TDS on Payment for Purchase of Goods | Section 194Q

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The provisions of section 194Q (inserted with effect from July 1, 2021) are given below –

• • Who is buyer – Under section 194Q, tax is deductible by buyer of goods. “Buyer” for this purpose, means 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. However, “buyer” does not include a person notified by the Central Government (subject to such conditions as may be specified therein†).
  • Who is responsible for tax deduction – Any person (being a buyer) who is responsible for paying any sum to any resident seller for purchase of any goods of the value (or aggregate of such value) exceeding Rs. 50 lakh in any previous year, is required to deduct tax at source under section 194Q with effect from July 1, 2021.
  • At what time tax is deductible – Tax should be deducted by buyer, at the time of credit of such sum to the account of the seller or at the time of payment thereof by any mode, whichever is earlier. Where, however, the above sum is credited to any account (whether called “suspense account” or by any other name) in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.
  • Rate of TDS – Tax is deductible by buyer at the rate of 0.1 per cent of the amount paid or payable exceeding Rs. 50 lakh (in no PAN cases, tax is deductible at the rate of 5 per cent).
  • Threshold limit – Threshold limit is Rs. 50 lakh.
  • When tax is not available – Tax is not deductible in the following cases –

• • Removing difficulty – If any difficulty arises in giving effect to the provisions of section 194Q, the Board may, with the approval of the Central Government, issue guidelines for the purpose of removing the difficulty. These guidelines shall be laid before each House of Parliament and shall be binding on the income-tax authorities and on the person liable to deduct tax.

Clarifications by CBDT – Vide Circular No. 13/2021, dated June 30, 2021 and Circular No. 20/2021, dated November 25, 2021, the following clarifications are given by the Board pertaining to section 194Q –

• • Transactions in securities – Section 194Q shall not be applicable in relation to,

a. transactions in securities and commodities which are traded through recognized exchanges;
b. transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges.

• • Adjustment for GST and other State levies – When tax is deducted at the time of credit of amount in the account of seller and in terms of the agreement or contract between the buyer and the seller, the component of GST comprised in the amount payable to the seller is indicated separately, tax shall be deducted under section 194Q on the amount credited without including such GST. If, however, 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 component of the amount to be invoiced in future.
    The above clarification will also be applicable in the case of purchase/sale of goods which are not covered by GST but covered by other State levies (i.e., VAT, excise duty, etc.).
  • Purchase returns – Tax is required to be 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 on that purchase. If that is the case and against this purchase return the money is refunded by the seller, then this tax deducted may be adjusted against the next purchase against the same seller. 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 has been completed with goods replaced.
  • Whether non-resident can be buyer under section 194Q – The provisions of section 194Q shall not apply to 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.
  • Whether tax is to be deducted when the seller is a person whose income is exempt – The provisions of section 194Q shall not apply on purchase of goods from a person (being a seller) who as a person is exempt from income tax under the Act (like person exempt under section 10) or under any other Act passed by the Parliament. However, this clarification would not apply if only part of the income of the seller is exempt.
  • Whether tax is to be deducted on advance payment – Since the provisions of section 194Q apply on payment or credit whichever is earlier, TDS shall apply to advance payment made by the buyer to the seller.
  • Whether provisions of section 194Q shall apply to buyer in the year of incorporation – Under section 194Q a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding Rs. 10 crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out. Since this condition would not be satisfied in the year of incorporation, the provisions of section 194Q shall not apply in the year of incorporation.
  • Whether provisions of section 194Q shall apply to buyer if the turnover from business is Rs. 10 crore or less – For the purposes of section 194Q, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding Rs. 10 crore during the immediately preceding financial year. Consequently, the sales or gross receipts or turnover from business carried on by him must exceed Rs. 10 crore. His turnover or receipts from non-business activity is not to be counted for this purpose.
  • Cross application of section 194-O, section 206C(1H) section 194Q – Under section 194Q(5), the provision of this section shall not apply to a transaction on which –

a. tax is deductible under any of the provisions of this Act; and
b. tax is collectible under the provisions of section 206C [other than a transactions on which sub-section (1H)] applies.

After conjoint reading of all these provisions the following clarifications are given by the Board –

1. 1. If tax has been deducted by the e-commerce operator on a transaction under section 194-O [including transactions on which tax is not deducted on account of sub-section (2) of section 194-O], that transaction shall not be subjected to tax deduction under section 194Q.
   2. Section 206C(1H) provides exemption from TCS if the buyer has deducted tax at source on goods purchased by him. To remove difficulties, it has been clarified that this exemption would also cover a situation where instead of the buyer, the e-commerce operator has deducted tax at source on that transaction of sale of goods by seller to buyer through e-commerce operator.
   3. If a transaction is both within the purview of section 194-O as well as section 194Q, tax is required to be deducted under section 194-O and not under section 194Q.
   4. Similarly, if a transaction is both within the purview of section 194-O as well as section 206C(1H), tax is required to be deducted under section 194-O. The transaction shall come out of the purview of section 206C(1H) after tax has been deducted by the e-commerce operator on that transaction. Once the e-commerce operator has deducted the tax on a transaction, the seller is not required to collect the tax under section 206C(1H) on the same transaction. Primary responsibility is on e-commerce operator to deduct the tax under section 194-O and that responsibility cannot be condoned if the seller has collected the tax under section 206C(1H). This is for the reason that the rate of TDS under section 194-O is higher than rate of TCS under section 206C(1H).
   5. If a transaction is both within the purview of section 194Q as well as section 206C(1H), the tax is required to be deducted under section 194Q. The transaction shall come out of the purview of section 206C(1H) after tax has been deducted by the buyer on that transaction. Once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax under section 206C(1H) on the same transaction. If, however, for any reason, tax has been collected by the seller under section 206C(1H), before the buyer could deduct tax under section 194Q on the same transaction, such transaction would not be subjected to tax deduction again by the buyer.

• E-auction services carried out through electronic portal – The provisions of section 194-O shall not apply in relation to e-auction activities carried out by e-auctioneers if the following parameters are satisfying –

a. the e-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported to the client;
b. the price so discovered through e-auction process is not necessarily the price at which the transaction takes place and it is up to the discretion of the client to accept the price or to directly negotiate with the counter-party;
c. the transaction of purchase/sale takes place directly between the buyer and the seller outside the electronic portal maintained by the e-auctioneer and price discovery only acts as the starting point for negotiation and conclusion of purchase/sale;

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† In exercise of this power, the Central Government has specified that Air India Assets Holding Ltd. shall not be considered as “buyer” for this purpose in case of transfer of goods by Air India Ltd. to it under a plan approved by the Central Government – Notification No. S.O. 3680(E), dated September 10, 2021.