How To Examine Whether A Legal Relationship Of Principal & Agent Exists? Supreme Court Explains In Bharti Airtel Case

The Supreme Court, in its judgment in Bharti Airtel Case, has explained how to examine whether a legal relationship of a principal and agent exists.

The Court also described the concept of principal and agent, master and servant, employer and independent contractor.

The Court in this case held that the cellular mobile telephone service providers are not under a legal obligation to deduct tax at source (TDS) on the income or profit component in the payments received by the distributors or franchisees from the third parties or customers, or while selling or transferring the pre-paid coupons or starter-kits to the distributors under Section 194-H of the Income Tax Act, 1961 (ITA).

The two-Judge Bench of Justice Sanjiv Khanna and Justice S.V.N. Bhatti held, “Agency in terms of Section 182 exists when the principal employs another person, who is not his employee, to act or represent him in dealings with a third person. An agent renders services to the principal. The agent does what has been entrusted to him by the principal to do. It is the principal he represents before third parties, and not himself. As the transaction by the agent is on behalf of the principal whom the agent represents, the contract is between the principal and the third party. Accordingly the agent, except in some circumstances, is not liable to the third party.”

The Bench observed that an agency is a triangular relationship between the principal, agent and the third party and in order to understand this relationship, one has to examine the inter se relationship between the principal and the third party and the agent and the third party.

Senior Advocates Arijit Prasad, Rupesh Kumar, and Advocate Praveen Kumar represented the appellant while Senior Advocates Kavin Gulati, Arvind P. Datar, Ajay Vohra, and Advocate Raj Bahadur Yadav represented the respondents.

The Supreme Court said that the following factors and aspects should be taken into consideration while examining whether a legal relationship of a principal and agent exists –

(a) The essential characteristic of an agent is the legal power vested with the agent to alter his principal’s legal relationship with a third party and the principal’s co-relative liability to have his relations altered.

(b) 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. This degree of control is less than the control exercised by the master on the servant, and is different from the rights and obligations in case of principal to principal and independent contractor relationship.

(c) The task entrusted by the principal to the agent should result in a fiduciary relationship. The fiduciary relationship is the manifestation of consent by one person to another to act on his or her behalf and subject to his or her control, and the reciprocal consent by the other to do so.

(d) As the business done by the agent is on the principal’s account, the agent is liable to render accounts thereof to the principal. An agent is entitled to remuneration from the principal for the work he performs for the principal.

The Court added that at this stage, three other relevant aspects/considerations should be noted. It said, “First is the difference between ‘power’ and ‘authority’. The two terms though connected, are not synonymous. Authority refers to a factual position, that is, the terms of contract between the two parties. The power of the agent however, is not, strictly speaking, conferred by the contract or by the principal but by the law of agency. 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 extent and existence of the power with the agent is determined by public policy. The authority, as observed above, refers to the factual situation. The second consideration is that the primary task of an agent is to enter into contracts on behalf of his principal, or to dispose of his principal’s property. The factors mentioned in clauses (b) to (d) in paragraph 8 above flow, and are indicia of this primary task. Clauses (b) to (d) of paragraph 8 are useful as tests or standards to examine the true nature or character of the relationship.”

The Court observed that lastly, the substance of the relationship between the parties, notwithstanding the nomenclature given by the parties to the relationship, is of primary importance and that the true nature of the relationship is examined by reference to the functions, responsibility and obligations of the so-called agent to the principal and to the third parties.

“An agent is distinct from a servant, in that an agent is subject to less control than a servant, and has complete, or almost complete discretion as to how to perform an undertaking. As Seavey said, ‘‘a servant (...) is an agent under more complete control than is a non servant’’.9 The difference is “in the degree of control rather than in the acts performed. The servant sells primarily his services measured by time; the agent his ability to produce results.” 10 This distinction can be criticised, for servants may have very wide discretion, and may not really be subject to control at all in practice, while agents may have their power to act circumscribed by detailed instructions”, it further noted.

