage from Bhopal Sugar Industries Limited (supra)

highlights the principles and the complexities involved in

determining the correct nature of the legal relationship between a

principal and an agent. Law permits individuals to enter into

complex contracts incorporating multiple rights and obligations. The

relationships between contacting parties have become

multi-dimensional, which may not strictly fall within an

employer-employee, principal-agent or principal-principal

relationship. A singular contract may create different legal

relationships and obligations. Independent contractors on occasion

act for themselves, and at other times may be creating legal

relations between their employers and third persons. For example,

a solicitor may start by giving advice (independent contractor), and

then as a consequence make a contract for his employer with

another person (agent).

15. In Labreche v. Harasymiw

17

, Valin J. delineated the question of

what an agency involves, stating that: (i) it refers to the power of the

17

(1992) 89 DLR (4

th

) 95 at 107.

Civil Appeal No. 7257 of 2011 & Ors. Page 14 of 44

agent to affect the principal’s position. However, this is not the sole

test, though it still remains one of the main criteria in determining

whether someone is an agent. There are several features in the

definition of an agent

18

. There can be several situations where one

person represents or acts for another, but this does not create the

relationship of principal and agent. It is only when the

representation or action on another’s behalf affects the latter’s legal

position, that is to say his rights against, or his liability towards,

other people, that the law of agency applies; (ii) the second feature

is the importance of the way in which law regards the relationship

which is created. The effect of the law is that it regulates the way in

which parties conduct themselves. The conduct of the parties is

considered in terms of law, regardless of the language or

nomenclature used by the parties. The true factual position must be

investigated to determine whether a relationship of agency has

come into existence between a set of parties or individuals.

16. The significant observation in the aforesaid judgment is that all

kinds of interactions with third parties or interested parties, resulting

from the introduction of the third parties with one who wishes a

particular undertaking to be performed, may not be a result of an

agency. For instance, a retail dealer or supplier of goods, obtains

18

See ¶8 of the judgment.

Civil Appeal No. 7257 of 2011 & Ors. Page 15 of 44

goods from a wholesale supplier or a manufacturer for subsequent

resale to retail customers or suppliers who, in turn, deals with retail

dealers or shopkeepers. Such ‘middlemen’ are sometimes referred

to as ‘agents’, when in fact they are franchisees of the manufacturer

or supplier, or are distributors of the manufactures’ goods, perhaps

with a ‘sole agency’ or special dealership for his goods. Such

‘agents’ can be real buyers, acting as principals on their own behalf.

Consequently, they are not liable to the manufacturer or supplier in

the way an agent might be for failure of duty, nor do their contracts

with other parties – whether it be suppliers, retail dealers or

individual customers – hold the party who sold to them, liable, for

any breach including misrepresentation or sale of defective goods.

The seller’s contractual or tortious liability is different from the

manufacturer’s liability on account of warranty/guarantee, statutory

liability or even obligation to a third party who purchases the goods

or avails services from/through the independent contractor. An

agent renders service to the principal, who he/she represents, and

therefore the principal, and not the agent, is liable to the third

parties. Further, the money received by an independent contractor

from his customers will belong to the independent contractor and

not to the party who sold to him. The money will be a part of such

independent contractor’s property in the event of his bankruptcy or

Civil Appeal No. 7257 of 2011 & Ors. Page 16 of 44

liquidation. This may be the case even if the contract of sale is one

of ‘sale or return’. It is important to avoid confusion, by applying the

legal tests, that may arise where the functions of the

‘buyer’ – described as an ‘agent’ – is really as that of a ‘middleman’,

and the necessary elements for creation of principal and an agent

relationship are absent. Two level commercial transaction can

result in an tripartite arrangement/agreement with respective rights

and obligations, without any of the two parties having

principal-agent relationship.

17. Clause (d) in paragraph 8 observes that the agent is liable to render

accounts to the principal as the business done by the agent is on

principal’s account. The agent is entitled to remuneration from the

principal for the work he performs. To decide whether a contracting

party acts for himself as an independent contractor, we may

examine whether in the course of work, he intends to make profits

for himself, or is entitled to receive prearranged remuneration. If the

party is concerned about acting for himself and making the

maximum profits possible, he is usually regarded as a buyer, or an

independent contractor and not as an agent of the principal. This

would be true even when certain terms and conditions have been

fixed relating to the manner in which the seller conducts his

business. We shall subsequently further elucidate on the

Civil Appeal No. 7257 of 2011 & Ors. Page 17 of 44

characteristics of an independent contractor, and differentiate them

from the principal-agent relationship.

