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Applicability Of Section 194Q

 

This section would be applicable from 1st July 2021.

 

CBDT issued its clarifications regarding this section just in the nick of time. According to circular No 13 of 2021 dated 30.06.2021;

 

1)Transactions through recognized stock exchange Transactions in securities and commodities made through recognized stock exchanges and recognized clearing corporations are exempt u/s 194Q because the buyer and seller do not know each other. But it does not make any difference on the status of listed shares in being considered as goods. Just like electricity, they are classified as goods, but when traded through a recognized stock exchange TDS under this section is not applicable.

It did not come naturally but it had to be clarified by the department. It has been made exempt because of practical impossibility owing to the fact that buyer and seller are not known to each other. Also, the government is already collecting STT on these transactions. The aim of this section is data collection which is already being fulfilled.

2) Applicability on transaction of unlisted equity shares-It also implies that transaction of unlisted equity shares will be covered by this section and any transaction meeting the criteria of this section would be covered by it. Hence this section is applicable to unlisted equity shares. There is no doubt that they are goods as specified in the definition of goods under the Sales of goods act 1930 and in the C.I.T V/s Anarkali Sarabhai case.

3)Transactions in electricity, renewable energy certificates,energy-saving certificates traded through power exchanges are exempt. The transactions made by the electricity generation units and electricity service providers (above 50 lacs in a financial year) without power exchanges are covered under the provisions of this section.

Related Topic:
TDS on Clearing & Forwarding Agents Payment

4)Any sum paid/ credited by the buyer between 1 April 21 and 30 June 21( both days inclusive) shall not be counted for tax deduction purposes.

5)If TDS is to be deducted on the basis of payment then GST has to be included because it is very difficult to separate the tax portion. If TDS is to be deducted on the basis of credit then only the Taxable value of the invoice is to be taken i.e. without GST.

6) In the case of purchase return, which happens after TDS has already been deducted, the extra TDS deduction is allowed to be adjusted against the future supply of goods by the same seller. In case the goods are returned before deduction then it would be reduced from the amount of purchase. It means that goods returned would not be included in the mode of payment. If the supplier replaces the goods of the same value, then there will be no further adjustment. If the buyer sends goods of value more than the purchase returned then on balance extra value TDS will be deducted.

Related Topic:
Interim restraining order against Sec 194N (TDS provision on cash withdrawal )

7) Non – residents without a permanent establishment in India are placed out of the ambit of this act. No TDS on import of goods.

8) If the buyer purchases any goods from the seller who is exempt from Income tax under this act {like persons exempt under sec 10 or by any other act passed by the parliament (like RBI act, ADB Act, etc) then he has not to deduct TDS. If the buyer is any person who is exempt from Income-tax ( as stated above) then also he is exempt from the provisions of this act. These above exemptions shall apply only when the persons stated above are fully exempt from income tax. If the said persons are partially exempt then provisions of sec 194 Q and 206C(1H) shall apply.

9) The provisions of this section shall not apply in the first year of the entity as the turnover of the previous year is taken as nil.

10)Turnover /gross receipts limit of 10 crores for the buyer will include only business turnover. Hence receipts due to rent, interest, capital gain, etc shall not be included in the calculation of the threshold of 10 crores and also not in the qualifying amount of the transactions.

Related Topic:
Detailed Analysis of Sec. 194Q and 206C(1H)

11)Hierarchy of sections 194O,194Q, and 206C(1H). 194O-( TDS deducted by the E comm operators on the purchase made by them from E comm Participants or sellers). 

  • If section 194 O is applicable then sec 194Q and 206C(1H) will not apply.
  • If section 194Q is applicable then sec 206C(1H) will not apply.
  • If section 194O and 194Q both will not apply then only sec 206C(1H) will be applicable.
  • If 206C (1H) has been applied then also 194O shall apply if applicable. 194O will supersede 206C(1H)

Related Topic:
All about Section 194 O of Income Tax Act 1961

12) If the e-comm seller has collected TCS on a certain transaction then also the E comm operator has to deduct TDS on that amount u/s 194O. That’s why the rate of TDS u/s 194O is more than the rate of TCS u/s 206C(1H).

