The Supreme Court in the case Bharti Cellular Limited v. Assistant Commissioner of Income Tax and Another observed wherein the court was dealing the question of cellular mobile service providers liability to deduct tax at source under Section 194-H of the Income Tax Act, 1961
The court in the case observed and has summarized aspects that must be kept in mind by Courts while examining whether principal-agent relationship exists in particular case.
The bench comprising of Justice Sanjiv Khanna and Justice SVN Bhatti, after referring to Section 182 of the Contract Act, 1872 stated:
1. The essential characteristic of an agent is the legal power vested with the agent in order to alter his principal’s legal relationship with a third party and the principal’s co-relative liability to have his relations altered.
2. As the agent acts on behalf of the principal, one of the prime elements of the relationship is the exercise of a degree of control by the principal over the conduct of the activities of the agent. Thus, this degree of control is less than the control which is exercised by the master on the servant, and it being different from the rights and obligations in case of principal to principal and independent contractor relationship.
3. The task entrusted by the principal to the agent should result in a fiduciary relationship. Thus, the fiduciary relationship is the manifestation of consent by one person to another to act which being on his or her behalf and subject to his or her control, and the reciprocal consent by the other in order to do so.
4. As the business is done by the agent is on the account of principal’s, the agent is liable to render accounts thereof to the principal. Thus, the agent is being entitled to remuneration from the principal for the work he performs for the principal.
The bench in the case observed with respect to the status of franchisee and distributor agreements.
The court while distinguishing the legal position of a distributor from that of an agent stated that a distributor does not act as a communicator or creator of a relationship between the principal and a third party.
Therefore, the legal position of a distributor is to be generally regarded as different form that of an agent. The distributor buys goods on his account and sells them in his territory…the distributor in such cases is an independent contractor and the independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract. But the agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent are fiduciary.
The court also stated with regards to the franchise agreements that there is detail and complexity involved in the relationship between a franchisor and the franchisee, which perhaps distinguishes franchisee agreements from distributorship agreements.
The court stated the relationship in given case may be that of an independent contractor.
The court observed that there is a close relationship between a franchisor and a franchisee because a franchisee’s operations are closely regulated, i.e., the Franchisee agreements may relate to distribution franchises, service franchises and production franchises. Thus, the strict restrictions placed on the franchisees – which may require the franchisee to sell only the franchised goods, operate in a specific location, maintain premises which are required to comply with certain requirements, and even sell according to specified prices – the relationship may in a given case be that of an independent contractor.
Further, the bench stated that the independent contractors work for themselves, even when they are employed for the purpose of creating contractual relations with the third persons.
Further, the court noted that an independent contractor is not required to render accounts of the business, as the same belongs to him and not his employer.
The court while distinguishing between power and authority stated that when a person gives authority to another person to do the acts which bring the law of agency into play, then, the law vests power with the agent to affect the principal’s legal relationship with the third parties.
The court also stated that bringing the independent contractors out of the purview of ‘agency’, it explicated that the term ‘agent’ should be restricted to one who has the power of affecting the legal position of his principal. Thus, it also underlined that the concept of agency under Explanation () to Section 194-H is contemplated in a restricted sense.
The court while considering the facts and circumstances of the case observed that the franchisees or distributors were free to sell the prepaid products of assessees at any price below the profits or income.
In response to the submissions made by the Revenue’s that the prepaid SIM cards remained property of the assessees without transfer of any title etc. to the franchisee or distributor. The court in the case concluded that the distributors or franchisees were operating under certain contractual obligations but the same did not reflect fiduciary character of the relationship, or that the business was being done on the principal’s account.