Section 194Q – Tax deduction on the purchase of goods and FAQs

23 Jun 2021 Admin Tax4wealth 0 Income Tax

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 anyperson 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.

Exemption available under section 194Q-

TDS provisions covered under section 194Q are not applicable under the following cases-

  • Transactions on which TDS is already deductible under other provisions of the Income Tax Act; or
  • Transactions on which TCS is collectable as per provisions of section 206C [other than a transaction on which TCS is collectable under section 206C(1H)].

 

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

 

 

 

 

 

 

 

 

Bottom of Form

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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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

  1. 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.

  1. 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.

  1. 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..

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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 & Co. would need to deduct tax at source here @ 0.1% of Rs.60 lakhs.

 

BY: Admin Tax4wealth

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