13) If a supplier has already collected tax u/s 206C(1H) before the buyer could deduct TDS u/s 194, then that transaction would not be subjected to tax deduction again by the buyer. Since the rate of TDS and TCS in these sections is the same, this concession has been provided to remove the difficulty in understanding.

Related Topic:
15 Reasons Why We Should File an ITR

 

Here is the bare text of section 194Q  for your easy reference.

‘194Q. Deduction of tax at source on payment of a certain sum for the purchase of goods.—(1) Any person, being a buyer who is responsible for paying any sum to any resident (hereafter in this section referred to as the seller) for purchase of any goods of the value or aggregate of such value exceeding fifty lakh 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 percent of such sum exceeding fifty lakh rupees 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 ten crore rupees 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 such conditions as may be specified therein.

(2) Where any sum referred to in sub-section (1) is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such income, such credit of income shall be deemed to be the credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(3) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

(4) Every guideline issued by the Board under sub-section (3) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and the person liable to deduct tax.

(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 subsection (1H) of section 206C applies.’.

Related Topic:
Section 194Q vis a vis Section 206C(1H)

As per the provisions of Sec 194 Q of I.T. Act, TDS is deductible by the buyer if;

1) The buyer is responsible for making payment of any sum to a resident seller; and

2) Such payment is to be done for the purchase of goods of the value /aggregate of the value exceeding 50 lakhs in the financial year.

Table of Contents

Applicability of the Buyer

  1. If the Turnover (sales, gross receipts) of the buyer during the financial year immediately preceding such a Financial year in which specified purchase of goods has taken place, exceeds 10 crores. Such turnover will mean only business turnover and will not include any receipt from rent, interest, capital gain, etc if they are not forming a part of business income.

2)The buyer will not include any person notified by the C G.

Time of deduction

TDS on purchase of goods is to be deducted by the buyer in the event of the earlier of the two.

a) At the time of credit of such sum into the account of the seller; or

b) At the time of making the payment of such sum to the seller.

Qualifying amount and rate of deduction

The qualifying amount will be dependent upon the event taking place earlier. Such amount pertaining to the earlier event which exceeds 50 lakhs (such amount- 5000000). The rate of deduction will be 0.1% of the amount exceeding 50 lakhs.

The rate of TDS will be 5 % if the seller fails to provide his PAN number.(section 206AA)

Note- In the normal case, where the person whose TDS is to be deducted, does not provide his PAN number, then the provision is to deduct 20 %TDS, but under section 194Q, this rate will be 5 %.

Examples

For e.g If the aggregate amount of purchase  is 60 lakhs then TDS will be deducted on (60-50= 10) 10 lakhs

For E.g Payment made in advance of 70 lakhs. Then TDS deducted will be on (70-50=20 ) 20 lakhs,

Further, if Goods purchased aggregating 95 lakhs, then TDS will be on (95-50-20=25) 25 lakhs.

Exceptions to sec 194 Q

Provisions of this section will not apply if ;

  1. Tax is deductible on that transaction under any other provisions of this act(I.T.Act)
  2. TCS is already collectible on that transaction under the provisions of Sec 206 C, except for any transaction on which section 206 C(1H) applies.

 

Explanations

1) Resident seller– any person who is resident in India i.e domestic supplier.

 

2) Any Goods– both capital goods and inventory (stock in trade). Not on service, works contract, employment contract.

 

3)There must be a purchase of goods of a specified amount in a financial year against which payment has been made or is to be made.

 

4)Payment by any mode – It means reducing liability by any mode, by cash or in-kind e.g barter, payment by adjustment of any amount by a book entry, payment by transfer of any other asset. The amount will include GST, reimbursement of charges, or any other incidental payment. Advances made to the supplier for the purchase of goods will be included in payment. Purchase return will not form a part of the payment. It will be reduced from the value of purchase.