18. We now turn to the facts of the present case. The assessees, as

noticed above, are cellular mobile telephone service providers in

different circles as per the licence granted to them under Section 4

of the Indian Telegraph Act, 1885

19

by the Department of

Telecommunications

20

, Government of India. To carry on business,

the assessees have to comply with the licence conditions and the

rules and regulations of the DoT and the Telecom Regulatory

Authority of India.

21

Cellular mobile telephone service providers

have wide latitude to select the business model they wish to adopt

in their dealings with third parties, subject to statutory compliances

being made by the operators. As per the business model adopted

by the telecom companies, the users can avail post-paid and

prepaid connections. In the present case, we are only concerned

with the business operations under the prepaid model.

19. Under the prepaid business model, the end-users or customers are

required to pay for services in advance, which can be done by

purchasing recharge vouchers or top-up cards from the retailers.

19

The ‘1885 Act’, for short.

20

‘DoT’, for short.

21

‘TRAI’, for short.

Civil Appeal No. 7257 of 2011 & Ors. Page 18 of 44

For a new prepaid connection, the customers or end-users

purchase a kit, called a start-up pack, which contains a Subscriber

Identification Mobile card

22

, commonly known as SIM card, and a

coupon of the specified value as advance payment to avail the

telecom services.

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.

22

‘SIM card’, for short.

Civil Appeal No. 7257 of 2011 & Ors. Page 19 of 44

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

23

:

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 in the above area

and they possess the financial to perform the above functions

and such other functions as may be assigned to them by BML

from time to time.

xx xx xx

A. It is expressly understood that the Agreement does not

confer any exclusive right to the FRANCHISEE to market the

Services nor does the Agreement gives any territorial right to

the FRANCHISEE. The BML expressly reserves its right to

enter into similar arrangements with other party(ies) to

market and promote the Services and to market the Services

directly to the customers if considered appropriate in terms of

business exigency and market requirements.

xx xx xx

2.1 Subject to the terms and conditions of this Agreement,

BML hereby appoints Central Supply Corporation, as its

FRANCHISEE to promote and market the Pre Paid Services

of BML and more particularly in terms of the policies of BML

as shall be informed by BML from time to time and the

FRANCHISEE hereby accepts the appointment as the

FRANCHISEE of BML.

23

Agreements in the case of assessees Vodafone Idea Limited (formerly known as Vodafone Mobile

Services Limited) and Idea Cellular Limited (now known as Vodafone Idea Limited) are somewhat

different. To avoid repetition or prolixity, we are not reproducing the said clauses.

Civil Appeal No. 7257 of 2011 & Ors. Page 20 of 44

xx xx xx

2.3 The parties recognize that it is commercially prudent and

desirable for the FRANCHISEE in the performance of the

obligations under this Agreement to appointment (sic)

Retailers/outlets for the retail promotion and marketing of Pre

Paid services. In such an event the FRANCHISEE shall

obtain the prior approval of BML for appointment(s) of

Retailers/outlets, and also to the terms and conditions of such

appointment.

2.4 The FRANCHISEE acknowledges that the business of

cellular mobile services is extremely competitive and exists

in an ever expanding market. The FRANCHISEE agrees and

acknowledges that during the term of this Agreement it shall

not undertake the activities under this Agreement for any

other provider of Cellular Mobile Telephone Services or any

similar competitive business.

xx xx xx

3.1 The FRANCHISEE warrants and represents that:

(a) It has all necessary statutory, regulatory and

municipal permissions, approvals and permits for

the running and operation of its establishment and

for the conduct of its business, more particularly for

the business as provided for in this Agreement.

(b) It is in compliance of all laws, regulars and rules in

the conduct of its business and the running of its

business establishment.

3.2 The FRANCHISEE shall indemnify and keep

indemnified BML from and against all and any costs,

expenses and charges imposed on BML as a result of any

action by a statutory, regulatory or municipal authority arising

out of non-compliance by the FRANCHISEE of laws, rules or

regulations in the running, operation and conduct of its

business and business establishment, more particularly with

respect to the conduct of its business provided for in this

Agreement.

xx xx xx

Civil Appeal No. 7257 of 2011 & Ors. Page 21 of 44

4.1 The FRANCHISEE shall maintain a suitable

establishment for the conduct of its business and the

performance of its obligations under this Agreement. The

FRANCHISEE shall use its best efforts to actively provide

effective ways to market and promote the Pre Paid Services

and shall always act in the interest of both BML and the

subscribers to the Services of BML.

