Tax Deducted at Source (TDS) – Section 194Q | Comprehensive Primer

Table of Content

1. Scope and application of Section 194Q
2. Definition of “Goods”
3. What payments are liable to TDS under section 194Q?
4. Whether adjustment is required in respect of purchase returns while deducting TDS under section 194Q?
5. Payers, who are covered by section 194Q

1. Scope and application of Section 194Q

With effect from 01.07.2021, section 194Q provides that any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the ‘seller’) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh rupees in any previous year, shall, 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, deduct an amount equal to 0.1% of such sum exceeding fifty lakh rupees as income-tax.

Check Out Taxmann's TDS Ready Reckoner which provides a detailed analysis of TDS & TCS provisions and guidance on controversial topics with supporting case laws. It covers section-wise TDS chapters, queries on TDS, Charts, FAQs on Section(s) 194P/194Q & 206C(1H) & Deferment of TDS on ESOPs by Start-ups. This book is amended by the Finance Act 2022.

For the purposes of this sub-section, “buyer” 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 purchase of goods is carried out. Central Government is empowered to exempt a person from obligation under this section by notification in the Official Gazette. Such exemption may be made subject to fulfilment of conditions as may be specified in that notification.

If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty. [Section 194Q(3)] Every guideline issued by the Board as above shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and the person liable to deduct tax.

Sub-section (3) of section 194Q of the Act empowers the Board (with the approval of the Central Government) to issue guidelines for the purpose of removing difficulties. In exercise of power contained under sub-section (3) of section 194Q of the Act, the CBDT, with the approval of the Central Government, has issued Guidelines for removal of difficulties vide Circular No. 13/2021, dated 30.06.2021.

The provisions 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 transaction to which sub-section (1H) of section 206C applies.

This means, if on a transaction a TDS or tax collection at source (TCS) is required to be carried out under any other provision, then it would not be subjected to TDS under this section. There is one exception to this general rule. If on a transaction TCS is required under sub-section (1H) of section 206C as well as TDS under this section, then on that transaction only TDS under this section shall be carried out. Such a situation would arise if turnover of each of both buyer as well as seller exceeded the Rs. 10 crore limit in immediately preceding financial year.

The distinction between the provisions of section 194Q and Section 206C(1H) is as follows:

Illustration

2. Definition of “Goods”

The term ‘goods’ is not defined in the Income-tax Act. The term ‘goods’ is of wide import. Anything which comes to the market can be treated as goods. However, this term ‘Goods’ has been defined under the Sale of Goods Act, 1930 and Central Goods and Services Tax Act, 2017 as under:

2.1 Sale of Goods Act, 1930

‘Goods’ means 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”

2.2 Central Goods and Services Tax Act, 2017

‘Goods’ means every kind of movable property other than money and securities but includes actionable claim, 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”

The Sale of Goods Act, 1930 is a specific statute which deals with the ‘sale of goods’ whereas the CGST Act, 2017 deals with tax on ‘supply of goods’. Thus, the definition of term ‘goods’ can be referred to from the Sale of Goods Act, 1930 for the purpose of section 194-O.

The following pronouncements of the Supreme Court are relevant in interpreting the term “goods”:

• • Marketability: To become “goods”, an article must be something which can ordinarily come to the market to be bought and sold. [UOI v. Delhi Cloth & General Mills AIR 1963 SC 791/1963 SCR Suppl. (1) 586] “. . goods ………… should have marketability…………….. In other words the goods ………… are saleable goods…..” [R.D. Saxena v. Balram Prasad Sharma [2000] 7 SCC 264]
  • Goods may be tangible or intangible: A “goods” may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. [Tata Consultancy Services v. State of A.P [2004] 141 Taxman 132 (SC)/BSNL v. UOI [2006] 3 STT 245/152 Taxman 135 (SC)].

The following are some of the illustrations of items that would fall within the scope of the term “goods”:

• • • Movable property;
    • Any commodity;
    • Shares or Securities [However, transactions in “shares and securities” through recognised stock exchanges exempted from section 194Q by Guidelines issued by CBDT u/s 194Q (CBDT’s Circular No. 13/2021, dated 30-6-2021).]
    • Electricity; [However, transactions in electricity, renewable energy certificates and energy saving certificates exempted from section 194Q by Guidelines issued by CBDT u/s 194Q (CBDT’s Circular No. 13/2021, dated 30-6-2021)]
    • Agriculture produce;
    • Fuel;
    • Motor vehicle;
    • Liquor;
    • Jewellery or bullion;
    • Art or Drawings;
    • Sculptures;
    • Scraps;
    • Canned software (off the shelf computer software)-The Supreme Court in its landmark decision of Tata Consultancy Services v. State of A.P [2004] 141 Taxman 132 (SC) held that Canned software (off the shelf computer software) are ‘goods’.

3. What payments are liable to TDS under section 194Q?

Section 194Q applies to payment of any sum to a resident seller for purchase of any goods of the value or aggregate of such value exceeding 50,00,000 in any previous year.

It does not matter whether purchase of goods is by way of capital expenditure or by way of revenue expenditure. There is no such exemption in section 194Q from deduction of tax at source from payments for purchase of capital goods.

