• Notification Date: 04-03-2024
• Notification No: N/A

TDS at Discounted Rates won't be offered for SIM Card Sales to Distributors: SC

Telecom companies received a major relief on Wednesday as the Supreme Court ruled against the demand of tax deducted at source (TDS) for selling prepaid SIM cards to the distributors at discounted rates.

The two-judge bench of Justice Sanjiv Khanna and Justice S.V.N. Bhatti passed the judgment in response to 40 appeals filed by telecom giants such as Bharti Airtel and Vodafone Idea regarding the applicability of TDS on discounts provided to prepaid distributors for the sale of SIM cards and recharge vouchers.

"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 in terms of the reportable judgment," the judgment noted.

The matter revolved around whether telecom service providers are obligated to deduct TDS under section 194H of the Income Tax Act. 

The contention stemmed from the interpretation of the relationship between the assessee and distributors, with the income tax department asserting it as that of principal to agent, thus subjecting the payments to be classified as commission under section 194H.

Telecom firms typically sell SIM card starter packs to distributors at prices below the market value. These packs are subsequently sold by distributors to retailers, and then to end customers. 

While the income tax department argued for a ‘principal-agent’ relationship between telcos and distributors, the telcos argued for a ‘principal-to-principal’ arrangement.

Section 194H is a rule in the Income Tax Act, 1961, which deals with deducting tax from income earned as commission or brokerage. This section applies to anyone who has to make such payments to someone living in India.

The main goal of Section 194H is to ensure that the government collects the right amount of taxes on commission and brokerage income. It makes it the responsibility of the payer to deduct the appropriate taxes from the payment and send it to the authorities. 

It’s important for both the payer and the recipient to comply with this section to meet their tax obligations as outlined in the Income Tax Act.