 

5)For purchase of goods– The payment has to be made for further purchase of goods and not for goods which have been already purchased. The words are “for purchase of goods” and not “ for purchased goods”.This section talks about the purchase of goods prospectively and not retrospectively i.e (F/y 21-22 onwards)

 

6)Any sum– The word “any “used earlier in the first sentence has been changed to “such sum“ after describing the purpose of that sum. Hence the sum is only for the purchase of goods.

 

7) Date of Application-The section is applicable from 1 st July 21. Any payment made or the amount credited before 1 July 2021 shall not be considered.

 

Note-  Rate of TDS for Non-filers of ITR: – Sec 206AB

 

According to sec 206AB, a new category of persons has been created having the following  features;

  1. They have not filed their return for the two consecutive previous financial years even after the expiry of the date of filing return u/s 139(1) which are immediately preceding the financial year in which tax is required to be deducted and ;
  2. The aggregate of tax collected/ deducted at source is Rs 50000/- or more in each year during both these financial years.

Then the rate of TDS applicable on them would be double the rate of TDS under any section or 5% (whichever is higher). There are certain exceptions to this section also.

If the returns filed are belated returns then also sec 206AB shall be applicable.

Hence the applicable rate of TDS on these persons u/s 194 Q would be 5%

Date of applicability w.r.t to the event triggering the provisions of this section.

 

The date of Application-The section is applicable from 1 st July 21.

 

 We are giving certain examples for you to understand the applicability of this section.

(Assuming all the T.O. limits of buyer and seller  are fulfilled)

 

Amt in the B/S(31 march 2021 1/4/2021 to 30/6/2021 After 1/7/2021 Amt applicable for TDS or TCS
NIL Advance 70 Lacs paid to the seller

206C(1H) applicable 

Since receipt is there

Purchase 60 Lacs TDS applicable on

60-50= 10 lacs

(clarification from the department-wide circular no 13 dated 30.6.21

NIL Adv 40 Lacs 

No 194Q and 206C(1H)

Purchase 60 Lacs

Payment 30 Lacs

(both on the same day)

TDS u/s 194Q 60-50=10 lacs

(clarified by dept)

NIL Adv made 40 lacs

Goods Purchased 60 lacs

No 206C(1H) since receipt less than 50 lacs

Payment  30 lacs

Purchase  20 Lacs

(both on the same day)

NO TDS (clarified by the dept) (the amounts before 1 July will not be considered )

206C(1H) will apply

Since receipt of more than 50 lacs

40+30-50=20 lacs

60 lacs credit Purchase 30 lacs

{ No 206C(1H)applicable

Since (No receipt)}

Payment 70 lacs

Purchase 60 lacs

70>60

Here rules of appropriation of payment will apply. The buyer has to specify against which amount he has made the payment. But we can safely say TDS will be on at least 

60-50=10 lacs 

 

The view expressed below was, before the clarification was given by the department.

 

In the present scenario, one of the two events (i.e.credit or debit) has already happened in the same financial year before Sec 194Q  becomes operational. In this situation, it would be advisable that tax is deducted considering payment as a trigger. It is important to note that what could be relevant u/s 194Q is not that both the events must occur after the provision is operational, what is important is that tax must be deducted whether there is payment or credit.

After the clarification, it has been made amply clear that any transaction before 1 July 21 will not be considered for this section.

Effects of this section on various types of transactions.

 

Capital goods– Yes it is applicable on ‘Capital Goods’ since the word used is “any goods”.

 

Import of goods into India– Since in import the seller is a foreign entity and according to this section the seller has to be a resident, therefore this section will not be applicable 

 

Export of goods from India  -Since in exports, the buyer is a foreign entity. Expecting a foreign buyer to deduct tax and remit it into India will be a practical impossibility.

 

Note – If the supplier is a non-resident ( as in the case of import into India) without a permanent establishment in India then he is outside the ambit of this section. But if the seller has a permanent establishment in India then the resident buyer has to deduct TDS as per this section if other conditions are satisfied.

 

Inter-branch transfer of stock

Since there is no relationship of “buyer and seller”, also there is no purchase. Hence it will not be covered under this section as the person is the same.

