TCS on Sale Of Goods Section 206C(1H) – Judicial Review

Memorandum of Objects On Finance Bill 2020

Clause 84 Widening the scope of section 206C to include TCS on foreign remittance through Liberalised Remittance Scheme (LRS) and on selling of overseas tour package as well as TCS on sale of goods over a limit.

Section 206C of the Act provides for the collection of tax at source (TCS) on business of trading in alcohol, liquor, forest produce, scrap etc. Sub-section (1) of the said section, inter-alia, provides that every person, being a seller shall, at the time of debiting of the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, collect from the buyer of certain goods a sum equal to specified percentage, of such amount as income-tax.

Further, in order to widen and deepen the tax net, it is proposed to amend section 206C to levy TCS on sale of goods above specified limit, as under:

•  A seller of goods is liable to collect TCS at the rate of 0.1 per cent on consideration received from a buyer in a previous year in excess of fifty lakh rupees. In non-PAN/ Aadhaar cases the rate shall be one per cent.
• Only that seller whose total sales, gross receipts or turnover from the business carried on by it exceed ten crore rupees during the financial year immediately preceding the financial year, shall be liable to collect such TCS.
• Central Government may notify person, subject to conditions contained in such notification, who shall not be liable to collect such TCS.
• No TCS is to be collected from the Central Government, a State Government and an embassy, a High Commission, legation, commission, consulate, the trade representation of a foreign State, a local authority as defined in Explanation to clause (20) of section 10 or any other person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to conditions as prescribed in such notification.
• No such TCS is to be collected, if the seller is liable to collect TCS under other provision of section 206C or the buyer is liable to deduct TDS under any provision of the Act and has deducted such amount.

These amendments will take effect from 1st April, 2020.

The provision as enacted reads as follows: Extracted from Finance Act, 2020

95. In section 206C of the Income-tax Act with effect from the 1st day of October, 2020,—

(I) after sub-section (1F), the following sub-sections shall be inserted, namely:—

(1H) Every person, being a seller, who receives any amount as consideration for sale of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, other than the goods being exported out of India or goods covered in sub-section (1) or sub-section (1F) or sub-section (1G) shall, at the time of receipt of such amount, collect from the buyer, a sum equal to 0.1 per cent. of the sale consideration exceeding fifty lakh rupees as income-tax:

Provided that if the buyer has not provided the Permanent Account Number or the Aadhaar number to the seller, then the provisions of clause (ii) of sub-section (1) of section 206CC shall be read as if for the words “five per cent.”, the words “one per cent.” had been substituted:

Provided further that the provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount.

Explanation.––For the purposes of this sub-section,––

“seller” means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the  financial year immediately preceding the financial year in which the sale of goods is carried out, not being a person as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.’

(1I) If any difficulty arises in giving effect to the provisions of sub-section (1G) of sub-section (1H), the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

(1J) Every guideline issued by the Board under sub-section (1-1) shall be  laid before each House of Parliament, and shall be binding on the Income-tax authorities and on the person liable to collect the sum.

From the reading of the legal provisions of section 206C(1H) (the Section), the following issues arise for consideration:

1. MEANING OF GOODS– It is important to under the consideration for sale of goods.  The word “Goods” is not defined in the Income Tax Act. The definition of Goods under GST Act may be more relevant for the purpose of this Section. As per Section 2(52) of the GST Act, “Goods’’ means every kind of movable property other than money and securities but includes actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. This definition is also common for the purpose of Sale of Goods Act 1930. Therefore, any person dealing in the above goods are expected to follow the TCS requirements.

2. SALE OF PROPERTIES– The question for consideration is whether receipt for sale of immovable properties are covered for TCS or not. The sale of properties distinctly covered under Section 194IA for value exceeding Rs. 50 lakhs. Sale of more than one immovable property, each less than 50 lakhs but aggregate value more than Rs. 50 lakhs by a builder to a customer is not covered under Section 194IA. The receipts for sales made by builders to customers are not covered under Section 206C(1H) since the subject matter of sale does not fall under the definition of “Goods”.

3. SERVICES: The said section is not applicable for sale of services. At times, it is not clear, whether the subject matter is sale of goods or sale of services such as sale of software, for which the Board may have to clarify.

4. PERSON: The Section is applicable to every person being a seller and ‘person’ as defined under section 2(31) of the Act includes Individual, HUF, Company, Firm, AOP, BOI, Coop Societies, Local Authority and Artificial Judicial Person. From the above, it is clear that it is applicable to all sales of goods effected by the Central or State Governments and local authorities as well.

5. BUSINESS: They should be engaged in the business carried on by him.  Adventure in the nature of trade or one of rare is not required.  It should be carried on meaning a continuous activity.

6. EXEMPTED TRANSACTIONS: The provisions of Section 206C(1H) is not applicable if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount. The Chapter XVII – BB and the Memorandum of Objects were with an intent to widen the tax base and to bring the buyers into the tax net.In a case where buyer is required to deduct TDS and has deducted so, it only captures the seller into tax net but not the buyer. The whole intent of the objective is defeated by the exemption provided and the law and the memorandum of self-contradicting in nature.

7. SELLER: “seller” means a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the sale of goods is carried out. To decide whether a seller is obliged to comply or not, his qualifying turnover needs to be looked into.

8. QUALIFYING TURNOVER: The turnover or gross receipts from the business shall exceed Rs 10 crores of the financial year immediately preceding the financial year.  For example in the case of a newly commenced business, even if the turnover exceeds Rs 10 crores, the provision is not applicable.  In any other case, if the turnover of the previous financial year is less than 10 crores, even if the turnover exceeds 10 crores in the current financial year, it is not applicable.  If the turnover of preceding financial year exceeds Rs 10 crores, the provision is applicable even if the turnover of the current financial year is less than 10 crores. The law does not make it mandatory to comply continuously once a seller is obliged to follow. This will lead to a situation where provisions are applicable and not applicable for different years depending on the quantum of turnover, less than or more than Rs. 10 Crore, of the seller. The provisions of the Act will oscillate with the fluctuations in the turnover of the assessee.

9. AMOUNT RECEIVED: The law envisages that the seller shall collect from the buyer a sum equal to 0.1% of the sale consideration at the time of receipt of such amount.

10. EXEMPTION: This section does not provide for exemption to the buyers who propose to use the goods as raw materials as is provided u/s 206(1A) to the class of transactions covered u/s 206(1).

11. NO LIABILITY CLAUSE TO PAY:The obligation to collect tax is cast under 206C(1), (1C), (1F), (1G) and (1H) and such persons are required to collect as income tax. However, sub-section 3 of Section 206C casting liability to pay within the prescribed time refers to the class of persons under sub-section 1 and sub-section (1C) and omits unintentionally the class of persons covered under sub-section (1F), (1G) and 1(H). In other words, there is a liability to collect but no duty to pay for the class of persons falling under sub-section (1F), (1G), (1H) in the absence of a enabling clause. The sub-section 3 of Section 206C is reproduced below:

206C(3) Any person collecting any amount under sub-section (1) or sub-section (1C) shall pay within the prescribed time the amount so collected to the credit of the Central Government or as the Board directs:

12. QUALIFYING AMOUNT: The amount on which the tax needs to be collected shall be limited only to the consideration for sale of goods. In the absence of sale of goods and amount received, the liability does not exist. The sale consideration can be interpreted as amount received in advance or in arrears.

13. CANCELLATION OF SALE: Practical difficulties arise where advance is collected for sale of goods and TCS is remitted and subsequently the contract is cancelled and the amount is refundable. In such cases, the seller is required to refund only the primary sale consideration received but not the TCS amount since such TCS amount is already credited as prepaid taxes and will appear in Form 26AS and the buyer cannot insist for refund of the TCS amount.

