TDS ON PURCHASE OF GOODS- DETAILED ANALYSIS OF SECTION 194Q

Introduction:

The provisions of Tax Deduction at Source (TDS) have been a major source of direct tax revenue to the Government. This has led the scope of TDS been widened over the period of time. The Finance Act, 2020 introduced section 206C(1H) which provided for collection of tax (TCS) by the seller from the buyer in cases where the amount received as sales consideration against goods exceeded Rs. 50 Lakhs in the previous year. Now, the Government has come out with new TDS provisions on similar lines. The Finance Act, 2021 inserted a new section “Section 194Q” providing deduction of tax at source on purchases of goods. This section will be effective from 1^st July, 2021.

A discussion of section 194Q is very important as both section 206C(1H) and section 194Q will have an interplay as any transaction dealing with goods might have implication of both the sections and therefore will create a lot of confusions. In this article, we will have an in-depth discussion of section 194Q with FAQs on its applicability.

Section 194Q reads as follows:

“(1) 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 50 Lakhs 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 Rs. 50 Lakhs as income-tax.

Explanation: 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 Rs. 10 crores during the financial year immediately preceding the financial year in which the purchase of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to the conditions as may be specified therein.

(2), (3), (4) …..

(5) 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 296C applies.”

Analysis of section 194Q:

Under section 194Q, the buyer is liable to deduct TDS.
Provisions of section 194Q are not applicable in case the seller is a non-resident.
TDS shall be deducted in case of purchase of any goods. Thus, no TDS is required to be deducted on purchase of services.
The buyer shall be liable to deduct TDS under section 194Q only when his turnover in the immediately preceding financial year was more than Rs. 10 crores. If the turnover of the buyer in the last financial year is below or up to Rs. 10 crores, the buyer is not responsible for TDS deduction u/s 194Q.
TDS shall be deducted @ 0.1% of the purchase value of goods in excess of Rs. 50 Lakhs from the seller. But if PAN of the seller is not available, TDS shall be deducted @ 5%.

PAN Available or Not	Rate of TDS u/s 194Q
If PAN of seller is available	0.1%
If PAN of seller is not available	5%

TDS shall be deducted at the time of credit to the account of seller or at the time of payment, whichever is earlier. Thus, TDS shall be deducted on the advance payments also.
The Central Government may notify the cases where the “Buyer” shall not be required to deduct TDS under section 194Q.

Exemptions from TDS u/s section 194Q:

TDS provisions under section 194Q shall not be applicable in the following two cases:
(a) Transactions on which TDS is already deductible under other provisions of the Income Tax Act;
(b) Transactions on which TCS is collectible under section 206C [other than a transaction on which TCS is collectible u/s 206C(1H)].

Due date of deposit of TDS

TDS deducted under section 194Q in a particular month shall be deposited on or before the following dates:

Type of deductor	Mode of payment of TDS	Due date for deposit of TDS
Office of Government	Without Income Tax Challan	On the same day on which tax is deducted
Office of Government	With Income Tax Challan ITNS 281	Within 7 days from the end of the month in which tax is deducted
Other Deductors	With Income Tax Challan ITNS 281	For April- February: within 7 days from the end of month in which Tax is deducted For March: on or before 30^th April

Due date of filing TDS return

Where TDS has been deducted as per the provisions of section 194Q, the buyer shall furnish TDS return in Form 26Q on a quarterly basis on or before the following dates:

Quarter	Due Date of furnishing TDS Return
April- June	31^st July of the Financial Year
July- September	31^st October of the Financial Year
October- December	31^st January of the Financial Year
January- March	31^st May of the financial year immediately following the financial year in which TDS is deducted

Penalty for non-filing of TDS return

Late Fees under section 234E	In case of delay in filing of TDS return, late fees u/s 234E shall be payable @ Rs. 200 per day during the period failure continues. However, the maximum late fees shall not be more than the aggregate amount of TDS deducted.
Penalty under section 271H	If the buyer fails to furnish TDS return or furnishes inaccurate information in the TDS return, he may be liable to penalty u/s 271H of a minimum Rs. 10,000 and up to Rs. 1 Lakh.