 

Clubbing of purchases and sales made by multiple branches of an entity- 

Distinctness of any entity is established by its PAN number or AADHAR no. Therefore if the branches have different PAN no. , they will be treated as a different person and their purchases and sales will not be clubbed for this section. If they have the same PAN no, then their purchases and sales will be clubbed. Accordingly, the qualifying limits will be calculated.

 

Clubbing of sale made by different branches of a resident seller to a buyer

 

Similarly, if the branches of the seller have different PAN no., they will be treated as a different person and their sales will not be clubbed for the same buyer. If they have the same PAN no. , then they will be considered as a single person and their sales to the same buyer will be clubbed.

 

Effect of GST on the Qualifying amount

 

At the time of Payment

 

Since it is very difficult for the buyer to segregate the amount paid to the seller between purchase amount and GST, the cumulative amount is taken for qualifying limits. Also in sec 206C(1H) the amount of receipt taken is inclusive of GST. Also, some professionals suggest that since the word used is “any sum “ then it is advisable to take the complete payment amount. (also clarified in the circular)

 

At the time of credit in the seller’s name

 

The view expressed below was before the clarification provided by the department.

Also when the purchase is credited to the account of the seller, the total invoice value is credited to the seller’s account i.e. inclusive of GST. Hence it is advisable to take the cumulative amount (i.e. Taxable value + GST ) for the calculation of qualifying amounts. It can be seen that TDS is deducted on the qualifying amount inclusive of GST.

For e.g.

Suppose a person (buyer having turnover exceeding 10 crores in a previous financial year) purchases goods of value 10000000 and GST thereon is 1800000. The invoice value will be one crore eighteen lakhs. The TDS deducted will be (11800000-5000000=6800000) *0.1/100=6800.

 

After the clarification wide circular no. 13 dated 30.6.21, the above view has changed and now the TDS would be deducted on the taxable value of goods only i.e. without GST. For e.g.  In the above example, the qualifying amount will be  1 crore only and TDS will be 5000.

 

Incidental charges and reimbursement charges

 

On the same lines, all the incidental charges and reimbursement charges are paid to the seller. If they are charged through a separate invoice and on an actual basis, it should not form part of the purchase value for deduction of TDS and for computing the Rs. 50,00,000 threshold limit, but at the time of making the payment it will be added to the amount paid to the seller and would become part of the 50 lakhs limit.

It is advisable to include the payment of these charges into the qualifying amount and deduct TDS on them ( if the specified limit has already been reached) as they are also credited to the account of the seller. It would keep you on the safer side and cause no harm.

 

Amounts already appearing in the balance sheet of 31 march 2021

 

According to the judgments in cases like;

1) J.P.Jani (ITO) vs Induprasad Devshankar Bhat 

2) S.S.Gadgil (ITO) vs Lal & co  

3) Ochhavlal Laljibhai Dharia 

 

It has been made amply clear in a number of judgments that whenever any

a new law is made or any amendment is done in any existing law, then it is a cardinal principle that it has to be construed prospectively and not retrospectively unless it has been expressly provided for.

 

( The same has been clarified in the circular )

 

Further, the above is based on the principle ofNova constitutio futuris formam imponere debet non praeteritis’, i.e. a new law ought to regulate what is to follow, not the past.

1)Since in the section the words used are “for purchase of goods” and not “ for purchased goods”, it can be construed that any credit amount in the name of the seller already appearing in the balance sheet would not be applicable for this section. But if further purchases are made from the same seller in a financial year (21-22 onwards) then that amount would be added to the qualifying amount.

 

a)For e.g if a seller’s account has a credit balance of 60 lakhs on 31 march 21  then that would not be applicable for this section because it is for goods already purchased and this section talks of the amount pertaining to the purchase of goods prospectively. (clarified now by the circular)

 

b)Suppose the credit balance is 20 lakhs and the new purchases in the financial year are 40 lakhs till now, then also the limit will not be triggered because; 1) the purchases are in different financial years  2) the credit balance of the balance sheet pertains to purchases before the applicability of this act.3) The circular has clarified that any amount before 1 July 21 will not be considered for this section.

c) Suppose there is a credit balance in the seller’s name on the balance sheet. The buyer makes the payment in the flow of transactions. The seller also continues to sell further goods.

