# Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant Commissioner of Income Tax, Circle 57, Kolkata and Another

- **Citation:** 2024 INSC 148
- **Court:** Supreme Court of India
- **Decided:** 2024-02-28
- **Case number:** Civil Appeal No. 7257 of 2011
- **Bench:** Sanjiv Khanna, S.V.N. Bhatti
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/bharti-cellular-limited-now-bharti-airtel-limited-v-assistant-commissioner-of-37499
- **Pages:** 38

## Headnote

The liability to deduct tax at source u/s.194-H, Income Tax Act,
1961 on the amount which, as per the Revenue, is a commission
payable to an agent by the assessees-cellular mobile telephone
service providers under the franchise/distributorship agreement
between the assessees and the franchisees/distributors.
Headnotes
Income Tax Act, 1961 - s.194-H - When not attracted -
Assessees entered into franchise or distribution agreements
and sold start-up kits, recharge vouchers at a discounted
price to the franchisee/distributors - As per Revenue, the
difference between 'discounted price' and 'sale price' in the
hands of the franchisee/distributors being in the nature of
'commission or brokerage' was the income of the franchisee/
distributors, the relationship between the assessees and the
franchisee/distributor was in the nature of principal and agent,
and thus, the assesses were liable to deduct tax at source
u/s.194-H - As per the assessees, neither the discount was
a 'commission or brokerage' u/Explanation (i) to s.194-H nor
were the franchisees/distributors their agents:
Held: Whether in law the relationship between the parties is that
of principal-agent is answered by applying s.182, Contract Act,
1872 - The obligation to deduct tax at source in terms of s.194-H
arises when the legal relationship of principal-agent is established
- 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 - 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
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[2024] 2 S.C.R.
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retailer/end-user/customer and the discounted price at which
they '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 their sole discretion - Assessee has no say in this
matter - Assessee does not at any stage either pay or credit
the account of the franchisee/distributor with the income by way
of commission or brokerage on which tax at source u/s.194-H is
to be deducted - Expression "direct or indirect" used in s.194-H
Explanation (i) is no doubt meant to ensure that "the person
responsible for paying" does not dodge the obligation to deduct
tax at source, even when the payment is indirectly made by the
principal-payer to the agent-payee however, deduction of tax at
source in terms of s.194-H is not to be extended and widened in
ambit to apply to true/genuine business transactions, where the
assessee is not the person responsible for paying or crediting
income- Assessees neither pay nor credit any income to the
person with whom he has contracted and are not privy to the
transactions between distributors/franchisees and third parties-
It is impossible for the assessees to deduct tax at source and
comply with s.194-H, on the difference between the total/sum
consideration received by the distributors/ franchisees from third
parties and the amount paid by the distributors/franchisees to
them - Payee receives payment when the third party makes the
payment - This payment is not the payment received or payable
by the assessee as the principal - The distributor/franchisee is
not the trustee who is to account for this payment to the assessee
as the principal - Assessees not under 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 - s.194-H not applicable to
the facts and circumstances of this case - Judgments of High
Courts of Delhi and Calcutta set aside. [Paras 6, 29, 31, 34,
36, 37 and 42]
Contract Act, 1872 - s.182 - 'agent' and 'principal' -

## Text

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* Author
[2024] 2 S.C.R. 1001 : 2024 INSC 148
Bharti Cellular Limited (Now Bharti Airtel Limited)
v.
Assistant Commissioner of Income Tax, Circle 57, Kolkata
and Another
(Civil Appeal No. 7257 of 2011)
28 February 2024
[Sanjiv Khanna* and S.V.N. Bhatti, JJ.]
Issue for Consideration
The liability to deduct tax at source u/s.194-H, Income Tax Act,
1961 on the amount which, as per the Revenue, is a commission
payable to an agent by the assessees-cellular mobile telephone
service providers under the franchise/distributorship agreement
between the assessees and the franchisees/distributors.