4.2 As covenanted for in clause 2.4, the FRANCHISEE

shall not involve himself in any manner either directly or

indirectly in any business or activity which is competitive with

the business of activities of BML. The FRANCHISEE

acknowledges that the adherence to this provision is a

material obligation of the FRANCHISEE under this

Agreement.

xx xx xx

4.4 The FRANCHISEE shall, in the conduct of its business

and performing its obligations under this Agreement, conform

and adhere to the policies of BML communicated to the

FRANCHISEE from time to time. The FRANCHISEE shall not

charge the customers of BML for the services anything more

than the rates specified by the BML from time to time.

4.5 The FRANCHISEE shall employ adequate

employees for performing its obligations under this

Agreement and in the promoting and marketing of the Pre

Paid Services. All contractual and statutory payments,

including wages and salaries to the employees of the

FRANCHISEE, shall be the sole liability and responsibility of

the FRANCHISEE.

4.6 The FRANCHISEE in respect of its business

establishment shall, if so desired by BML, in order to

effectively project the Franchisee, make alterations,

modifications in and install such furniture, fixture and air

conditioning equipment, fax, computer, with internet

connection as required necessary and mutually agreed upon

and the cost of such alterations, renovation shall be borne

exclusively by the FRANCHISEE.

4.7 The FRANCHISEE agrees and undertakes to

maintain proper and sufficient quantities of the prepaid start

up packs and recharge coupons in respect of the Pre Paid

service in order to meet the market requirements at all times

and in accordance with the guidelines and instructions issued

by BML from time to time.

Civil Appeal No. 7257 of 2011 & Ors. Page 22 of 44

4.8 The FRANCHISEE shall use its best efforts and

endeavours to market and promote the Pre Paid Services to

meet the growing demands of the Subscribers. At no point of

time shall any right, title or interest pass to the FRANCHISEE

in respect of the Pre-Paid Cards for the Pre Paid Services

given to the subscribers for connection to the Service and all

right, title, ownership and property rights in such cards shall

at all times vest with BML.

4.9 The FRANCHISEE shall seek prior written approval

from BML for its promotional literature campaign (including

promotional material which bears the Trademarks, logos and

trade names of BML) for the Pre Paid Services. BML will not

share the expenditure incurred by the FRANCHISEE for such

advertising and publicity of the Services unless agreed to

earlier in writing. Any share of the expenditure stated above

and the ratio for the same shall be decided by BML from time

to time at its sole discretion.

4.10 The FRANCHISEE shall be solely liable and

responsible, at its business premises, for the safety and

storage of all pre paid start up kits, recharge cards and other

material in respect of the Pre Paid Services. BML shall not be

liable for any loss, pilferage or damage to the items as stated

here above and the FRANCHISEE shall indemnify BML from

all loss caused to BML arising out of any loss, pilferage or

damage to the items as stated here above.

xx xx xx

4.12 The liability to insure and keep insured the items as

stated in Clause 4.10 at the business establishment of the

FRANCHISEE shall be of the FRANCHISEE and the liability

for any loss or damage due to any fire, burglary, theft, etc. will

be that of the FRANCHISEE.

xx xx xx

4.14 The FRANCHISEE shall be responsible for collection of

all necessary agreement/contract forms and other related

forms, and for obtaining the signature of the customer on

these forms. The FRANCHISEE shall forward all such forms,

duly completed in all respects and signed by customers to

BML for its verification and records.

xx xx xx

Civil Appeal No. 7257 of 2011 & Ors. Page 23 of 44

5.1 From time to time, BML will review with the FRANCHISEE

minimum subscription, targets for the Pre Paid Services,

taking into account the market development and market

potential and other relevant factors. The achievements of

these prescribed targets by the FRANCHISEE is a material

obligation of the FRANCHISEE under this Agreement.

xx xx xx

6.2 The FRANCISEE shall employ a fully trained service staff

whose training has been completed in accordance with the

standards set out by BML.

xx xx xx

8.1 The FRANCHISEE’s price and payment for services will

be specified by BML from time to time. The rates are subject

to variation during the terms of this Agreement at the sole

discretion of BML and shall be intimated to the Distributor

from time to time.

xx xx xx

8.3 All other tax liabilities arising in connection with or out

of the agreement transactions pertaining to the

FRANCHISEE shall be the responsibility of the

FRANCHISEE.

xx xx xx

10.1 The FRANCHISEE accepts for all purposes that all

trademarks, logos, trade names or identifying marks and

slogans used by BML in respect of the Service and the Pre

Paid Services, whether registered or not, constitute the

exclusive property of BML or their affiliated companies as the

case may be, and cannot be used by the FRNCHISEE except

in connection with the promotion and marketing of the

Services of BML and that too with the express written consent

of BML. The FRANCHISEE shall not contest, at any time, the

right of the BML or its affiliated companies to any such

Trademark or trade name used or claimed by BML or such

affiliated companies in respect of the Service or Pre Paid

Services.

