I sell prepaid SIM cards and recharge coupons to my distributors at a discount. Is that discount commission on which I must deduct tax under section 194H?
Yes, on the Delhi High Court's view. It set aside the Tribunal and held that the relationship between the cellular operator and its prepaid market associates was principal and agent, not principal to principal. The distributor never became the owner of the SIM card, which remained the operator's property and gave the ultimate subscriber access to the operator's network; what was being delivered was a service, and a service cannot be bought and sold. The distributor was a link in the chain by which the operator provided that service. The discount was therefore commission within section 194H, and the operator was rightly treated as in default under section 201(1) with interest under section 201(1A).
Decided by the High Court (High Court of Delhi at New Delhi - A.K. Sikri and Siddharth Mridul, JJ. (judgment per A.K. Sikri, J.)) on 2010-02-19, reported as ITA No.145 of 2009 and ITA No.784 of 2009 (Delhi High Court). It bears on section 194H, section 201(1), section 201(1A), section 133 of the Income Tax Act 1961, in TDS Defaults matters.
This is the leading Delhi authority on the prepaid distributor question and it framed the argument for a decade of litigation. Two strands do the work. The first is the agency test the Court took from its own decision in Singapore Airlines: an agency exists where one person can create a legal relationship between his principal and a third party, and the distributor here brought the subscriber into a contract with the operator. The second is the character of what is supplied: the SIM card is a device for access, title never passes, and the operator remains under all the statutory obligations to the subscriber, so there is no sale of goods to be had. The Court also used the operator's own conduct against it - it was deducting tax on postpaid distributor commission, and could not show why prepaid was different in substance.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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A survey under section 133 at the assessee's premises showed it was not deducting tax at source on discounts given to its prepaid distributors. The company provided cellular services through SIM cards, selling prepaid connections through distributors called prepaid market associates at a discount, for assessment years 2003-04 and 2004-05. Under the distribution agreement the SIM cards and recharge coupons were to be stored so as to show at all times that they were owned by the company; markings could not be removed or obscured; full legal and equitable title remained with the company; distributors could not without written consent market or solicit competing telephony services, refer subscribers to competitors or pass customer data to them; retailers were appointed by the distributor only with the company's written approval; the maximum price of cards and coupons was fixed by the company; the distributor had to collect and forward subscriber information, without which no SIM could be activated; the company retained its intellectual property rights and rights of inspection; and minimum performance targets were set with a unilateral right of termination. The Assessing Officer held the relationship was principal and agent, that the discount was commission, and treated the company as in default under section 201(1) with interest under section 201(1A). The Commissioner (Appeals) agreed. The Tribunal reversed, holding the relationship was one of seller and purchaser, and the Revenue appealed.
The appeals were allowed and the Tribunal's judgment on this aspect set aside, with no costs. The question framed - whether the Tribunal erred in holding the payments were not commission under section 194H - was answered in favour of the Revenue and against the assessee. The High Court agreed with the Cochin Bench in Vodafone Essar Cellular and the Calcutta Bench in Bharti Cellular, and with their rejection of the assessee's reliance on the stamp vendor and dealer cases. Its grounds were that in the supply of SIM cards and recharge coupons there is no sale and purchase of goods but the provision of a service; that the operator remains the owner of the products, which are only devices giving access to its network; that the operator carries all the legal obligations to the prepaid subscriber even though the direct dealing is between distributor and consumer; that the absence of a cash payment or credit entry is a matter of the operator's own internal management; and that a service cannot be sold or bought, only provided, the distributors being linking agents in the chain of delivery.
The Court took the test of agency from its own decision in CIT v. Singapore Airlines Ltd: an agency arises where one person is vested with authority to create a legal relationship between his principal and a third party, so that the principal may sue and be sued by that third party; the agent may exercise discretion but need not have a formal contract. Applying it, the distributor brought the subscriber into a direct relationship with the operator, just as a travel agent issuing a ticket binds the airline to the passenger. The Court found the incidents of ownership decisive against the Tribunal's contract of sale analysis. Title in the SIM cards and coupons never passed; the permissive right to use a SIM card to reach the network is given only to the ultimate consumer on activation, and only the operator or that consumer can uncover the secret number, so the distributor never held the cards as absolute owner. Nor was sales tax paid on the supply, the transaction having been treated throughout as service. The Court also relied on the operator's own practice: it deducted tax under section 194H on postpaid distributor commission, and since the essence of the service to prepaid and postpaid customers is identical, the difference being technical and confined to billing and revenue collection, the burden lay on the operator to show why the prepaid arrangement should escape. On mechanics, the Court held that allowing the margin at the invoice stage is equivalent to paying commission, and that the operator can collect the net price together with the tax element from the distributor, who can then claim credit; the absence of an occasion to pay was of the operator's own making through the wording of its agreement. Finally it distinguished the Kerala decisions in M.S. Hameed and the stamp vendor cases as arising in different settings.