Headnotes
Income Tax Act, 1961 - s.194-H - When not attracted -
Assessees entered into franchise or distribution agreements
and sold start-up kits, recharge vouchers at a discounted
price to the franchisee/distributors - As per Revenue, the
difference between 'discounted price' and 'sale price' in the
hands of the franchisee/distributors being in the nature of
'commission or brokerage' was the income of the franchisee/
distributors, the relationship between the assessees and the
franchisee/distributor was in the nature of principal and agent,
and thus, the assesses were liable to deduct tax at source
u/s.194-H - As per the assessees, neither the discount was
a 'commission or brokerage' u/Explanation (i) to s.194-H nor
were the franchisees/distributors their agents:
Held: Whether in law the relationship between the parties is that
of principal-agent is answered by applying s.182, Contract Act,
1872 - The obligation to deduct tax at source in terms of s.194-H
arises when the legal relationship of principal-agent is established
- 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 - 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
1002
[2024] 2 S.C.R.
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retailer/end-user/customer and the discounted price at which
they '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 their sole discretion - Assessee has no say in this
matter - Assessee does not at any stage either pay or credit
the account of the franchisee/distributor with the income by way
of commission or brokerage on which tax at source u/s.194-H is
to be deducted - Expression "direct or indirect" used in s.194-H
Explanation (i) is no doubt meant to ensure that "the person
responsible for paying" does not dodge the obligation to deduct
tax at source, even when the payment is indirectly made by the
principal-payer to the agent-payee however, deduction of tax at
source in terms of s.194-H is not to be extended and widened in
ambit to apply to true/genuine business transactions, where the
assessee is not the person responsible for paying or crediting
income- Assessees neither pay nor credit any income to the
person with whom he has contracted and are not privy to the
transactions between distributors/franchisees and third parties-
It is impossible for the assessees to deduct tax at source and
comply with s.194-H, on the difference between the total/sum
consideration received by the distributors/ franchisees from third
parties and the amount paid by the distributors/franchisees to
them - Payee receives payment when the third party makes the
payment - This payment is not the payment received or payable
by the assessee as the principal - The distributor/franchisee is
not the trustee who is to account for this payment to the assessee
as the principal - Assessees not under 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 - s.194-H not applicable to
the facts and circumstances of this case - Judgments of High
Courts of Delhi and Calcutta set aside. [Paras 6, 29, 31, 34,
36, 37 and 42]
Contract Act, 1872 - s.182 - 'agent' and 'principal' - Whether
a legal relationship of a principal and agent exists, factors
to be taken into consideration:
Held: (a) The essential characteristic of an agent is the legal
power vested with the agent to alter his principal's legal
[2024] 2 S.C.R.
1003
Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant
Commissioner of Income Tax, Circle 57, Kolkata and Another
relationship with a third party and the principal's co-relative
liability to have his relations altered - (b) As the agent acts
on behalf of the principal, one of the prime elements of the
relationship is the exercise of a degree of control by the principal
over the conduct of the activities of the agent - This degree of
control is less than the control exercised by the master on the
servant, and is different from the rights and obligations in case
of principal to principal and independent contractor relationship
- (c) The task entrusted by the principal to the agent should
result in a fiduciary relationship - The fiduciary relationship is
the manifestation of consent by one person to another to act
on his or her behalf and subject to his or her control, and the
reciprocal consent by the other to do so - (d) As the business
done by the agent is on the principal's account, the agent is liable
to render accounts thereof to the principal - An agent is entitled
to remuneration from the principal for the work he performs for
the principal - Other relevant aspects/considerations, discussed.
