Rationale of introduction of Section 194O in Chapter XVII B of Income Tax Act, 1961 by finance act, 2020
Background-
After the introduction of the chapter VIII of finance act, 2016 Consisting of the provisions of equalization levy read with Section 10(50), there is a constant concern from the revenue authorities to tax the residents e commerce participate who are somehow escaped from taxation.
Since the provisions of Equalization levy shall applicable only on the e-commerce participate being non residents
The main agenda of bringing this section to target those assessee who are selling their goods /services using various established platform like Flip-Kart/Myntra /Amazon.
Although these players no doubt provide these small sectors a great scope to globalize their products using their digital platforms/applications, but on the other hand there is greater escapement of taxation of income also noticed by the revenue.
Hence, in order to bring the parity & to increase the taxation base, finance act 2020 come up with new section 194 O in the chapter XVII – B, which is discussed hereunder;
1) The provisions of section 194O are applicable to the ‘resident E commerce participators‘ when they provide the provisions of service or Sale of goods through the intermediary E commerce operators who provide the digital platform/electronic platform to effectively facilitate the services of E-commerce participate.
For example-
Mr A is the carpet maker in the remote village of Kutch district of Gujrat. In order to scale up its business, he Joined hands with Flipkart to provide its digital platform to advertise his product to attract the customers nationwide.Sales Proceeds will first be credited into the account of Flip-Kart& after charging commission of 5% Flip-Kart will revert back the balance money within 2 business day.
Now, Mr Basant from Bihar order two carpets whose sales price is Rs 8000/- per piece and made the requisite payment. Now, as per the contract, Flip-Kart after deducting 5% commission, paid the balance amount of Rs 15,200/-
In this whole scenario for the purpose of section 194 – O, Mr A who sold carpet through Flip-Kart is E-commerce participate ” who sold his goods through the “digital platform” of Flip-Kart which is known as e- commerce operator “
2) Section 194 O shall apply only when e commerce participate is residents, if the e-commerce operator is a nonresident within the meaning of income tax act, then also this section shall apply. Since, restrictions are only on e-commerce participate that he must be resident for the purpose of applicability of section 194O
3) Usually what happen , when we buy any goods /service etc. one commerce participate , the money which we paid first go to the e-commerce operator (the intermediary) & after that this money is transferred to e commerce participate, but direct payments to the E Commerce participators is also covered as per Explanation 1 to Section.
To understand Explanation 1 to section 194O let us enhance the above Illustration and suppose Mr Basant gave order of third carpet whose sale price is Rs 11,000/- due to its specific features of cooling & although the transaction of the same was entered through Flip-Kart , but the payment for the same was actually directly credited to the bank account of Mr A (the e commerce participate ) instead of making payment to the e-commerce operator the flip-kart.
Since the services had been provided using the digital platform of Flip-Kart the e commerce operator, it has been deemed that for the purpose of deductions of TDS us 194 – O such Rs 11,000/- shall also include in the
gross amount & TDS shall be deducted on this amount also by Flip-Kart(Explanation 1 to section 194O)
4) Mr A buys a laptop worth Rs 25,800/- from Laptop merchandise Limited using the digital platform of Flip-Kart. How much amount of tax to be deducted by Mr A while paying the amount to Flip-Kart?
Ans – TDS is not required to deduct by Mr A since he is the buyer of the goods and not the intermediary.since the entire scheme is applicable only on intermediary being e-commerce operator. Hence, Flip-Kart is required to deduct the TDS
5) Mr A resident buys a movie ticket worth Rs 1000/- the payment was made through gateway of Amazon pay (an USA based e commerce operator) to book my show. There was offer of 30% cashback.
Ans – TDS shall be required to deduct @ 1% on gross amount ia Rs 1,000/- not on the net amount of Rs 7,00/-.It hardly matters that Amazon pay is a USA e commerce operator, what actually matter is the book my shop the e- commerce participate must be an indian resident.
6) Mr John purchased flight tickets from USA to Delhi using the payment gateway of Amazon pay from the website of yatra.com an Indian e-commerce participate.
Ans – The TDS shall still be attracted us 194 O it is a redundant matter for the purpose of section 194O that what is the residential status of the ultimate buyer/user of service
7) Mr Raghu is regularly dealing in selling of special tea of Darjeeling tea estate. In order to scale up its business, he Joined hands with Amazon to sell the special Darjeeling tea.
During the financial year 2020-21, total gross amount received from Amazon by Raghu was Rs 4,80,000/- which was after deducting the commission of amazon of INR60,000/- as per amazon it is not liable to deduct the tax at sources while settling the payment to Mr Raghu since the Gross amount is less than Rs 5,00,000/-
Ans – in order to provide relief to small e commerce participate (Mr Raghu) in this case , sub section 2 have been introduced in Section 194 – O, which provides that if the e-commerce participate being individual or HUF , than deductions of TDS shall not require to made by e-commerce operator (amazon in this case )until the gross amount received by such e commerce participate doesn’t exceeds Rs 5,00,000/- in a financial year, using the platform of e commerce operators.Since in the given case, gross receipts exceed Rs 5,00,000/- in a financial year ia Rs 5,40,000/- hence TDS shall require to be deducted us 194 – O.
8) suppose in Illustration 7, Mr Raghu is a nonresidents e commerce participate and the gross amount received by him through e commerce operator is Rs 3,80,000/-.Analysis
Ans – such case is not at all covered in Section 194 – O, since the e commerce participate is a nonresident individual. Hence, to check the limits of Rs 5,00,000/- is of no use. This aspect should be squarely covered in Chapter VIII of finance act, 2016 dealing with equalization levy assuming the amazon have permanent establishment in india.
