Supreme Court Rules Against TDS Applicability On SIM Card Sales To Distributors

In a relief for telecom firms, the Supreme Court on Wednesday ruled that telecom companies are not liable to deduct TDS for selling pre-paid SIM cards to their distributors at a rate below the market price.

In doing so, the top court has rejected the positions taken in this case by the Delhi High Court and the Calcutta High Court.

The dispute involved telecom giants such as Bharti Airtel Ltd. and Vodafone Idea Ltd.

These telcos are engaged in the service of providing SIM card services to their customers.

At a time, this was achieved by selling SIM card starter packs to the distributors at a rate below market prices, and these cards were then sold to the retailers, by whom they were ultimately sold to the customers.

At the centre of the controversy lay the issue of classifying the relationship between these telcos and their distributors or franchisees as a principal-to-agent relationship or a principal-to-principal one.

The revenue had maintained that the relationship is that of a principal-to-agent one and that the lower price at which the distributors get the SIM card starter pack is to be treated as commission for the purposes of the Income Tax Act.

To the contrary, the telcos maintained that this relationship is a principal-to-principal one and that the lower price offered should be treated as a discount and not a commission.

It must be noted that, as per Section 194H of the Act, tax is supposed to be deducted at source if the transaction is categorised as being in the nature of a commission.

The case reached the apex court after the Calcutta High Court held that providing starter packs at a price below the market price is an indirect payment in the form of commission, and the same is leviable to tax under the Act.