[Paras 8, 9]
Income Tax Act, 1961 - Explanation (i) to s.194-H:
Held: The words "direct" or "indirect" in Explanation (i) to s.194-H
are with reference to the act of payment - The legislative intent
to include "indirect" payment ensures that the net cast by the
section is plugged and not avoided or escaped, albeit it does not
dilute the requirement that the payment must be on behalf "the
person responsible for paying"- This means that the payment/
credit in the account should arise from the obligation of "the person
responsible for paying" - The payee should be the person who
has the right to receive the payment from "the person responsible
for paying" - Further, explanation (i) to s.194-H, by using the
word "indirectly", does not regulate or curtail the manner in which
the assessee can conduct business and enter into commercial
relationships - Neither does the word "indirectly" create an
obligation where the main provision does not apply - The tax
legislation recognises diverse relationships and modes in which
commerce and trade are conducted, albeit obligation to tax at
source arises only if the conditions as mentioned in s.194-H
are met and not otherwise - This principle does not negate the
compliance required by law - Latter portion of the Explanation
(i) to s.194-H is a requirement and a pre-condition - It should
not be read as diminishing or derogating the requirement of
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the principal and agent relationship between the payer and the
recipient/payee. [Paras 4, 5 and 34]
Income Tax Act, 1961 - Issue as regards the liability to
deduct tax at source u/s.194-H 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 -
Plea of the Revenue relying upon the decision of this Court
in Singapore Airlines Ltd. and Another v. Commissioner of
Income Tax [2022] 9 SCR 1 that assessees would be liable
to deduct tax at source even if they are not making payment
or crediting the income to the account of the franchisee/
distributor:
Held: Rejected - When the obligation, and the time and manner
in which the tax is mandated by law to be deducted at source, is
fixed by the statute, 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 s.119 - Decision in Singapore
Airlines Limited can not be read in the manner as suggested by
the Revenue. [Para 38]
Franchise agreement and distributorship agreement -
Distinction - Legal position of a distributor different from
agent - Distributor, an independent contractor:
Held: Legal position of a distributor, it is to be generally regarded
as different from that of an agent - The distributor buys goods
on his account and sells them in his territory - In such cases,
distributor 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 - Franchise agreements
are normally considered as sui generis, though they have
been in existence for some time - They provide a mechanism
whereby goods and services may be distributed - In franchise
agreements, the supplier or the manufacture, i.e. a franchisor,
appoints an independent enterprise as a franchisee through
whom the franchisor supplies certain goods or services - There
is a close relationship between a franchisor and a franchisee
because a franchisee's operations are closely regulated, and this
possibly is a distinction between a franchise agreement and a
[2024] 2 S.C.R.
1005
Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant
Commissioner of Income Tax, Circle 57, Kolkata and Another
distributorship agreement - Franchise agreements are extremely
detailed and complex - Notwithstanding the strict restrictions
placed on the franchisees, the relationship may in a given case
be that of an independent contractor - Facts of each case and
the authority given by 'principal' to the franchisees matter and
are determinative - Further, an independent contractor is free
from control on the part of his employer, and is only subject to
the terms of his contract - But an agent is not completely free
from control, and the relationship to the extent of tasks entrusted
by the principal to the agent are fiduciary - As contract with an
independent agent depends upon the terms of the contract,
sometimes an independent contractor looks like an agent from
the point of view of the control exercisable over him, but on an
overview of the entire relationship the tests specified in clauses
(a) to (d) in paragraph 8 may not be satisfied - The distinction
is that independent contractors work for themselves, even when
they are employed for the purpose of creating contractual relations
with the third persons - An independent contractor is not required
to render accounts of the business, as it belongs to him and not
his employer. [Paras 39, 40]
Law relating to agency - Exclusion of servants and
independent contractors:
Held: 'Agent' denotes a relationship that is very different from that
existing between a master and his servant, or between a principal
and principal, or between an employer and his independent
contractor - Although servants and independent contractors are
parties to relationships in which one person acts for another, and
thereby possesses the capacity to involve them in liability, yet
the nature of the relationship and the kind of acts in question
are sufficiently different to justify the exclusion of servants and
independent contractors from the law relating to agency - 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 s.194-H of the
Income Tax Act, 1961. [Para 41]
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Doctrine/Principles - Doctrine of presumption against
doubtful penalisation:
Held: The deduction of tax provisions should be programmatically
and realistically construed - In case of a legal or factual doubt in a
given case, the assessee can rely on the doctrine of presumption
against doubtful penalisation - Whether or not the said doctrine
should be applied 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. [Para 35]
Words and expressions - 'power'; 'authority'.
Case Law Cited
Singapore Airlines Ltd. and Another v. Commissioner
of Income Tax, [2022] 9 SCR 1 : (2023) 1 SCC 497 -
dsitinguished.
Bhopal Sugar Industries Limited v. Sales Tax Officer,
Bhopal, [1977] 3 SCR 578 : (1977) 3 SCC 147;
Commissioner of Income Tax, Ahmedabad and Others v.