The Court enunciated that the payee receives payment when the third party makes the payment and this payment is not the payment received or payable by the assessee as the principal. It said that the distributor/franchisee is not the trustee who is to account for this payment to the assessee as the principal and the payment received is the gross income or profit earned by the distributor/franchisee. The Court also said that it is the income earned by distributor/ franchisee as a result of its efforts and work, and not a remuneration paid by the assessee as a cellular mobile telephone service provider.

“The distributor buys goods on his account and sells them in his territory. The profit made is the margin of difference between the purchase price and the sale price. The reason is, that the distributor in such cases is an independent contractor. Unlike an agent, he does not act as a communicator or creator of a relationship between the principal and a third party. The distributor has rights of distribution and is akin to a franchisee. Franchise agreements are normally considered as sui generis, though they have been in existence for some time. Franchise agreements provide a mechanism whereby goods and services may be distributed”, it also noted.

The Court explained that an independent contractor is free from control on the part of his employer, and is only subject to the terms of his contract but an agent is not completely free from control, and the relationship to the extent of tasks entrusted by the principal to the agent are fiduciary.

“As contract with an independent agent depends upon the terms of the contract, sometimes an independent contractor looks like an agent from the point of view of the control exercisable over him, but on an overview of the entire relationship the tests specified in clauses (a) to (d) in paragraph 8 may not be satisfied. The distinction is that independent contractors work for themselves, even when they are employed for the purpose of creating contractual relations with the third persons. An independent contractor is not required to render accounts of the business, as it belongs to him and not his employer”, it added.

The Court, therefore, held that the term ‘agent’ denotes a relationship that is very different from that existing between a master and his servant, or between a principal and principal, or between an employer and his independent contractor and although servants and independent contractors are parties to relationships in which one person acts for another, and thereby possesses the capacity to involve them in liability, yet the nature of the relationship and the kind of acts in question are sufficiently different to justify the exclusion of servants and independent contractors from the law relating to agency.

“In other words, the term ‘agent’ should be restricted to one who has the power of affecting the legal position of his principal by the making of contracts, or the disposition of the principal’s property; viz. an independent contractor who may, incidentally, also affect the legal position of his principal in other ways. This can be ascertained by referring to and examining the indicia mentioned in clauses (a) to (d) in paragraph 8 of this judgment. It is in the restricted sense in which the term agent is used in Explanation (i) to Section 194-H of the Act”, it concluded.

Accordingly, the Apex Court dismissed the appeals.

Cause Title- Bharti Cellular Limited (Now Bharti Airtel Limited) v. Assistant Commissioner of Income Tax, Circle 57, Kolkata and Another (Neutral Citation: 2024 INSC 148)

Appearance:

Appellant: Senior Advocates Arijit Prasad, Rupesh Kumar, AOR Praveen Kumar, ASG Venkatraman, AOR Raj Bahadur Yadav, Advocates Alka Agarwal, Digvijay Dam, V C Bharathi, Santosh Kumar, and Prahlad Singh.

Respondents: Senior Advocates Kavin Gulati, Arvind P. Datar, Ajay Vohra, AOR Raj Bahadur Yadav, Advocates Mahesh Agarwal, Rishi Agrawala, Sayree Basu Mullick, M.S. Ananth, Syree Basu Mullick, Madhvi Agarwal, Madhavi Agarwal, Sayaree Basu Mallik, Madhavi Agrawal, Abhinabh Garg, AOR E. C. Agrawala, AOR Harish Pandey, Advocates Sachit Jolly, Anuradha Dutt, Disha Jham, Soumya Singh, AOR B. Vijayalakshmi Menon, Advocates Kumar Visalaksh, Udit Jain, Archit Gupta, Arihant Tater, Ajitesh Dayal Singh, Ajitesh Dayal Singh, Praveen Kumar, Harish Pandey, and AOR Abhishek Vikas.

Click here to read/download the Judgment