No withholding tax on discount on prepaid SIM cards, recharge vouchers

In a recent ruling, the Supreme Court (SC) clarified that discounts given on the print price of prepaid SIM cards and recharge coupon vouchers by telecom operators to distributors will not trigger withholding tax obligations under the Income-tax laws.

The SC’s decision, which came in a batch of appeals with Bharti Cellular as the lead case, settled a controversy that had seen conflicting judgments from various high courts.

The SC laid out a four-factor test to determine if an entity qualifies as an agent, emphasizing factors such as legal power to bind the principal, control over conduct, fiduciary relationship, and accountability to render accounts and receive remuneration.

EY-India in its newsletter explains that, in this case, the SC found no principal-agent relationship between the distributors and the telecom operators, as distributors were required to purchase the SIM cards and vouchers at a discounted price, with the freedom to sell below the printed price without rendering accounts to the telecom operators.

The SC clarified that telecom operators were not liable to withhold tax as they did not credit or pay any income to distributors as commission. It also emphasized that the profit earned by distributors from resale cannot be considered as indirect payment by the telecom company.

Furthermore, the SC noted that the telecom operators, not being privy to contracts between distributors and end customers, cannot be expected to withhold tax at source. The SC recommended that the Central Board of Direct Taxes (CBDT) issue clear and prospective instructions or circulars to avoid such disputes in the future. Caalley