We sell prepaid SIMs and vouchers to distributors below list price. Is that margin commission under 194H?
No. The Supreme Court held that the distributor buys the starter kits and recharge vouchers at a discount on a principal-to-principal basis, so the margin is a trade discount and not commission or brokerage; the operator has no obligation to deduct under s.194H.
Decided by the Supreme Court (Supreme Court of India — Sanjiv Khanna J. and S.V.N. Bhatti J.) on 2024-02-28, reported as [2024] 462 ITR 247 (SC); [2024] 298 Taxman 552 (SC); [2024] 160 taxmann.com 12 (SC); 2024 INSC 148; Civil Appeal Nos. 7257 of 2011 and others. It bears on section 194H, section 201 of the Income Tax Act 1961, in TDS Defaults matters.
This closes a long-running dispute in which operators were treated as assessees in default under s.201 for not deducting on distributor margins. The Court affirmed the Rajasthan, Karnataka and Bombay High Court view and reversed the contrary Delhi and Calcutta decisions, so the Delhi and Calcutta rulings can no longer be cited against you. The four-fold agency test it applies — can the intermediary bind the principal, does the principal control his conduct, is the relationship fiduciary, must he account and is he paid by the principal — travels well beyond telecom to any discount-versus-commission dispute.
Binding on every court and authority in India.
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Cellular mobile telephone service providers sold prepaid start-up kits and recharge vouchers to franchisees and distributors at a price discounted from the price printed on the pack. The distributor paid that discounted price in advance, before the products reached any retailer or customer, and was then free to sell at any price below the printed price; the operator had no say in the resale price. Under the agreements the right, title and interest in the prepaid cards never passed to the distributor and remained with the operator, a condition traceable to the licence issued by the Department of Telecommunications. The Revenue treated the margin between the discounted price and the price the distributor realised as commission or brokerage attracting deduction under s.194H, and the operators as assessees in default. The assessees' case was that they paid no commission or brokerage and that the distributors were not their agents. The High Courts of Delhi and Calcutta had held tax was deductible; Rajasthan, Karnataka and Bombay had held s.194H was not attracted. Assessment year 2011-12.
Cellular mobile service providers are under no legal obligation to deduct tax at source under s.194H on the income or profit component in the payments received by their distributors and franchisees from third parties and customers, or while selling or transferring prepaid coupons or starter kits to distributors. Section 194H was held inapplicable on these facts. The assessees' appeals against the Delhi and Calcutta High Court judgments were allowed and those judgments set aside; the Revenue's appeals against the Rajasthan, Karnataka and Bombay High Court judgments were dismissed (para 42).
Section 194H is engaged only where a legal relationship of principal and agent exists between the payer and the payee, a question answered by s.182 of the Contract Act 1872 (paras 6-7). At para 8 the Court set out four indicia of agency: the agent's legal power to alter the principal's relationship with a third party; a degree of control by the principal over the agent's activities; a fiduciary character in the task entrusted; and a duty to render accounts to the principal, coupled with remuneration from him. Applying these, the contractual obligations of the distributors and franchisees disclosed no fiduciary character and no business done on the operator's account (para 29). That the title in the prepaid cards never passed to the distributor was accepted as correct, but explained as a mandate of the DoT licence rather than a badge of agency. The decisive point was the mechanics of payment: the distributor's income is the difference between the price he receives from the retailer or customer, fixed at his sole discretion, and the discounted price he has already paid, so the operator neither pays nor credits that income at any stage and the statutory trigger never arises (paras 30-31, 37). The word 'indirectly' in Explanation (i) exists to stop a person responsible for paying from dodging an obligation that applies; it does not create an obligation where the main provision does not, and s.194H is not to be widened to catch genuine business transactions (para 34). In law a distributor is generally an independent contractor rather than an agent: he buys on his own account, does not act as communicator or creator of a relationship between the principal and a third party, and need not render accounts of a business that is his own (paras 39-41). The Court also observed that deduction provisions should be construed programmatically and realistically, and suggested the CBDT issue clear, and where justified prospective, instructions to reduce withholding-tax litigation (para 35).
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 distributors/franchisees from the third parties/customers, or while selling/transferring the pre-paid coupons or starter-kits to the distributors.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that the distributor buys the starter kits and recharge vouchers at a discount on a principal-to-principal basis, so the margin is a trade discount and not commission or brokerage; the operator has no obligation to deduct under s.194H. This was decided by the Supreme Court (Supreme Court of India — Sanjiv Khanna J. and S.V.N. Bhatti J.) and bears on section 194H, section 201 of the Income Tax Act 1961. It is reported as [2024] 462 ITR 247 (SC); [2024] 298 Taxman 552 (SC); [2024] 160 taxmann.com 12 (SC); 2024 INSC 148; Civil Appeal Nos. 7257 of 2011 and others. This closes a long-running dispute in which operators were treated as assessees in default under s.201 for not deducting on distributor margins. The Court affirmed the Rajasthan, Karnataka and Bombay High Court view and reversed the contrary Delhi and Calcutta decisions, so the Delhi and Calcutta rulings can no longer be cited against you. The four-fold agency test it applies — can the intermediary bind the principal, does the principal control his conduct, is the relationship fiduciary, must he account and is he paid by the principal — travels well beyond telecom to any discount-versus-commission dispute. If it applies to you, the first step is this: Put the distributor agreement on record and point to the terms showing the distributor takes title to stock, bears his own risk and sets his own resale price.
