SC rules discount on prepaid SIM cards and recharge coupon vouchers not liable for withholding as commission or brokerage

This Tax Alert summarizes the recent Supreme Court (SC) decision in a batch of appeals with lead case being that of Bharti Cellular Ltd. v ACIT[1]  (Taxpayer). The issue before the SC was whether discount allowed to distributors on print price of prepaid SIM cards and recharge coupon vouchers by the telecom operators can trigger withholding tax obligation under the provisions of the Indian Tax Laws (ITL). 

The controversy was dealt with by an array of High Court decisions with divergent views and hence petitions were filed before the SC.

While adjudicating on the issue, the SC has elucidated factors for determining principal-agent and principal-principal relationship. Importantly, it laid down four factor tests to qualify as agent viz. (a) presence of legal power of agent to legally bind the principal with third party, (b) principal exercising certain degree of control over the conduct of agent, (c) fiduciary relationship between them, (d) liability of agent to render accounts to principal and entitlement to receive remuneration from the principal. 

On the facts of the lead case, after noting the terms of the distribution agreement in case of prepaid vouchers, the SC ruled that there was no principal-agent relationship between the distributors and the Taxpayer, as the distributors were required to purchase the SIM cards, vouchers at discounted price. The distributors had the right to sell the same at any price below the printed price at their discretion and were also not required to render any accounts to the Taxpayer. Further, there existed no fiduciary relationship between the distributors and the Taxpayer. 

Further, the SC held that the withholding tax provision of the ITL is not applicable in the hands of the Taxpayer as it has not credited or paid any income to the distributors in nature of commission. The SC made it clear that profit earned by resale of SIM card cannot be regarded as an event leading to indirect payment by telecom company to the distributors.

Further, since the Taxpayer was not privy to contract between distributors and retailers or end customers, it was impossible for the Taxpayer to withhold tax at source. The SC also noted that in absence of a statutory mandate, the Taxpayer cannot be obligated to collect information of discount from distributor which is a far-fetched requirement imposing unfair obligation and inconvenience.

Additionally, the SC observed that in order to reduce litigation, the Central Board of Direct Taxes (CBDT) should issue appropriate instructions/circulars which are clear and prospective to clarify the doubts on issues arising in withholding tax provision after adopting consultative approach.

[1] (Civil Appeal No. 7257 of 2011)