Section 194Q – Tax deduction on the purchase of goods and FAQs
Section 194Q – Tax deduction on the purchase of goods
and FAQs
As per provisions of section 194Q of the Income Tax
Act, TDS is
deductible if-
·
The buyer
is responsible for making payment of a sum to the resident seller; and
·
Such
payment is to be done for the purchase of goods of the value/ aggregate of the
value exceeding INR 50 Lakhs.
Explanation of the term ‘buyer’-
As per explanation to section 194Q, the term ‘buyer’ means as
under-
· A person
having total sales/ gross receipts/ turnover exceeding INR 10 Crores in the
immediately preceding Financial Year in which the specified purchase of goods
took place;
·
Buyer
will not include any person notified by the Central Government.
Time
of tax deduction on the purchase of goods under Section 194Q
TDS on purchase of goods is to be deducted by the buyer within earlier
of the following dates-
·
At the
time of credit of the sum into the account of the seller; or
·
At the
time of payment of the sum thereof.
Rate of TDS
deduction under Section 194Q
The buyer is liable to deduct TDS at the rate of 0.1% of the purchase
value above INR 50 Lakhs.
However, in case the Permanent Account Number (PAN) of the seller is not available. Then, the buyer would be liable to
deduct tax @5%.
The
effective date of applicability of provisions of Section 194Q
The provisions introduced vide section 194Q will be effective From 1st July 2021.
Other important
points related to Section 194Q
Some of the important points relating to TDS deductible on purchase of
goods are summarized hereunder-
·
TDS is
also deductible under section 194Q against any amount credited to ‘suspense
account’ or any other account under the books of accounts of the person liable
to make payment of such income.
·
Transactions,
wherein, TDS is deductible under both the provisions i.e., section 206C(1H)
and section 194Q. Under such cases, TDS would be deductible only
under section 194Q.
·
Provisions
of section 194Q are not applicable when the
seller is a non-resident.
·
In case
the buyer fails to comply with the tax deduction provisions covered under section
194Q. Then,
as per the provision of section 40a(ia), there would be disallowance of
expenditure up to 30% of the value of the transaction.
·
As not
specifically mentioned, provisions of section 194Q apply to the purchase of
both the types of goods i.e. capital as well as revenue.
Examples relating
to section 194Q–
Example 1 –
Mr. A, a buyer, having a total turnover of INR 50 Crores. Mr. A
purchases goods from Mr. B, a seller, worth INR 52 Lakhs.
Analysis of applicability of section 194Q in the given transaction is
narrated hereunder-
·
Since
buyer’s turnover is above INR 10 Crores, provisions of section
194Q get
applicable.
·
Further,
the buyer has purchased goods having a value of more than INR 50 Lakhs.
·
TDS
under section 194Q will be deductible by the buyer
in the following manner-
|
Particulars |
Amount |
|
Taxable amount (INR
52 Lakhs – INR 50 Lakhs) |
INR 2 Lakhs |
|
Rate at which TDS
deductible under section 194Q |
0.1% |
|
Amount of TDS
deductible |
INR 200 |
Example 2 –
Mr. X, a buyer, is having gross receipts of INR 40 Crores. Mr. X buys
goods from Mr. Y worth INR 60 Lakhs. Notably, Mr. Y, a seller, is having a
turnover of INR 15 Crores.
Applicability of provisions of section 194Q in the above transaction is
narrated hereunder-
·
Provisions
of section 194Q get attracted as the buyer is having gross
receipts above INR 10 Crores.
·
However,
provisions of section 206C(1H) also get applicable as a seller is having a
turnover above INR 10 Crores.
·
Applicability
of TDS/ TCS provisions are analyzed hereunder-
Since both the provisions i.e., section 194Q and section 206C(1H) gets
applicable. TDS would be deductible only under section
194Q as
per the table below-
|
Particulars |
Amount |
|
Taxable amount (INR
60 Lakhs – INR 50 Lakhs) |
INR 10 Lakhs |
|
Rate at which TDS
deductible under section 194Q |
0.1% |
|
Amount of TDS
deductible |
INR 1000 |
FAQ’s on
Section 194Q of the Income-tax Act,1961
1. Is section 194Q
applicable to the purchase of capital goods?