Interplay between TDS u/s 194Q and TCS u/s 206C(1H)

The provisions of section 206C(1H) had been inserted by Finance Act, 2020 with effect from 1^st October, 2020 in respect of TCS on sale of goods to be collected by the seller from the buyer of the goods. Whereas section 194Q deals with TDS on purchase of goods to be deducted by the buyer. Therefore, there might be a situation where both section 194Q and section 206C(1H) are applicable to a transaction of sale and purchase of goods.

However, section 206C(1H) provides a specific exclusion from TCS applicability where the buyer of goods is liable to deduct TDS on the said transaction and has so deducted TDS. Hence, if TDS has been deducted by the buyer on purchase of goods, then the seller is not required to collect TCS u/s 206C(1H) on the same transaction.

Comparison between section 194Q and section 206C(1H)

Particulars	TDS on purchase of Goods- Section 194Q	TCS on sale of goods- Section 206C(1H)
Effective date of applicability	1^st July, 2021	1^st October, 2020
Person liable to deduct or collect	The buyer is liable to deduct TDS	The seller is liable to collect TCS
Threshold Turnover Limit to trigger the applicability of section	Where the total sales, gross receipts or turnover of the buyer exceeds Rs. 10 crores in the immediately preceding financial year	Where the total sales, gross receipts or turnover of the seller exceeds Rs. 10 crores in the immediately preceding financial year
Rate of TDS/TCS	If PAN available: 0.1% If PAN not available: 5%	If PAN available: 0.1% (0.075% for FY 2020-21) If PAN not available: 1%
Amount on which Tax to be deducted or collected	Tax to be deducted on purchases in excess of Rs. 50 lakhs	Tax to be collected on receipt of sales consideration in excess of Rs. 50 Lakhs
Time of deduction or collection	At the time of credit or payment, whichever is earlier	At the time of receipt
Due date of depositing TDS/TCS	TDS to be deposited to Government by 7^th day of subsequent month and by 30^th April in case of March month	TCS to be deposited by 7^th day of subsequent month and by 30^th April in case of March month
TDS/TCS returns to be filed in	Form 26Q	Form 27EQ
TDS/TCS certificate to be issued in	Form 16A	Form 27D
Preference of TDS or TCS	The buyer shall deduct TDS u/s 194Q if the purchase value exceeds Rs. 50 Lakhs. In this case, the seller will not collect TCS u/s 206C(1H)	The seller shall collect TCS u/s 206C(1H) only if the buyer is not liable to deduct TDS or the buyer has not deducted TDS u/s 194Q.
Specific exclusions from section	Section 194Q is not applicable if: Tax is deductible under other provisions of the Act Tax is collectible under provisions of section 206C except section 206C(1H)	Section 206C(1H) is not applicable, if the buyer is: Importer of goods Central or State Government, Local Authority An Embassy, High Commission, legation, Commission, Consulate and Trade Representation of a foreign state.

