TaxTMI 
TaxTMI 
2024 (3) TMI 41
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.... Madhvi Agarwal, Adv. Ms. Madhavi Agarwal, Adv. Ms. Sayaree Basu Mallik, Adv. Ms. Madhavi Agrawal, Adv. Mr. Abhinabh Garg, Adv. Mr. E. C. Agrawala, AOR Mr. Harish Pandey, AOR Mr. Kavin Gulati, Sr. Adv. Mr. Sachit Jolly, Adv. Ms. Anuradha Dutt, Adv. Ms. Disha Jham, Adv. Ms. Soumya Singh, Adv. Ms. B. Vijayalakshmi Menon, AOR Mr. Arvind P. Datar, Sr. Adv. Mr. Ajay Vohra, Sr. Adv. Mr. Kumar Visalaksh, Adv. Mr. Udit Jain, Adv. Mr. Archit Gupta, Adv. Mr. Arihant Tater, Adv. Mr. Ajitesh Dayal Sisngh, Adv. Mr. Ajitesh Dayal Singh, Adv. Mr. Praveen Kumar, Adv. Mr. Harish Pandey, Adv. Mr. Abhishek Vikas, AOR JUDGMENT SANJIV KHANNA , J. This common judgment decides the aforestated appeals preferred by the Revenue and the assessees, who are cellular mobile telephone service providers. The issue relates to the liability to deduct tax at source under Section 194-H of the Income Tax Act, 1961"The Act", for short on the amount which, as per the Revenue, is a commission payable to an agent by the assessees under the franchise/ distributorship agreement between the assessees and the franchisees/distributors. As per the assessees, neither are they paying a commission or brokerage to the fran....
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.... any income by way of commission or brokerage, shall deduct income tax at the prescribed rate The expression "any person (...) responsible for paying" is a term of art, defined vide Section 2042 204. Meaning of "person responsible for paying".-For the purposes of the foregoing provisions of this chapter and Section 285, the expression "person responsible for paying" means- (i) in the case of payments of income chargeable under the head "Salaries" other than payments by the Central Government or the Government of a State, the employer himself or, if the employer is a company, the company itself, including the principal officer thereof; (ii) in the case of payments of income chargeable under the head "Interest on securities" other than payments made by or on behalf of the Central Government or the Government of a State, the local authority, corporation or company, including the principal officer thereof; (ii-a) in the case of any sum payable to a non-resident Indian, being any sum representing consideration for the transfer by him of any foreign exchange asset, which is not a short-term capital asset, the authorised person responsible for remitting such sum to the non-reside....
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.... when covered under the four corners of the said explanation. We would not like to pronounce on this aspect as it has not been argued by the Revenue, and it appears that the requirement of relationship of principal and agent has been read into the main section. Further, applying common or commercial parlance meaning to the terms 'brokerage' or 'commission', given the wide divergence in which it is understood, would lead to confusion and has pitfalls. Deduction of Tax provisions should be pragmatically and realistically construed, and not as enmeshes or by adopting catch-as-catch-can approach. When doubts exist, the Central Board of Direct Taxes may examine this question and may issue appropriate instructions/circular after ascertaining the views of assessees and other stakeholders. The decision should be clear, and we trust and hope that an obligation, if imposed, will be prospective. (See paragraph 34 of the judgment.) of the Act defines the expressions 'commission' or 'brokerage', as: "Explanation. - For the purposes of this section, - (i) "commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf ....
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.... payer and the recipient/payee. 6. It is settled by a series of judgments of this Court that the expression 'acting on behalf of another person' postulates the existence of a legal relationship of principal and agent, between the payer and the recipient/payee. Singapore Airlines Ltd. and Another v. Commissioner of Income Tax, (2023) 1 SCC 497, 23-29 The law of agency is technical. Whether in law the relationship between the parties is that of principal-agent is answered by applying Section 182 of the Contract Act, 1872 "Contract Act", for short. Therefore, the obligation to deduct tax at source in terms of Section 194-H of the Act arises when the legal relationship of principal-agent is established. It is necessary to clarify this position, as in day to day life, the expression 'agency' is used to include a vast number of relationships, which are strictly, not relationships between a principal and agent. 7. Section 182 of the Contract Act, defines the words 'agent' and 'principal' and reads as under: "182. "Agent" and "principal" defined.- An "agent" is a person employed to do any act for another, or to represent another in dealings with third persons. The person for....
