Introduction: The interaction between Section 194Q and Section 206C(1H) of the Income Tax Act, 1961, introduces specific obligations for buyers and sellers in high-value transactions. Section 206C(1H) mandates sellers to collect TCS on receipts exceeding INR 50 Lakhs, while Section 194Q requires buyers to deduct TDS on payments exceeding the same threshold. This guide explores these provisions, their exemptions, and clarifications to ensure compliance and proper tax handling.
As per section 206C(1H) of the IT Act, every person, who is a seller and receives a consideration for sale of any goods (except for those goods exported out of India) of an aggregate value exceeding INR 50 Lakhs, such person shall collect a sum of 0.1% of such sum which exceeds such INR 50 Lakhs, at the time of receipt of such amount.
where, seller means as a person whose total sales, gross receipts or turnover from the business carried on by him exceeds INR 10 Cr during the financial year immediately preceding the financial year in which the transaction of sale of goods is carried out.
As per Section 194Q of the IT Act, any person, being a buyer who is responsible to pay for the purchase of any ‘goods’, a sum exceeding INR 50 Lakhs, is required to deduct an amount equal to 0.1% of such sum which exceeds such INR 50 Lakhs, at the time of credit of such some to the account of the seller or the payment to such seller, whichever is earlier.
where, buyer is defined as a person whose total sales, gross receipts or turnover from the business carried on by him exceeds INR 10 Cr during the financial year immediately preceding the financial year in which the purchase of goods is carried out.
Further as per circular no. 13 of 2021, it has been clarified that the turnover limit will not be calculated basis the receipts of non-business activities carried on by the buyer. Accordingly, a ‘person’ should be carrying out a business/ commercial activity to qualify as a ‘buyer’.
However, as per section 194Q(5), the provisions of this section shall not apply to a transaction on which-
- tax is deductible under any of the provisions of the Act; and
- tax is collectible under the provisions of section 206C other than a transaction to which sub-section (1H) of section 206C applies.
Accordingly, it can be concluded that section 206C(1H) overrides section 194Q of the Act.
Clarifications in relation to interplay of section 194Q and section 206C(1H)
Q.1 Whether section 194Q will be application to non-residents?
Ans. Basis circular no.13 of 2021, it has been clarified that the provisions of section 194Q shall not apply where the buyer is a non-resident, whose purchase of goods from seller resident in India is not effectively connected with the permanent establishment of such non-resident in India.
where, permanent establishment means a fixed place of business through which the business of the enterprise is wholly or partly carries on.
Q.2 Whether unlisted shares are covered in the definition of ‘goods’?
Ans. As per section 2(7) of the Sales of Goods Act, 1930, ‘goods’ means every kind of moveable property other than actionable claims and money; and includes stock and shares
For section 194Q – As per circular no. 13 of 2021, it has been clarified that the provisions of section 194Q of the IT Act shall not be applicable to transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation.
For section 206C(1H) – As per circular no 17 of 2021, it has been clarified that the provisions of section 206C(1H) of the IT Act shall not be applicable to transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation.
The specific carve-out in section 206C(1H) for transactions involving export and import suggests that the provision is intended to only cover those goods which are generally considered as capable of being exported and imported. Since the transactions in shares/ securities are not typically considered as ‘export’ or ‘import’, one can argue that such transactions are not intended to be covered under section 206C(1H) albeit intended to cover only other physical goods and commodities.
Accordingly, having regard to the wide meaning of ‘goods’ under SOGA, and the broad scope of section 206C(1H) and 194Q emerging from the Circular, it would be difficult to exclude ‘shares/ securities’ from the ambit of ‘goods’.
Q.3 Whether the transferor of shares/ securities qualifies as a ‘seller’ for the purpose of section 206C(1H)?
Ans. Guidance Note on tax audit under section 44AB issued by the ICAI provides that sale proceeds received from the sale of shares, securities, debentures, etc. held as investment will not form part of turnover. However, if they are held as stock-in-trade, the sale proceeds thereof will form part of turnover.