FREQUENTLY ASKED QUESTIONS- SECTION 194Q

Sr.No.	Question	Answer
FAQ-1	Who is liable to deduct TDS under section 194Q	TDS u/s 194Q shall be deducted by a buyer carrying on a business whose total sales, gross receipts or turnover from the business exceeds Rs. 10 crores during the immediately preceding financial year. Thus, the liability to deduct tax u/s 194Q shall arise in the F.Y. 2021-22 w.e.f. 01^st July, 2021 if the turnover of the buyer is more than Rs. 10 crores in the F.Y. 2020-21.
FAQ-2	On which type of assesses section 194Q is applicable	Section 194Q is applicable on all types of assessee whether individual/HUF/Firm/LLP or company. The applicability of section 194Q is based on turnover limit.
FAQ-3	What are the conditions for deduction of tax u/s 194Q	The buyer shall deduct TDS u/s 194Q if the following conditions are satisfied: The seller is a resident person in India The aggregate value of goods purchased by the buyer from such seller is more than Rs. 50 Lakhs in the previous year The Central Government has not excluded the “buyer” from the applicability of section 194Q by a notification in Official Gazette.
FAQ-4	When shall TDS be deducted u/s 194Q	TDS u/s 194Q shall be deducted at the earlier of the following: (a) At the time of credit of such sum to the account of the seller or (b) At the time of payment by any mode The tax shall be deducted even if such sum is credited to any other account whether called “Suspense Account” or by any other name.
FAQ-5	Is TDS required on purchase of services u/s 194Q	No TDS is required to be deducted on purchase of services u/s 194Q. TDS provisions u/s 194Q are applicable only on the purchase of goods.
FAQ-6	What is the rate of TDS under section 194Q	If PAN of the seller is available, the buyer shall deduct TDS @ 0.1% of the purchase value of goods exceeding Rs. 50 Lakhs. If PAN is not available: - 5%
Note: While applying TDS rates, we shall also look into the applicability of newly inserted section 206AB by Finance Act 2021. Section 206AB prescribes higher rates of TDS in case the deductee is a non-filer of income tax returns. Section 206AB states that the rates of TDS shall be higher of the following in case of specified persons: At the twice of the rates specified in the relevant provisions of the Act or At the twice of rates in force; or 5% A ‘Specified Person’ is a person who has: Not filed returns of income for both of the immediately preceding 2 years relevant to the year in which tax is to be deducted or collected; and Whose aggregate of TDS + TCS in his case is Rs. 50,000 or more in each of these immediately preceding 2 years.
FAQ-7	Whether TDS to be deducted on purchase of capital goods	“Goods” means every kind of movable property subject to certain exceptions and inclusions, irrespective of whether it is capital goods or not. Therefore, TDS is required to be deducted u/s 194Q on purchase of capital goods having value exceeding Rs. 50 Lakhs.
FAQ-8	Is a buyer importing goods from outside India required to deduct TDS under section 194Q	Section 194Q provides that the buyer shall be liable to deduct TDS if the seller is a resident person. In the case of import, the seller is generally non-resident, therefore the buyer shall not be obliged to deduct TDS under this section. However, the buyer may take a declaration regarding the residential status of the seller. However, the buyer might be liable for TDS u/s 195 or payment of equalization levy in respect of such transaction. Further, in the case of purchase of goods through High Seas Sales transaction, this exception may not be applicable as the High seas seller may be a resident.
FAQ-9	Whether TDS is required under section 194Q from the goods exported abroad	In case of export of goods, the seller is a resident and the buyer of goods is a foreigner (non-resident). The words used in section 194Q are “Any person being a buyer”. Thus, the liability to deduct TDS under section 194Q may arise on the foreigner (non-resident) buyer (which is practically not feasible) The CBDT has clarified this matter and has stated that a non-resident buyer shall not be required to comply with the provisions of section 194Q of the Act.
FAQ-10	Whether TDS to be deducted on the purchase of immovable property by a developer	‘Goods’ means every kind of movable property subject to certain exceptions and inclusions. Hence, the immovable property shall not be treated as goods. Therefore, TDS u/s 194Q shall not be deducted from the purchase of immovable property by a developer.
FAQ-11	Whether TDS to be deducted on advance payment made to the seller	Section 194Q provides that TDS is to be deducted on paying any sum for purchase of goods and TDS shall be deducted at the time of credit or at the time of payment, whichever is earlier. On the basis of reading of above provision, it can be safely concluded that TDS should be deducted even where any advance payment is made towards future purchase of goods. In some cases, the buyer makes advance payment as ‘deposit’ which is not intended to be adjusted against future purchase. TDS shall not be deducted against such deposit until such deposit is actually adjusted against the purchase.