Income Computation and Disclosure Standards (ICDS), notified under section 145(2) of the Act, is applicable only for computation of income. ICDSs are not applicable for any other purpose including determining the time of credit of income for deduction of tax at source (TDS).TDS will have to be deducted on the date of credit of sum in books of account or on date of payment irrespective of whether the amount is considered earlier or later for deduction as per the ICDS. The amount of expenditure on which tax has to be deducted is determined by the entry in the books of account and not by the amount for which deduction is allowed under ICDS for computation of income [ICAI’s Tehnical Guide on ICDS].

Section 145A of the Act is relevant only for the purposes of determining income chargeable under the head “Profits and Gains for business or profession”. Section 145A(ii) provides that the valuation of purchase of goods should be adjusted to include the amount of any tax, duty or cess or fee actually paid or incurred by the assessee to bring the goods or services to the place of its location and condition. This adjustment is required only for determining income chargeable under the head “Profits and Gains for business or profession”, not for any other purpose including TDS/TCS.

Whether TDS under section 194Q is applicable even where payment is made in kind? Say, shares are allotted to the vender by the company buyer?

Tax views are possible here:

VIEW 1

Section 194Q will apply even where payment is made in kind.

The word ‘purchase’ is not defined in section 194Q of the Act nor is it defined in any of the definitional clauses of section 2 of the Act. Therefore, one has to rely on its plain meaning.

According to P.R. Aiyar’s Advanced Law Lexicon, the plain meaning of ‘purchase’ connotes “buying for a price or equivalent of price by payment in kind or adjustment towards an old debt or for monetary consideration”.

The above plain meaning fits well with the context of section 194Q as the section refers to “paying any sum….for purchase of any goods” and “payment thereof by any mode”. Section 194Q reads: “any person, being a buyer who is responsible for paying any sum …. for purchase of any goods…. , shall, 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, deduct…”

It would be relevant to note the wordings of some other TDS sections and compare and contrast their wordings with section 194Q :

194C

“Any person responsible for paying any sum…. shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct…”

194J

Any person… who is responsible for paying… any sum by way of shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct….

194LA

Any person responsible for paying… any sum… shall, at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct…

Sections 194C, 194J and 194LA refer to “payment… in cash or by issue of a cheque or draft or by any other mode”. The words “any other mode” in sections 194C, 194J and 194LA come after a listing of modes of payment in money and can be interpreted ejusdem generis cash/cheque/draft. “Any other mode” in these sections can’t be interpreted as payment in kind. Section 194Q, on the other hand, refers to “payment ..by any mode”.

Thus, it can be said that sections 194C, 194J and 194LA contemplate payments in money only and not in kind while section 194Q contemplates payment by any mode-even in kind.

Thus, it is possible to take a view that purchase of goods paid for by any mode (even in kind) would be covered by section 194Q.

VIEW 2

However, an alternative view is possible.

Section 194B, Section 194R(1) and Section 194S have been compared in the Table below:

In CIT v. Hindustan Lever Ltd. [2013] 39 taxmann.com 152, in the context of section 194B, the Karnataka High Court held that the word deduction employed in TDS provisions, postulates are duction or subtraction of an amount from a gross sum to be paid and payment of the net amount there- after. Where the winnings is wholly in kind subtraction/reduction of any sum therefrom does not arise. In other words, the provisions do not cast any duty/responsibility to deduct the tax at source where the winnings is wholly in kind. If the winnings is wholly in kind, as a matter of fact, there cannot be any deduction of tax at source. The Legislature, therefore, has cast duty/responsibility on such person to ensure that the tax is paid before the winnings is released. The proviso to section 194B makes it further clear that no duty of deduction of tax in respect of the winnings is cast on the person who is responsible for paying, where the winnings is wholly in kind. Undoubtedly, in that eventuality such person should ensure that the tax has been paid in respect of the winnings before releasing it to the winner.

It can be seen that wherever law intends to cover payment in kind under TDS, it provides a practical mechanism whereby payer has to ensure payee pays the TDS amount before releasing the payment in kind to the payee.

VIEW 2 above seems to be the better view. It is possible to take a view that if payment in kind had been contemplated by section 194Q, there would be a proviso in section 194Q similar to the respective proviso in section 194B/first proviso in 194R(1)/proviso to section 194S(1).

Whether adjustment is required to be made for GST for the purposes of deduction of TDS under section 194Q?

Further question arises whether GST Input Tax credit in respect of GST paid on purchases will have to be included/excluded for computing limit purposes and for TDS purposes?

Besides, CBDT has clarified that “wherever in terms of the agreement or contract between the payer and the payee, the component of ‘GST on services’ comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII- B of the Act on the amount paid or payable without including such ‘GST on services’ component. GST for these purposes shall include Integrated Goods and Services Tax, Central Goods and Services Tax, State Goods and Services Tax and Union Territory Goods and Services Tax. [CBDT’s Circular No. 23/2017, dated 19.07.2017].

CBDT has, vide Circular No. 13/2021, dated 30.06.2021, clarified that the above clarification in Circular No. 23/2017 shall apply to TDS under section 194Q, as under:

• • 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 of the Act on the amount credited without including such GST.
  • However, if 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.