Telecom cos not liable to TDS for selling pre-paid SIM cards to distributors: Supreme Court

New Delhi: In a significant judgment, the Supreme Court on Wednesday declared that telecom companies are not liable to deduct tax at source on income or profit in the payments received for selling pre-paid SIM cards from their distributors at a rate below the market price. 

A bench of Justices Sanjiv Khanna and S V N Bhatti allowed appeal filed by Bharti Airtel Limited and others and set aside judgements by Delhi and Calcutta high courts.

The judgment came as big relief to telecom companies like Bharti Airtel Ltd and Vodafone Idea Ltd.

In its judgment, the bench said, "We hold that the assessees (telecom companies) 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."

Dealing with a batch of 40 appeals by telecom companies and the income-tax department, the bench said that Section 194H of the Income Tax Act, 1961, was not applicable to the facts and circumstances of this case. 

"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," the bench said.

Under Section 194H of the Act, tax is imposed on the earnings generated through commission or brokerage.   

The court dealt with the issue of whether telecom companies should deduct tax at source on the discounts offered to distributors for the sale of SIM cards and recharge vouchers. 

The Income Tax department, for its part, had said that the relationship between the telecom firms and distributors was like a principal to an agent. 

The tax department said that the lower price at which the distributors get the SIM card starter-pack is to be treated as commission for the purpose of taxation. 

However, telecom companies said that they are not paying a commission or brokerage to the distributors, and the distributors are not their agents. The lower price offered should be treated as a discount and not a commission for the purpose of the income-tax Act, they said.

The court, while deciding the issue, also dismissed the appeals by the revenue department challenging the judgements of Rajasthan, Karnataka and Bombay.