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Income Tax Appellate Tribunal, DELHI
order of Ld. Commissioner of Income Tax (Appeals)/ National Faceless Appeal Centre, (Ld. CIT(A)’/’NFAC’ for short), dated 25/11/2022 for the Assessment Year 2015-16.
Though the registry is not mentioned the delay in filing the present Appeal in the order sheet, the Ld. Senior Counsel appearing for Assessee's Representative fairly submitted that,as an abundant precaution, an application for condonation of delay has been filed.
The Ld. Senior Counsel brought to the notice of the Bench that the order impugned has been passed on 25/11/2022 u/s 250 of the Income Tax Act, 1961 ('Act' for short), however, the same was made known to the Assessee only on 24/07/2025. The Ld. Senior Counsel further submitted that the order impugned has not been served on the Assessee on its registered mail id and produced several documents to prove that the Assessee was under the bona-fide belief that the Appeal was still pending before the Ld. CIT(A).
Per contra, the Ld. Departmental Representative vehemently objected for condoning the delay.
We have heard both the parties and perused the material available on record. As could be seen from the documents produced by the Assessee, the Assessee was under the bona-fide belief that the first Appeal was still pending before the Ld. CIT(A). Further it is the claim of the Assessee that the order impugned was not served on the Assessee through registered mail-id. Considering the above facts and circumstances andalso for the reasons stated in the application for condonation of delay, the delay in filing the present Appeal is condoned.
The Ld. Senior Counsel further submitted that the solitary issue involved in the present Appeal is regarding the applicability of Section 194H of the Act on the amount of discount offered on sale of pre-paid products, being, right to use airtime for a specified value given by the Assessee to its distributors. Further submitted that the said issue is no more res-integra as the Hon'ble Supreme Court in Assessee’s own case for Assessment Year 2011-12, reported in (2024) 160 taxmann.com 12 (S.C) decided the issue in favour of the Assessee.
Thus, sought for allowing the Appeal.
Per contra, the Ld. Departmental Representative though vehemently objected for allowing the Appeal by relying on the orders of the Lower Authorities, could not controvert the submissions made by the Ld. Assessee's Representative and not brought any contrary judicial precedents in favour of the Revenue.
We have heard both the parties and perused the material available on record. In the Assessee’s own case for Assessment Year 2011-12, the Hon'ble Supreme Court decided the issue involved in the present Appeal in favour of the Assessee in following the manners:
“33.2 Having considered the aforesaid mechanism and the nature of relationship between a principal and an agent26, 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 England27, 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. xxxxxx “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.”
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. 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.
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 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 applied30, 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.
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 SCC643. 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. 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. 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.
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, 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.
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 Airlines Limited (supra) can be read in the manner as suggested by the Revenue.
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 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.
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.
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.
In view of the aforesaid discussion, we hold that the assessees would not be under a legal obligation to deduct tax atsource 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. 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.”
By respecrfully following the ratio involved in the present Appeal, we hold that Section 194H of the Act is not applicable to the facts and circumstances of the case. Accordingly, additions made by the A.O. which has been confirmed by the Ld. CIT(A) is hereby deleted.
In the result, Appeal of the Assessee is allowed.