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Understanding CBDT Circular on TDS on Purchase of Goods u/s 194Q with Practical Examples

As anticipated, the Apex body CBDT has come up with a Clarificatory Circular No. 13 of 2021 bearing folio no. 370142/26/2021-TPL, containing clarificatory guidelines on newly inserted provisions concerning applicability of TDS on Purchase of Goods u/s 194Q of the Income Tax Act.

In this Taxalogue, all the significant clarifications/guidelines as contained in the captioned CBDT Circular No. 13 of 2021, concerning the practical implementation of the provisions of section 194Q w.e.f. 1.7.2021, have been explained with practical illustrations.

However, before proceeding towards the captioned CBDT Circular, it is desirable and worthwhile to first understand the newly inserted provisions on TDS on purchase of goods u/s 194Q w.e.f. 1.7.2021, as under:

Practical Examples on CBDT Circular on TDS on Purchase of Goods u/s 194Q

A Quick Referencer on New TDS Provisions u/s 194Q

1. A Buyer purchasing any goods in value exceeding Rs. 50,00,000/- in a financial year and having his/her turnover from business or profession in excess of Rs. 10 crores, in immediately preceding financial year, from a resident seller, is liable to deduct TDS u/s 194Q @ 0.1% on such purchase consideration booked or advance paid, in excess of Rs 50 lakhs, on or after 1.7.2021.

2. TDS liability u/s 194Q shall arise on all purchases booked or advance paid on or after 1.7.2021. Purchases booked or advance paid between 1.4.2021 till 30.6.2021 will be considered for determining the threshold purchase limit of Rs. 50,00,000/- in FY 2021-22.

3. In case of Non furnishing of PAN by Seller, TDS Rate shall be 5% u/s 194Q read with section 206AA.

4. In case of non-filing of ITR by the seller, in immediately two preceding financial years for which due date of return filing u/s 139(1) has expired, and the aggregate amount of TDS or TCS of such seller, in each of these two preceding financial years is Rs 50,000 or more, then TDS rate u/s 194Q read with section 206AB shall be 5%.

6. The liability of the buyer, to deduct TDS u/s 194Q shall prevail over the liability of the seller to collect TCS u/s 206C(1H) on all purchase/sale transactions entered after 1.7.2021.

7. If the Buyer fails to deduct the applicable TDS u/s 194Q then in addition to penal interest a disallowance of 30% of his/her purchases on which TDS was required to be deducted shall also get attracted u/s 40a(ia).

Key Takeaways from CBDT Circular on Section 194Q on TDS on Purchase of Goods

(i) Section 194Q not to apply on purchases debited or paid before 1.7.2021

The stated CBDT Circular No. 13 of 2021 has clarified that the TDS provisions under section 194Q will not apply on any purchases booked/debited or paid before 1.7.2021.

If either of the two events i.e., debiting purchases in books or making payment for purchases, had happened before 1 July 2021, that transaction would not be subjected to the provisions of section 194Q of the Act.

Example 1: Mr. Mayank purchases goods worth Rs. 55 lakhs and debits the same in his books of accounts on 30.6.2021. He makes payment for the said purchases on 15.7.2021. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

In this case, Mr. Mayank shall not be liable to deduct TDS u/s 194Q on such purchases of Rs. 55 lakhs booked/debited in his books, before 1.7.2021, though paid after 1.7.2021.

Example 2: Mr. Mayank makes an advance payment of Rs. 55 lakhs for purchase of goods on 30.6.2021, and debits such purchases in his books on 15.7.2021. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

In this case, Mr. Mayank will not be liable to deduct TDS u/s 194Q on such purchases of Rs. 55 lakhs, paid before 1.7.2021, though debited after 1.7.2021.

(ii) Purchases debited or paid between 1.4.2021 till 30.6.2021 to be considered for determining the threshold purchase value of Rs. 50 lakhs for FY 2021-22

The stated CBDT Circular No. 13 of 2021 has clarified that for determining the specified threshold purchase value limit of Rs. 50 lakhs for the FY 2021-22, any purchases debited or paid between 1.4.2021 till 30.6.2021 will be taken into account. However, TDS u/s 194Q is required to be deducted only on purchases debited or paid on or after 1.7.2021.

