Income Tax Department vs. M/S Idea Cellular Ltd

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ITA/162/2023HC Madhya Pradesh19 March 2024Bench: HON'BLE SHRI JUSTICE SUSHRUT ARVIND DHARMADHIKARI3 pages
For Petitioner: Veena Mandlik
AI SummaryRemanded

What did the High Court hold?

The High Court noted that the Supreme Court, in Civil Appeal No. 7257/2011 (Bharti Cellular Ltd. Now Bharti Airtel Limited vs. Assistant Commissioner of Income Tax, Circle 57, Kolkata and another) vide its judgment dated 28/02/2024, had conclusively decided the issue. The Supreme Court held that assessees would not be under a legal obligation to deduct tax at source on the income/profit component in payments received by distributors/franchisees from third parties/customers, or while selling/transferring pre-paid coupons or starter-kits to distributors. Consequently, Section 194-H of the Act was held to be not applicable to the facts and circumstances of such cases. The Supreme Court allowed appeals filed by assessees challenging Delhi and Calcutta High Court judgments and dismissed appeals filed by the Revenue challenging Rajasthan, Karnataka, and Bombay High Court judgments. In light of this Supreme Court decision, the High Court found that nothing survived for adjudication in the present appeal filed by the Revenue.

What were the facts?

The appeal was filed by the Income Tax Department (Revenue) against M/s Idea Cellular Ltd. (Assessee) under Section 260-A of the Income Tax Act, 1961. The dispute concerns the liability to deduct tax at source under Section 194-H of the Act on amounts considered by the Revenue as commission payable to franchisees/distributors under franchise/distributorship agreements. The Assessee contended that no commission or brokerage was paid, and the franchisees were not their agents. The High Courts of Delhi and Calcutta had previously held such payments liable for TDS, while Rajasthan, Karnataka, and Bombay High Courts had ruled otherwise. The Supreme Court had addressed a similar issue in Civil Appeal No. 7257/2011.

What were the issues?

1. Whether the Assessee was under a legal obligation to deduct tax at source under Section 194-H of the Income Tax Act, 1961, on payments made to franchisees/distributors in relation to franchise/distributorship agreements, considering the Revenue's view that these payments constituted commission. Assessee's contention: The Assessee argued that they were neither paying commission or brokerage to the franchisees/distributors, nor were the franchisees/distributors their agents, thus Section 194-H was not attracted. Revenue's contention: The Revenue contended that the payments made to franchisees/distributors under the agreements were in the nature of commission and therefore liable for TDS under Section 194-H. The judgment notes conflicting views from various High Courts (Delhi and Calcutta vs. Rajasthan, Karnataka, and Bombay) on this issue.

Which sections of the Income-tax Act were involved?

Section 194-H,Section 260-A

AI-generated summary — verify with the full judgment below

1 IN THE HIGH COURT OF MADHYA PRADESH AT INDORE BEFORE HON'BLE SHRI JUSTICE SUSHRUT ARVIND DHARMADHIKARI & HON'BLE SHRI JUSTICE HIRDESH INCOME TAX APPEAL No. 162 of 2023 BETWEEN:- INCOME TAX DEPARTMENT THE COMMISSIONER OF INCOME TAX (TDS) AAYKAR BHAWAN, HOSHANGABAD ROAD (MADHYA PRADESH) .....APPELLANT (MS. VEENA MANDLIK, ADVOCATE) AND M/S IDEA CELLULAR LTD LIMITED FIRM 139-140, ELECTRONICS COMPLEX, PARDESHIPURA TAN BPLI00953B (MADHYA PRADESH) .....RESPONDENT (SHRI SUMIT NEEMA, SENIOR ADVOCATE WITH SHRI GAGAN TIWARI, ADVOCATE) Reserved on 26/02/2024 Passed on 19/03/2023 ____________________________________________________________________ This appeal is being heard and order has been passed on for 19/03/2024 this day and Justice Sushrut Arvind Dharmadhikari passed the following: Signed by: JAGADISHAN AIYER Signing time: 20-03-2024 13:28:16 Signature Not Verified 2 ORDER Heard on IA No.1334/2024, an application for condonation of delay of 6 days in filing this appeal under Section 5 of the Limitation Act. 2. For the reasons stated in the application, the same is hereby allowed and the delay stands condoned. 3. Also heard on the question of admission. 4. The issue raised in this appeal under Section 260-A of the Income Tax Act, 1961 (which shall be referred herein after as “Act, 1961”) relates to liability to deduct of the tax at source under Section 194-H of the Act, 1961 on the amount which, as per Revenue, Commission payable to an agent by the assessees under the franchise/distributorship agreement between the assessees and the franchinsees/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 assesses 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. 5. Some of the assessees had approached the Apex Court in Civil Appeal No.7257/2011 (Bharti Cellular Ltd. Now Bharti Airtel Limited vs. Assistant Commissioner of Income Tax, Circle 57, Kolkata and another). 6. The aforesaid issue has been answered by Apex Court vide its judgment dated 28/02/2024 in Civil Appeal No.7257/2011 and came to the conclusion as under :- Signed by: JAGADISHAN AIYER Signing time: 20-03-2024 13:28:16 Signature Not Verified 3 “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.” 7. In view of the aforesaid, nothing survives for adjudication in this appeal filed by the Revenue. Accordingly, appeal is hereby disposed off. (S.A. Dharmadhikari) (Hirdesh) Judge Judge Aiyer* Signed by: JAGADISHAN AIYER Signing time: 20-03-2024 13:28:16 Signature Not Verified

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