Supreme Court Holds Section 194-H of Income Tax Act Not Applicable to Cellular Service Providers
In a recent ruling, the Supreme Court held that cellular mobile service providers are not obligated to deduct tax at source under Section 194-H of the Income Tax Act, 1961 on the income/profit component in payments received by their franchisees/distributors from third parties/customers. The decision stemmed from agreements where service providers sold start-up kits and recharge vouchers to franchisees/distributors at discounted prices, who in turn sold these products to customers at their discretion. The Court emphasized that the legal relationship of principal-agent must be established for the obligation to deduct tax at the source to arise, and highlighted that the service providers were not privy to the transactions between the distributors/franchisees and third parties. It was concluded that Section 194-H cannot be applied to genuine business transactions where the assessee is not responsible for paying or crediting income. The Court cautioned against adopting a catch-as-catch-can approach to tax provisions and dismissed the Revenue’s suggestion that the service providers should periodically request transaction information to then deduct tax at the source, deeming it an unfair obligation beyond the statutory mandate. The decision favored the cellular service providers, leading to the allowance of their appeals against certain High Court judgments while dismissing those filed by the Revenue in other cases.
For detailed information, refer to the case title Bharti Cellular Limited v. Assistant Commissioner of Income Tax and Another, Civil Appeal No. 7257 of 2011 available for download here.