Example 1: Mr. Mayank purchases goods worth Rs. 55 lakhs and debits the same in his books of accounts on 30.6.2021. He makes payment for the said purchases on 15.7.2021. He purchases another tranche of goods worth Rs. 40 lakhs on 1.7.2021 from the same seller and credits the seller’s account in his books on 1.7.2021. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

In this case, Mr. Mayank shall be required to deduct TDS @ 0.1% of Rs. 4000/- on purchases of Rs 40 lakhs debited by him on 1.7.2021, since the threshold purchase limit of Rs. 50 lakhs for the FY 2021-22, has already been crossed by him by way of his earlier purchases of Rs 55 lakhs booked on 30.6.2021. It is to be noted here that payment of Rs. 55 lakhs made by him on 15.7.2021, towards purchases debited by him on 30.6.2021, shall not be liable for deduction of TDS u/s 194Q.

Example 2: Mr. Mayank makes an advance payment of Rs. 55 lakhs for purchase of goods on 30.6.2021, and debits such purchases in his books on 15.7.2021. He makes an advance payment of Rs 40 lakhs in respect of purchase of another tranche of goods on 1.7.2021 from the same seller and is yet to credit the seller’s account in his books. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

In this case, Mr. Mayank shall be required to deduct TDS @ 0.1% of Rs. 4000/- on advance payment towards purchases of Rs. 40 lakhs, paid by him on 1.7.2021, since the threshold purchase limit of Rs. 50 lakhs for the FY 2021-22, has already been crossed by him by way of his earlier advance payment towards purchases of Rs 55 lakhs on 30.6.2021. It is to be noted here that the purchase debit of Rs. 55 lakhs in his books on 15.7.2021 shall not be liable for TDS deduction u/s 194Q.

Example 3: Mr. Mayank purchases goods worth Rs. 15 lakhs and debits the same in his books of accounts on 30.6.2021. He makes payment for the said purchases on 15.7.2021. He purchases another tranche of goods worth Rs. 40 lakhs on 1.7.2021 from the same seller and credits the seller’s account in his books on 1.7.2021. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

 

In this case, the buyer Mr. Mayank will be liable to deduct TDS @ 0.1% u/s 194Q of Rs. 500/- on purchase value of Rs 5 lakhs. Total purchases of Mr Mayank in FY 2021-22 will be equal to Rs. 55 lakhs (15 lakhs plus 40 lakhs). Out of these total purchases of Rs. 55 lakhs exemption from deduction of TDS will be available for the purchases of Rs 50 lakhs.

Example 4: Mr. Mayank purchases goods worth Rs. 15 lakhs and debits the same in his books of accounts on 30.6.2021. He makes payment for the said purchases on 15.7.2021. He purchases another tranche of goods worth Rs. 55 lakhs on 1.7.2021 from the same seller and credits the seller’s account in his books on 1.7.2021. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

In this case, the buyer Mr. Mayank will be liable to deduct TDS @ 0.1% u/s 194Q of Rs. 2000 on purchase value of Rs 20 lakhs. Total purchases of Mr Mayank in FY 2021-22 will be equal to Rs. 70 lakhs (15 lakhs plus 55 lakhs). Out of these total purchases of Rs. 70 lakhs exemption from deduction of TDS will be available for the purchases of Rs 50 lakhs.

(iii) TDS u/s 194Q not to be deducted on GST amount indicated separately in the purchase invoice

It has been clarified in the captioned CBDT circular that TDS u/s 194Q is not to be deducted on GST amount included in the purchase value and indicated separately in the purchase invoice. 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.

Example 1: Mr. Mayank purchases goods worth Rs. 55 lakhs plus applicable GST @ 5% and debits the same in his books of accounts on 30.6.2021. He makes payment for the said purchases on 15.7.2021. He purchases another tranche of goods worth Rs. 40 lakhs plus applicable GST @ 5% of Rs. 2 lakhs on 1.7.2021 from the same seller and credits the seller’s account in his books on 1.7.2021. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

In this case, Mr. Mayank shall be required to deduct TDS @ 0.1% of Rs. 4000/- on purchases of Rs. 40 lakhs debited by him on 1.7.2021, since the threshold purchase limit of Rs. 50 lakhs for the FY 2021-22, has already been crossed by him by way of his earlier purchases of Rs 55 lakhs debited on 30.6.2021. Since GST amount of Rs 2 lakhs has been indicated separately in the purchase invoice, TDS u/s 194Q shall not be deducted on this GST amount.

It is to be noted here that payment of Rs. 55 lakhs made by him on 15.7.2021, towards purchases debited by him on 30.6.2021, shall not be liable for deduction of TDS u/s 194Q.