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....s for the principal. 9. At this stage, three other relevant aspects/considerations should be noted. First is the difference between 'power' and 'authority'. The two terms though connected, are not synonymous. Authority refers to a factual position, that is, the terms of contract between the two parties. The power of the agent however, is not, strictly speaking, conferred by the contract or by the principal but by the law of agency. When a person gives authority to another person to do the acts which bring the law of agency into play, then, the law vests power with the agent to affect the principal's legal relationship with the third parties. The extent and existence of the power with the agent is determined by public policy. The authority, as observed above, refers to the factual situation. The second consideration is that the primary task of an agent is to enter into contracts on behalf of his principal, or to dispose of his principal's property. The factors mentioned in clauses (b) to (d) in paragraph 8 above flow, and are indicia of this primary task. Clauses (b) to (d) of paragraph 8 are useful as tests or standards to examine the true nature or character of the relationship....
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.... differs essentially from a contract of sale inasmuch as an agent after taking delivery of the property does not sell it as his own property but sells the same as the property of the principal and under his instructions and directions. Furthermore, since the agent is not the owner of the goods, if any loss is suffered by the agent he is to be indemnified by the principal. This is yet another dominant factor which distinguishes an agent from a buyer-pure and simple. In Halsbury's Laws of England, Vol. 1, 4th Edn., in para 807 at p. 485, the following observations are made: "807. Rights of agent. -The relation of principal and agent raises by implication a contract on the part of the principal to reimburse the agent in respect of all expenses, and to indemnify him against all liabilities, incurred in the reasonable performance of the agency, provided that such implication is not excluded by the express terms of the contract between them, and provided that such expenses and liabilities are in fact occasioned by his employment." 12. The aforesaid judgment in the context of distinction between a contract of sale and contract of agency observes that the agent is authorise....
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....between their employers and third persons. For example, a solicitor may start by giving advice (independent contractor), and then as a consequence make a contract for his employer with another person (agent). 15. In Labreche v. Harasymiw (1992) 89 DLR (4th) 95 at 107, Valin J. delineated the question of what an agency involves, stating that: (i) it refers to the power of the agent to affect the principal's position. However, this is not the sole test, though it still remains one of the main criteria in determining whether someone is an agent. There are several features in the definition of an agent See 8 of the judgment. There can be several situations where one person represents or acts for another, but this does not create the relationship of principal and agent. It is only when the representation or action on another's behalf affects the latter's legal position, that is to say his rights against, or his liability towards, other people, that the law of agency applies; (ii) the second feature is the importance of the way in which law regards the relationship which is created. The effect of the law is that it regulates the way in which parties conduct themselves. The conduct of ....
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....ion of principal and an agent relationship are absent. Two level commercial transaction can result in an tripartite arrangement/agreement with respective rights and obligations, without any of the two parties having principal-agent relationship. 17. Clause (d) in paragraph 8 observes that the agent is liable to render accounts to the principal as the business done by the agent is on principal's account. The agent is entitled to remuneration from the principal for the work he performs. To decide whether a contracting party acts for himself as an independent contractor, we may examine whether in the course of work, he intends to make profits for himself, or is entitled to receive prearranged remuneration. If the party is concerned about acting for himself and making the maximum profits possible, he is usually regarded as a buyer, or an independent contractor and not as an agent of the principal. This would be true even when certain terms and conditions have been fixed relating to the manner in which the seller conducts his business. We shall subsequently further elucidate on the characteristics of an independent contractor, and differentiate them from the principal-agent relations....