Ahmedabad Stamp Vendors Association, (2014) 16 SCC
114; Ahmedabad Stamp Vendors Association v. Union of
India, (2002) 257 ITR 202 (Guj.); Director, Prasar Bharati
v. Commissioner of Income Tax, Thiruvananthapuram,
[2018] 3 SCR 287 : (2018) 7 SCC 800; Securities
and Exchange Board of India v. Sunil Krishna Khaitan
and Others, [2022] 18 SCR 987 : (2023) 2 SCC 643
- referred to.
Commissioner of Income Tax v. Singapore Airlines Ltd.,
(2009) 319 ITR 29 - referred to.
Labreche v. Harasymiw, (1992) 89 DLR (4th) 95 at
107 - referred to.
Books and Periodicals Cited
F.E. Dowrick, The Relationship of Principal and Agent,
17 MLR 24, 37 (1954); Restatement (Third) Of Agency
(American Law Institute Publishers 2007); Warren A.
[2024] 2 S.C.R.
1007
Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant
Commissioner of Income Tax, Circle 57, Kolkata and Another
Seavey, The Rationale of Agency, 29 YALE L.J. 859,
866 (1920); G.H.L. Fridman, The Law of Agency 33
(Butterworths, 7 ed. 1996) - referred to.
List of Acts
Income Tax Act, 1961; Contract Act, 1872; Indian Telegraph Act,
1885.
List of Keywords
Liability to deduct tax at source; Cellular mobile telephone service
providers; Agent; Principal; Franchise/distributorship agreement;
Commission; Brokerage; Power; Authority; Fiduciary character of
the relationship; Servants; Independent contractor; Independent
agent; Law relating to agency; Doctrine of presumption against
doubtful penalisation.
Case Arising From
CIVIL APPELLATE JURISDICTION : Civil Appeal No.7257 of 2011
With
Civil Appeal Nos. 2652-2653, 4949-4950, 4947-4948 of 2015, 7455
of 2018, 111, 2860 of 2021, 8902 of 2022, 7729, 7735, 7736, 7737,
7738, 7739, 7740, 7741, 7742, 7743, 7679, 7680, 7681, 7682, 7744,
7745, 7746, 7747, 7748, 7848, 7849, 7852, 7853, 7854, 7855, 7856,
7857, 7859 of 2023, 3514, 3515, 3516 And 3517 of 2024
From the Judgment and Order dated 19.05.2011 of the High Court at
Calcutta in ITA No.222 of 2006
Appearances for Parties
Balbir Singh, N. Venkatraman, A.S.Gs., Arvind P. Datar, Ajay Vohra,
Arijit Prasad, Kavin Gulati, Sr. Advs., Kumar Visalaksh, Udit Jain,
Archit Gupta, Arihant Tater, Ajitesh Dayal Singh, Praveen Kumar,
Harish Pandey, Raj Bahadur Yadav, Digvijay Dam, V.C. Bharathi,
Santosh Kumar, Rupesh Kumar, Prahlad Singh, Alka Agarwal, Ms.
Ankita Anilkumar Singh, Deepak Kumar, Indrajit Prasad, Shyam
Gopal, Aditya Rathore, Naman Tandon, Samarvir Singh, Prasenjeet
Mohapatra, Sachit Jolly, Ms. Anuradha Dutt, Ms. Disha Jham, Ms.
Soumya Singh, Ms. B. Vijayalakshmi Menon, Abhishek Vikas, Mahesh
Agarwal, Rishi Agrawala, Ms. Sayree Basu Mullick, Ms. Madhvi
Agarwal, M.S. Ananth, Ms. Sayree Basu Mullik, Abhinabh Garg, E.C.
Agrawala, Advs. for the appearing parties.
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Judgment / Order of the Supreme Court
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, 19611 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 franchisees/distributors,
nor are the franchisees/distributors their agents. The High Courts
of Delhi and Calcutta have held that the assessees were liable
to deduct tax at source under Section 194-H of the Act, whereas
the High Courts of Rajasthan, Karnataka and Bombay have held
that Section 194-H of the Act is not attracted to the circumstances
under consideration.
2.
To avoid prolixity and repetition, we are not referring to the facts
and arguments in the beginning, and will preface our judgment by
reproducing Section 194-H of the Act and explaining its contours.