Example 2: Mr. Mayank makes an advance payment of Rs. 55 lakhs for purchase of goods on 30.6.2021, and debits such purchases in his books on 15.7.2021 along with the applicable GST @ 5%.

He further makes an advance payment of Rs 40 lakhs in respect of purchase of another tranche of goods on 1.7.2021 from the same seller and debits the same in his books as purchases of Rs. 38,09,525/- and GST of Rs. 1,90,475/-, after adjusting the applicable GST @ 5%, indicated separately in the purchase invoice. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

In this case, Mr. Mayank shall be required to deduct TDS @ 0.1% of Rs. 4000/- on the entire advance payment of Rs. 40 lakhs, paid by him on 1.7.2021, and not just on Rs.38,09,525/- as subsequently booked by him as purchases, based on reverse calculations for adjusting the applicable GST amount of Rs. 1,90,475/- included in such advance payment of Rs. 40 lakhs.

 

(iv) In case of Purchase Returns, excess deducted TDS amount to be adjusted against the next purchase from the same seller

It has been clarified in the captioned CBDT circular 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 under section 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 excess tax deducted in respect of purchase returns, may be adjusted against the next purchase against the same seller. No adjustment is required it the purchase return is replaced by the goods by the seller as in that case the purchase on which tax was deducted under section 194Q of the Act has been completed with goods replaced.

Example: Mr. Mayank purchases goods worth Rs. 70 lakhs plus applicable GST @ 5% of Rs. 3.5 lakhs on 1.7.2021 and credits the seller’s account in his books on 1.7.2021. However, he returns goods worth Rs. 10 lakhs on 15.8.2021. He purchases another tranche of goods of Rs. 30 lakhs from the same seller on 20.8.201. Mr. Mayank’s turnover from his business in FY 2020-21 was Rs.11 crores.

TDS u/s 194Q on first tranche of Purchases of Rs. 70 lakhs

In this case, Mr. Mayank shall be required to deduct TDS @ 0.1% of Rs. 2000/- on purchases of Rs. 20 lakhs which are in excess of the threshold purchase value limit of Rs. 50 lakhs, and deposit the same with the exchequer on or before 7.8.2021.

TDS u/s 194Q on second tranche of Purchases of Rs. 30 lakhs

However, in order to incorporate the due effect of subsequent purchase returns of Rs 10 lakhs, the corresponding excess TDS @ 0.1% of Rs 1000/- on such purchase returns is required to be adjusted from the TDS of Rs. 3000/- u/s 194Q on the next purchase of Rs. 30 lakhs from the same seller. So, a nett. TDS of Rs. 2000/- (Rs. 3000- Rs. 1000) is required to be deducted by Mr. Mayank u/s 194Q in respect of his second purchases on 20.8.2021 and deposited on or before 7.9.2021.

(v) Section 194Q not applicable during the first year of incorporation of the buyer’s entity.

Example: The buyer entity M/s Mayank Enterprises Pvt Ltd is incorporated on 1.4.2021. Its turnover from 1.4.2021 till 30.6.2021 crosses Rs 10 crores. It purchases goods worth Rs 80 lakhs on 1.7.2021.

In this case, the buyer entity M/s Mayank Enterprises Pvt Ltd will not be required to deduct any TDS on purchase of goods u/s 194Q in the FY 2021-22, as this year happens to be its first year of incorporation and as such the specified mandatory condition of having turnover in excess of Rs 10 crores in the immediately preceding financial year is not being fulfilled by the purchasing entity.

(vi) The threshold turnover limit of the buyer’s turnover in excess of Rs. 10 crores in the immediately preceding financial year, shall include only business turnover and not non-business receipts.

Example: Mr. Mayank purchases goods worth Rs. 70 lakhs plus applicable GST @ 5% of Rs. 3.5 lakhs on 1.7.2021 and credits the seller’s account in his books on 1.7.2021. His receipts/turnover from his business in the FY 2020-21 was Rs. 10 crores and his interest income from fixed deposits was Rs. 50 lakhs. This interest income of Rs 50 lakhs on fixed deposits though credited in the P&L account has been accounted for as other income under the head “Income from Other Sources” in the ITR of Mr Mayank for the AY 2021-22.

In this case, the non-business income of Mr. Mayank i.e. the interest income of Rs. 50 lakhs will not be taken into account in determining the threshold turnover limit of turnover in excess of Rs. 10 crores in the immediately preceding FY 2020-21. Since, the business receipts of Rs. 10 crores of Mr Mayank in the FY 2020-21 are not in excess of the specified limit of Rs. 10 crores, so, Mr. Mayank will not be liable to deduct any TDS on any purchase of goods, u/s 194Q, in the FY 2021-22.