xx xx xx

Civil Appeal No. 7257 of 2011 & Ors. Page 24 of 44

11.2 During the term of this Agreement, the FRANCHISEE is

authorised to use BML’s trademarks, logos and trade names

only in connection with the FRANCHISEE’s use of such

trademarks, logos and trade names as set out in this

Agreement. The FRANCHISEE’s use of such trademarks,

logos and trade names shall be in accordance with the

guidelines issued by BML. Nothing herein shall give the

FRANCHISEE any right, title or interest in such trademarks,

logos or trade names, in the event of termination of this

Agreement, however caused, the FRANCHISEE’S right to

use such Trademarks, logos or trade names shall cease

forthwith. The FRANCHISEE agrees not to attach any

additional trademarks, logos or trade designation to the

Trademarks of BML.

11.3 For as long as this Agreement continues in force but not

thereafter, the FRANCHISEE may identify itself as an

authorised FRANCHISEE of BML, but shall not use the

Trademarks, logos and trade names of BML as part of its

proprietorship name/corporate/partnership name or

otherwise indicate to the public that it is an affiliate of BML.

xx xx xx

11.5 BML shall allow the FRANCHISEE to use its logo to be

displayed on the sign board to be placed at the

FRANCHISEE’s outlet(s) and on the each memos and/or

official business documents issued by the FRANCHISEE

towards the services effected from the outlet(s). However, the

intellectual property rights associated with Trademarks, logos

and trade names are and shall remain the sole property of

BML.

xx xx xx

14.1 BML shall not be liable to the FRANCHISEE or any other

party by virtue of the termination of this Agreement for any

reason whatsoever, including but not limited to any claim for

loss of profits or compensation or prospective profits or on

account of any expenditure, investments, leases, capital

improvements or any other commitments made by the

FRANCHISEE in connection with the business made in

reliance upon or by virtue of FRANCHISEE’s appointment

under this Agreement. It is expressly agreed that no

compensation whatsoever shall be payable by BML to the

FRANCHISEE upon the termination of this Agreement.

Civil Appeal No. 7257 of 2011 & Ors. Page 25 of 44

14.2 Upon receipt of any notice of termination of this

Agreement the FRANCHISEE shall conduct all its operations

until the effective date of termination mentioned in such

notice in the manner which is consistent with the obligation of

the FRANCHISEE hereunder and the FRANCHISEE shall

not prejudice the reputation or goodwill of BML and the

interests of the subscribers in any manner whatsoever.

14.3 Upon termination of this Agreement for any reason, the

FRANCHISEE shall cease to represent himself as the

authorised FRANCHISEE of BML and shall not act in a

manner, which is likely to cause confusion or to deceive the

public. The FRANCHISEE shall promptly remove all

Trademarks, signs, words, trademarks (sic), logos and any

other representations connected with BML. In the event the

FRANCHISEE fails to comply with the above, BML shall have

the right to enter upon the FRANCHISEE’s premises and

remove, without liability, all Trademarks, signs, logos,

trademarks (sic), materials written documents and any other

representations connected with BML and the FRANCHISEE

shall reimburse to BML all costs and expenses incurred

thereof.

14.4 In the event of termination of this Agreement,

FRANCHISEE shall return to BML by the effective date of

termination all advertising and promotional materials,

marketing aids and other documents and materials received

and all Confidential Information received under this

Agreement.

14.5 Both parties agree that goodwill created with respect to

Service and Pre Paid Services is the exclusive property of

BML. Any expenditure for promotion, advertising and other

efforts by FRANCHISEE is made with the knowledge that this

Agreement may be terminated pursuant to Article 13 hereof.

Under no circumstance shall BML be obliged to pay to the

FRANCHISEE upon termination of this Agreement any

termination pay or compensation for subscriber acquisition,

special indemnification, or any other terminatio n

compensation.

xx xx xx

16.1 The FRANCHISEE understands that it is an

independently owned business entity and this Agreement

does not make the FRANCHISEE, its employees, associates

or agents as employees, agents or legal representatives of

BML for any purpose whatsoever. The FRANCHISEE has no

Civil Appeal No. 7257 of 2011 & Ors. Page 26 of 44

express or implied right or authority to assume or to

undertake any obligation in respect of or on behalf of or in the

name of BML, or to bind BML in any manner. In case, the

FRANCHISEE, its employees, associates or agents hold out

as employees, agents, or legal representatives of BML, the

FRANCHISEE shall forthwith upon demand make good

any/all loss, cost, damages, including consequential loss,

suffered by BML on this account.