 In that case, the amount of goods purchased in the current year after 1 July 21 will be taken only. If the buyer makes payments of more than 50 lakhs in the current year after 1 July 21 then it has to be ascertained how it is to be apportioned. Since the right of apportionment lies first with the buyer, he has to make a proper distinction between the payment made against current goods or against the previous year’s balance.

 

2)Any debit balance in the seller’s name in the balance sheet can be, because of the advance paid or return of goods to the seller. This would have no bearing because this section talks of payments made in the financial year 21-22 onwards and the goods returned are also pertaining to previously purchased goods. (clarified by the circular)

 

Transaction in listed securities through recognized stock exchanges.

 

In the provisions of Capital gains, it has been made very clear that securities are considered as goods and sec 206C (1H) applies to the sale of goods. But the department issued circular no. 17of 2020 stating categorically that sec 206C(1H) will not be applicable if listed securities are traded through recognized stock exchanges. Hence it can be understood that sec 194Q will not be applicable on these transactions. It has been clarified further now.

 

Transaction of unlisted shares

 

According to the judgment in Anarkali Sarabhai vs CIT, it was established that Shares are ‘goods’ and transactions of unlisted shares come in the purview of sale and purchase. Shares are also included in the definition of goods under the Sales of goods act and there is no differentiation on the basis, of them, being listed or platform of trade. Goods are not defined in the Income-tax act and CGST act but there are judgments to include electricity and shares into the purview of goods.

 

Redemption of Preference shares by a company

 

In the judgment of Anarkali Sarabhai vs C.I.T (1997), it was established that preference shares are goods as per I.T.Act, and redemption of preference shares comes under the definition of ‘transfer of goods’. Redemption of preference shares is buying of goods by the company. Hence if the qualifying conditions are fulfilled then provisions of this section will be applicable.

 

Redemption of units of a mutual fund (more than Rs 50 lakhs in a year of a single investor)

 

An investor receives two types of Payments (incomes) from the units of mutual funds. a) dividend income b) capital gains upon redemption of its units. 

In the new regime, DDT( dividend distribution tax ) has been abolished and the burden of tax has again been shifted on to the investor. According to Sec 194K (which has been introduced from Finance Act 2020) a mutual fund company has to deduct a TDS of 10% on dividend income received by the investor on the amount exceeding Rs 5000/-.

 

b) In this sec 194K it is also made clear that there will be no capital gains tax on redemption of units of mutual funds.

Although units of mutual funds are considered as goods, they attract TDS under sec 194K and are exempt from capital gains. Mutual funds invest in listed securities traded through stock exchanges that do not come under the application of sec 194Q. There are ample reasons to believe that mutual fund units also do not attract section 194Q. It has been clarified now.

 

 Buyback of shares

 

According to the judgment in Anarkali Sarabhai vs CIT, it was established that Shares are  ‘goods’ and buyback of shares comes in the purview of sale and purchase. But it is taxable under sec 115AQ and it is covered under exemptions of this section i.e it is taxable under any other section of this act. According to sec  115AQ(4), 20 % tax has to be paid by the company on the distribution of income by buyback method and it is not taxable in the hands of the receiver.  Hence sec 194Q  is not applicable on the buyback of shares.              

Purchase of immovable property.

 

Whenever a person purchases an immovable property(other than agricultural land ) whose consideration is above 50 lakhs, then he has to deduct TDS @ 1 % on that consideration u/s 194(IA). Although Immovable property is considered as goods and there is sale and purchase but it is covered under the exception of sec 194Q.Therefore it is not applicable.

 

Purchase of software

 

The Supreme Court in its landmark decision of Tata Consultancy Services v. the State of A.P [2004] 141 Taxman 132 (SC) held that Canned software (off the shelf computer software) are ‘goods’. Therefore, the purchase of Canned software (off-the-shelf computer software) is the purchase of ‘goods’ and will be liable to TDS under section 194Q. 