An agency comes into existence where one person is vested with the authority or capacity to create a legal relationship between person referred to as a principal and an outside third party.
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Handle my notice → Ask a CA on WhatsAppYes, on the Delhi High Court's view. It set aside the Tribunal and held that the relationship between the cellular operator and its prepaid market associates was principal and agent, not principal to principal. The distributor never became the owner of the SIM card, which remained the operator's property and gave the ultimate subscriber access to the operator's network; what was being delivered was a service, and a service cannot be bought and sold. The distributor was a link in the chain by which the operator provided that service. The discount was therefore commission within section 194H, and the operator was rightly treated as in default under section 201(1) with interest under section 201(1A). This was decided by the High Court (High Court of Delhi at New Delhi - A.K. Sikri and Siddharth Mridul, JJ. (judgment per A.K. Sikri, J.)) and bears on section 194H, section 201(1), section 201(1A), section 133 of the Income Tax Act 1961. It is reported as ITA No.145 of 2009 and ITA No.784 of 2009 (Delhi High Court). This is the leading Delhi authority on the prepaid distributor question and it framed the argument for a decade of litigation. Two strands do the work. The first is the agency test the Court took from its own decision in Singapore Airlines: an agency exists where one person can create a legal relationship between his principal and a third party, and the distributor here brought the subscriber into a contract with the operator. The second is the character of what is supplied: the SIM card is a device for access, title never passes, and the operator remains under all the statutory obligations to the subscriber, so there is no sale of goods to be had. The Court also used the operator's own conduct against it - it was deducting tax on postpaid distributor commission, and could not show why prepaid was different in substance. If it applies to you, the first step is this: Test the arrangement by asking who ends up in a contract with the customer; if your distributor puts the customer into a direct relationship with you, expect section 194H to be applied.
A survey under section 133 at the assessee's premises showed it was not deducting tax at source on discounts given to its prepaid distributors. The company provided cellular services through SIM cards, selling prepaid connections through distributors called prepaid market associates at a discount, for assessment years 2003-04 and 2004-05. Under the distribution agreement the SIM cards and recharge coupons were to be stored so as to show at all times that they were owned by the company; markings could not be removed or obscured; full legal and equitable title remained with the company; distributors could not without written consent market or solicit competing telephony services, refer subscribers to competitors or pass customer data to them; retailers were appointed by the distributor only with the company's written approval; the maximum price of cards and coupons was fixed by the company; the distributor had to collect and forward subscriber information, without which no SIM could be activated; the company retained its intellectual property rights and rights of inspection; and minimum performance targets were set with a unilateral right of termination. The Assessing Officer held the relationship was principal and agent, that the discount was commission, and treated the company as in default under section 201(1) with interest under section 201(1A). The Commissioner (Appeals) agreed. The Tribunal reversed, holding the relationship was one of seller and purchaser, and the Revenue appealed. The matter was decided on 2010-02-19 by the High Court (High Court of Delhi at New Delhi - A.K. Sikri and Siddharth Mridul, JJ. (judgment per A.K. Sikri, J.)). On those facts the High Court held as follows. The appeals were allowed and the Tribunal's judgment on this aspect set aside, with no costs. The question framed - whether the Tribunal erred in holding the payments were not commission under section 194H - was answered in favour of the Revenue and against the assessee. The High Court agreed with the Cochin Bench in Vodafone Essar Cellular and the Calcutta Bench in Bharti Cellular, and with their rejection of the assessee's reliance on the stamp vendor and dealer cases. Its grounds were that in the supply of SIM cards and recharge coupons there is no sale and purchase of goods but the provision of a service; that the operator remains the owner of the products, which are only devices giving access to its network; that the operator carries all the legal obligations to the prepaid subscriber even though the direct dealing is between distributor and consumer; that the absence of a cash payment or credit entry is a matter of the operator's own internal management; and that a service cannot be sold or bought, only provided, the distributors being linking agents in the chain of delivery.
The Court took the test of agency from its own decision in CIT v. Singapore Airlines Ltd: an agency arises where one person is vested with authority to create a legal relationship between his principal and a third party, so that the principal may sue and be sued by that third party; the agent may exercise discretion but need not have a formal contract. Applying it, the distributor brought the subscriber into a direct relationship with the operator, just as a travel agent issuing a ticket binds the airline to the passenger. The Court found the incidents of ownership decisive against the Tribunal's contract of sale analysis. Title in the SIM cards and coupons never passed; the permissive right to use a SIM card to reach the network is given only to the ultimate consumer on activation, and only the operator or that consumer can uncover the secret number, so the distributor never held the cards as absolute owner. Nor was sales tax paid on the supply, the transaction having been treated throughout as service. The Court also relied on the operator's own practice: it deducted tax under section 194H on postpaid distributor commission, and since the essence of the service to prepaid and postpaid customers is identical, the difference being technical and confined to billing and revenue collection, the burden lay on the operator to show why the prepaid arrangement should escape. On mechanics, the Court held that allowing the margin at the invoice stage is equivalent to paying commission, and that the operator can collect the net price together with the tax element from the distributor, who can then claim credit; the absence of an occasion to pay was of the operator's own making through the wording of its agreement. Finally it distinguished the Kerala decisions in M.S. Hameed and the stamp vendor cases as arising in different settings. In the words reproduced by the source cited on this page: "An agency comes into existence where one person is vested with the authority or capacity to create a legal relationship between person referred to as a principal and an outside third party."