16.2 It is understood that the relationship between the parties

is solely on principal-to-principal. FRANCHISEE shall not

acquire, by virtue of any provision of this Agreement or

otherwise, any right, power or capacity to act as an agent or

commercial representative of BML for any purpose

whatsoever. Nothing contained in the contract shall be

deemed or construed as creating a joint venture relationship

or legal partnership etc. between BML and the

FRANCHISEE.

16.3 The FRANCHISEE shall not obtain/offer the pre paid

cards and/or recharge coupons for the Pre Paid Service from

any other source other than BML unless such permission is

granted in writing by BML in order to meet the specific needs

of the market and subscribers as determined by BML.

xx xx Xx”

22. As per the agreement, the franchisee/distributor is appointed for

marketing of prepaid services and for appointing the retailer or

outlets for sale promotion. It is pertinent to note that the retailers or

outlets for sale promotion are appointed by the franchisee/

distributor and not the assessee. The franchisees/distributors have

agreed not to undertake activities mentioned in the agreement for

any other competitive cellular mobile telephone service provider in

the business. The franchisees/distributors have to comply with

statutory, regulatory and municipal permissions while conducting

Civil Appeal No. 7257 of 2011 & Ors. Page 27 of 44

the business. The franchisees/distributors have agreed to

indemnify and keep indemnified the assessee against any and all

costs, expenses and charges imposed on the assessee because of

any action by a statutory, regulatory or municipal authority due to

non-compliance by the franchisee/distributor. The franchisee/

distributor has to maintain a suitable establishment for the conduct

of business and performance of obligations. While doing so, the

franchisee/distributor shall conform and adhere to the policies

communicated to it from time to time by the assessee. The

franchisee/distributor shall employ adequate employees for

performing its obligations, and all contractual and statutory

payments, including wages, are to be paid by the

franchisee/distributor. The assessee can, if it so desires, call upon

the franchisee/distributor to make alterations, modifications in

furniture, air conditioning equipment etc., as required and

necessary and mutually agreed. Costs of such alternations and

distributions are to be borne by the franchisee/distributor.

23. The franchisee/distributor has to maintain proper and sufficient

quantities of prepaid start-up packs and recharge coupons to meet

the market requirements. The franchisee/distributor shall follow the

guidelines and directions issued by the assessee from time to time.

At no point of time, the right, title, or interest in the prepaid cards

Civil Appeal No. 7257 of 2011 & Ors. Page 28 of 44

shall pass on to the franchisee/distributor. All rights, title ownership

and property rights in the cards shall rest with the assessee. The

franchisee/distributor shall be solely responsible and liable for

safety and storage of prepaid start-up kits, recharge cards and

other material. The assessee will not be liable for any loss, pilferage

or damage to the pre-paid coupons/starter-kits. The franchisee/

distributor is to indemnify the assessee for any loss caused on this

account. The franchisee/distributor is to insure the prepaid start-up

kits/ recharge coupons. The liability for any loss or damage due to

fire, burglary, theft etc. is that of the franchisee/distributor.

24. On termination of the agreement, the franchisee/distributor shall

continue its operation till the effective date of termination mentioned

in the notice. Upon termination, the franchisee/distributor is

required to return all advertising and promotional material, etc. to

the assessee by the effective date of termination. Further, the

assessee is not liable to the franchisee/distributor or any other party

for any loss of profits or compensation or prospective profits or on

account of any expenditure, etc. in the event of termination.

25. The assessee is to review the minimum subscriptions/targets for

prepaid services taking into account market development and

potential and other relevant factors. The franchisee/distributor is to

Civil Appeal No. 7257 of 2011 & Ors. Page 29 of 44

employ a fully trained service staff, who have undergone training in

accordance to the standards set out by the assessee. The

franchisee/distributor will be responsible to collect all necessary

agreement/contract forms and other related forms, after obtaining

signatures of the customers on the said forms. These forms, duly

completed in all respects and signed by the customers, will be

forwarded to the assessee for its verification and record.

26. The franchisee’s/distributor’s price and payment for services will be

specified by the assessee from time to time. The rates can be varied

during the terms of the agreement at the discretion of the assessee

and such variation is to be intimated to the franchisee/distributor.

All tax liabilities in connection with, or arising out of, the transactions

pertaining to the agreement shall be the responsibility of the

franchisee/distributor.

