The Gujarat High Court ruled in favor of Bharti Airtel Ltd., determining that the discounts offered to its distributors on pre-paid SIM cards and recharge coupons do not constitute a commission and, therefore, are not subject to tax deduction at source ( TDS ) under Section 194H of the Income Tax Act, 1961.
The assessee, Bharti Airtel Ltd, a provider of cellular mobile telephone service under the brand name ‘Airtel,’ has devised two schemes, prepaid and postpaid, for which franchisees are appointed by the appellant.
The Revenue had raised a dispute regarding whether the discount offered by Bharti Airtel Ltd to its distributors on the payment made towards pre-paid SIM cards and recharge coupons was in the nature of commission, which would necessitate TDS, or whether it was a principal-to-principal transaction, thus exempting it from TDS requirements.
It was submitted that both questions had been answered by the Supreme Court in the appellant’s case in Civil Appeal No. 7257 of 2011 by a judgment and order dated 28.02.2024, and therefore, this appeal should be allowed in favor of the appellant in terms of the decision of the Supreme Court.
The Supreme Court had ruled that the discounts provided to distributors did not constitute commission or brokerage under Explanation (i) to Section 194-H of the Act.
The court highlighted several clauses from the distributor agreement to illustrate the nature of the relationship and concluded that the relationship between Bharti Airtel Ltd. and its distributors was not one of principal and agent. Therefore, Bharti Airtel Ltd. was not obligated to deduct TDS on the discounts provided.
The Supreme Court noted that the assessees have entered into franchise or distribution agreements with several parties. The discounts are given on the printed price of the packs. This discount, as per the assessees, is not a ‘commission or brokerage’ under Explanation (i) to Section 194-H of the income tax Act.
Considering the ruling of the Supreme Court, the Gujarat High Court allowed the appeal, affirming that both substantial questions of law were answered in favor of Bharti Airtel Ltd. Consequently, the Civil Application was disposed of in alignment with the appeal’s outcome.
A division bench of Justices Bhargav D. Karia and Niral R. Mehta stated that Section 194-H of the Act does not apply to the facts and circumstances of the case and that the assessees would not be legally required to deduct tax at source on the income or profit component of the payments.
Shalin Mehta, along with Aditi S. Raol, represented Bharti Airtel Ltd., while Senior Standing Counsel MS Maithili D. Mehta appeared for the Income Tax Department.
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