[Opinion] TDS Liability on Selling Pre-paid SIM Cards

Eshaan Singal – [2024] 160 taxmann.com 353 (Article)

Exploring the Ascending Trend of Agency and Franchise Business Models and the Vitality of Comprehending TDS (Tax Deducted at Source) under Section 194-H.

Agency and franchise business models are experiencing a notable surge, serving as a beacon for aspiring entrepreneurs. These models offer an avenue for business ownership by capitalizing on established brands, tried-and-tested methodologies, and ongoing support systems.

Delving deeper

What Constitutes a Recruitment Agency Franchise?

A recruitment agency franchise embodies a business structure wherein an individual (referred to as the franchisee) acquires the rights to operate a recruitment agency under the banner of an established company (the franchisor).

Franchisees reap the benefits of brand recognition, extensive support mechanisms, and proven operational frameworks, albeit in exchange for fees and adherence to the franchisor’s standards.

These frameworks particularly thrive within the dynamic terrain of the staffing industry.

Mechanics of Recruitment Agency Franchise Models

• Franchise Agreement: Franchisees formalize their commitment through a contractual agreement with the franchisor, delineating terms such as fees, royalties, and operational benchmarks.
• Training and Assistance: Franchisors furnish comprehensive training modules encompassing recruitment methodologies, marketing strategies, and technological adeptness.
• Brand Authority: Franchisees capitalize on the established brand’s cachet to allure both clients and prospective candidates effectively.
• Operational Protocols: Adhering to the franchisor’s guidelines ensures uniformity and adherence to established standards.
• Royalties and Fees: Franchisees sustain the franchisor-franchisee ecosystem by remitting ongoing fees in exchange for brand utilization and ongoing support.

Advantages of Recruitment Agency Franchise Models:

• Brand Eminence: Instant credibility and market prominence are conferred upon franchisees owing to the franchisor’s esteemed reputation.
• Proven Operational Blueprint: Well-honed methodologies pave the way for seamless agency operations, ensuring efficacy and efficiency.
• Flexibility: Franchisees exhibit adaptability in navigating through evolving work dynamics and shifting consumer preferences.

Understanding the nuances of franchise models and ensuring compliance with TDS provisions are quintessential elements for fostering successful business ventures.

In light of this, referencing the case of Bharti Cellular Ltd. v. Asstt. CIT [2024] 160 taxmann.com 12 (SC) further underscores the importance of navigating tax obligations adeptly within the framework of agency and franchise operations.

A set of appeals has been lodged by Bharti Cellular Ltd., a cellular mobile telephone service provider, addressing the issue of their obligation to deduct tax at source under Section 194-H of the Income Tax Act (ITA). The crux of the matter revolves around the contention by the Revenue that the amounts, deemed as commissions payable to agents under franchise or distributorship agreements, should be subjected to TDS. The assessees argue that they neither pay commission nor brokerage to their franchisees/distributors, and furthermore, deny the agency relationship with them.

The High Courts of Delhi and Calcutta have ruled in favor of the Revenue, affirming the assessees’ liability to deduct tax at source under Section 194-H of the Act. Conversely, the High Courts of Rajasthan, Karnataka, and Bombay have held that the circumstances in question do not attract the provisions of Section 194-H of the Act.

Click Here To Read The Full Article