But if you buy any customized software then it would come under services and liable to TDS u/s 194 J or 194 O . Hence “off the shelf software “is covered under sec 194 Q( if other conditions are satisfied) but customized software is not.

 

Purchase of jewelry

 

Jewelry is covered under the definition of goods. Hence the purchase of jewelry for business purposes is covered under this act. But if any person purchases jewelry for personal use and satisfies the conditions of applicability of the buyer and amount of transaction then it will also be covered under this act. There is no distinction of purpose mentioned in the act.

 

Payment of consideration for any purchase by the issue of shares

If any company purchases any goods (say plant and machinery) and according to the agreement the consideration is to be paid in form of one lakh equity shares whose market value is 75/- share. Then the transaction amount can be accurately determined and it is covered under this section because payment can be made in any mode.

 

Payment of consideration by transferring some other asset or Barter between the buyer and seller ( provided other conditions are satisfied)

 

If any buyer purchases some asset (say new Jewellery) and pays the seller by transferring old jewelry equivalent to the invoiced amount, then it would definitely be covered in this section because payment can be by any mode.

 

Loan advanced to the seller by the buyer

 

If the buyer gives a loan to the seller, then this payment is not for the purchase of goods and is not debited from the goods purchased account of the seller. Hence it is not covered in this section.

 

Loan of material

 

If any person loans some material for a short period of time, then it is not a transaction of sale and purchase. Also, there is no relationship of buyer and seller in this transaction. Hence it will not be covered under this section. For eg, if a person who is otherwise a seller takes a hundred sacks of cement on loan from his usual buyer on the condition of return in 3 days as his goods have not arrived, then it is not covered under 194Q.

 

Treatment of Goods returned

 

In the circular, it has been made clear that goods returned will be treated as purchase returns and they will be deducted from the amount of purchase for calculating the qualifying amount for TDS. Purchase return will not be considered as a mode of payment. The amount of credit in the name of the seller will be reduced by the value of goods returned.

 

Treatment of Advance (If it qualifies for the threshold limit)

 

Since advance has been made to the seller for procuring goods, hence it is covered under this section.

 

Various scenarios

 

a)Suppose a person provides paper sheets to the printer for printing books. The printer issues an invoice for printing only. All the conditions for Sec 194 Q are fulfilled but in this case of Job Work Purchase, TDS is required to be deducted u/s 194C and not under section 194Q. 

Suppose the person purchases printed books and the printer issues an invoice of complete books. The person makes the payment by giving paper sheets to the printer and he issues an invoice of paper. In that case, 194 Q will be applicable.

b) Where TCS is charged by the Seller u/s 206C other than section 260C(1H)

Suppose you purchased a motor vehicle for Rs. 70 Lac and TCS is charged by the Dealer u/s 206C(1F), then no TDS shall be deducted u/s 194Q by you.

 

Relationship between Section 206C(1H) and 194Q

 

Both these sections have the same thresholds, qualification limits, and tax rates.

Sec 194 Q has been given precedence over 206C (1H) because 194 Q will be applicable on transactions on which 206 C(1H) also applies.

On the other hand 206C (1H) will not be applicable on transactions where 194 Q  applies. We  are explaining this by various examples given below;

 

For E.g. a) A partnership firm PQR & CO. (turnover in f/y 20-21, 40 crores) invoiced goods of Rs 60 lakhs to a proprietorship firm ( R enterprises, turnover in the previous financial year 12 crores), of one of the partners R after 1 July 2021. At the time of payment, the amount of the invoice was debited from the capital account of R. Both the entities are distinct.

 

View 1 – When drawing of goods by the partner is considered as “purchase”

 

Applicability of sec194 Q and sec 206C(1H)

 

1) In the above case all the conditions of sec194 Q are fulfilled. Therefore sec 194 Q will prevail. And then there would be no need for sec 206C(1H). TDS would be deducted u/s 194Q by R enterprises. The mode of payment can be by a book entry.

