Case of: Bharati Cellular Ltd Vs Assistant Commissioner of Income Tax By Supreme Court

In Case of: Bharti Cellular Ltd.
Order By: Supreme Court
Date: 28th February 2024


Supreme Court sets aside HC order on taxing SIM card sales discounts


Under the Indian Tax Laws (ITL), a provision mandates the withholding of tax at a rate of 5% on income payable to residents, categorized as “commission or brokerage.” This term encompasses payments received indirectly or directly by an individual acting on behalf of another for services rendered or related to the buying or selling of goods or transactions involving assets other than securities.

In the telecom sector, companies providing cellular services often appoint distributors to sell SIM cards and recharge coupon vouchers to retailers or end customers. These distributors typically receive the SIM cards and vouchers at a discounted price (e.g., INR 80) and have the discretion to sell them at a price not exceeding the printed price (e.g., INR 100).

The tax authority asserted that the agreement between telecom companies and distributors constituted an agency contract, with distributors acting on behalf of the telecom company. It deemed the discount provided (INR 20) as “commission,” subject to withholding tax under the ITL.

This controversy led to litigation in various High Courts (HCs) across different jurisdictions. One group of HCs contended that the distribution arrangement for prepaid SIM cards warranted withholding tax, as distributors merely acted as intermediaries binding the telecom company and the end customer. Conversely, another group of HCs argued against the withholding obligation, citing a principal-to-principal relationship between the parties and emphasizing the distributors’ liability for risks associated with the products.

Moreover, these HCs deliberated on the intrinsic value of SIM cards, recognizing them as a right to service integral to telecom provision, further complicating the tax treatment of their sale.

Given the disparate judicial interpretations, petitions were filed before the Supreme Court (SC) to adjudicate the applicability of withholding tax under the ITL concerning the discounts or income earned by distributors from the sale of recharge vouchers in the hands of the telecom companies.

Bharti Cellular Ltd. (hereinafter referred to as “Taxpayer”) is a prominent telecom operator in India, engaged in providing prepaid SIM cards and recharge coupon vouchers through a network of distributors. The Taxpayer operates in compliance with Indian Tax Laws (ITL) and diligently fulfils its tax obligations.

The primary issue before the Supreme Court (SC) in this batch of appeals, with the lead case being Bharti Cellular Ltd. v. ACIT, revolves around whether the discount offered by telecom operators to distributors on the print price of prepaid SIM cards and recharge coupon vouchers can trigger withholding tax obligations under the provisions of the ITL.

Given the divergence in views among various High Court decisions on this matter, petitions were filed before the SC seeking clarification and uniformity in interpretation of the relevant provisions of the ITL.

Supreme Court Observations

During the adjudication process, the SC elucidated the factors essential for determining the existence of a principal-agent or principal-principal relationship. It established a four-factor test to qualify as an agent, including the legal power of the agent to bind the principal with third parties, the degree of control exercised by the principal over the agent, the existence of a fiduciary relationship, and the obligation of the agent to render accounts to the principal while being entitled to remuneration.

In the context of the lead case, the SC examined the terms of the distribution agreement concerning prepaid vouchers. It concluded that no principal-agent relationship existed between the distributors and the Taxpayer. This determination was based on several factors: distributors were required to purchase SIM cards and vouchers at a discounted price, had the autonomy to sell them below the printed price at their discretion, were not obligated to render accounts to the Taxpayer, and no fiduciary relationship existed between them.

Additionally, the SC ruled that the withholding tax provision of the ITL was not applicable to the Taxpayer since it did not credit or pay any income to distributors resembling a commission. It emphasized that the profit earned from the resale of SIM cards could not be construed as an indirect payment by the telecom company to the distributors.


The SC held that the Taxpayer was not obligated to withhold tax at the source as it was not privy to the contracts between distributors and retailers or end customers. It deemed the requirement of the Taxpayer to collect information on discounts from distributors as impractical and unfair, especially in the absence of a statutory mandate.

Moreover, the SC suggested that to mitigate future litigation, the Central Board of Direct Taxes (CBDT) should issue clear and prospective instructions or circulars, following a consultative approach, to clarify doubts concerning withholding tax provisions.