No TDS on Payments Received by Distributors/Franchisees from Third Parties

Vodafone Idea Limited Vs CIT (Calcutta High Court)

The case of Vodafone Idea Limited Vs CIT (Calcutta High Court) addresses the significant issue of tax deduction at source (TDS) obligations under the Income Tax Act on payments received by distributors and franchisees. This case, pertaining to the assessment years 2012-13 and 2013-14, raised crucial questions about the applicability of Section 194H of the Income Tax Act, 1961.

Vodafone Idea Limited (Vi) challenged the application of Section 194H of the Income Tax Act, which mandates TDS on commission or brokerage payments. The specific contention was whether the discount allowed to distributors for pre-paid sim cards and recharge coupons constituted commission, thereby requiring TDS deduction. The appeal raised two substantial questions of law:

1. Whether Vodafone Idea Limited was obligated to deduct TDS on discounts provided to distributors under Section 194H?

2. Whether Vodafone Idea Limited could be deemed an assessee in default Under Section 201 for not complying with Section 194H, thereby incurring liability for tax or interest?

The case heavily referenced the Supreme Court’s judgment in Bharti Cellular Limited (now Bharti Airtel Limited) Vs. Assistant Commissioner of Income Tax. In this precedent, the Supreme Court concluded that cellular service providers were not required to deduct TDS under Section 194H on the income or profit components received by distributors from third parties or customers.

The Calcutta High Court, acknowledging the Supreme Court’s ruling in the Bharti Cellular Limited case, aligned its decision accordingly. The Court found that the relationship between Vi and its distributors, as well as the nature of the transactions, did not necessitate the application of Section 194H. The Court answered both substantial questions of law in favor of Vi, effectively ruling that:

• Vi was not required to deduct TDS on the discounts provided to distributors for pre-paid sim cards and recharge coupons.
• Vi could not be considered an assessee in default under Section 201 for non-compliance with Section 194H, and thus, no tax or interest could be demanded.

This ruling provides significant relief to telecom companies by clarifying that discounts offered to distributors for pre-paid services do not attract TDS under Section 194H. It also sets a precedent for similar cases, ensuring that telecom operators are not unduly burdened by TDS obligations on distributor transactions.

The Vodafone Idea Limited Vs CIT case underscores the importance of judicial clarity on tax matters affecting large-scale industries like telecommunications. By following the Supreme Court’s precedent, the Calcutta High Court has reinforced the position that TDS obligations under Section 194H do not apply to discounts given to distributors.

FULL TEXT OF THE JUDGMENT/ORDER OF CALCUTTA HIGH COURT

1. Sachit Jolly, learned Counsel appears for the appellant through video conference and Smt. Smita Das the, learned standing Counsel appears for the respondent.

2. The matter relates to assessment years 2012-13 and 2013-14.

3. The appeal has been admitted by this Court by order dated 12.12.2018 on the following substantial questions of law:

a) Whether having regard to the relationship between the appellant and its distributors and course of dealings between them, the appellant was required to comply with the provisions of section 194H of the Income Tax Act, 1961 relating to tax deduction at
source with reference to the discount allowed to the distributors in respect of pre-paid sim cards and pre-paid vouchers/recharge coupons?

b) Whether the appellant can be deemed to be an assessee in default under section 201 for non­compliance with section 194H and any tax or interest can be demanded from it?

4. Both the learned Counsel for the parties jointly state that the controversy is covered by the judgment of Hon’ble Supreme Court dated 28.2.2024 in civil appeal 7257 of 2011 [Bharti Cellular Limited(Now Bharti Airtel Limited) Vs. Assistant Commissioner of Income Tax Circle-57, Kolkata and Anr.] and in view thereof, both the substantial questions of law deserve to be answered in favour of the assessee and against the revenue.

5. We find that in the case of Bharti Cellular Limited (Supra), Hon’ble Supreme Court concluded as under:

“In view of the aforesaid discussion, 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 194-H of the Act is not applicable to the facts and circumstances of this case. Accordingly, the appeals filed by the assessee-cellular mobile service providers, challenging the judgments of the High Courts of Delhi and Calcutta are allowed and these judgments are set aside. The appeals filed by the Revenue challenging the judgments of High Courts of Rajasthan, Karnataka and Bombay are dismissed. There would be no orders as to cost. Pending applications, if any, shall stand disposed of.”

6. Following the aforesaid judgment in the case of Bharti Cellular Limited (Supra) and also as stated jointly by learned Counsel for the parties, the substantial questions of law are answered in favour of the assessee and against the revenue.

7. The appeal is dismissed.