27. The trademarks, logos, trade names or identifying marks and

slogans used by the assessee, whether registered or not, are

exclusive property of the assessee or the affiliated companies. The

use of such marks, logos etc. will be in accordance with the

guidelines issued by the assessee. As long as the agreement is in

force, but not thereafter, the franchisee/distributor shall identify

itself as an authorised franchisee, but shall not use trademarks,

Civil Appeal No. 7257 of 2011 & Ors. Page 30 of 44

logos, tradenames, as part of its proprietorship name/corporate/

partnership name or otherwise. The franchisee/distributor is entitled

to use its logo on the side door at its outlets and on its memos and

official business documents towards the services effected from the

outlet.

28. On the question of actual business financial model adopted and

followed, it is an admitted position that the franchisees/distributors

were required to pay in advance the price of the welcome kit

containing the SIM card, recharge vouchers, top-up cards, e-tops,

etc. The abovementioned price was a discounted one. Such

discounts were given on the price printed on the pack of the prepaid

service products. The franchisee/distributor paid the discounted

price regardless of, and even before, the prepaid 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.

29. The Revenue has highlighted that the prepaid SIM cards were not

the property of franchisee/distribution and no right, title or interest

was transferred to them. These were always to remain the property

of the assessee. This is correct, but it is equally true that this is a

Civil Appeal No. 7257 of 2011 & Ors. Page 31 of 44

mandate and requirement of the licence issued to the assessee by

the DoT. In actual practice, the right to use the SIM card and its

possession is handed over and given to the end-user, that is, the

customer who installs the SIM card in his phone to avail the

telecommunication services. Similarly, the franchisees/distributors

are to ensure that the post-paid customers/end-users fill up the form

as prescribed along with the documents which are given and

submitted to the assessee. These are mandates prescribed by the

licence issued by the DoT to the assessees. The 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.

30. The 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 have ‘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 the sole discretion of the franchisee/distributor.

The assessee has no say in this matter.

Civil Appeal No. 7257 of 2011 & Ors. Page 32 of 44

31. It is not the case of the Revenue that the tax at source under

Section 194-H of the Act is to be deducted on the difference

between the printed price and the discounted price. This cannot be

the case as the Revenue cannot insist that the

franchisee/distributor must sell the products at the printed price and

not at a figure or price below the printed price. The obligation to

deduct tax at source is fixed by the statute itself, that is, on the date

of actual payment by any mode, or at the time when income is

credited to the account of the franchisee/distributor, whichever is

earlier. In the context of the present case, the income of the

franchisee/distributor, being the difference between the sale price

received by the franchisee/distributor and the discounted price, is

paid or credited to the account of the franchisee/distributor when he

sells the prepaid product to the retailer/end-user/customer. The

sale price and accordingly the income of the franchisee/distributor

is determined by the franchisee/distributor and the third parties.

Accordingly, the 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 under

Section 194-H of the Act is to be deducted.

32. Faced with the above situation, the Revenue has relied upon the

use of the expression “payment received or receivable directly or

Civil Appeal No. 7257 of 2011 & Ors. Page 33 of 44

indirectly by a person acting on behalf of the other person”, that is,

‘the principal’. It is argued that even if the franchisee/distributor

receives payment in the form of income from the

retailer/end-user/customer, it would require deduction of tax at

source as payment received or receivable, directly or indirectly, is

to be subjected to deduction of tax. In support of the argument,

reliance is placed upon decision in the case of Singapore Airlines

Limited (supra).

33. The decision in Singapore Airlines Limited (supra) is required to

be understood in the context of the contract in the said case, which

was in terms of the rules/agreement set up by the International

Airport Transport Association

24. IATA would fix a ceiling price, and

the price an airline could charge from its customers with a discretion

to the airlines to sell their tickets at a net fare lower than the base

fare but not higher. The air carriers were required to furnish a fare

list to the Director General of Civil Aviation. The arrangement

between the airlines and travel agents was covered by the

Passenger Sales Agency Agreement

25, which would set out the

conditions under which the travel agent carried out sale of tickets

along with other ancillary services. The travel agents were entitled

24

‘IATA’, for short.

25

‘PSA’, for short.

Civil Appeal No. 7257 of 2011 & Ors. Page 34 of 44

to 7% commission on sale of the tickets for its services as the

standard commission based on the price bar set by the IATA. The

airlines were deducting tax at source under Section 194-H of the

Act on the 7% commission. In addition to the 7% commission, the

travel agents were also entitled to additional/supplementary

commission on the tickets sold by them . The

additional/supplementary commission and the amount at which the

tickets were sold were computed by the travel agents and

transmitted to the billing and settlement plan (BSP). The BSP,

functioning under the aegis of the IATA, managed, inter alia,

logistics vis-à-vis payments, and acted as a forum for agents and

airlines to examine details pertaining to the sale of the flight tickets.