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.... Act. 21. In order to decide the dispute in question, we would like to refer to some of the relevant clauses of the franchisee/distributor agreement between Bharti Airtel Limited and the franchisee/distributors, which read as under Agreements in the case of assessees Vodafone Idea Limited (formerly known as Vodafone Mobile Services Limited) and Idea Cellular Limited (now known as Vodafone Idea Limited) are somewhat different. To avoid repetition or prolixity, we are not reproducing the said clauses. : Bharti Airtel Limited "WHEREAS THE FRANCHISEE has approached BML and have expressed their keen desire to be one of the FRANCHISEE's to undertake the job of promoting and marketing of Pre Paid and also other related services all under the brand name of "MAGIC" to the potential subscribers, under the terms of this Agreement. The FRANCHISEE has also represented that they have infrastructure, manpower and experience in the above area and they possess the financial to perform the above functions and such other functions as may be assigned to them by BML from time to time. xx xx xx A. It is expressly understood that the Agreement does not confer any exclusiv....
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....d conduct of its business and business establishment, more particularly with respect to the conduct of its business provided for in this Agreement. xx xx xx 4.1 The FRANCHISEE shall maintain a suitable establishment for the conduct of its business and the performance of its obligations under this Agreement. The FRANCHISEE shall use its best efforts to actively provide effective ways to market and promote the Pre Paid Services and shall always act in the interest of both BML and the subscribers to the Services of BML. 4.2 As covenanted for in clause 2.4, the FRANCHISEE shall not involve himself in any manner either directly or indirectly in any business or activity which is competitive with the business of activities of BML. The FRANCHISEE acknowledges that the adherence to this provision is a material obligation of the FRANCHISEE under this Agreement. xx xx xx 4.4 The FRANCHISEE shall, in the conduct of its business and performing its obligations under this Agreement, conform and adhere to the policies of BML communicated to the FRANCHISEE from time to time. The FRANCHISEE shall not charge the customers of BML for the services anything m....
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....e to the items as stated here above and the FRANCHISEE shall indemnify BML from all loss caused to BML arising out of any loss, pilferage or damage to the items as stated here above. xx xx xx 4.12 The liability to insure and keep insured the items as stated in Clause 4.10 at the business establishment of the FRANCHISEE shall be of the FRANCHISEE and the liability for any loss or damage due to any fire, burglary, theft, etc. will be that of the FRANCHISEE. xx xx xx 4.14 The FRANCHISEE shall be responsible for collection of all necessary agreement/contract forms and other related forms, and for obtaining the signature of the customer on these forms. The FRANCHISEE shall forward all such forms, duly completed in all respects and signed by customers to BML for its verification and records. xx xx xx 5.1 From time to time, BML will review with the FRANCHISEE minimum subscription, targets for the Pre Paid Services, taking into account the market development and market potential and other relevant factors. The achievements of these prescribed targets by the FRANCHISEE is a material obligation of the FRANCHISEE under this Agreement. ....
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....partnership name or otherwise indicate to the public that it is an affiliate of BML. xx xx xx 11.5 BML shall allow the FRANCHISEE to use its logo to be displayed on the sign board to be placed at the FRANCHISEE's outlet(s) and on the each memos and/or official business documents issued by the FRANCHISEE towards the services effected from the outlet(s). However, the intellectual property rights associated with Trademarks, logos and trade names are and shall remain the sole property of BML. xx xx xx 14.1 BML shall not be liable to the FRANCHISEE or any other party by virtue of the termination of this Agreement for any reason whatsoever, including but not limited to any claim for loss of profits or compensation or prospective profits or on account of any expenditure, investments, leases, capital improvements or any other commitments made by the FRANCHISEE in connection with the business made in reliance upon or by virtue of FRANCHISEE's appointment under this Agreement. It is expressly agreed that no compensation whatsoever shall be payable by BML to the FRANCHISEE upon the termination of this Agreement. 14.2 Upon receipt of any notice of t....