It was decided by the High Court on 2010-02-19 and is reported as ITA No.145 of 2009 and ITA No.784 of 2009 (Delhi High Court). Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 194H, section 201(1), section 201(1A), section 133, 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 department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeals were allowed and the Tribunal's judgment on this aspect set aside, with no costs. The question framed - whether the Tribunal erred in holding the payments were not commission under section 194H - was answered in favour of the Revenue and against the assessee. The High Court agreed with the Cochin Bench in Vodafone Essar Cellular and the Calcutta Bench in Bharti Cellular, and with their rejection of the assessee's reliance on the stamp vendor and dealer cases. Its grounds were that in the supply of SIM cards and recharge coupons there is no sale and purchase of goods but the provision of a service; that the operator remains the owner of the products, which are only devices giving access to its network; that the operator carries all the legal obligations to the prepaid subscriber even though the direct dealing is between distributor and consumer; that the absence of a cash payment or credit entry is a matter of the operator's own internal management; and that a service cannot be sold or bought, only provided, the distributors being linking agents in the chain of delivery. It arises in TDS Defaults matters, on section 194H, section 201(1), section 201(1A), section 133 of the Income Tax Act 1961, and was decided by High Court of Delhi at New Delhi - A.K. Sikri and Siddharth Mridul, JJ. (judgment per A.K. Sikri, 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. Check whether title in what you supply actually passes - retention of ownership, control over pricing and the right to inspect all point towards agency. Look at your own treatment of comparable channels: deducting tax on one distributor stream and not on an economically identical one is very hard to defend. Do not rely on the absence of a payment or a credit entry; the Court held that allowing a margin at the invoice stage is equivalent to paying commission, and that the payer can collect the tax element from the distributor. Because the courts have differed on this, check the current position before deciding not to deduct, and consider deducting under protest while the point is argued.
Overruled. Do not rely on this judgment. The Supreme Court has since decided the point the other way. In Bharti Cellular Ltd (now Bharti Airtel Ltd) v Assistant Commissioner of Income Tax (28 February 2024, 2024 SCC OnLine SC 198 / (2024) 462 ITR 247) the Court held at para 42: '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.' The appeals from the Delhi and Calcutta High Courts - the courts that had held the relationship to be principal and agent and s.194H attracted, the view this judgment states - were allowed and those judgments set aside, while the appeals from the Rajasthan, Karnataka and Bombay High Courts, which had held s.194H inapplicable, were dismissed. Until 2024 this was a genuine High Court split; it is now closed against the Delhi view. The Delhi High Court itself now treats the question as 'answered against the appellants in light of the judgment rendered by the Supreme Court' - Pr.CIT v Bharat Sanchar Nigam Ltd (Delhi High Court, 15 April 2024). A citedby search returns 38 later decisions, the great majority of them Tribunal decisions predating the Supreme Court judgment; they should be read as superseded on this point. 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.
The harvested page is clipped: about 5,900 characters from the middle are missing, covering part of the assessee's argument and the beginning of the Court's own analysis, including its treatment of the Sale of Goods Act and section 182 of the Contract Act. The operative reasoning and the order were read. Much of the Court's stated ground consists of its adoption of the Cochin Bench's findings in Vodafone Essar Cellular, quoted at length; that order itself was not read. No reporter citations were supplied, so the appeal numbers are used. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeals were allowed and the Tribunal's judgment on this aspect set aside, with no costs. The question framed - whether the Tribunal erred in holding the payments were not commission under section 194H - was answered in favour of the Revenue and against the assessee. The High Court agreed with the Cochin Bench in Vodafone Essar Cellular and the Calcutta Bench in Bharti Cellular, and with their rejection of the assessee's reliance on the stamp vendor and dealer cases. Its grounds were that in the supply of SIM cards and recharge coupons there is no sale and purchase of goods but the provision of a service; that the operator remains the owner of the products, which are only devices giving access to its network; that the operator carries all the legal obligations to the prepaid subscriber even though the direct dealing is between distributor and consumer; that the absence of a cash payment or credit entry is a matter of the operator's own internal management; and that a service cannot be sold or bought, only provided, the distributors being linking agents in the chain of delivery.
TaxSphere, “CIT v Idea Cellular Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-idea-cellular-ltd/ (validity last checked 2026-08-29)
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