FAQ-12	Whether payment of advance before 01-07-2021 for purchase of goods will be subject to TDS	The provisions of section 194Q are effective from 1^st July 2021 therefore, section 194Q shall apply to the purchases made on or after 01-07-2021. In other words, the tax shall be deducted where the payment is made or the amount is credited on or after 01-07-2021. Thus, where any of the event (i.e. payment or credit) has occurred before 1^st July, 2021, no liability to deduct TDS will arise. CBDT has also given clarification to this effect.
FAQ-13	Whether the amount advances as a loan to the seller shall come within the ambit of section 194Q	The requirement to deduct TDS under section 194Q shall arise if the purchase value from any seller exceeds Rs. 50 Lakhs during the previous year. The deduction is to be made at the time of credit or at the time of payment, whichever is earlier. Since, the loan advanced by the buyer to a seller is not a payment towards the purchase of goods, it shall remain outside the purview of this provision. Thus, there is no requirement to deduct TDS on loans advanced by the buyer to the seller. But if in case the loan already given to a seller is treated as an advance for purchase of goods on a future date by adjustment against such purchases, the liability to deduct TDS shall arise on the date of such adjustment.
FAQ-14	Whether tax to be deducted on the purchase of goods by one branch from another	The existence of two distinct parties as ‘seller’ and ‘buyer’ is a pre-requisite for TDS under section 194Q. This condition is not fulfilled in case of a branch transfer of goods. Therefore, the provisions of section 194Q are not applicable in case of branch transfers.
FAQ-15	Whether additional or out-of-pocket expenses form part of purchase value of goods for the purpose of TDS u/s 194Q	If additional or out-of-pocket expenses are reflected in the purchase invoice itself, it should form part of purchase value and TDS shall be deducted on such expenses also. But If additional or out-of-pocket expenses are charged through a separate invoice or debit note on actual basis, it shall not form part of purchase value for the purpose of deduction of TDS and also for computing threshold limit of Rs. 50 Lakhs.
FAQ-16	Whether TDS required to be deducted on the transaction in electricity	The CBDT has clarified that the transaction in electricity, renewable energy certificates and energy-saving certificates traded through power exchanges registered under Regulation 21 of the CERC shall be out of the scope of TCS u/s 206C(1H). The same rationale has also been given by CBDT in respect of clarification given vide its circular no. 13/2021 dated 30th June, 2021
FAQ-17	Whether a transaction in securities through stock exchange shall be subject to TDS u/s 194Q	The CBDT vide Circular No. 17 of 2020 has clarified that the provisions of section 206C(1H) shall not be applicable in relation to transactions in securities and commodities which are traded through recognized stock exchanges or cleared and settled by the recognized clearing corporation, including recognized stock exchanges or recognized clearing corporations located in International Financial Services Centre (IFSC). Section 194Q will also not be applicable on similar transactions as clarified by CBDT vide circular no. 13/2021 dated 30th June, 2021.
FAQ-18	Whether TDS be deducted on purchase of software u/s 194Q	Taxation of software has been a subject matter of debate under Income Tax Act. However, the Finance Act 2012, has clarified by amendments under section 9 that the consideration for the use or right to use of computer software is a royalty. The payment towards royalty is subject to TDS under section 194J or section 195. Therefore, the provisions of section 194Q will not apply where the tax is deductible under any other provision. However, the supreme Court in its judgement in Tata Consultancy Services vs. State of A.P. [2004] 141 Taxman 132(SC) held that Canned software (off the shelf computer software) are ‘goods’. Therefore, if the purchase of software has been treated as goods in the light of above decision, then the buyer shall be liable to deduct TDS subject to conditions laid under section 194Q.
FAQ-19	Whether TDS to be deducted on the total invoice value including GST	A similar issue has been raised in respect of section 194J where CBDT vide circular no. 23/2017 dated 19-7-2017 has clarified that wherever in terms of the agreement or contract between the payer and payee, the component of ‘GST on services’ comprised in the amount payable to a resident is indicated separately, TDS shall be deducted on the amount paid or payable without including such ‘GST on services’ component. However, such clarification was issued in respect of GST on services only. Similar principle may also be inferred in case of section 194Q. Therefore, in our opinion, TDS u/s 194Q shall be deducted on the purchase value without including GST therein. CBDT has also clarified the same vide circular no. 13/2021 dated 30th June, 2021.
