Himanshu SinhaPartner
Aditi GoyalPartner
Aishwarya PalanSenior Associate
Key Developments
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Supreme Court holds that the discount offered by a telecom company to SIM card distributors is not 'commission' for the purposes of withholding tax provisions
The Supreme Court, in a batch of appeals,1 held that Bharti Cellular Ltd. (Taxpayer) is not liable to withhold tax on the income component of the payments received by SIM card distributors/franchisees from third parties/customers or on the sale of starter kits to the distributors.
The Taxpayer sold starter kits to distributors at a discount for onward sale to end customers. The distributors paid the price upfront for these prepaid products and were free to sell them to retailers/actual customers at any price lower than the price printed on the products. The difference between the sale price and the discounted purchase price was considered as the distributor’s profits. The Taxpayer did not withhold tax on the income component of the payments received by the distributors.
The tax office treated the difference between the purchase price of the starter kits and the price at which they were sold to third parties as ‘commission/brokerage’. Further, the tax authorities held that the relationship between the Taxpayer and the franchisees/distributors was like a principal-agent relationship. Accordingly, the tax authorities were of the view that tax should have been withheld by the Taxpayer on the commission amount.
The Supreme Court examined whether a principal-agent relationship existed between the Taxpayer and the distributor and set out relevant factors to be considered in this respect. Based on the contractual obligations of the parties, the Supreme Court held that there is no principal-agent relationship between them.
The Court observed that the obligation to withhold tax is fixed by the statute, which requires deduction of tax on the date of actual payment, or at the time when income is credited to the account of the distributor, whichever is earlier. In this case, the income of the distributor (i.e., the difference between the sale price and the discounted purchase price) was paid/credited to the distributor when it sold the prepaid product to the customer. The telecom company at no stage paid or credited the commission or brokerage income to the distributor. Therefore, it was held that no tax was required to be withheld by the Taxpayer.
Further, on the tax authorities’ argument regarding the requirement to withhold tax since the payment was indirectly received by the distributors, the Supreme Court held that the obligation to withhold tax would not arise in genuine transactions wherein the taxpayer is not a person responsible for paying or crediting the income. Consequently, the Supreme Court observed that the Taxpayer was not privy to the transactions between the end customers and the distributors and therefore, it would be impossible for the Taxpayer to withhold tax. The Supreme Court also rejected the tax authorities’ argument that taxpayers should periodically obtain information and then withhold tax as it was far-fetched and beyond the statutory mandate.
This ruling puts an end to the long-drawn litigation on this point and is a welcome relief for telecom companies. Additionally, the detailed analysis of a principal-agent relationship provided by the Supreme Court in this decision and the principles enumerated in this regard would help in determining taxability for similar business models in other industries.
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Ministry of Finance notifies lower tax rate for royalty income and fees for technical services under the India-Spain tax treaty by invoking the most favoured nation clause
The ‘most favoured nation’ (MFN) clause in a tax treaty allows importing benefits into a tax treaty between India and a member of the Organisation for Economic Cooperation and Development (OECD) from a tax treaty signed subsequently by India with another member of the OECD. In this context, ‘benefits’ relate to granting lower tax rates for certain incomes, restricting the scope of income, etc.
The automatic applicability of the MFN clause had been a subject matter of protracted litigation until the Supreme Court of India settled the issue last year. The Court, in the case of Nestle SA,2 held that the issuance of a notification by the government is a necessary and mandatory condition to give effect to the MFN clause contained in a tax treaty. This was in line with the circular3 issued by the Central Board of Direct Taxes (CBDT) where one of the conditions to invoke the MFN clause of a tax treaty is that a separate notification must be issued in this respect. (To read our detailed update on the Nestle SA decision, click here.)
In line with the circular and the Supreme Court’s decision in Nestle SA, the Ministry of Finance recently issued a notification4 (Notification) invoking the MFN clause under the India-Spain tax treaty. As per the Notification, the government has modified the India-Spain tax treaty by importing a lower tax rate of 10% in respect of royalty income and fees for technical services (FTS) from the India-Germany tax treaty (which was entered into after the India-Spain treaty and provided a lower tax rate for certain items of income), if the recipient is the beneficial owner of the income. Before the Notification, the India-Spain tax treaty provided for a tax rate of 10% for royalties relating to payments for the use of, or the right to use, industrial, commercial, or scientific equipment, but a 20% tax rate for FTS and other royalties.
In addition to the benefit of a lower rate, the MFN clause under the India-Spain tax treaty permits a more restricted scope of taxability, if a tax treaty entered by India with another OECD country contains a more restricted scope. However, the Notification has been issued only for the lower tax rate. Many of India’s tax treaties (such as those with France, Sweden, Netherlands, Switzerland, etc.) contain the MFN clause and it will be interesting to observe if notifications for other countries will be issued by the government. Moreover, the Supreme Court’s decision on the review petitions filed by taxpayers against the Nestle SA judgment is also awaited.
[1] Bharti Cellular Limited (Now Bharti Airtel Limited) v Assistant Commissioner of Income Tax [TS-135-SC-2024]
[2] Assessing Officer (International Taxation) v Nestle SA [2023] 155 taxmann.com 384 (SC)
[3] Circular 3 of 2022 dated 3 February 2022
[4] Notification No. 33/2024 dated 19 March 2024
