Telcos not under legal obligation to deduct tax at source on profits to be made by their distributors: SC

The Supreme Court has ruled that telecom firms are not under a legal obligation to deduct tax at source on profits to be made by their distributors or franchisees by selling prepaid coupons and SIM cards to mobile phone users.

A bench comprising justices Sanjiv Khanna and SVN Bhatti delivered the landmark judgement on Wednesday on a batch of appeals and cross appeals filed by the Income Tax department and telecom operator Bharti Airtel Limited (BAL).

The legal question pertained to the liability to deduct tax at source under Section 194-H of the Income Tax Act, 19611 on the amount to be earned by the distributors or franchisees of BAL by selling the pre-paid coupons and SIM cards to the consumers.

The Income Tax department had claimed that the profits, earned by the distributors, is a commission payable to “an agent by the assessees (telecom firm) under the franchise/ distributorship agreement between the assessees and the franchisees/distributors”.

Dealing with the IT laws including the provisions on TDS, Justice Khanna, writing the judgement for the bench, said, “We hold that the assesses (telecom firms) 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, or while selling/transferring the pre-paid coupons or starter-kits to the distributors.” It held section 194-H of the IT Act is not applicable to the facts and circumstances of this case.

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 top court allowed the appeals of telecom service provider firms and set aside the judgments of the High Courts of Delhi and Calcutta. The high courts of Delhi and Calcutta had held that the telecom firms were liable to deduct tax at source under Section 194-H of the Act.

The telecom firms said they sell “the start-up kits and recharge vouchers of the specified value at a discounted price to the franchisee/distributors” and the discounts are given on the printed price of the packs.

The discount, as per telecom firms, is not a ‘commission or brokerage’ under the IT law and hence, they are not obligated to deduct tax at source.

The IT department, on the other hand, said the difference between ‘discounted price’ and ‘sale price’ in the hands of the distributors being in the nature of ‘commission or brokerage’ is their income and hence, the telcos were liable to deduct tax at source under Section 194-H of the Act.

Settling the dispute, Justice Khanna, in his 44-page judgement, said it was not the case of the IT dept that the tax at source is to be deducted on the difference between the printed price and the discounted price.