Decoding Section 194Q of the Income Tax Act, 1961 in 35 FAQs

1

From when Section 194Q TDS on Purchase of Goods Effective?

Will be effective from 01-07-2021.

2

Who is liable to Deduct TDS under Section 194Q?

Any person who is a buyer

3

What does a Buyer Mean?

'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

4

Whether the buyer importing goods from outside India required to deduct TDS u/s 194Q?

No, the obligation to deduct tax under this provision arises only when the payment is being made to a resident seller. In case of import, the seller is a non-resident, therefore buyer will not be having any obligation to deduct TDS. However, the TDS would required to be deducted u/s 195.

5

Whether TDS is also applicable on Export Transaction?

TDS liability will arise when a payment is being 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

6

Does the seller needs to be resident or non-resident

Mandatory to be resident

7

When Tax shall be deduction under this provision?

The tax shall be deducted from the purchases made by a buyer if the following conditions are met:
(a) Goods are purchased from a resident person;
(b) The Value or aggregate of value of Goods Purchased is exceeding Rs. 50 lakhs in any FY; and
(c) The buyer should not be in the list of persons excluded from the provision for deduction of tax.

NOTE: The tax shall not be deducted under this provision if the tax is deductible or collectible under any other provision except Section 206C(1H). Thus, if a transaction is subject to TCS under Section 206C(1H), the buyer shall have the first obligation to deduct the tax. If he does so, the seller will not have any obligation to collect the tax under Section 206C(1H).

8

Is the provision applicable for both Goods and Services ?

No. The Provision is only applicable for Goods and Not for Services. This means that for receipt of services deduction of TDS under this section is not required.

9

Is this provision also applicable on Purchase of Capital Goods?

Yes, section 194Q applies to purchase of all goods whether on capital or on revenue account.

10

Whether a transaction in securities through stock exchanges shall be subject to TDS under this provision?

Section 206C(1H) provides 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). Therefore, TDS Shall not be deducted on these transactions.

11

Whether TDS to be deducted on the purchase of immovable property by a developer?

Immovable property is not 'goods'. Therefore, TDS would not be Deducted u/s 194Q.TDS shall be deductible under section 194-IA if consideration is Rs. 50,00,000 or more.

12

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).

13

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 capitalizes 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.

14

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. 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. 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.
Thus, the tax shall be deductible on purchase of jewellery if other conditions are also fulfilled.

15

Will TDS under section 194Q apply to redemption of preference shares by a company?

Preference shares are movable property and goods.
Therefore, 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.

16

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.

17

What shall be the timing of deduction of tax?

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

18

What is the rate at which tax is to be deducted if PAN & Aadhar is furnished?

an amount equal to 0.1% of such sum exceeding fifty lakh rupees as income-tax

19

What is the rate at which tax is to be deducted if PAN & Aadhar is NOT furnished?

an amount equal to 5% of such sum exceeding fifty lakh rupees as income-tax

20

What will be the Consequence of Non-Deduction of TDS?

If TDS is not Deducted u/s 194Q then 30% of the Expense shall be Disallowed u/s 40a(ia).

21

If the consideration for purchase of goods exceeds INR 50 Lakh, is the TDS required to be made on the entire consideration or only on the consideration that exceeds INR 50 Lakh?

On the amount exceeding Rs.50,00,000/-
For Example :- Let us say, in case where the first purchase was made for INR 35 lakh and the second purchase was made for INR 40 lakh, the TDS should be made only on the second purchase and only on the amount of INR 25 lakh (i.e. 35 lakh + 40 lakh – 50 lakh). The threshold of INR 50 lakh shall apply year-wise.

22

Whether the threshold for TDS be reckoned for each seller and for the FY 2021-22, should it be from 01-Apr-2021 or 01-Jul-2021?

Yes, the Threshold of INR 50 Lakhs is Seller wise.
Regarding the Cut off date for the purpose of reckoning the threshold of INR 50 lakh, As a prudent measure, it is advisable that the purchase/s made prior to 01st July 2021 during FY 2021-22 shall be included.
Also, where the purchases made prior to 01st July 2021 already exceeded INR 50 lakh, the buyer need not to do TDS on that excess amount while paying or crediting further consideration to the account of the seller on or after 01st July 2021.

