Discount on prepaid SIM cards and recharge coupon is not liable for TDS: SC


Discount on prepaid SIM cards and recharge coupon is not liable for TDS: SC



Bharati Cellular Ltd v ACIT – CA No 7257 of 2011


  1. The taxpayers are cellular mobile telephone service providers in different circles as per the licence granted to them under section 4 of the Indian Telegraph Act, 1885, by the Department of Telecommunications (DoT), Government of India.
  1. The taxpayer had entered into franchise or distribution agreements with several parties.
  1. The question was whether the sale of prepaid SIM cards by the taxpayers to distributors at discounted prices (below MRP), which was ultimately sold by such distributors at MRP or below MRP, but above the purchase price, would attract tax deduction at source (TDS) under section 194H of the Income-tax Act, 1961, [relating to tax deduction at source on commission/brokerage income of payee]?

Hon SC held as below:

  1. There are four factor tests to qualify as agent viz. (a) presence of legal power of agent to legally bind the principal with third party, (b) principal exercising certain degree of control over the conduct of agent, (c) fiduciary relationship between them, (d) liability of agent to render accounts to principal and entitlement to receive remuneration from the principal.
  1. There was no principal-agent relationship between the distributors and the Taxpayer, as the distributors were required to purchase the SIM cards, vouchers at discounted price. The distributors had the right to sell the same at any price below the printed price at their discretion and were also not required to render any accounts to the Taxpayer. Further, there existed no fiduciary relationship between the distributors and the Taxpayer.
  1. The Taxpayer cannot be obligated to collect information of discount from distributor and thus, it was impossible for the Taxpayer to withhold tax at source.
  1. Thus, telecom companies selling prepaid SIM cards to distributors/franchisees at discounted prices, would not attract TDS under section 194H.

The copy of the order is as under: