Section 194O of Income-tax Act, 1961 – TDS on payment by one e-commerce operator to another e-commerce operator
In order to widen and deepen the tax net by bringing participants of e-commerce within tax net, vide the Finance Act No. 12 of 2020, the Government of India has inserted a new section 194-O in the Income-tax Act, 1961 (‘the Act’), effective from October 1, 2020.
As defined in Section 194-O of the Act, an “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. And, an “e-commerce operator” means a person who owns, operates or manages digital or electronic facility or platform for electronic commerce.
In terms of the provisions of section 194-O of the Act, an e-commerce operator (resident/ non-resident) is required to withhold tax from the gross amount paid/ payable to an e-commerce participant (resident) in respect of sale of goods or provision of services or both facilitated through its digital or electronic facility or platform (by whatever name called). The tax is required to be withheld at the rate of one percent (subject to reduced rate u/s 197B of the Act, for the specified period) of the gross amount of such sales or services or both. Further, this section also provides that any payment made by a purchaser of goods or recipient of services directly to an e-commerce participant shall be deemed to be the amount credited or paid by an e-commerce operator to an e-commerce participant and accordingly be included in the gross amount of such sale or services for the purpose of withholding tax under this section.
Section 194-O of the Act, provides specific exclusions. This section is not applicable (i) to non-resident e-commerce participants; and (ii) to individuals and Hindu undivided family where the gross amount paid/ payable does not exceed five lakh rupees and such e-commerce participant has furnished Permanent Account Number or Aadhaar number to an e-commerce operator.
In view of above specific exclusions, a point for consideration arises is as to whether the provisions of section 194-O of the Act, would apply to cases where an e-commerce operator makes payments to another e-commerce operator for facilitating use of its digital or electronic facility or platform to other e-commerce operator for selling goods or services of their e-commerce participants.
Let’s understand this by way of an example. Suppose a corporate travel agency is an e-commerce operator which facilitates sale of travel related products or services or both, of its various e-commerce participants through its digital or electronic platform. This travel agency in turn, in order to widen its customer base and reach, uses digital or electronic platform of another e-commerce operator. In this case, whether e-commerce operator is required to withhold tax u/s 194-O of the Act, while making payment to travel agency (also an e-commerce operator)? Here a possible view could be that if travel agency is purely acting as an e-commerce operator then no tax withholding will be required as payment would not be flowing from an e-commerce operator to an e-commerce participant. This is a case of multi-layer transaction where more than one party qualify as e-commerce operator.
In such a case, a view may be taken that TDS provisions of section 194-O of the Act, will not be applicable when payment is made by one e-commerce operator to another e-commerce operator. However, this view may not hold good if travel agency creates its customised travel products/ packages or provides service or both and sales through e-commerce operator. The Central Board of Direct Taxes (‘CBDT’) should, therefore, provide clarity on multi-layer transactions to avoid situation of disputes and difference of opinion between such parties regarding withholding tax obligation. Further, relying on the guidelines issued by the CBDT vide Circular No.17 of 2020 dated September 29, 2020, travel agency may claim that tax should be withheld only once on one transaction and there should not be multiple time withholding of tax on the same transaction.
Here it is pertinent to note that the CBDT has in its above Circular given clarification with respect to payment gateway that payment gateway will not be liable to withhold tax if e-commerce operator has already withheld tax on the same transaction. Therefore on similar lines, the CBDT should also clarify that in case of any transaction where multiple parties are involved, tax should be withheld only once on same transaction. For this Travel agency may furnish an undertaking to e-commerce operator for compliance with TDS provisions in respect of payments made to their e-commerce participants.
Considering such unclear position, until CBDT comes out with some clarification it is advisable to approach income tax department and obtain lower / nil tax withholding certificate to avoid any litigation in future. Also, there are practical difficulties like the amount of tax withheld (at one percent of gross amount paid/ payable) may be higher than the amount of profit margins/ fee/ commission income, resulting into loss for e-commerce operators/ participants which is not the intention of the legislature. Therefore, CBDT may also consider reducing withholding tax rate appropriately.
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I want to know if a foreign company is selling services in India. Would that company is able to withhold tax?