In a landmark judgment, the Supreme Court of India has established a critical clarification regarding the tax obligations of companies and their distributors or franchisees. Through the case of Bharti Cellular Ltd. vs. Assistant Commissioner of Income-tax, Circle 57, decided on February 28, 2024, the court ruled that companies are not required to deduct tax at source (TDS) under section 194H of the Income-tax Act, 1961, on the income or profits earned by their distributors or franchisees from the sale of prepaid products, such as coupons or starter-kits.
This decision addresses a long-standing ambiguity over whether the commission or income earned by distributors from selling these prepaid products should be subject to TDS deduction by the companies supplying these products. The Supreme Court's judgment brings clarity to this matter with several key observations:
Autonomy in Pricing: The court noted that the sale price of prepaid products set by distributors or franchisees is determined independently, without interference from the companies. This autonomy in pricing was a significant factor in distinguishing the nature of their relationship from that of a principal-agent.
Nature of the Relationship: The agreements and operational practices between the companies and their distributors/franchisees do not reflect a fiduciary relationship where one acts on behalf of the other. Instead, the relationship is more akin to that of independent contractors or franchisees who purchase and then resell the products.
Legal Position and Rights: Unlike agents, distributors, and franchisees do not serve as intermediaries creating a connection between the principal (company) and third parties (customers or retailers). Their legal standing is distinct, possessing rights more similar to that of a franchisee, which involves a higher degree of independence in conducting sales.
This ruling signifies a notable shift in understanding the tax liabilities concerning the distribution and sale of prepaid products. By establishing that such income or profit does not attract TDS under section 194H, the Supreme Court has provided substantial relief and legal clarity to businesses and their distribution networks. This decision is expected to have a wide-ranging impact, particularly for companies involved in the sale of prepaid telecommunication products, by simplifying their tax compliance requirements and affirming the independence of distributors and franchisees in setting their sale strategies and pricing.
