The Supreme Court has stated that telecom companies are not legally obligated to deduct Tax Deducted at Source (TDS) on profits earned by distributors or franchisees from selling prepaid coupons and SIM cards to customers. Justices Sanjiv Khanna and S.V. Bhatti delivered this significant ruling on Wednesday regarding appeals filed by the Income Tax Department and telecommunications service provider Bharti Airtel.
Case Overview
This case concerns the applicability of Section 194H of the Income Tax Act, 1961, which pertains to TDS obligations related to commissions payable on income earned by Bharti Airtel’s distributors or franchisees from selling prepaid coupons and SIM cards. The Income Tax Department contended that telecom firms are required to deduct TDS on the profits earned by distributors, as agreed upon in the arrangements between franchisees or distributors and the designated telecom company.
No Mandatory TDS on Distributors’ Profits
Justice Khanna, writing the decision on behalf of the bench, stated that in our opinion, telecom companies as taxpayers would be legally obligated to withhold TDS on income/profit received from third parties, i.e., customers, by distributors or franchisees.
Furthermore, the bench remarked that Section 194H of the Income Tax Act does not apply to the facts and circumstances of this case. This provision mandatorily imposes tax deduction at source only on payments made to a source.
The Income Tax Department had filed appeals against the judgments of the High Courts of Rajasthan, Karnataka, and Bombay. The High Courts had ruled that this section of the Income Tax Act does not apply to the present circumstances.