Bharti Cellular v. ACIT: no Section 194-H TDS on distributor margins

The facts in brief

The dispute concerned the pre-paid mobile telephony distribution model that became ubiquitous across India in the 2000s. A cellular operator — here Bharti Cellular Ltd., now Bharti Airtel Ltd. — sells pre-paid starter kits and recharge coupons to a network of distributors and franchisees at a discount off the printed maximum retail price. The distributor then on-sells the product, directly or through a chain of retailers, to the end customer. The difference between the discounted price the distributor pays the operator and the price at which the product reaches the customer is the distributor's margin.

The Revenue's case was that this margin was, in substance, "commission" paid by the operator to the distributor for services rendered in marketing and distributing the operator's product. On that view, the operator was a "person responsible for paying" commission and was obliged, under Section 194-H of the Income Tax Act, 1961, to deduct tax at source on the margin — failing which it could be treated as an assessee-in-default and visited with the consequences of non-deduction.

The operators resisted on a single foundational point: the transaction with the distributor was a sale of goods (pre-paid coupons and starter kits) on a principal-to-principal basis. The distributor bought the product, took title, bore the commercial risk of resale, and earned a trading margin — not a commission. If there was no principal-and-agent relationship, Section 194-H simply did not apply.

The question had divided the High Courts. The Delhi and Calcutta High Courts had held the operators liable to deduct. The Rajasthan, Karnataka and Bombay High Courts had held Section 194-H inapplicable. The competing lines came to the Supreme Court on a batch of appeals, and a two-judge bench of Justices Sanjiv Khanna and S.V.N. Bhatti delivered judgment on 28 February 2024.

The statutory question

Section 194-H, inserted into Chapter XVII-B of the Income Tax Act, requires any person (other than an individual or HUF below the audit threshold) responsible for paying "commission or brokerage" to a resident to deduct income tax at the prescribed rate at the time of credit or payment. The Explanation to the section defines "commission or brokerage" to include any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services), or for any services in the course of buying or selling of goods, or in relation to any transaction relating to any asset, valuable article or thing.

The operative words for this case are "acting on behalf of another person." The whole architecture of Section 194-H presupposes an agency: a principal who pays, and an agent who acts on the principal's behalf and is remunerated by commission. The provision is not a general tax on every trading margin. It is a withholding obligation triggered specifically by a payment of commission to an agent.

The question therefore collapsed into a question of legal characterisation: is the operator-distributor relationship one of principal and agent, or one of principal and principal? If the former, the margin is commission and TDS applies. If the latter, the margin is the distributor's own trading profit, earned on goods it owns, and Section 194-H has nothing to operate on.

What the Court held

The Court held that cellular mobile service providers are not obliged to deduct tax at source under Section 194-H on the income or profit component embedded in the amounts that distributors and franchisees earn from third-party customers, including on the sale or transfer of pre-paid coupons and starter kits to the distributors.

The relationship between the operator and its distributors is one of sale — principal-to-principal — not principal-and-agent. The distributor purchases the pre-paid product at a discount, takes it on its own account, and resells it. The margin it retains is the fruit of its own trading activity, not a commission paid to it by the operator for services rendered on the operator's behalf. Because there is no agency, there is no "commission or brokerage" within the meaning of the Explanation, and Section 194-H is not attracted.

The distinction the Court drew is the classic one between an agent and a buyer for resale. An agent acts for and binds the principal; what the agent holds, the agent holds for the principal and must account for. A distributor who buys to resell binds no one but itself, holds the goods as owner, and owes no account of its resale profit to the seller. The Court underscored that the distributor is not a trustee obliged to account to the operator for what it earns from the customer.

On that footing, the operator never "pays" anything to the distributor in the sense Section 194-H contemplates. The flow of value runs the other way: the distributor pays the operator a discounted price and keeps whatever it can realise on resale. There is no payment of commission by the operator to the distributor on which a withholding obligation could fasten.

Resolving the High-Court split

The most practically significant feature of the judgment is that it settled a conflict that had run for years across five High Courts. The Delhi and Calcutta High Courts had accepted the Revenue's characterisation and held the operators liable to deduct. The Rajasthan, Karnataka and Bombay High Courts had taken the opposite view, treating the arrangement as a sale and Section 194-H as inapplicable.

The Supreme Court endorsed the Rajasthan, Karnataka and Bombay line. The reasoning of those courts — that the transaction is a sale, that the distributor is an independent contractor, and that a trading margin is not commission — was held to be correct. The contrary reasoning of the Delhi and Calcutta High Courts was disapproved.

The resolution matters beyond telecom. The agency test the Court articulated — that an agent is one with power to affect the legal position of the principal, and that a buyer-for-resale who is not bound to account for its margin is not an agent — is a test for the whole of Chapter XVII-B. The same question recurs across every distribution and dealership chain in which a manufacturer sells discounted product to a dealer who resells at a margin: FMCG, pharmaceuticals, consumer durables, automobiles. Wherever the relationship is genuinely one of sale and resale, Section 194-H does not reach the dealer's margin.

Why the characterisation is load-bearing

The judgment is a reminder that withholding-tax liability turns on the legal substance of a relationship, not on the commercial fact that one party's profit depends on another's product. It is tempting, on the Revenue's view, to treat any margin earned in distributing a manufacturer's goods as remuneration for distribution services. But the Income Tax Act does not tax margins as commission; it taxes commission paid to agents. The presence of a margin is not the presence of an agency.

For tax administrators, the consequence is that the inquiry must begin with the contractual and commercial reality: does the intermediary take title to the goods and bear the risk of resale, or does it merely procure transactions for the principal and account for the proceeds? If the former, the arrangement is a sale and Section 194-H does not apply, however large the operator's stake in the distributor's success. If the latter, the payment is commission and the withholding obligation arises.

For businesses, the decision supplies a clean compliance rule. A distribution model structured as a genuine sale-and-resale — with the distributor taking title, setting (within limits) its own resale terms, and bearing inventory and credit risk — does not carry a Section 194-H withholding obligation on the distributor's margin. The decision thus removes a recurring source of demand-and-default exposure across India's distribution economy.

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Sources

1. LiveLaw — coverage of Bharti Cellular v. ACIT (Section 194-H / distributor TDS): https://www.livelaw.in/top-stories/supreme-court-section-194h-income-tax-act-tds-discount-prepaid-sim-cards-bharti-cellular-250000
2. SCC OnLine / SCC Times — case analysis, 2024 INSC 148: https://www.scconline.com/blog/post/2024/03/01/supreme-court-no-tds-under-section-194h-income-tax-act-telecom-distributors-prepaid-coupons/
3. Verdictum — Bharti Cellular Ltd. v. ACIT summary (2024 INSC 148): https://www.verdictum.in/court-updates/supreme-court/bharti-cellular-ltd-v-acit-2024-insc-148-section-194h-income-tax-act
4. Bar & Bench — Supreme Court on TDS and telecom distributor discounts: https://www.barandbench.com/news/litigation/supreme-court-no-tds-section-194h-income-tax-telecom-distributors