Guidelines for TDS on purchase of goods under section 194Q of the Income Tax Act

The CBDT has come out with Circular No. 13/2021 dated 30^th June, 2021 to prescribe the guidelines for deduction of TDS under section 194Q of the Income Tax Act, 1961. These are as below:

The Finance Act, 2021 inserted a new section 194Q in the Income Tax Act, 1961 which will be effective from 1^st July, 2021. According to this section, any buyer who is responsible for paying any sum to any resident seller for purchase of any goods of the value or aggregate of value exceeding Rs. 50 Lakhs in any previous year is liable to deduct TDS. The buyer at the time of credit of such sum to the account of the seller or at the time of payment, whichever is earlier, is required to deduct an amount equal to 0.1% of such sum exceeding Rs. 50 Lakhs as income tax.

The “Buyer” is defined to be a person whose total sales or gross receipts or turnover from the business carried on by him exceed Rs. 10 crores during the financial year immediately preceding the financial year in which the purchase of goods is carried out. The Central Government has been authorised to specify by notification in the Official Gazette, person who would not be considered as buyer for the purposes of this section.

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. Various representations have been received by the Board for issuing guidelines for removing certain difficulties. In exercise of power contained under section 194Q(3) of the Act, the Board, with the approval of the Central Government, hereby issues the following guidelines. These guidelines at some places have also tried to remove difficulties in implementing the provisions of section 194-O and sub-section (1H) of section 206C of the Act using power contained in sub-section (4) of section 194-O of the Act and sub-section (1-I) of section 206C of the Act.

Applicability on transactions carried through various exchanges

It has been represented that there are practical difficulties in implementing the TDS provisions under section 194Q of the Act in case of certain exchanges and clearing corporations. It has been stated that sometime in these transactions there is no one to one contract between the buyers and the sellers.

In order to remove such difficulties, it is provided that the provisions of section 194Q of the Act shall not be applicable in relation to, -
(i) Transactions in securities and commodities which are traded through recognised stock exchanges or cleared and settled by the recognised clearing corporation, including recognised stock exchanges or recognised clearing corporation located in International Financial Service Centre;
(ii)  Transactions in electricity, renewable energy certificates and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of the CERC; and

For this purpose:
(i) “Recognised clearing corporation” shall have the same meaning assigned to it in clause (i) of the Explanation to clause (23EE) of section 10 of the Act;
(ii) “Recognised stock exchange” shall have the meaning assigned to it in clause (ii) of the Explanation I to sub-section (5) of section 43 of the Act; and
(iii) “International Financial Services Centre” shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, 2005.

Calculation of threshold for the financial year 2021-22

Since section 194Q would come into effect from 1^st July, 2021, it was requested to clarify how the threshold of Rs. 50 Lakhs specified under this section shall be computed and whether the tax is required to be deducted in respect of advance paid before 1^st July, 2021 and sum credited thereafter.

It is hereby clarified that-

(i) Since section 194Q of the Act mandates buyer to deduct tax on credit of sum in the account of seller or on payment of such sum whichever is earlier, the provision of this sub-section shall not apply on any sum credited or paid before 1^st July, 2021. If either of the two events had happened before 1^st July, 2021, the transaction would not be subjected to the provisions of section 194Q of the Act.

(ii) Since the threshold of Rs. 50 lakhs is with respect to the previous year, calculation of sum for triggering TDS under section 194Q shall be computed from 1^st April, 2021. Hence, if a person being buyer has already credited or paid Rs. 50 Lakhs or more up to 30^th June, 2021 to a seller, the TDS under section 194Q shall apply on all credit or payment during the previous year, on or after 1^st July, 2021, to such seller.

Adjustment for GST, purchase returns

It is requested to clarify whether adjustment is required to be made for GST or purchase returns for the purpose of tax deduction u/s 194Q. Vide circular no. 17 of 2020 dated 29^th Sep. 2020, it was clarified that no adjustment on account of GST is required to be made for collection of tax u/s 206C(1H) of the Act since the collection is made with reference to receipt of amount of sales consideration. However, the situation is different so far as TDS is concerned. It has been clarified in Circular no. 23 of 2017 dated 19^th July, 2017 as under:

“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 IGST, CGST, SGST and UTGST.”

Accordingly with respect to TDS under section 194Q of the Act, it is clarified that 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 seller, the component of GST comprised in the amount payable to the seller is indicated separately, tax shall be deducted u/s 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.