Cellular mobile telephone service providers sold prepaid start-up kits and recharge vouchers to franchisees and distributors at a price discounted from the price printed on the pack. The distributor paid that discounted price in advance, before the products reached any retailer or customer, and was then free to sell at any price below the printed price; the operator had no say in the resale price. Under the agreements the right, title and interest in the prepaid cards never passed to the distributor and remained with the operator, a condition traceable to the licence issued by the Department of Telecommunications. The Revenue treated the margin between the discounted price and the price the distributor realised as commission or brokerage attracting deduction under s.194H, and the operators as assessees in default. The assessees' case was that they paid no commission or brokerage and that the distributors were not their agents. The High Courts of Delhi and Calcutta had held tax was deductible; Rajasthan, Karnataka and Bombay had held s.194H was not attracted. Assessment year 2011-12. The matter was decided on 2024-02-28 by the Supreme Court (Supreme Court of India — Sanjiv Khanna J. and S.V.N. Bhatti J.). On those facts the Supreme Court held as follows. Cellular mobile service providers are under no legal obligation to deduct tax at source under s.194H on the income or profit component in the payments received by their distributors and franchisees from third parties and customers, or while selling or transferring prepaid coupons or starter kits to distributors. Section 194H was held inapplicable on these facts. The assessees' appeals against the Delhi and Calcutta High Court judgments were allowed and those judgments set aside; the Revenue's appeals against the Rajasthan, Karnataka and Bombay High Court judgments were dismissed (para 42).
Section 194H is engaged only where a legal relationship of principal and agent exists between the payer and the payee, a question answered by s.182 of the Contract Act 1872 (paras 6-7). At para 8 the Court set out four indicia of agency: the agent's legal power to alter the principal's relationship with a third party; a degree of control by the principal over the agent's activities; a fiduciary character in the task entrusted; and a duty to render accounts to the principal, coupled with remuneration from him. Applying these, the contractual obligations of the distributors and franchisees disclosed no fiduciary character and no business done on the operator's account (para 29). That the title in the prepaid cards never passed to the distributor was accepted as correct, but explained as a mandate of the DoT licence rather than a badge of agency. The decisive point was the mechanics of payment: the distributor's income is the difference between the price he receives from the retailer or customer, fixed at his sole discretion, and the discounted price he has already paid, so the operator neither pays nor credits that income at any stage and the statutory trigger never arises (paras 30-31, 37). The word 'indirectly' in Explanation (i) exists to stop a person responsible for paying from dodging an obligation that applies; it does not create an obligation where the main provision does not, and s.194H is not to be widened to catch genuine business transactions (para 34). In law a distributor is generally an independent contractor rather than an agent: he buys on his own account, does not act as communicator or creator of a relationship between the principal and a third party, and need not render accounts of a business that is his own (paras 39-41). The Court also observed that deduction provisions should be construed programmatically and realistically, and suggested the CBDT issue clear, and where justified prospective, instructions to reduce withholding-tax litigation (para 35). In the words reproduced by the source cited on this page: "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 distributors/franchisees from the third parties/customers, or while selling/transferring the pre-paid coupons or starter-kits to the distributors."
It was decided by the Supreme Court on 2024-02-28 and is reported as [2024] 462 ITR 247 (SC); [2024] 298 Taxman 552 (SC); [2024] 160 taxmann.com 12 (SC); 2024 INSC 148; Civil Appeal Nos. 7257 of 2011 and others. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 194H, section 201, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Cellular mobile service providers are under no legal obligation to deduct tax at source under s.194H on the income or profit component in the payments received by their distributors and franchisees from third parties and customers, or while selling or transferring prepaid coupons or starter kits to distributors. Section 194H was held inapplicable on these facts. The assessees' appeals against the Delhi and Calcutta High Court judgments were allowed and those judgments set aside; the Revenue's appeals against the Rajasthan, Karnataka and Bombay High Court judgments were dismissed (para 42). It arises in TDS Defaults matters, on section 194H, section 201 of the Income Tax Act 1961, and was decided by Supreme Court of India — Sanjiv Khanna J. and S.V.N. Bhatti J.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show that the distributor renders no account to you for what he earns from third parties and is not remunerated by you. Do not let the officer rest the demand on the words 'direct or indirect' in the Explanation to s.194H; the Court held those words cannot be stretched to catch a genuine principal-to-principal sale. If s.201 proceedings are already on foot for earlier years, take this decision as a ground rather than negotiating the quantum.
Still good law. Followed by the Madhya Pradesh High Court in CIT (TDS) v. Idea Cellular Ltd., IT Appeal No. 52 of 2024, decided 1 July 2024, which reproduced para 42 and disposed of the Revenue's appeal on the footing that nothing survived for adjudication. In the judgment itself the Court set aside the contrary Delhi and Calcutta High Court decisions (including CIT v. Idea Cellular Ltd. [2010] 325 ITR 148 (Delhi)) and dismissed the Revenue's appeals against the Rajasthan, Karnataka and Bombay decisions. The Court also suggested that the CBDT issue clarificatory instructions on withholding obligations, and that they be prospective where justified. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
Cellular mobile service providers are under no legal obligation to deduct tax at source under s.194H on the income or profit component in the payments received by their distributors and franchisees from third parties and customers, or while selling or transferring prepaid coupons or starter kits to distributors. Section 194H was held inapplicable on these facts. The assessees' appeals against the Delhi and Calcutta High Court judgments were allowed and those judgments set aside; the Revenue's appeals against the Rajasthan, Karnataka and Bombay High Court judgments were dismissed (para 42).
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