 

2)Suppose in the above case the turnover of R enterprises in the previous financial year was only 8 crores.

 

Then the eligibility criteria of the buyer are not fulfilled and Sec 194 Q will not be applicable. Hence sec 206 C (1H) will be applied and TCS will be collected by the partnership firm from R enterprises.

 

3) Suppose in the above case the turnover of PQR & CO is 7 crores in the previous financial year and turnover of R enterprises in the previous year is 12 crores. 

 

Then the eligibility criteria of the buyer as per sec 194Q has been fulfilled and R enterprises have to deduct  TDS u/s 194 Q.

 

4) Suppose in the above case the date of the invoice was 30 April and the capital account was also debited on the same day.

 

Then Sec 206C(1H) would have been applicable and PQR & CO would have collected TCS from the buyer.

 

View 2- When drawing of goods is considered as “transfer of stock” and not “purchase” 

 

According to section 9B in the Act by Finance Act, 2021, receipt of any stock in trade by a partner from the firm in connection with its dissolution or reconstitution shall be deemed to be a transfer of stock in trade by a firm to partner. Therefore, it can be argued that drawings of stock by a partner from the firm cannot be treated as a “purchase” so as to attract TDS under section 194Q. But in this case, it is not mentioned that there is any dissolution or reconstitution of the firm. So drawing of stock can be safely considered as a purchase not a transfer of stock.
CBDT needs to clarify this issue in its guidelines

Differences between 194 Q and 206C(1H)

 

Basis of difference TDS u/s 194 Q TCS u/s 206C(1H)
Applicability on  Purchase  Sale
Who has to comply Buyer is liable to deduct TDS on Purchase Of goods or Payment made in any form

(whichever is earlier)

Seller is liable to collect TCS on the amount of receipt of payment in any form
Effective date 01/07/2021 01/10/2020
Turnover Limit T.O. of the buyer should be more than 10 crores in the previous year T.O. of a seller should be more than 10 crores in the previous year
Qualifying limit w.r.t. transactions Purchases from seller or payment to seller > 50 

Lacs in the f/y 

Sales to buyer > 50 lacs in the f/y                        

The receipt should exceed 50 lacs in the f/y

Rate  0.1% ( purchase value or payment made) 0.1% of sales receipts
Time of compliance Purchase credit or payment made( whichever is earlier) At the time of receipt
If PAN not Available 5% 1%
Quarterly statement to be filed  in 26Q 27EQ
Certificate to be issued Form 16 A Form 27D
Other sections Applicable 206AA,206AB(with some exceptions) and

40a(ia)

206 CCA

 

Effect of sec 40 a(ia) on 194Q

 

According to the sec 40a(ia) – Any person who is liable to deduct TDS on any transaction, if fails to deduct or deposit (when deducted) the TDS by the due date of filing return for a f/y u/s 139(1), then 30% of that sum which was payable by him to the resident would be added to his income. 

For e.g  If a person makes a purchase of 70 lacs from a seller and all the conditions of 194Q are satisfied, then he fails to deduct and deposit TDS by the due date of filing return u/s 139(1). The amount added to his income (disallowance) would be ;

70-50=20 Lacs* 30%=6 Lacs

The rationale behind bringing these two provisions

 

With the introduction of sec 206 C in Finance act 2020 (TCS)and sec 194 Q (TDS) in Finance act 2021, the government has clearly shown its intention to bring the maximum number of persons under the tax net. It was for the first time that provisions of TCS and TDS were brought on sale/purchase of goods. The rate of tax deduction and tax collection has been kept very low (0.1%). Therefore it becomes amply clear that the primary objective is not tax collection but a collection of data regarding various transactions which go beyond the department’s radar. Now, these transactions have been made mandatory to be disclosed in the return. This would also enable the authorities to cross-check the returns filed by the parties to the transactions.

 

An interim order restraining the authorities concerned from deducting tax on the source on the basis of the aforesaid provisions of Section 194N till 30th September 2021. Interim restraining order against Sec 194N (TDS provision on cash withdrawal) 

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