2026 (1) TMI 873 - AT - Income Tax

Payments to prepaid-product distributors for airtime sales not treated as agency; no TDS u/s194H

Whether payments/discounts to distributors for sale of prepaid products attract TDS under s.194H - Court applied the Supreme Court's restrictive ... TDS u/s 194H - 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 - nature of relationship between a principal and an agent - difference between the relations of master and servant and of principal and agent HELD THAT:- The said issue is no more res-integra as the Hon'ble Supreme Court in Assessee’s own case [2024 (3) TMI 41 - SUPREME COURT] 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. 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. Section 194H of the Act is not applicable to the facts and circumstances of this case. Decided in favour of assessee. Issues: Whether Section 194H of the Income-tax Act, 1961 applies to the discount on sale of pre-paid products (right to use airtime) provided by the assessee to its distributors, such that the assessee is liable to deduct tax at source on the distributor's income/profit component.Analysis: The legal framework centres on Section 194H (and its Explanation (i)) which fixes TDS liability on the 'person responsible to pay' or credit income, and the definition in Section 204. The analysis applies the principal-agent tests and the distinction between agents and independent contractors/distributors, considering whether the assessee pays or credits the relevant income to distributors or whether distributors earn independent profit from third-party transactions. Precedent reasoning holding that obligations under Section 194H do not extend to genuine business transactions where the payer is not the person responsible to pay or credit the income is applied. The doctrine of presumption against doubtful penalisation and considerations of practicality and statutory timelines for deduction and deposit of TDS are relevant; where the statutory conditions for deduction are not met, Explanation (i) cannot be used to widen liability. Authoritative treatment of distributor/franchisee relationships as generally akin to independent contractors, subject to factual tests, is applied to conclude that the distributors' margins/profits from third-party sales are not payments by the assessee.Conclusion: Section 194H of the Income-tax Act, 1961 is not applicable to the facts; the additions made by the assessing authority and confirmed by the appellate authority are deleted and the appeal is allowed in favour of the assessee.Ratio Decidendi: Section 194H does not impose TDS liability where the assessee is not the person responsible to pay or credit the income to the payee; a distributor/franchisee's independent profit from third-party transactions is not income paid or credited by the assessee and therefore falls outside the scope of Section 194H.