The relevant portion of Section 194-H reads as under:
"194-H. Commission or brokerage.- Any person, not
being an individual or a Hindu undivided family, who is
responsible for paying, on or after the 1st day of June,
2001, to a resident, any income by way of commission (not
being insurance commission referred to in Section 194-D)
or brokerage, shall, at the time of credit of such income
to the account of the payee or at the time of payment of
such income in cash or by the issue of a cheque or draft
or by any other mode, whichever is earlier, deduct income
tax thereon at the rate of five per cent:
Provided that no deduction shall be made under this
section in a case where the amount of such income or,
1
 "The Act", for short.
[2024] 2 S.C.R.
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Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant
Commissioner of Income Tax, Circle 57, Kolkata and Another
as the case may be, the aggregate of the amounts of
such income credited or paid or likely to be credited or
paid during the financial year to the account of, or to, the
payee, does not exceed fifteen thousand rupees:
Provided further that an individual or a Hindu undivided
family, whose total sales, gross receipts or turnover from
the business or profession carried on by him exceed one
crore rupees in case of business or fifty lakh rupees in
case of profession during the financial year immediately
preceding the financial year in which such commission
or brokerage is credited or paid, shall be liable to deduct
income tax under this section.
Provided also that no deduction shall be made under this
section on any commission or brokerage payable by Bharat
Sanchar Nigam Limited or Mahanagar Telephone Nigam
Limited to their public call office franchisees.
xx
xx
xx"
3.
Section 194-H of the Act imposes the obligation to deduct tax at
source, states that any person responsible for paying at the time of
credit or at the time of payment, whichever is earlier, to a resident 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 of the Act. As per
2
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-resident Indian or for crediting
such sum of his Non-resident (External) Account maintained in accordance with the Foreign Exchange Management Act, 1999 (42 of 1999)], and any rules made thereunder;
(ii-b) in the case of furnishing of information relating to payment to a non-resident, not being a company,
or to a foreign company, of any sum, whether or not chargeable under the provisions of this Act,
the payer himself, or, if the payer is a company, the company itself including the principal officer
thereof;
(iii)
in the case of credit or, as the case may be, payment of any other sum chargeable under the provisions of this Act, the payer himself, or, if the payer is a company, the company itself including the
principal officer thereof.
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the clause (iii) of Section 204, in the case of credit or in the case of
payment in cases not covered by clauses (i), (ii), (ii)(a), (ii)(b), "the
person responsible for paying" is the payer himself, or if the payer
is a company, the company itself and the principal officer thereof.
4.
Explanation (i) to Section 194-H3 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 of another person for services
rendered (not being professional services) or for any
services in the course of buying or selling of goods
or in relation to any transaction relating to any asset,
valuable article or thing, not being securities;"
Payment is received when it is actually received or
paid. The payment is receivable when the amount
is actually credited in the books of the payer to the
account of the payee, though the actual payment
may take place in future. The payment received or
(iv)
in the case of credit, or as the case may be, payment of any sum chargeable under the provisions
of this Act made by or on behalf of the Central Government or the Government of a State, the drawing and disbursing officer or any other person, by whatever name called, responsible for crediting,
or as the case may be, paying such sum.
(v)
in the case of a person not resident in India, the person himself or any person authorised by such
person or the agent of such person in India including any person treated as an agent under Section 163.]
Explanation. -For the purposes of this section, -
(a)
"non-resident Indian" and "foreign exchange asset" shall have the meanings assigned to them in
Chapter XII-A;
(b)
"authorised person" shall have the meaning assigned to it in clause (c) of Section 2 of the Foreign
Exchange Management Act, 1999 (42 of 1999).
3
Sub-section 1 to Section 194-H of the Act can be interpreted as requiring deduction of tax at source on
commission and brokerage, even when the principal and agent relationship does not exist between the
parties. Explanation (i) to Section 194-H of the Act can be read as expanding and widening the scope of
the provision of sub-section (1) to include in the ambit of brokerage and commission, payments made
by the principal to the agent, 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-catchcan 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.)
[2024] 2 S.C.R.
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Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant
Commissioner of Income Tax, Circle 57, Kolkata and Another
receivable should be to a person acting on behalf of
another person. The words "another person" refers to
"the person responsible for paying". The words "direct"
or "indirect" in Explanation (i) to Section 194-H of the
Act are with reference to the act of payment. Without
doubt, the legislative intent to include "indirect" payment
ensures that the net cast by the section is plugged
and not avoided or escaped, albeit it does not dilute
the requirement that the payment must be on behalf
"the person responsible for paying". This means that
the payment/credit in the account should arise from
the obligation of "the person responsible for paying".