Yes,
section 194Q applies to purchase of all goods whether on capital or on revenue account.
2. Is a buyer importing
goods from outside India required to deduct TDS under this section?
The
obligation to deduct tax under this provision arises only when the payment is
made to a resident seller. As in the case of import, the seller is a non-resident,
the buyer will not have any obligation to deduct tax under this provision.
However, the TDS under Section 195 may be required in respect of such
transaction.
3. Whether tax is
required to be deducted under Section194Q from the goods exported abroad?
Liability
to deduct tax under this provision arises only when the payment is made to a
resident seller. As in the transaction of export of goods, the seller is a
resident but the buyer is a non-resident. Thus, the liability to deduct tax
under this provision may arise on the non-resident buyer, which may not be
practically possible. Thus, the Central Government may exempt such transactions
in view of the powers given by the Explanation to Section
194Q.
4. Whether a transaction
in securities through stock exchanges shall be subject to TDS under this
provision?
Section
206C(1H) provides for the collection of tax (TCS) on the sale of goods. CBDT
has, vide Circular No. 17 of 2020, clarified that provisions
of Section 206C(1H) shall not be applicable in relation to 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 corporations
located in International Financial Service Centre (IFSC).
One
needs to wait and see if CBDT issues such clarification in the context of
section 194Q also exempting such transactions in view of the fact that there no
one-to-one contract between the buyers and sellers and this makes TDS
provisions unworkable in such situation.
5. Whether TDS to be
deducted on the purchase of immovable property by a developer?
Immovable
property is not “goods”. TDS shall be deductible on consideration paid for
purchase of immovable property (other than agricultural land) under section
194-IA and not under this section. TDS is deductible under that section if
consideration is Rs. 50,00,000 or more.
6. Whether TDS is
required to be deducted on the transaction in electricity?
Section194Q provides for the deduction of
tax on the payment made for the purchase of goods. The Apex Court in
the case of State of Andhra Pradesh v. National
Thermal Power Corporation (NTPC) (2002) 5 SCC 203, held that
electricity is a movable property though it is not tangible. It is ‘goods’.
Thus, it may be concluded that the tax should be deducted from the payment made
in respect of the transaction in electricity.
A
transaction in electricity can be undertaken either by way of direct purchase
from the company engaged in generation of electricity or through power
exchanges. The CBDT has clarified vide Circular No. 17 of 2020
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 under the provision
of Section 206C(1H).
In
respect of direct purchase from generating company, TDS will be deductible u/s
194Q. In respect of purchase through power exchanges, it remains to be seen
whether similar exemption as granted from section 194-O and section 206C(1H)
will be granted from section 194Q also.
FAQs on new provision relating to TDS on
purchase of goods
7. Whether TDS should be
deducted on the purchase of 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’. Therefore, purchase of Canned software
(off the shelf computer software) is purchase of ‘goods’ and will be liable to
TDS under section 194Q even if buyer-entity capitalises the same in its books.
Purchase of customised or tailor-made software may be “services” and liable to
TDS under section 194J or section 194-O.
8. Whether TDS is liable
to be deducted on purchase of Jewellery not connected with business?
Tax
is required to be deducted by a buyer carrying on business whose total sales,
gross receipts or turnover from the business exceeds Rs. 10 crores during the
financial year immediately preceding the financial year in which such goods are
purchased. There is no condition that the purchases should be connected with
the business only. Thus, if a person is falling within the definition of the
buyer, tax is required to be deducted even if such purchase is not connected
with the business carried on by him.
Jewellery,
being a movable property, is covered within the term goods. There is no
specific exclusion under Section194Q for deduction of TDS on purchase of
jewellery. Thus, the tax shall be deductible on purchase of jewellery if other
conditions are also fulfilled.
