Case Law Details
Bharti Cellular Limited Vs ACIT (Supreme Court of India)
In a recent landmark decision, the Supreme Court of India rendered a significant ruling regarding the application of Section 194-H of the Income Tax Act, 1961, in the case of Bharti Cellular Limited Vs ACIT. This ruling has far-reaching implications for cellular service providers and their dealings with franchisees and distributors. Here’s a comprehensive overview of the case and its implications.
Background: The case revolved around whether cellular mobile service providers are liable to deduct tax at source on the income/profit component of payments received by their franchisees/distributors from third parties/customers. Bharti Cellular Limited, the appellant, had entered into franchise/distribution agreements with various parties for its prepaid connections. Under these agreements, they sold startup kits and recharge vouchers at discounted prices to franchisees/distributors, who in turn sold them to customers.
Legal Dispute: The crux of the legal dispute was whether Bharti Cellular Limited was obligated to deduct tax at source under Section 194-H of the Income Tax Act. While some High Courts held in favor of the Revenue’s stance, others disagreed, leading to conflicting judgments. The core argument was whether the relationship between the cellular service provider and the franchisee/distributor constituted that of principal-agent, thereby invoking the provisions of Section 194-H.
Court Observations and Analysis: The Supreme Court meticulously analyzed the contractual relationship between Bharti Cellular Limited and its franchisees/distributors. It emphasized that the obligation to deduct tax at source arises when a principal-agent relationship is established. Referring to Section 182 of the Contract Act, the Court outlined the factors determining such a relationship.
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