The payee should be the person who has the right to
receive the payment from "the person responsible for
paying". When this condition is satisfied, it does not
matter if the payment is made "indirectly".4
5.
The services rendered by the agent to the principal, according to the
latter portion of Explanation (i) to Section 194-H of the Act, should
not be in the nature of professional services. Further, Explanation
(i) to Section 194-H of the Act restricts application of Section 194H of the Act to the services rendered by the agent to the principal
in the course of buying and selling of goods, or in relation to any
transaction relating to any asset, valuable article, or thing, not being
securities. The latter portion of the Explanation (i) to Section 194H of the Act is a requirement and a pre-condition. It should not be
read as diminishing or derogating the requirement of the principal
and agent relationship between the 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.5 The law of agency is technical. Whether in law the
relationship between the parties is that of principal-agent is answered
4
We are unable to visualize 'indirect' credit in the books of the payer to the account of the payee. Credit
entry is required even in cases of set-off. Nevertheless, this judgment should not be read as laying down
that 'indirect' credit in the books shall not require deduction of tax under Section 194-H of the Act.
5
Singapore Airlines Ltd. and Another v. Commissioner of Income Tax, [2022] 9 S.C.R. 1 : (2023) 1 SCC
497, ¶¶ 23-29.
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by applying Section 182 of the Contract Act, 18726. 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
whom such act is done, or who is so represented, is called
the "principal"."
Agency in terms of Section 182 exists when the principal employs
another person, who is not his employee, to act or represent
him in dealings with a third person. An agent renders services
to the principal. The agent does what has been entrusted to him
by the principal to do. It is the principal he represents before
third parties, and not himself. As the transaction by the agent
is on behalf of the principal whom the agent represents, the
contract is between the principal and the third party. Accordingly
the agent, except in some circumstances, is not liable to the
third party.
8.
Agency is therefore a triangular relationship between the principal,
agent and the third party. In order to understand this relationship,
one has to examine the inter se relationship between the principal
and the third party and the agent and the third party. When we
examine whether a legal relationship of a principal and agent exists,
the following factors/aspects should be taken into consideration:
(a) The essential characteristic of an agent is the legal power
vested with the agent to alter his principal's legal relationship
with a third party and the principal's co-relative liability to have
his relations altered.7
6
"Contract Act", for short.
7
F.E. Dowrick, The Relationship of Principal and Agent, 17 MLR 24, 37 (1954).
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Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant
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(b)
As the agent acts on behalf of the principal, one of the prime
elements of the relationship is the exercise of a degree of control
by the principal over the conduct of the activities of the agent. This
degree of control is less than the control exercised by the master on
the servant, and is different from the rights and obligations in case
of principal to principal and independent contractor relationship.
(c)
The task entrusted by the principal to the agent should result
in a fiduciary relationship. The fiduciary relationship is the
manifestation of consent by one person to another to act on
his or her behalf and subject to his or her control, and the
reciprocal consent by the other to do so.8
(d) As the business done by the agent is on the principal's account,
the agent is liable to render accounts thereof to the principal.
An agent is entitled to remuneration from the principal for the
work he performs 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. Lastly, the substance of the relationship between
the parties, notwithstanding the nomenclature given by the parties
to the relationship, is of primary importance. The true nature of the
relationship is examined by reference to the functions, responsibility
8
Restatement (Third) of Agency (American Law Institute Publishers 2007).
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and obligations of the so-called agent to the principal and to the
third parties.