9. Whether additional,
allied and out-of-pocket expenses form part of the purchase value of goods?
Where
these expenses have been reflected in the purchase invoice itself, it should
form part of purchase value and TDS will be deductible on the same. If they are
charged through a separate invoice and on actuals basis, it should not form
part of purchase value for deduction of TDS and for computing the Rs. 50,00,000
threshold limit..
10.
Whether TDS has to be deducted on advance payment made to
the seller?
Subject
of TDS liability is “sum for purchase of goods” and not “sum goods purchased”. The latter expression would
mean payment for completed purchases of goods where purchases is completed by
delivery of goods by the seller. Advance payment is clearly sum for “purchase
of goods” as purpose of payment is to purchase goods and adjust the advance
against amount payable for such purchase. Therefore, advance for payment of
goods will also attract TDS.
11.
Whether the amount advanced as a loan to the seller shall
come within the ambit of this provision?
Loan
advanced by buyers is not a payment towards the purchase of goods. Hence, there
is no requirement to deduct TDS on loan advanced by the buyer. However, if at
any future date, such loan amount is settled against purchased value, the
liability to deduct TDS shall arise. The tax shall be deducted on the date on
which parties agreed to adjust the loan amount against the outstanding
liability.
12.
Whether tax to be deducted on the purchase of goods by one
branch from another?
The
TDS under this section is required to be deducted by any person, being a buyer,
responsible for making payment to the seller for the purchase of goods. Thus,
the existence of two distinct parties as ‘seller’ and ‘buyer’ is a
pre-requisite to construe a transaction as a purchase. The condition of
purchase is not fulfilled in the context of branch transfer. Therefore, the
provisions of this section shall not apply in the case of branch transfers.
13.
What shall be the treatment of debit note for computation of
TDS?
As
the tax has to be computed on the purchase value, the adjustment made to the
ledger of the seller by issuing the debit note will not have an impact on the
tax to be deducted. The position would remain the same if, after the deduction
of tax, the seller repays some consideration to the buyer. In such a situation,
the amount of purchase value shall not be reduced with the amount so refunded
or the debit note so adjusted for calculation of TDS.
14.
If the seller has multiple units, whether purchases made
from different units need to be aggregated?
Where
tax is required to be deducted at source, the deductee is required to furnish
his PAN or Aadhaar number to the deductor failing which the tax is required to
be deducted at higher rates. If the PAN or Aadhaar number is available, the
threshold limit of Rs. 50 lakhs shall be computed in respect of each PAN or
Aadhaar number. In other words, if different units of the seller are under the
same PAN or Aadhaar number, the amount paid or payable to all such units shall
be aggregated to compute the limit of Rs. 50 Lakhs.
15.
Can a seller apply for the certificate for lower deduction
of TDS?
An
assessee can apply to the Assessing Officer to issue a certificate for deduction
of tax at lower rates. Such certificate shall be issued if existing and
estimated tax liability of assessee justifies deduction of tax at a lower rate.
Further, certain assessees have an option to file a declaration for nildeduction
of tax.
However,
the Finance Act, 2021 has not made any consequential amendments to section
197/section 197A to extend the benefit to apply for a certificate for deduction
of tax at lower rates or to file declaration for nil deduction
in respect of transactions covered under Section194Q. Hence, the seller does
not have the option to approach the Assessing Officer to issue a certificate
for a lower tax deduction or to file declaration for nil deduction
in respect of transactions covered under section194Q. In fact, Section 206C(1H)
also does not allow the buyer to apply for the lower or nil TCS
certificate.
16.
Will TDS under section 194Q apply to redemption of
preference shares by a company?