14. TCS ON BAD DEBTS RECOVERED: Situation will also be different if after the sale of the goods, the seller treats whole or any part of the debt as bad debt and subsequently recovers some portion of the bad debt. Difficulty arises in interpreting, whether the bad debts recovered is a part of sale consideration or not. Of course, it is an amount received from a buyer belatedly and the only nexus between the seller and the buyer is on account of sale of goods and the amount received is only for the sale consideration with timing differences and cannot become anything else in the hands of the seller. The treatment in the books of seller as bad debts recovered, cannot take away his liability under Section 206C(1H).

15. ADHOC SALE CONSIDERATION:Wherever the amount collected from the buyers is an ad hoc amount, the seller need to gross it up and remit the TCS accordingly.

16. EXEMPTED SALES:Wherever, the buyer deducts TDS, the seller is not liable for TCS as per second proviso to Section 206C(1H). It is not always clear to the seller whether or not the buyer will do TDS and if so on what portion of the sale consideration. This particularly happens in the case of turn-key projects or composite contracts. The overlapping of both TDS and TCS can not be ruled out when both the seller and the buyer act cautiously.

17. TWICE GROSSING UP:Every time the seller receives part of the sale consideration in advance, the seller is mandated to remit that portion of GST to the GST authorities. He is also required to remit TCS under Section 206C(1H). Difficulty arises in calculation of the amount required to be remitted as the seller needs to calculate GST first and then calculate TCS later, both on grossing up basis requiring tedious calculations.

18. TIME OF LIABILITY:There is a class of difference between 206C(1), 206C(1C) and 206C(1H). In sub-section 206C(1) and 206C(1C), the seller needs to collect TCS at the time of debiting the amount payable by the buyer or at the time of receipt, whichever is earlier. Conspicuously, such timing stipulation is absent in 206C(1H). The liability under 206C(1H) arises only on receipt basis.

19. NEED TO RAISE AN INVOICE In order to collect TCS under Section 206C(1H) also under other TCS provisions, the seller needs to raise an invoice including the amount of TCS, account in the books as a TCS liability even though not payable. Even though the TCS amount is debited to the buyer, the liability under Section 206C(1H) does not arise till the time the amount is collected.

20. MISMATCH BETWEEN BOOKS AND 26AS: Due to the requirement of TCS arising on collection basis, there are timing differences between the year of purchase made by the buyer and the TCS credit amount appearing in Form 26AS. This will lead to reconciliation differences between the books of the buyer and Form 26AS in such a manner that the purchases as in Form 26AS will never match with the purchases in the books of the buyer. This also may lead to selecting the cases for scrutiny on the basis of mismatches.

21. DEEMED RECEIPTS:Where a buyer is required to keep EMD, security deposit or performance guarantee, and if such amounts are later adjusted towards sale consideration, the seller still will have to remit TCS even though it is not a receipt in technical language but is a part of the sale consideration deemed to have been received. Such deemed receipts are not stated in the section.

22. BARTER TRANSACTIONS:Many a times, it is a business practice to sell and buy in settlement of debts.  Such settlement of debts, may not be a receipt, but a deemed receipt of sale consideration and in our considered opinion, TCS is applicable.

23. THIRD PARTY PAYMENTS:In quite a few cases, the sale proceeds are partly paid by Government as release of subsidy or the costs are funded by a third party payments.  All such transactions also amount to receipts on behalf of a buyer and hence the seller will be under obligation to remit TCS.

24. TRANSITIONAL YEAR AND FAQS: The provisions of TCS u/s 206(1H) were to take effect from 1-4-2020 vide the The Finance Bill as introduced, but as it became law, it is effective from 1^st Oct 2020. In the transitional financial year 2020-21, there are lots of unclear legal requirements, which the Board will have to take note of.  By virtue of Section 206C(1I), the Board may issue guidelines/FAQs to remove the difficulties faced as per section 206(1J), every guideline issued by the Board under sub-section (1-1) shall be  laid before each House of Parliament, and shall be binding on the Income-tax authorities and on the person liable to collect the sum.

Article is Authored by-

J V KODHANDAPANI, FCA, CHARTERED ACCOUNTANT

VENKATESH K PANI, BA LLB (Hons), ADVOCATE