Further, as per CBDT clarification F No 225/12/2016/ITA.II dated 2 May 2016, income arising from the transfer of unlisted shares would be income under the head ‘capital gains’ irrespective of the period of holding of such shares. Accordingly, for non-resident investors/ investment holding company, etc.it can be argued that the activity of holding investments in India is not carrying on business in India so as to trigger implications under section 206C(1H).
Accordingly, individual promoters of companies selling their shares and not carrying on any business on their own (even though business is carried out through companies, etc.) should also not qualify as a ‘seller’ for the purpose of section 206C(1H). However, an alternate view maybe taken that in case non-resident investors/ promoters run the business of the entity being sold, the income of the entity maybe considered to be the income of the non-resident investors/ promoters and accordingly, the non-resident investor/ promoter may qualify as a seller for the purpose of section 206C(1H).
Q.4 Whether collection of TCS in respect of transactions involving non-residents can be said to be extra-territorial in operation?
Ans. Section 206C(1H) requires ‘every person being a seller’ to collect tax at source. A plain reading of the provision suggests that non-residents may also be included within its ambit. In the context of section 195, Supreme Court in the case of Vodafone International Holding B.V had held that a literal construction of “any person responsible for paying” as including non-residents would lead to absurd consequences.
Q.5 Whether adjustment of purchase returns is required while deduction of TDS u/s 194Q?
Ans. As per circular no. 13 of 2021, it has been clarified that if the tax is deducted at the time of payment or credit, whichever is earlier, thus, before purchase return happens, the tax must have already been deducted under section 194Q of the Act on that purchase. In that case, if the money is refunded by the seller, then this tax deducted may be adjusted against the next purchase against the same seller.
However, no adjustment is required if the purchase return is replaced by the goods by the seller as in that case the purchase on which tax was deducted under section 194Q of the Act has been completed with goods replaced.
Q.6 Whether adjustment of GST and other taxes is required while deduction of TDS u/s 194Q?
Ans. As per circular no. 13 of 2021, it has been clarified that if the component of GST and other taxes comprised in the amount payable to the seller is indicated separately, tax shall be deducted u/s 194Q of the Act on the amount credited without including such GST and other taxes.
However, if the tax is deducted on payment basis because the payment is earlier than the credit, the tax would be deducted on the whole amount as it is not possible to identify that payment with GST and other taxes component of the amount to be invoiced in future.
Q.7 Whether any adjustment on account of sale return, discount or indirect taxes can be made u/s 206C(1H)?
Ans. As per circular no. 17 od 2021, it has been clarified that no adjustment on account of sale return or discount or indirect taxes including GST is required to be made for collection of tax u/s 206C(1H) of the Act since the collection is made with reference to receipt of amount of sale consideration.
Q.8 Whether sale of shares/ securities to a non-resident qualify as ‘export of goods outside India’?
Ans. A view maybe taken that, in a situation where the share certificates of an Indian company are physically taken out of India, arguably it can fall within the phrase ‘goods being exported out of India’.
However, since the situs of shares/ securities of an Indian company will be in India even after share certificates are taken out of India, there could still be a risk of not qualifying it as an ‘export’.
Q.9 Whether acquirer of shares/ securities qualify as ‘buyer’?
Ans. The meaning of ‘buyer’ for the purpose of section 206C(1H) inter alia excludes a person importing goods into India. Where the shares/ securities are in dematerialised form, it may not be possible to say that goods are imported in India. However, if physical share certificates are brought into India, there may be a possibility for such acquirer of shares/ securities not to qualify as a ‘buyer’.
Conclusion: Understanding the nuances between Section 194Q and Section 206C(1H) is essential for businesses engaged in significant transactions. By adhering to the defined thresholds and conditions, companies can navigate their TDS and TCS obligations effectively. The clarifications provided by the tax authorities further assist in ensuring accurate tax practices, mitigating risks of non-compliance, and fostering a transparent financial environment.
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