Preference
shares are movable property and goods. In Anarkali Sarabhai v. CIT [1997]
90 Taxman 509 (SC), the Court held that redemption of preference shares is
clearly ‘sale’ by the shareholder to the company and would come within the
purview of ‘transfer’ in view of the following :
·
reading
of sections 77, 80, and 85 of the Companies Act, 1956 [now sections 67, 55, and
43 of the Companies Act, 2013] makes it clear that when a preference share is
redeemed by a company, what a shareholder does is, to sell the shares to the
company. Such a transaction is nothing but the sale of the preference shares by
the shareholder to the company.
That
is why after specifically laying down in section 77(1) of the said Act [now
section 67(1) of the 2013 Act] that no company shall have the power to buy its
own shares, it was necessary to specify in sub-section (5) thereof [sub-section
(4) of section 67 of the 2013 Act] that this provision shall not affect the
rights of a company to redeem any preference shares issued by it.
redemption
of preference shares did not amount to sale, it would not have been necessary to
specifically provide that the restriction imposed upon a company in respect of
buying its own shares will not apply to the redemption of preference shares
issued by the company.
Therefore,
it would appear that if redemption proceeds to any preference shareholder
exceeds Rs. 50,00,000 limit, TDS under section 194Q would apply as it amounts
to purchase of goods.
17.
Will TDS under section 194Q apply to buyback of shares by a
company? Will such buyback amount to purchase of goods?
It
would clearly amount to purchase of goods in view of Supreme Court decision
in Anarkali Sarabhai v. CIT [1997] 90 Taxman
509. Besides section 68 of the Companies Act, 2013 dealing with buyback of
shares refers to it as purchase in the section heading as well as text of the
provisions. However, buyback of shares by domestic companies are subject to 20%
tax under section 115QA of the Act and the consideration is exempt from tax in
the hands of the shareholders under section 10(34A). So it will be a case of
fully tax-free income being subjected to TDS. Besides, section 115QA(4) says
that the tax paid by the company under that section shall be treated as final
payment of tax in respect of distributed income on buyback of shares. In view
of the above, it appears no tax under section 194Q shall be deductible on
buyback of shares. It is better for CBDT to clarify this in removal of
difficulties guidelines.
18.
Company whose turnover is Rs.12 crores in immediately
preceding financial year buys Rs.75,00,000 capital goods from a supplier. The
agreement with the supplier is 1,00,000 shares of the company whose fair market
value is Rs.75,00,000 shall be allotted to the supplier as consideration? Is
TDS deductible u/s 194Q ?
Doubtless,
if we go by the plain meaning of “purchase of goods”, there is purchase of
goods. And the words “payment thereof by any mode” do not exclude payment in
kind. Issue of shares in consideration for capital goods is clearly payment in
kind and clearly “payment thereof in any mode”. TDS will have to be deducted at
the time of credit of Rs.75,00,000 to supplier’s account or at the time of
payment thereof by any mode (i.e. mode of allotment of shares),
whichever is earlier.
19.
Is section 194Q applicable to barter exchange of goods?
It
appears so in view of the words “payment thereof in any mode” used in section
194Q
20.
Will section 194Q apply to loan of material?
It
so happens, for example, Builder A takes building material on loan from Builder
B. Builder A commits to replace to Builder B the quantity taken when his own
stocks arrive. This is loan of material. Section 194Q applies to purchase of
goods and not loan of material.
21.
How does a loan of material differ from barter?
In
barter, it is not exactly the same item in same quantity that is given back. In
loan of material same quantity of same material taken is given back.
22.
Will TDS under section 194Q apply to the redemption of units
by Mutual Fund exceeding Rs.50,00,000 in a financial year to a unitholder? Can
it be said to be “purchase of goods” by the Mutual Fund?
Consequent
on abolition of Dividend Distribution Tax, the Finance Act, 2020 inserted
section 194K with effect 1-4-2020 to levy TDS at the rate of 10% on the
dividend/income paid by the Company/Mutual Fund to its share/unit holder if the
amount of such dividend/income exceeds five thousand rupees in a financial
year.