33.1 This Court examined the operation of the BSP where the financial

data regarding sale of tickets was stored. The BSP agglomerated

the data from multiple transactions. Thereupon, this data was

transmitted either bimonthly or twice a month to the airlines. It is on

the basis of this data that the airlines/air carriers were required to

pay the additional commission to the travel agents. These are the

striking distinguishing features in Singapore Airlines Limited

(supra) case.

Civil Appeal No. 7257 of 2011 & Ors. Page 35 of 44

33.2 Having considered the aforesaid mechanism and the nature of

relationship between a principal and an agent

26, this Court found

considerable merit in the argument of the Revenue that the airlines/

air carriers utilised the BSP to discern the amount earned as

additional/supplementary commission and accordingly arrive at the

income earned by the agent to deduct tax at source, in accordance

with the provisions of Section 194-H of the Act. If the aforesaid

mechanism is understood, then it is not difficult to appreciate and

understand the conclusion arrived at by this Court in the said case.

33.3 Thus, the question whether there was relationship of principal and

agent was not in dispute, but nevertheless the assessees in the

said case disputed liability to deduct tax at source on the

additional/supplementary commission. However, the judgment

does refer to the difference between the legal relationship of master

and servant, principal and agent, and between principal and

principal. In this context, reference is made to the statement of law

in Halsbury’s Law of England

27, which reads:

“The difference between the relations of master and servant

and of principal and agent may be said to be this: a principal

has the right to direct what work the agent has to do: but a

master has the further right to direct how the work is to be

done.”

26

As stated above the airlines were deducting tax at source under Section 194-H on the 7%

commission (standard commission). The dispute only related to whether the airlines were liable to

deduct tax at source on the additional commission (supplementary commission).

27

Vol. 22, p. 113, ¶ 192 and Vol. 1, at p. 193, Article 345.

Civil Appeal No. 7257 of 2011 & Ors. Page 36 of 44

xx xx xx

“An agent is to be distinguished on the one hand from a

servant, and on the other from an independent contractor. A

servant acts under the direct control and supervision of his

master, and is bound to conform to all reasonable orders given

him in the course of his work; an independent contractor, on

the other hand, is entirely independent of any control or

interference and merely undertakes to produce a specified

result, employing his own means to produce that result. An

agent, though bound to exercise his authority in accordance

with all lawful instructions which may be given to him from time

to time by his principal, is not subject in its exercise to the direct

control or supervision of the principal. An agent, as such is not

a servant, but a servant is generally for some purposes his

master's implied agent, the extent of the agency depending

upon the duties or position of the servant.”

34. We have already expounded on the main provision of

Section 194-H of the Act, which fixes the liability to deduct tax at

source on the ‘person responsible to pay’ – an expression which is

a term of art – as defined in Section 204 of the Act and the liability

to deduct tax at source arises when the income is credited or paid

by the person responsible for paying.

28

The expression “direct or

indirect” used in Explanation (i) to Section 194-H of the Act 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 Section

194-H of the Act is not to be extended and widened in ambit to apply

to true/genuine business transactions, where the assessee is not

28

See ¶ 5 of the judgment.

Civil Appeal No. 7257 of 2011 & Ors. Page 37 of 44

the person responsible for paying or crediting income. In the

present case, the assessees neither pay nor credit any income to

the person with whom he has contracted. Explanation (i) to Section

194-H of the Act, 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 Section 194-H of the Act are met and not otherwise. This principle

does not negate the compliance required by law.

35. Deduction of tax at source is a substantial source of the direct tax

revenue. The ease of collection and recovery is obvious. Deduction

and deposit of tax at source checks evasion and non-payment of

tax. It expands the tax base. However, the assessee as a deductor

is not paying tax on his/her income, and collects and pays tax

otherwise payable by the third party. Liability of the third party to

pay tax when not deducted remains unaffected. Failure to deduct

tax at source has serious and quasi-penal consequences for an

assessee. The deduction of tax provisions should be

programmatically and realistically construed, and not as enmeshes

Civil Appeal No. 7257 of 2011 & Ors. Page 38 of 44

or by adopting catch-as-catch-can approach. In case of a legal or

factual doubt in a given case, the assessee can rely on the doctrine

of presumption against doubtful penalisation.

29

Whether or not the

said doctrine should be applied

30

, 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.

31

In

addition to enhancing revenue and ensuring tax compliance, an

equally important aim/objective of the Revenue is to reduce

litigation. The instructions/circular, if and when issued, should be

clear, and when justified – require the obligation to be made

prospective.

36. Notably, the Delhi High Court in Commissioner of Income Tax v.

Singapore Airlines Ltd.

