TDS under Section 194Q : An Analysis

The Finance Act 2020 inserted Sub Section (1H) in Section 206C to provide for tax collection by a seller from the amount received as consideration for the sale of goods if it exceeds Rs. 50.00 Lacs in any previous year. On the Similar lines the Finance Act 2021 inserted a new section 194Q to provide tax deduction by a buyer from the purchase of goods. Section 194Q is made applicable w.e.f. 01.07.2021.

194Q When Applicable : Any person (Buyer) responsible for paying sum to any resident (Seller) for purchase of goods of the value or aggregate of such values exceeding 50 Lacs rupees in any previous year shall at the time of payment/credit (Whichever is earlier) deduct an amount equal to 0.1 percent of such sum exceeding fifty lacs rupees as income tax.

Buyer is also defined : A person whose total sales, gross receipts or turnover from the business carried on by him exceed Rs. 10 Crore during the Financial Year immediately preceding the financial year in which the purchase of goods is carried out.

Buyer can be resident or non resident, It has been clarified by the CBDT that Section 194Q is not applicable to a non resident who does not have permanent establishment in India.

What constitutes Goods : The Sales of Goods Act, 1930 is a specific statute that deals with the ‘sale of good’. Thus the definition of the term ‘goods’ can be referred to from the Sale of Goods Act, 1930 for the purpose of Section 194Q.

‘Goods’ is defined as per Section 2 (7) of the ‘Act’ as. “Every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.”

Therefore, the tax is to be deducted under 194Q from the purchase value of :

• Movable property;
• Any Commodity;
• Share and Securities;
• Electricity;
• Agriculture Produce;
• Fuel;
• Motor Vehicle;
• Liquor;
• Jewellery and Bullion;
• Art or drawings;
• Sculptures;
• Scraps;
• Forest produce; etc

Item wise detailed analysis :

Whether transaction in securities done through stock exchanges are subject to TDS  : There is no one to one contract between buyers and sellers. To remove difficulty, the CBDT has clarified that the provisions of section 194Q shall not be applicable in relation to transactions in securities (and commodities) that are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporations, including recognized stock exchanges or recognized clearing corporation located in International Financial Service Centre (IFSC).

Whether transaction in Electricity are subject to TDS : In the case of State of Andhra Pradesh Vs National Thermal Power Corporation (NTPC) (2002) 5 SCC 203, held that Electricity is a movable property though not tangible. CBDT has clarified that transaction in electricity, renewal energy certificates and energy saving certificates traded through power exchanges registered under Regulation 21 of CERC shall be out of the scope of TDS under the provision of Section 194 Q. Thus TDS is deductible on the transaction only when there is direct purchase from the company engaged in electricity generation.

Whether transaction of purchase of software are subject to TDS : The Finance Act 2012 has made a clarificatory amendment in definition of Royalty given in Section 9 stating that use and right to use computer software is royalty. The payment towards royalty is subject to TDS under section 194J or section 195 as the case may be. The provision of section 194Q would not apply where tax is deductible under any other provision.

In Tata Consultancy Services Vs the State of A.P. (2004) 141 Taxman 132 (SC) held that canned software are goods. If the purchase of software is treated as purchase of services than TDS shall be deducted under section 194J or 195. On the other hand if purchase of software is treated as purchase of goods TDS under section 194Q is to be deducted.

Whether transaction of purchase of Jewellery are subject to TDS : There is no condition that purchase should be connected with the business only. Jewellery, being a movable property, is covered with in the term goods. There is no specific exclusion on purchase of Jewellery. Tax shall be deductible on the purchase of Jewellery if other conditions are also fulfilled.

Whether GST component in sale value is subject to TDS : The CBDT has clarified that under 194 Q TDS shall be deducted on the amount credited without including GST if following conditions are satisfied :

• The TDS deducted at the time of credit of amount in the account of the seller; and
• The component of GST comprised in the amount payable to the seller is indicated separately as per the terms of the agreement or contract between the buyer and the seller.

IF GST amount is non separable TDS has to be deducted on full amount.

Whether Loan advanced to the seller are subject to TDS : The loan advanced by buyer is not a payment towards the purchase of goods, it shall remain outside the purview of this provision. If such loan amount is settled against purchased value at any future date, the liability to deduct TDS shall arise.

What is the treatment of purchase return : CBDT has clarified that since tax is required to be deducted at the time payment or credit, which ever is earlier, thus before purchase return happens, the tax must have already been deducted under section 194Q on that purchases. If seller has refunded the money against purchase return TDS may be adjusted against the next purchases from the same seller.

Simultaneous applicability of Section 194 Q and 206 C (1H) : Second proviso to Section 206 C (1H) provides that if buyer is liable to deduct tax under any other provision on the goods purchased by him from the seller and has deducted no tax shall be deducted on that transaction. Section 194 Q (5) provides that no tax is required to be deducted by person under this provision if tax is deductible under any other provision or tax is collectible U/S 206C (Except U/s 206C (1H)). The Buyer shall have a primary and foremost obligation to deduct the tax, and no tax shall be collected on such transactions U/s 206 C (1H). However tax has not been deducted by the seller for any reason Section 206 (1H) shall apply.

Distinction between 194Q and 206C(1H):

Example :

Rs. Crore

Some other clarifications :-

Whether Tax to be deducted when income of seller / buyer is exempt from tax : CBDT has clarified that Section 194 Q shall not be applicable if income of seller is exempt. Similarly 206 C (1H) shall not be in force for buyer whose income is exempt from tax ( Under section 10 or otherwise).

Whether Turnover /Receipt of non –business activity is to be counted for threshold limit : NO

Cross Application of 194Q, 194O and 206C(1H) :

• Transaction is both within the purview of 194O and 194Q, then Tax shall be deducted under 194O.
• Transaction is both within the purview of 194O and 206 C(1H), then Tax shall be deducted under 194O of the Act.
• Transaction is both within the purview of 194Q and 206C, then tax shall be deducted under 194Q of Income Tax Act, 1961.