23

Whether purchase returns should be adjusted while computing the threshold of INR 50 lakh in a financial year?

The threshold of INR 50 lakh is to be computed considering the consideration paid for 'purchase' of goods and thus, if the goods are returned, the value of such goods shall be reduced for arriving at the threshold of INR 50 lakh
However, such purchase returns ought to have been made on or before the point of tax deduction as the threshold of INR 50 lakh has to be checked at the point of time when liability to deduct at source arises. Any subsequent returns cannot be considered.

24

Whether charges, namely, freight, packing etc. are part of the invoice should the same be considered for tax deduction u/s. 194Q?

The section uses the phrase '…for purchase of goods..', which clearly indicates that the payment attributable to purchase of goods alone should be considered under section 194Q. Reimbursements are charged on the invoice on an adhoc basis, say as a % of goods sold, instead of actual charges, then such charges could be considered as part of the value of goods for computing the amount of tax deductible at source under section 194Q.
Caution needs to be exercised on the applicability of TDS under section 194C in respect of freight charges. However, the amount of GST levied as part of the invoice shall not considered for TDS in view of the clarifications from CBDT vide circular no. 23/17 dated 19-07-2017.

25

Would the provision of section 194Q and provision of section 206C(1H), both be applicable for a transaction of purchase of goods?

Yes, the proposed provisions of section 194Q are similar to the provisions of section 206C(1H) of the Act.
The objective of the Government behind introducing Section 194Q is widening and deepening tax base provisions.
If a buyer is liable to deduct tax at source under any other provision of the Act on the goods purchased by him and deducts such amount then such transaction will not again suffer collection of tax at source under section 206C(1H) of the Act. Thus, provisions of section 194Q and the provisions of section 206C(1H) are mutually exclusive.

26

Will TDS under section 194Q be deducted on GST amount also?

GST levied as part of the invoice shall not considered for TDS in view of the clarifications from CBDT vide circular no. 23/17 dated 19-07-2017.

27

Whether additional, allied and out-of-pocket expenses form part of the purchase value of goods?

Where these expenses are 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.

28

Is buyer required to deduct tax at source at the time of payment of consideration as in case of the provision of section 206C(1H) of the Act or at the time of purchase?

The proposed provisions of section 194Q is to a large extent similar to the provisions of section 206C(1H) of the Act. However, the point for collection of TCS under section 206C(1H) of the Act is receipt of consideration whereas TDS under section 194Q is required to be made at the time of payment or credit, whichever is earlier.
Let us say, Mr. Max purchased goods on credit for INR 50 Lakh in the Year 1 and for INR 45 lakh in Year 2. Entire payment for the above two consignments were made in Year 2. In such case, there would not arise any TDS requirement under section 194Q for any of the above years since the purchase made for any of these years do not exceed INR 50 lakh. The threshold of INR 50 lakh is to be reckoned based on the amount of purchase in a year and not the amount of consideration or advance paid in a year.

29

In case of multiple units of the same legal entity whether the threshold of turnover would include purchase from different locations/branches?

As per Sub-section (1) of section 194Q, the term buyer refers to a 'person' and a branch office is not a separate person but it is a unit of a 'person'. Therefore, the purchases made from a single seller from different locations/units has to be aggregated to determine the applicability of the provision of this section.

30

Would there be a multiplicity of TDS under section 194Q on the same transaction?

It is made clear that where tax is deductible under any other provisions of the Act, such transaction will not be covered under the purview of section 194Q.
Thus, duplication of TDS provisions is avoided. However, it is possible that a transaction which was subject matter of TDS earlier in the hands of a buyer may again be subjected to TDS when the goods are resold.

31

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 for 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.

32

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.

33

Whether tax to be deducted on the purchase of goods by one branch from another i.e. for Branch Transfers?

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.

34

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.

35

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.