CA Prasun Kumar Bhattacharyya
ISSUE
Whether by virtue of the provisions of Section 196, can TDS under Section 194O be avoided in case the seller or the service provider is the Government.
OPINION
At the outset, it is to be understood that Section 194O(1) effective from 1st October, 2020, starts with a non-obstante clause, i.e.
“Notwithstanding anything to the contrary contained in any of the provisions of Part B of this Chapter…” and goes on to state that
“where sale of goods or provision of services of an e-commerce participant is facilitated by an e-commerce operator through its digital or electronic facility or platform (by whatever name called), such e-commerce operator shall, at the time of credit of amount of sale or services or both to the account of an e-commerce participant or at the time of payment thereof to such e-commerce participant by any mode, whichever is earlier, deduct income-tax at the rate of one per cent of the gross amount of such sales or services or both.”
In other words, the TDS mandated under this section is to be effected from payments or credits made to the “e-commerce participant” who evidently is involved in “sale of goods or provision of services” and such involvement of the “e-commerce participant” is facilitated “by an e-commerce operator through its digital or electronic facility or platform..” The points that arise here-from are :-
Who is an “e-commerce participant” ?
Well the Explanation within the section states “e-commerce participant” means a person resident in India selling goods or providing services or both, including digital products, through digital or electronic facility or platform for electronic commerce;
Section 2(31) of the Income tax Act, 1961 defines a person in an inclusive manner and states
“person” includes—
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) a local authority, and
(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.
[Explanation.—For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains;]
An artificial person like the Government -can sue or be sued in its own name in a Court of law or a Tribunal and hence is an artificial juridical person. The Government by virtue of being an “artificial juridical person” satisfies the definition of a person.
Now we need to settle whether the Government in any manner is involved in “sale of goods or provision of services”. Well, that may not be the primary function of the Government, but on occasions more than one, it needs to get into this arena of sale of goods or provision of services and when it does so via the e-commerce operator through its digital or electronic facility or platform, then it does bring about the conducive situation of this section 194O to be attracted.
So far we have a situation that the Government is bound by Section 194O in as much it does fulfill the criteria of being an “e-commerce participant”
Now, let us turn to Section 196, a section by numerical chronology coming after Section 194O and it too starting with a non-obstante clause, though a bit limited in its ambit, as follows :-
“Notwithstanding anything contained in the foregoing provisions of this Chapter ..”
In other words, this non-obstante clause section limits itself only to the foregoing provisions, of course, including Section 194O. The only issue that maybe brought out here is, if the provisions of Section 194O and Section 196 have any contradiction, which section should prevail considering the non-obstante clause of the respective sections being substantially and significantly different.
Now we know that in cases of such contradiction, the section coming numerically later ought to prevail i.e. Section 196 should prevail. However, here again a counter argument can be put as follows :-
(1) Section 194O is to be introduced in 2020 while Section 196 has been in existence right through having been substituted twice, once by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988. Earlier, it was substituted by the Finance (No. 2) Act, 1967, w.e.f. 1-4-1967. Hence, Section 194O, being a later enactment, it should prevail.
(2) The sweeping non-obstante clause that Section 194O has by stating “Notwithstanding anything to the contrary contained in any of the provisions of Part B of this Chapter…” in so far as it covers the entire Chapter including the sections after it i.e. Section 196, hence Section 194O ought to prevail
However, in my considered opinion, without calling it a drafting chink, Section 194O has been put in the capsule in such a manner that it can and does come before Section 196 and thereby loses on any contrary stand to it, by virtue of being comparatively, a former Section. However, the framers of the legislation could have avoided this hitch by proper drafting
Now let us see what protection does Section 196 offer to the Government
It states in no uncertain terms that none of the sections of the TDS provisions coming before Section 196 shall be applicable to the Government and other stated “person”/s therein under given set of circumstances (for easier reading, relevant portion attributable to the Government has been assimilated and stated here)
“Notwithstanding anything contained in the foregoing provisions of this Chapter, no deduction of tax shall be made by any person from any sums payable to the Government, where such sum is payable to it by way of interest or dividend in respect of any securities or shares owned by it or in which it has full beneficial interest, or any other income accruing or arising to it.”
Now, the issues that can emanate in a transaction involving Section 194O in which the Government is involved as “e-commerce participant” would be that such sum is payable to the Government in which it (the Government) has full beneficial interest, or any other income accruing or arising to it.
Hence, simply put, Section 196 offers full protection to the Government from the applicability of Section 194O in the set of activity and circumstances discussed above and no TDS ought to be effected in such a case. However, if the Government in any manner has less than full beneficial interest or being devoid of any other income accruing or arising to it, then the provisions of Section 194O must apply
In this light, we may also measure and take care of what has emanated in amendments effected in Section 206C with effect from 01/10/2020, the same day as Section 194O will commence its journey.
Interestingly, within the amendments (effective from 01/10/2020) of Section 206C and in the Explanation portion (which is there since 01/04/1992) of Section 206C the Central and State Governments have been expressly excluded from the definition of “buyer” and applicability of Section 206C has thereby been prohibited in their case.
A school of thought may emerge to view that since Sec 194O has not expressly excluded the Government and on the contrary has an absolute non-obstante clause covering the entire Part B of the TDS chapter for it to be applicable to all, yours truly will then call it a perfect amenable position in as much as :-
(a) Section 206C had to expressly state its exemption of the Government as a “Buyer” in as much as the protection of Section 196 is lost the moment one steps into any section after Section 196
(b) Section 206C is a case of Tax collection at source while Section 196 remains a case of Tax Deduction at source
In view of the aforesaid, we iterate our humble opinion that :-
(a) Section 196 offers full protection to the Government from the applicability of Section 194O in the set of activity and circumstances discussed above i.e. a transaction involving Section 194O in which the Government is involved as “e-commerce participant” receives the sum in which it (the Government) has full beneficial interest, or any other income accruing or arising to it (the Government) and no TDS is applicable in such a case
(b) However, in case the Government does not have full beneficial interest or does not have any other income accruing or arising to it, then the protection shield of Section 196 shall not lie and the e-commerce operator must enforce TDS u/s 194O