Further, with respect to purchase return, its is clarified that the 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 u/s 194Q of the Act 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 u/s 194Q of the Act has been completed with goods replaced.

Whether non-resident can be buyer under section 194Q of the Act

It is clarified that the provisions of section 194Q of the Act 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. For this purpose, “permanent establishment” shall mean to include a fixed place of business through which the business of the enterprise is wholly or partly carries on.”

Whether tax is to be deducted when the seller is a person whose income is exempt

It is clarified that the provisions of section 194Q of the Act 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 (Like RBI Act, ADB Act etc.)
Similarly, with respect to section 206C(1H) of the Act, it is clarified that the provisions of this sub-section shall not apply to sale of goods to a person, being a buyer, who as a person is exempt from income tax under the Act (like a person exempt under section 10) or under any other Act passed by the Parliament (Like RBI Act, ADB Act etc.)

The above clarifications would not apply if only part of the income of the person (being a seller or being a buyer, as the case may be) is exempt.

Whether tax is to be deducted on advance payment

It is clarified that since the provisions apply on payment or credit, whichever is earlier, the provisions of section 194Q of the Act shall apply to advance payment made by the buyer to the seller.

Whether provisions of section 194Q the Act shall apply to buyer in the year of incorporation

It is clarified that under section 194Q of the Act, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding Rs. 10 crores 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 of the Act shall not apply in the year of incorporation.

Whether provisions of section 194Q of the Act shall apply to buyer of the turnover from business is Rs. 10 crore or less

It is clarified that for the purposes of section 194Q of the Act, a buyer is required to have total sales or gross receipts of turnover from the business carried on by him exceeding Rs. 10 crores during the financial year immediately preceding the financial year in which the purchase of goods is carried out.
Hence, the sales or gross receipts or turnover from business carried on by him must exceed Ts. 10 crores. 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) and section 194Q

• Under sub-section (3) of section 194-O of the Act, a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub-section (2), shall not be liable to tax deduction at source under any other provision of Chapter XVII of the Act.
• Under second proviso to sub-section (1H) of section 206C of the Act, the provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provisions of this Act on the goods purchased by him from the seller and has deducted such tax
• Under sub-section (5) of section 194Q of the Act, the provisions of this section shall not apply to a transaction on which:
  (i) Tax is deductible under any of the provisions of this Act; and
  (ii) Tax is collectible under the provisions of section 206C, other than a transaction on which sub-section (1H) of section 206C applies.

After conjoint reading of all these provisions, the following is clarified:

• If tax has been deducted by the e-commerce operator on a transaction u/s 194-O of the Act [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 u/s 194Q of the Act.
• Though sub-section (1H) of section 206C of the Act provides exemption from TCS if the buyer has deducted TDS on goods purchased by him, to remove difficulties, it is clarified that this exemption would cover also cover a situation where instead of the buyer the e-commerce operator has deducted TDS on that transaction of sale of goods by seller to buyer through e-commerce operator.

• If a transaction is both within the purview of section 194-O of the Act as well as section 194Q of the Act, the tax is required to be deducted u/s 194-O of the Act and not under section 194Q of the Act.
• Similarly, if a transaction is both within the purview of section 194-O of the Act as well as section 206C(1H) of the Act, tax is required to be deducted u/s 194-O of the Act. The transaction shall come out of the purview of section 206C(1H) of the Act 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 tax under section 206C(1H) of the Act on the same transaction.

It is clarified that here primary responsibility is on e-commerce operator to deduct the tax under section 194-O of the Act and that responsibility cannot be condoned if the seller has collected the tax u/s 206C(1H) of the Act. This is for the reason that the rate of TDS u/s 194-O is higher than the rate of TCS u/s 206C(1H).

• If a transaction is both within the purview of section 194Q as well as section 206C(1H) of the Act, the tax is required to be deducted under section 194Q of the Act. The transaction shall come out of the purview of section 206C(1H) of the Act after tax has been deducted by the buyer on that transaction. However, if, for any reason, tax has been collected by the seller u/s 206C(1H) of the Act, before the buyer could deduct tax u/s 194Q of the Act on the same transaction, such transaction would not be subjected to tax deduction again by the buyer. This concession is provided to remove difficulty, since the tax rate if deduction and collection are same in section 194Q and section 206C(1H) of the Act.