FAQ-20	What shall be the impact of debit note for computing TDS u/s 194Q	Since the tax has to be deducted on the purchase value, any adjustment made to the account of the seller by way of issuing a debit note will not have any significant impact on the amount of TDS to be deducted. The amount of purchase value shall not be reduced with the amount of debit note for calculation of the amount of TDS.
FAQ-21	Whether purchase returns should be adjusted for computing the threshold limit of Rs. 50 Lakhs in a financial year	The threshold of Rs. 50 Lakhs is to be computed after considering the purchase value of goods. Therefore, where the goods are returned, the value of such returns shall be reduced to arrive at the threshold limit of Rs. 50 lakhs. But, once tax is deducted on the basis of crossing the threshold limit of Rs. 50 Lakhs and later the net purchases fall below Rs. 50 Lakhs owing to purchase return, such returns shall not be relevant for TDS already deducted.
FAQ-22	If the seller has multiple units from which purchases are made by a buyer, whether purchases made from different units be aggregated?	If different units of a seller are under same PAN, the purchases made form such different units shall be aggregated for computing the threshold limit of Rs. 50 Lakhs.
FAQ-23	Whether TDS u/s 194Q be deducted in case of a works contract	In case of works contract where a single invoice is issued without bifurcation of goods and services component, TDS shall be deducted u/s 194C. Therefore, section 194Q shall not apply. Otherwise, TDS on goods component forming part of a works contract shall be deducted u/s 194Q.
FAQ-24	How will be threshold limit of Rs. 50 Lakhs computed	The threshold limit of Rs. 50 Lakhs shall be computed from 01-04-2021. Thus, if a buyer has already purchased goods of value Rs. 50 Lakhs or more up to 30-06-2021 from a seller, TDS under section 194Q shall apply on all purchases made on or after 01-07-2021.
FAQ-25	Where goods are purchased by a customer from an e-commerce participant, would section 194Q apply or section 194-O	Section 194-O was introduced requiring deduction of tax by e-commerce operator while making payment to e-commerce participants. So far as the condition to trigger section 194-O satisfies, TDS should be deducted by the e-commerce operator under section 194-O of the Act for the following reasons: Section 194Q specifically exempts transactions that are subject to TDS under any other provisions of the Act; and Section 194-O starts with a non-abstante clause and therefore overrides section 194Q.
FAQ-26	Once the consideration for purchase of goods exceeds Rs. 50 lakhs, is TDS required to be deducted on the entire purchase or on the purchase exceeding Rs. 50 Lakhs	Tax shall be deducted on the purchase value in excess of Rs. 50 lakhs only. Suppose, you make first purchase of Rs. 30 Lakhs and then makes second purchase from same person Rs. 25 Lakhs, then TDS shall be deducted @0.1% on Rs. 5 Lakhs.
FAQ-27	Can a seller apply for the certificate for lower deduction of TDS in respect of section 194Q	The Finance Act, 2021 has not allowed the benefit to apply for a certificate for deduction of tax at lower rates or nil rates in respect of transactions covered by section 194Q.
FAQ-28	What shall be the consequences for failure to deduct or pay TDS u/s 194Q	If the buyer fails to deduct TDS in whole or part or fails to deposit the TDS to Government, then he shall be deemed to be an “assessee in default”. If the buyer fails to deduct TDS, he shall be liable to pay interest @ 1% for every month or part thereof on the amount of tax he fails to deduct. If the buyer has deducted TDS but fails to deposit the same, he shall be liable to pay interest @ 1.5% for every month or part thereof on the amount of tax he failed to deposit to the credit of the Government. Further, non-deduction of TDS will also attract disallowance of expenses u/s 40(a)(ia) to the extent of 30% of the purchase value while computing business income of the buyer.
FAQ-29	Consequences of being “Assessee in Default”	Levy of interest under section 220 Penalty under section 221 Recovery proceedings under section 222, 227, 229 and 232 Prosecution proceedings

CBDT has issued Circular No. 13/2021 dated 30th June, 2021 to clarify various issues related to section 194Q and also section 194-O and section 206C(1H). You may access the circular at the following link: Circular No. 13/2021 dated 30th June, 2021

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