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....ase, the FRANCHISEE, its employees, associates or agents hold out as employees, agents, or legal representatives of BML, the FRANCHISEE shall forthwith upon demand make good any/all loss, cost, damages, including consequential loss, suffered by BML on this account. 16.2 It is understood that the relationship between the parties is solely on principal-to-principal. FRANCHISEE shall not acquire, by virtue of any provision of this Agreement or otherwise, any right, power or capacity to act as an agent or commercial representative of BML for any purpose whatsoever. Nothing contained in the contract shall be deemed or construed as creating a joint venture relationship or legal partnership etc. between BML and the FRANCHISEE. 16.3 The FRANCHISEE shall not obtain/offer the pre paid cards and/or recharge coupons for the Pre Paid Service from any other source other than BML unless such permission is granted in writing by BML in order to meet the specific needs of the market and subscribers as determined by BML. xx xx Xx" 22. As per the agreement, the franchisee/distributor is appointed for marketing of prepaid services and for appointing the retailer or outlets....
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....art-up kits/ recharge coupons. The liability for any loss or damage due to fire, burglary, theft etc. is that of the franchisee/distributor. 24. On termination of the agreement, the franchisee/distributor shall continue its operation till the effective date of termination mentioned in the notice. Upon termination, the franchisee/distributor is required to return all advertising and promotional material, etc. to the assessee by the effective date of termination. Further, the assessee is not liable to the franchisee/distributor or any other party for any loss of profits or compensation or prospective profits or on account of any expenditure, etc. in the event of termination. 25. The assessee is to review the minimum subscriptions/targets for prepaid services taking into account market development and potential and other relevant factors. The franchisee/distributor is to employ a fully trained service staff, who have undergone training in accordance to the standards set out by the assessee. The franchisee/distributor will be responsible to collect all necessary agreement/contract forms and other related forms, after obtaining signatures of the customers on the said forms. These ....
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....ed to the assessee by the DoT. In actual practice, the right to use the SIM card and its possession is handed over and given to the end-user, that is, the customer who installs the SIM card in his phone to avail the telecommunication services. Similarly, the franchisees/distributors are to ensure that the post-paid customers/end-users fill up the form as prescribed along with the documents which are given and submitted to the assessee. These are mandates prescribed by the licence issued by the DoT to the assessees. The contractual obligations of the distributors/franchisees, do not reflect a fiduciary character of the relationship, or the business being done on the principal's account. 30. The franchisees/distributors earn their income when they sell the prepaid products to the retailer or the end-user/customer. Their profit consists of the difference between the sale price received by them from the retailer/end-user/customer and the discounted price at which they have 'acquired' the product. Though the discounted price is fixed or negotiated between the assessee and the franchisee/distributor, the sale price received by the franchisee/ distributor is within the sole discretion ....
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.... base fare but not higher. The air carriers were required to furnish a fare list to the Director General of Civil Aviation. The arrangement between the airlines and travel agents was covered by the Passenger Sales Agency Agreement 'PSA', for short, which would set out the conditions under which the travel agent carried out sale of tickets along with other ancillary services. The travel agents were entitled to 7% commission on sale of the tickets for its services as the standard commission based on the price bar set by the IATA. The airlines were deducting tax at source under Section 194-H of the Act on the 7% commission. In addition to the 7% commission, the travel agents were also entitled to additional/supplementary commission on the tickets sold by them. The additional/supplementary commission and the amount at which the tickets were sold were computed by the travel agents and transmitted to the billing and settlement plan (BSP). The BSP, functioning under the aegis of the IATA, managed, inter alia, logistics vis-à-vis payments, and acted as a forum for agents and airlines to examine details pertaining to the sale of the flight tickets. 33.1 This Court examined the ope....
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....en 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." 34. 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. See 5 of the judgment 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 respon....
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....uld include the question of prospective or retrospective application, 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. We do acknowledge that the Central Board of Direct Taxes has on several occasions quelled doubts and issued instructions/circulars 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. 36. Notably, the Delhi High Court in Commissioner of Income Tax v. Singapore Airlines Ltd. (2009) 319 ITR 29 had held that tax under Section 194-H of 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 Del....
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....tute, 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. 39. 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, appo....