10. An agent is distinct from a servant, in that an agent is subject to
less control than a servant, and has complete, or almost complete
discretion as to how to perform an undertaking. As Seavey said, ''a
servant (...) is an agent under more complete control than is a nonservant''.9 The difference is "in the degree of control rather than in
the acts performed. The servant sells primarily his services measured
by time; the agent his ability to produce results."10 This distinction
can be criticised, for servants may have very wide discretion, and
may not really be subject to control at all in practice, while agents
may have their power to act circumscribed by detailed instructions.11
11. This Court in Bhopal Sugar Industries Limited v. Sales Tax Officer,
Bhopal12, has expounded the difference between principal-agent and
principal-principal relationship, in the following words:-
"5. ... the essence of the matter is that in a contract of sale,
title to the property passes on to the buyer on delivery of the
goods for a price paid or promised. Once this happens the
buyer becomes the owner of the property and the seller has no
vestige of title left in the property. The concept of a sale has,
however, undergone a revolutionary change, having regard
to the complexities of the modern times and the expanding
needs of the society, which has made a departure from the
doctrine of laissez faire by including a transaction within the
fold of a sale even though the seller may by virtue of an
agreement impose a number of restrictions on the buyer, e.g.
fixation of price, submission of accounts, selling in a particular
area or territory and so on. These restrictions per se would
not convert a contract of sale into one of agency, because
in spite of these restrictions the transaction would still be a
sale and subject to all the incidents of a sale. A contract of
agency, however, differs essentially from a contract of sale
inasmuch as an agent after taking delivery of the property
9
Warren A. Seavey, The Rationale of Agency, 29 YALE L.J. 859, 866 (1920).
10
Ibid.
11
G.H.L. Fridman, The Law of Agency 33 (Butterworths, 7 ed. 1996).
12
[1977] 3 SCR 578 : (1977) 3 SCC 147.
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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 authorised to sell or buy on behalf of the principal, whereas the
essence of contract of sale is the transfer of title of goods for the
price paid or promised to be paid. In case of an agency to sell, the
agent who sells them to the third parties, sells them not as his own
property, but as a property of the principal, who continues to be the
owner of the goods till the sale. The transferee is the debtor and
liable to account for the price to be paid to the principal, and not to
the agent for the proceeds of the sale. An agent is entitled to his
fee or commission from the principal.
13. This distinction and test was referred to by this Court in Commissioner
of Income Tax, Ahmedabad and Others v. Ahmedabad Stamp
Vendors Association13, which is a case relating to Section 194-H
of the Act. This Court had approved the decision of the High Court
in Ahmedabad Stamp Vendors Association v. Union of India14.
We may also refer to two more decisions of this Court. In the case
13
(2014) 16 SCC 114.
14
(2002) 257 ITR 202 (Guj.).
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of Director, Prasar Bharati v. Commissioner of Income Tax,
Thiruvananthapuram15, this Court has observed that the explanation
appended to Section 194-H of the Act defining the expression
'commission or brokerage' is an inclusive definition giving wide
meaning to the expression 'commission'. The second decision is
in the case of Singapore Airlines Limited v. Commissioner of
Income Tax, Delhi16, which we shall refer to subsequently in some
detail as to its exact purport and ratio. However, at this stage, we
would like to examine in some detail commercial relationships in
the nature of an independent contractor, that are legally, principal
to principal dealings.
14. The passage from Bhopal Sugar Industries Limited (supra)
highlights the principles and the complexities involved in determining
the correct nature of the legal relationship between a principal and
an agent. Law permits individuals to enter into complex contracts
incorporating multiple rights and obligations. The relationships
between contacting parties have become multi-dimensional, which
may not strictly fall within an employer-employee, principal-agent or
principal-principal relationship. A singular contract may create different
legal relationships and obligations. Independent contractors on
occasion act for themselves, and at other times may be creating legal
relations 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. Harasymiw17, 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 agent18. 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
15
[2018] 3 SCR 287 : (2018) 7 SCC 800.
16
[2022] 9 SCR 1 : (2023) 1 SCC 497.
17
(1992) 89 DLR (4th) 95 at 107.
18
 See ¶8 of the judgment.
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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 the parties is considered in
terms of law, regardless of the language or nomenclature used by the
parties. The true factual position must be investigated to determine
whether a relationship of agency has come into existence between
a set of parties or individuals.
16. The significant observation in the aforesaid judgment is that all kinds
of interactions with third parties or interested parties, resulting from
the introduction of the third parties with one who wishes a particular
undertaking to be performed, may not be a result of an agency. For
instance, a retail dealer or supplier of goods, obtains goods from
a wholesale supplier or a manufacturer for subsequent resale to
retail customers or suppliers who, in turn, deals with retail dealers
or shopkeepers.