+ Ita 137/2023 Unitech Wireless Tamil Nadu Pvt Ltd v. Commissioner Of Income Tax & Ors

$~4 & 5, 32 & 33 IN THE HIGH COURT OF DELHI AT NEW DELHI+ ITA 137/2023 UNITECH WIRELESS TAMIL NADU PVT LTD UNITECH WIRELESS TAMIL NADU PVT LTD ..... Appellant Through: Ms. M. Bajpai, Mr. Priyam Bhatnagar, Advs. Bhatnagar, Advs. versus COMMISSIONER OF INCOME TAX & ORS. ..... Respondent Through: Mr. Sanjeev Menon, Adv. 5 + ITA 138/2023 UNITECH WIRELESS TAMIL NADU PVT LTD UNITECH WIRELESS TAMIL NADU PVT LTD ..... Appellant Through: Ms. M. Bajpai, Mr. Priyam Bhatnagar, Advs. Bhatnagar, Advs. versus COMMISSIONER OF INCOME TAX & ORS. ..... Respondent Through: Mr. Sanjeev Menon, Adv. 32 + ITA 20/2023 UNITECH WIRELESS TAMIL NADU PVT LTD UNITECH WIRELESS TAMIL NADU PVT LTD ..... Appellant Through: Ms. M. Bajpai, Mr. Priyam Bhatnagar, Advs. Bhatnagar, Advs. versus COMMISSIONER OF INCOME TAX & ORS. ..... Respondent Through: Mr. Sanjeev Menon, Adv. 33 + ITA 76/2023 UNITECH WIRELESS TAMIL NADU PVT LTD UNITECH WIRELESS TAMIL NADU PVT LTD ..... Appellant Through: Ms. M. Bajpai, Mr. Priyam Bhatnagar, Advs. versus COMMISSIONER OF INCOME TAX & ORS. ..... Respondent Through: Mr. Sanjeev Menon, Adv. CORAM:HON'BLE MR. JUSTICE YASHWANT VARMAHON'BLE MR. JUSTICE PURUSHAINDRA KUMAR KAURAV O R D E R % 10.04.2024 1.These appeals which assail the validity of the order of the Income Tax Appellate Tribunal [“ITAT”] raise the following common question: - “Whether the Income Tax Appellate Tribunal fell into error in interpreting the provision of Section 194H of the Income Tax Act, 1961 given the facts and circumstances obtaining in the case?” 2.Undisputedly, while dealing with the aforesaid aspect, the Supreme Court in Bharti Cellular Limited (Now Bharti Airtel Limited)vs. Assistant Commissioner of Income Tax, Circle 57, Kolkata and Another [2024 SCC OnLine SC 198] has observed as follows: - “39. Coming back to the legal position of a distributor, it is to be generally regarded as different form that of an agent. The distributor buys goods on his account and sells them in his territory. The profit made is the margin of difference between the purchase price and the sale price. The reason is, that the distributor in such cases 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. The distributor has rights of distribution and is akin to a franchisee. Franchise agreements are normally considered as sui generis, though they have been in existence for some time. Franchise agreements 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 distributorship agreement. Franchise agreements are extremely detailed and complex. They may relate to distribution franchises, service franchises and production franchises. Notwithstanding the –strict restrictions placed on the franchisees which may require the franchisee to sell only the franchised goods, operate in a specific location, maintain premises which are required to comply with –certain requirements, and even sell according to specified prices 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. 40. 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. 41.Thus, the term „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. In other words, the 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 Section 194-H of the Act. 42. In view of the aforesaid discussion, we hold that the assessees 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. Section 194-H of the Act is not applicable to the facts and circumstances of this case. Accordingly, the appeals filed by the assessee – cellular mobile service providers, challenging the judgments of the High Courts of Delhi and Calcutta are allowed and these judgments are set aside. The appeals filed by the Revenue challenging the judgments of High Courts of Rajasthan, Karnataka and Bombay are dismissed. There would be no orders as to cost. Pending applications, if any, shall stand disposed of.” 3.In view of the aforesaid, we answer the question of law in favour of the assessee and set aside the orders of the ITAT dated 12 October 2022 passed in ITA 137/2023 and ITA 138/2023 and 31 May 2022 passed in ITA 20/2023 and ITA 76/2023. 4.The appeals shall stand disposed of on the aforesaid terms. YASHWANT VARMA, J. APRIL 10, 2024/neha PURUSHAINDRA KUMAR KAURAV, J.