In
response to queries received after presentation of Finance Bill, 2020 in
Parliament as to, CBDT had clarified, vide Press Release,
dated 4-2-2020 that “a Mutual Fund shall be required to deduct TDS @ 10% only
on dividend payment and no tax shall be required to be deducted by the Mutual
Fund on income which is in the nature of capital gains. Necessary
clarification, if required, shall be proposed in the relevant provision of the
law”. Accordingly, section 194K, as finally enacted, clarifies that no TDS will
be deductible by Mutual Funds on payment of income in the nature of capital
gains. There has been no amendment to section 194K by Finance Act, 2021 so as
to require deduction of TDS by Mutual Fund on deduction of units. Therefore, it
appears that though units can be considered as goods, TDS under section 194Q
will not be attracted on redemption of units by Mutual Fund. One hopes CBDT
will clarify this aspect in removal of difficulties guidelines under section
194Q.
23.
M/s ABC & Co., a partnership firm, invoiced goods worth
Rs.60,00,000 on 15.07.2021 to Partner A’s sole proprietory business A & co.
and debited partner’s capital account as drawings. The turnover of A & Co.
was Rs.12 crores in Financial Year 2020-21. ABC & Co., turnover in
Financial Year 2020-21 was Rs.70 crores. Is ABC & Co. liable to collect tax
at source u/s 206C(1H)? Is A & Co. liable to deduct TDS u/s 194Q?
VIEW
1:
It
can be argued the firm and partner are separate legal entities for tax purposes
under the Act with separate PANs. Therefore, there can be purchase/sale
transaction between a firm and its partner.
If
we go by the plain meaning of ‘purchase of goods”, there is purchase of goods [See Para
30.1-2 above]. And the words “payment thereof by any mode” do not
leave any doubt that payment can be by way of debit by the firm to capital
account of partner for price of goods. So, TDS under section 194Q is attracted
as far as A&Co. is concerned as its turnover exceeds Rs.10 crores in
immediately preceding financial year. Firm is bound to collect TCS under
section 206C(1H) as its turnover exceeds Rs.10 crores in immediately preceding
financial year.
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. Since both provisions apply in present situation, ABC
& Co. will not collect TCS and only A & Co. will deduct TDS under
section 194Q.
VIEW
2:
If
drawings of goods by partner from firm can be considered as purchase by partner
and sale by firm, there would have been no need for insertion of section 9B in
the Act by Finance Act, 2021 for clarifying that receipt of any stock in trade
by a partner from firm in connection with its dissolution or reconstitution
shall be deemed to be a transfer of stock in trade by firm to partner.
Therefore, it can be argued that drawings by partner from firm cannot be
treated as “purchase” so as to attract TDS under section 194Q.
CBDT
needs to clarify this issue in its removal of difficulties guidelines.
24.
M/s ABC & Co., a partnership firm, settled retiring
partner’s accounts by transferring stock-in-trade of FMV Rs.60 lakhs on
15.07.2021 to his sole proprietorship concern A & Co. The turnover of A
& Co. was Rs.12 crores in Financial Year 2020-21. ABC & Co., turnover
in Financial Year 2020-21 was Rs.70 crores. Is ABC & Co. liable to collect
tax at source u/s 206C(1H)? Is A & Co. liable to deduct TDS u/s 194Q?
As
the firm has given stock-in-trade to retiring partner to settle his capital
account balance, it is clearly “in connection with reconstitution of specified
entity” and is thus a deemed transfer under section 9B newly inserted in the
Act by Finance Act, 2021. This would amount to a deemed sale by firm and deemed
purchase by A & Co. 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. Since both
provisions apply in present situation, ABC & Co. will not collect TCS and
only A & Co. will deduct TDS under section 194Q. Purchase account will be
debited and proprietor A’s capital account will be credited by A & Co. At
this point of time TDS of 0.1% would have to be deducted on 0.1% of
Rs.10,00,000 (assuming that A & Co. and ABC & Co. do not have any other
purchase-sale dealings during the financial year).
A A & Co. would need to deduct tax at source here @ 0.1% of Rs.60 lakhs.
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