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Recently, vide circular no. 20 of 2021 dated 25th November 2021, the Central Board of Direct Taxes has come up with various important clarifications on number of issues relating to provisions of section 194O(4); section 194Q(3) and section 206C(1H). The same is analyzed and explained in the current article.

Briefs of all the three relevant sections-

Before going into the clarification provided vide the above referred circular, firstly, let us have a brief about all the three relevant sections-

1. Section 194O of the Income Tax Act-

An e-commerce operator is required to deduct TDS @1% on the gross amount of sale of goods or provision of services facilitated via its digital/ electronic facility/ platform.

2. Section 194Q of the Income Tax Act-

A buyer, (whose total sales/ receipts/ turnover exceeds INR 10 Crores in the immediately preceding Financial Year of purchase) paying an amount of consideration exceeding INR 50 Lakhs, will be liable to deduct TDS @0.1% on the value exceeding INR 50 Lakhs.

3. Section 206C(1H) of the Income Tax Act-

A seller (whose total sales/ receipts/ turnover exceeds INR 10 Crores in the immediately preceding Financial Year) receiving an amount of sale consideration exceeding INR 50 Lakhs will be liable to collect TCS @0.1% of the sale consideration exceeding INR 50 Lakhs.

Various guidelines/ clarification in the matter-

1. E-auction services vis-à-vis applicability of section 194O; 194Q and 206C(1H)- Facts to be satisfied-

  • An e-auctioneer conducts e-auction services for its clients via its electronic portal.
  • An e-auctioneer is responsible only for the price discovery. Such price discovery is reported to the client.
  • The price discovered via e-auction is not the final transaction price. The price can vary as per the discretion of the client. Importantly, price discovery acts only as the first point of negotiation.
  • The transaction of purchase or sale takes place directly between the buyer and seller. Accordingly, the payment of the transaction is also carried out directly between the buyer and seller.
  • The client deducts TDS (under any section other than section 194O) on the payments made to the e-auctioneer for providing e-auction services.

Clarification on the matter-

  • Provisions of section 194O shall not apply in relation to the e-auction activities carried out by e-auctioneers provided all the above facts are satisfied.
  • Buyer and seller will be liable to deduct TDS and collect TCS as per Section 194Q and Section 206C(1H).

2. Deduction of TDS under section 194Q on various state levies and taxes (other than GST)-

Situation Deduction/ non-deduction of TDS u/s 194Q
When TDS is deducted at the time of credit of amount and in terms of agreement/ contract, the component of taxes (i.e., VAT or service tax or excise or CST) is indicated separately in the invoice. TDS is not to be deducted on the component of such taxes (i.e., VAT or service tax or excise or CST).
When TDS is deducted on a payment basis TDS is to be deducted on the component of such taxes.
In case of purchase return, if the TDS is already deducted and the money is refunded by the seller TDS deducted u/s 194Q must be adjusted against the next purchase from the same seller.

3. Applicability of provisions of section 194Q vis-à-vis exemption under section 206C(1A)-

As per provisions of section 206C(1A), TCS is not to be collected when the following two conditions are satisfied-

  • The buyer of the goods is resident in India; and
  • The buyer has provided a declaration stating that the goods will be utilized for manufacturing or processing or producing the articles/ things.

Recent guidelines under Section 194O(4); Section 194Q(3) and Section 206C(1H)

It is clarified that the buyer will be liable to deduct TDS on the goods as per provisions of section 194Q, wherein, the seller is exempted from the collection of TCS under section 206C(1A).

4. Applicability of provisions of section 194Q in case of a government department (other than a PSU or corporation)-

The government department is liable to deduct TDS under section 194Q if the following two conditions are satisfied-

Condition 1 – The government department should be carrying out a business or commercial activity; and

Condition 2 – The total sales/ receipts/ turnover from such business/ commercial activity during the immediately preceding Financial Year of purchase is more than INR 10 Crores.

Further, the following two important clarifications are also provided-

  • The buyer will not be liable to deduct TDS under section 194Q when the seller is either Department of Central Government or Department of State Government.
  • PSU or corporations are liable to deduct tax as per provisions of section 194Q.

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