(vii) Interplay between TDS by e-Commerce Operator u/s 194-O, TDS on purchase of Goods u/s 194Q & TCS on Sale of Goods u/s 206C(1H)

It has been clarified in the captioned CBDT Circular that:

  1. If a transaction is both within the purview of section 194-O of the Act as well as section 194Q of the Act, tax is required to be deducted under section 194-O of the Act and not under section 194Q of the Act.
  2. Similarly, if a transaction is both within the purview of section 194-O of the Act as well as sub-section (IH) of section 206C of the Act, tax is required to be deducted under section l94-O of the Act. The transaction shall come out of the purview of sub- section (IH) of section 206C 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 the tax under sub-section (IH) of section 206C 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 under sub-section (1H) of section 206C of the Act. This is for the reason that the rate of TDS under section 194-O is higher than rate of TCS under sub-section (1H) of section 206C of the Act.
  3. If a transaction is both within the purview of section 194-Q of the Act as well as sub-section (l H) of section 206C of the Act, the tax is required to be deducted under section 194-Q of the Act. The transaction shall come out of the purview of sub-section (1H) of section 206C of the Act after tax has been deducted by the buyer on that transaction. Once the buyer has deducted the tax on a transaction, the seller is not required to collect the tax under sub-section (IH) of section 206C of the Act on the same transaction. However, if, for any reason, tax has been collected by the seller under sub-section (IH) of section 206C of the Act, before the buyer could deduct tax under section 194-Q 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 tax rate of deduction and collection are same in section 194Q and sub- section (IH) of section 206C of the Act.

Example 1: Mr. Mayank (buyer), places an online order on amazon.in (e-commerce operator) for purchase of certain goods worth Rs. 60 lakhs plus GST @ 5% from M/s Goods Supplier Pvt Ltd (e-commerce participant listed as seller on amazon.in), on 1.7.2021 and makes the online payment of Rs. 63 lakhs/- on amazon.in. The business turnover of Mr. Mayank (buyer) as well as M/s Goods Supplier Pvt Ltd (seller) in the FY 2020-21 was 12 crores each.

In this e-commerce transaction, amzon.in (e-commerce operator), is required to deduct TDS of Rs. 60,000/- @ 1 % u/s 194O, on Rs. 60 lakhs, from the payment of M/s Goods Supplier Pvt Ltd (e-commerce participant).

Neither the buyer Mr. Mayank is liable to deduct TDS u/s 194Q nor the seller M/s Goods Supplier Pvt Ltd is liable to collect any TCS u/s 206C(1H).

Example 2: Mr. Mayank has purchased goods from Mr. Selldom worth Rs. 55 lakhs on 31.3.2021 and Rs. 50 lakhs on 1.7.2021, and Mr. Selldom has received payment of Rs. 60 lakhs on 15.7.2021, with respect to the two purchases made by Mr. Mayank. The business turnover of both Mr. Mayank (buyer) and Mr. Selldom (seller)in FY 2020-21 was Rs. 12 crores. Whether TDS has to be deducted by Mr. Mayank u/s 194Q or TCS has to be collected by Mr. Selldom u/s 206C(1H) (assuming other conditions of section 194Q and section 206C(1H) are satisfied)?

Ans. Since the buyer Mr. Mayank has not crossed the threshold limit of Rs. 50 lakhs in FY 2021-22 and the seller Mr. Selldom has received the amount exceeding the threshold limit of Rs. 50 lakhs, on 15.7.2021, in FY 2021-22, the seller Mr. Selldom has to collect the tax (TCS) of Rs. 1000 @ 0.1% on Rs. 10 lakhs, if all the conditions of section 206C(1H) are satisfied.

Example 3: Mr. Mayank has purchased goods from Mr. Selldom worth Rs. 55 lakhs on 31.3.2021 and Rs. 60 lakhs on 1.7.2021, and Mr. Selldom has received payment of Rs. 80 lakhs on 15.7.2021, with respect to the two purchases made by Mr. Mayank. The business turnover of both Mr. Mayank (buyer) and Mr. Selldom (seller)in FY 2020-21 was Rs. 12 crores. Whether TDS has to be deducted by Mr. Mayank u/s 194Q or TCS has to be collected by Mr. Selldom u/s 206C(1H) (assuming other conditions of section 194Q and section 206C(1H) are satisfied)?

