Telcos TDS norms: A bench comprising justices Sanjiv Khanna and SVN Bhatti addressed a series of appeals and cross-appeals between the Income Tax department and telecom giant Bharti Airtel Limited (BAL), in a ruling delivered on Wednesday. The legal matter at hand concerned the liability for tax deduction at source under Section 194-H of the Income Tax Act, 1961, on earnings by distributors or franchisees of BAL from the sale of prepaid coupons and SIM cards.

The Income Tax department contended that the profits earned by distributors constituted a commission payable to BAL under franchise or distributorship agreements.

Justice Khanna, writing for the bench, concluded that BAL was not legally obligated to deduct tax at source on the income component received by distributors from third parties or customers, or on the sale of prepaid coupons or starter kits. The judgment found Section 194-H of the IT Act inapplicable to the circumstances of this case.

Section 194-H of the Act mandates tax deduction at source by any person responsible for paying commission or brokerage to a resident, at the time of credit or payment, whichever is earlier, at the prescribed rate.

The Supreme Court allowed the appeals of telecom service provider firms, overturning judgments by the High Courts of Delhi and Calcutta that ruled in favour of the Income Tax department's position.

However, the apex court dismissed the appeals filed by the IT department against the judgments of the high courts of Rajasthan, Karnataka, and Bombay, which held that Section 194-H of the Act did not apply in the present context.

According to the case details, telecom firms engage in agreements with distributors or franchisees to distribute prepaid mobile services, including SIM cards and recharge vouchers. The telecom firms argue that the discounts provided to distributors on the printed price of packs are not considered commission or brokerage under tax law, thus absolving them from the obligation to deduct tax at source.

Justice Khanna's 44-page judgment clarified that the IT department did not argue for a tax deduction on the difference between the printed and discounted prices, acknowledging that distributors are not mandated to sell products at the printed price.

(With PTI inputs)