32

had held that tax under Section 194-H

29

See Securities and Exchange Board of India v. Sunil Krishna Khaitan and Others, (2023) 2 SCC

643. However, in the present case doctrine of presumption against doubtful penalisation is not

applicable. The assessees were earlier deducting tax at source under Section 194-H of the Act, though

the amount on which tax was being deducted is unclear. On legal opinion they stopped deducting tax

at source.

30

This would include the question of prospective or retrospective application.

31

We do acknowledge that the Central Board of Direct Taxes has on several occasions quelled doubts

and issued instructions/circulars.

32

(2009) 319 ITR 29.

Civil Appeal No. 7257 of 2011 & Ors. Page 39 of 44

of the Act is not required to be deducted on the discounted tickets

sold by the airlines/air carriers through travel agents. Revenue did

not challenge the decision of the Delhi High Court to this extent and

therefore, this dictum attained finality. As noted, it is not the case of

the Revenue that tax is to be deducted when payment is made by

the distributors/franchisees to the mobile service providers. It is also

not the case of the revenue that tax is to be deducted under Section

194-H of the Act on the difference between the maximum retail

price income of the distributors/ franchisees and the price paid by

the distributors/franchisees to the assessees. The assessees are

not privy to the transactions between distributors/franchisees and

third parties. It is, therefore, impossible for the assessees to deduct

tax at source and comply with Section 194-H of the Act, on the

difference between the total/sum consideration received by the

istributors/ franchisees from third parties and the amount paid by

the distributors/ franchisees to them.

37. The argument of the Revenue that assessees should periodically

ask for this information/data and thereupon deduct tax at source

should be rejected as far-fetched, imposing unfair obligation and

inconveniencing the assesses, beyond the statutory mandate.

Further, it will be willy-nilly impossible to deduct, as well as make

payment of the tax deducted, within the timelines prescribed by law,

Civil Appeal No. 7257 of 2011 & Ors. Page 40 of 44

as these begin when the amount is credited in the account of the

payee by the payer or when payment is received by the payee,

whichever is earlier. The 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. The payment received is

the gross income or profit earned by the distributor/franchisee. It is

the income earned by distributor/ franchisee as a result of its efforts

and work, and not a remuneration paid by the assessee as a cellular

mobile telephone service provider.

38. We must, therefore, reject the argument of the Revenue relying

upon the decision of this Court in Singapore Airlines Limited

(supra) that assessees would be liable to deduct tax at source even

if the assessees are not making payment or crediting the income to

the account of the franchisee/distributor. 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 Section

119 of the Act. We do not think that the decision in Singapore

Civil Appeal No. 7257 of 2011 & Ors. Page 41 of 44

Airlines Limited (supra) can be read in the manner as suggested

by the Revenue.

39. Coming back to the legal position of a distributor, it is to be generally

regarded as different form that of an agent. The distributor buys

goods on his account and sells them in his territory. The profit made

is the margin of difference between the purchase price and the sale

price. The reason is, that the distributor in such cases 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. The distributor has rights of distribution and is akin to

a franchisee. Franchise agreements are normally considered as sui

generis, though they have been in existence for some time.

Franchise agreements 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. They may relate

to distribution franchises, service franchises and production

Civil Appeal No. 7257 of 2011 & Ors. Page 42 of 44

franchises. Notwithstanding the strict restrictions placed on the

franchisees – which may require the franchisee to sell only the

franchised goods, operate in a specific location, maintain premises

which are required to comply with certain requirements, and even

sell according to specified prices – 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.

40. 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.

Civil Appeal No. 7257 of 2011 & Ors. Page 43 of 44

41. Thus, the term ‘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. In

other words, the 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 Section 194-H of

the Act.

42. In view of the aforesaid discussion, we hold that the assessees

would not be under a legal obligation to deduct tax at source on the

income/profit component in the payments received by the

Civil Appeal No. 7257 of 2011 & Ors. Page 44 of 44

distributors/franchisees from the third parties/customers, or while

selling/transferring the pre-paid coupons or starter-kits to the

distributors. Section 194-H of the Act is not applicable to the facts

and circumstances of this case. Accordingly, the appeals filed by

the assessee – cellular mobile service providers, challenging the

judgments of the High Courts of Delhi and Calcutta are allowed and

these judgments are set aside. The appeals filed by the Revenue

challenging the judgments of High Courts of Rajasthan, Karnataka

and Bombay are dismissed. There would be no orders as to cost.

Pending applications, if any, shall stand disposed of.

......................................J.

(SANJIV KHANNA)

......................................J.

(S.V.N. BHATTI)

NEW DELHI;

FEBRUARY 28, 2024.