Ans. In such a case, the liability of the buyer Mr. Mayank to deduct TDS u/s 194Q will prevail over the liability of the seller Mr. Selldom to collect TCS u/s 206C(1H), with respect to purchases/sale transactions recorded on or after 1.7.2021. So, in respect of the second purchase made by Mr. Mayank on 1.7.2021, of Rs 60 lakhs, the buyer Mr. Mayank will collect TDS u/s 194Q on purchase value of Rs 10 lakhs (60 lakhs minus exemption limit of 50 lakhs) @ 0.1% of Rs. 1000.

However, the seller Mr. Selldom will also be required to collect TCS on the sale consideration received by him of Rs 55 lakhs in respect of sale of Rs 55 lakhs executed by him before 1.7.2021. The amount of TCS to be collected by Mr. Selldom u/s 206C(1H) will be Rs. 5000/-, @ of 0.1% of sale receipts in excess of Rs 50 lakhs i.e. 5 lakhs.

(viii) TDS provisions u/s 194Q not applicable in case of non-resident buyers

The text of section 194Q makes it very clear that this section is applicable only if the goods are being purchased from a resident seller. However, there was some ambiguity regarding the applicability of this section vis-à-vis the residential status of the buyer. So, in order to remove this ambiguity, the captioned CBDT circular has clarified that the provisions of section 194Q will not get attracted if the buyer is 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.

Example 1: Mr. Mayank is a non-resident Indian having no fixed place of business in India, and he purchases goods worth Rs. 80 lakhs on 1.7.2021. In such a case, since Mr. Mayank is a non-resident, therefore, he will not be liable to deduct any TDS u/s 194Q.

Example 2: Mr. Mayank is a non-resident Indian and is carrying on business in India through a fixed place of business in India in the form an entity M/s Mayank Enterprises. M/s Mayank Enterprises purchases goods worth Rs. 80 lakhs on 1.7.2021 and business turnover of M/s Mayank Enterprises in FY 2020-21 was Rs. 15 crores.

In this case, since the non-resident buyer, Mr. Mayank is having a fixed place of business in India, M/s Mayank Enterprises, and the purchases of Rs. 80 lakhs are in connection with the business activity of this fixed place of business, therefore, Ms. Mayank Enterprises will be required to deduct TDS of Rs. 3000/- on purchases of Rs. 30 lakhs in excess of Rs. 50 lakhs u/s 194Q.

Important Note: The author foresees the possibility of increased litigations in cases as illustrated in this Example 2 on account of different and varying definitions of ‘permanent establishment’ as contained in section 194Q and the relevant DTAAs. In majority of the DTAAs, the fixed place of business is not considered as permanent establishment, if other specified criterias are not met. So, litigations may arise in future, where the revenue authorities may require the non-resident buyer entity having a fixed place of business in India to deduct TDS u/s 194Q, and such non resident buyer entity may take shelter of more beneficial provisions of applicable DTAA, in taking the stand of non-requirement of deduction of such TDS u/s 194Q.

(ix) Section 194Q not applicable if the seller is exempt from the levy of Income Tax

It has been clarified in the captioned CBDT Circular 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.)

Example: M/s SEZ Enterprises is an eligible SEZ entity, registered u/s 10AA of the Income Tax Act. Mr. Mayank purchases goods worth Rs. 60 lakhs from M/s SEZ Enterprises on 1.7.2021 and business turnover of Mr. Mayank in FY 2020-21 was Rs. 15 crores.

In this case, since the income of the seller entity M/s SEZ Enterprises is exempt u/s 10AA of the Income Tax Act, the buyer Mr. Mayank will not be liable to deduct TDS u/s 194Q in respect of his purchases of Rs. 60 lakhs from M/s SEZ Enterprises.

(x) Section 194Q not applicable in case of purchase of shares and securities and electricity

It has been clarified in the captioned CBDT Circular that the provisions of section 194Q of the Act shall not apply on:

(i) purchase of shares and securities which are traded through recognised stock exchanges or are cleared and settled by the recognised clearing corporation including those located in International Financial Service Centre.

(ii) purchase of electricity, renewable energy certificates and energy saving certificates traded through registered power exchanges.

Example: Mr. Mayank purchases equity shares of Reliance Industries worth Rs 80 lakhs on 1.7.2021 on BSE. He will not be required to deduct any TDS u/s 194Q on such purchase of shares.

The author can also be reached at mayankmohanka@gmail.com


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