In a significant decision, the Supreme Court has ruled that telecom companies are not legally obliged to deduct Tax Deducted at Source (TDS) on the profits earned by distributors or franchisees from selling prepaid coupons and SIM cards to customers. Justices Sanjiv Khanna and S.V. Bhatti pronounced this crucial verdict on Wednesday on appeals filed by the Income Tax Department and telecom service provider Bharti Airtel.
Case Background
The issue at hand revolves around the applicability of Section 194H of the Income Tax Act, 1961, concerning TDS obligations related to commission payments earned by Bharti Airtel’s distributors or franchisees on income derived from selling prepaid coupons and SIM cards to consumers. The Income Tax Department argued that distributors earn a commission from predetermined arrangements between telecom firms and agents.
TDS Not Mandatory on Distributors’ Profits
Justice Khanna, writing the decision on behalf of the bench, stated, “We are of the view that telecom companies, as payers, are legally obligated to deduct TDS on income/profit received from third parties, i.e., customers, by distributors or franchisees.” Additionally, the bench remarked that Section 194H of the Income Tax Act does not apply to the facts and circumstances of this case. This section mandatorily imposes TDS on commission payments at the source.
The Income Tax Department had filed appeals against rulings of the High Courts of Rajasthan, Karnataka, and Bombay. These High Courts had held that this section of the Income Tax Act does not apply to the circumstances under consideration.