9) An income tax consultancy firm resident in India provides professional services using the platform of ” connect professional” an e commerce operator & charged Rs 7,00,000/- consultancy fees from its client Mr X.Now, Mr X is in argument that “Connect professional” is an e-commerce operator & only it is liable to deduct the TDS us 194 – O & as per Section 194 – O (3) he is not liable to deduct the tax at sources under Section 194J. Discuss the proposition of claim made by Mr X for non-deduction of tax at sources vide Section 194J
Ans – The argument of Mr X that he is not liable to deduct the TDS on professional fees us 194 J is in accordance with law.For clear understanding I am presenting the bare provisions of Section 194- O (3)
“Notwithstanding anything contained in Part B of this Chapter, a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub-section (2), shall not beliable to tax deduction at source under any other provision of this Chapter:
Chapter XVII B in income tax also includes Section 194J. Subsection 3 is focused on the transactions which are being subjected to Section 194 – O (1), shall not be covered by any other provisions of Chapter XVII- B.
It means the entire transaction is out of the purview of tax deduction at sources us 194J since this transaction is covered in Section 194 – O (1), and hence the argument of Mr X is in accordance with law.
One has to look behind the actual reasoning of introduction of TDS in such a case which is to trace such a transaction & Hence merely a single deduction of tax at sources whether us 194J/194O will fulfil the objective of the revenue. Since 194 – O overruled the entire chapter of XVII- B, hence deduction shall be made in accordance with section 194 – O
10) Suppose in Illustration 9, the gross amount is Rs 2,50,000/- instead of Rs 7,00,000/-. Now, whether Mr X is liable to deduct the TDS us 194J on such transaction?
Ans – Still No, and the rationale behind not deducting the tax is covered in Illustration 9 since 194 O gives an overriding effect with respect to entire chapter XVII B of the ” Act “
11) Mr Balram runs a proprietary business name as Village creativity is dealing in selling of household crockery items such a silver dishes, colorful pots etc. through four e commerce operator & the gross amount received during the financial year from such e commerce operator are as follows–
E commerce operators Amount
1) Digi India Pvtlimited – Rs 1,60,000/
2) Easy pay limited – Rs 2,40,000/-
3) Quick servicesInc – Rs 45,000/-
4) Digital evolution Ltd – Rs 1,35,000/-
Village creativity is an e commerce participate run by an individual Mr Balram , having an argument that it is eligible to receive the entire amount of Rs 5,80,000/- without deducting the taxes at sources us 194 – O , since the individual limits for each e-commerce operator must be increased beyond Rs 5,00,000/- in order to attract the provisions of Section 194 O. Discuss
Ans – The argument of Mr Balram is not in accordance with the law, since while calculating the limits of Rs 5,00,000/- in order to claim the exemption from requirements of deductions of TDS shall be taken cumulatively in accordance with section 194 – O (2). Hence TDS shall be deducted in accordance with section 194 O since the aggregate limits of Rs 5,00,000/- during the financial year have been exceeded.
But now who is liable to deduct the TDS in such a scenario is really a debatable issue which may arise during the course of practical implementation of this sub section. & how each e commerce operator will know that overall limits of Rs 5,00,000/- had been crossed, because of the certain reason like –
1) Technical difficulties of implementing suchcases.
2) Contractual agreement will play a major role to prevent the effective implementation of this section.
3) For Example, the contract between Digi India and Mr Balram is of such nature, that Mr Balram can’t disclose to its other e commerce operator say Easy pay ink the total amount/values etc. of transactions entered by them during the financial year failing which Mr Balram is liable for stringent action of lawsuits.
Now, in such a case, it is really very difficult for other parties to deduct the TDS since there can be a situation where they will completely unaware that overall exemption limit of Rs 5,00,000/- had been crossed on the part of e commerce participate.
Hence, in order to remove these types of practical difficulties , Section 4 and 5 have been introduced in Section 194O , which gives power to board on approval of central government to implement such provisions as it seems necessary in order to remove the difficulties from the effective elements of the section and all such directions etc. shall be in binding nature for the parties concerned including Assessing officer.
12) what may be the possible solution as in order to remove /mitigate such situation of difficulty?
Ans – According to my opinion, that instead of putting overall limits of Rs 5,00,000/- in the part of e commerce participate, the board should implement the individual limit of each e commerce operator.
Means say if individual limit is fixed at Rs 1,00,000/- then for Digi India they can easily trace the total value of transaction entered by using their platform and implementation can become smooth.
Further Previous year turnover limits as stood in various other section of chapter XVII B can also be incorporate.
13) Correspondingly Section 206AA had been amended vide Finance act , 2020 which provides that where the deduction of tax is required to be made by virtue of Section 194O & the e commerce participate fails to furnish the requisite documents of PAN /Aadhar Number , then tax shall be deducted at a higher rate than 1 % she h shall not exceed @ 5 % in anycase.
14) suppose in the above case, Digi India also provides some advertising services using their platform which is not directly connected with the business of Village creativity of Mr Balram, and it collect Rs 45,000/- from such advertising services.Whether this service is also liable for deduction of tax at sources us 194 O?
Ans – as per the proviso to subsection 3 of Section 194 – O, such services of advertising which is not directly associated with the business of e commerce participate is not covered for the purpose of deduction of tax at sources us 194 O
Summary
There is no single point argument will persist that after the implications of Section 194-O the revenue base of the government will enhanced & also be escaped income of such e commerce participators come into the limelight of revenue authorities during the course of time. However, practical difficulties of actually applying these sections will also arises which leads to litigation. Hence, board should come up with amendments in near future by exercising the rights & power given up its u/s 194O (4) & 194O (5).
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