Does section 194Q apply to the purchase of capital goods?

Yes, section 194Q applies to purchasing all goods, whether on capital or revenues account.

Does a buyer importing goods require a TDS deduction under 194Q?

This section comes into play when paid to a resident seller. As in import, the seller is a non-resident, the buyer will not have any obligation to deduct tax under this provision. However, we may need the TDS under section 195.

Will the tax be deducted under Section194Q on the export of goods abroad?

Liability to deduct tax under this section arises only when the payment is for a resident seller. As in the export of goods, a seller is a resident person, but a buyer is a non-resident person. Thus, liability to deduct tax under this section may arise on the non-resident buyer, which may not be practically possible. Therefore, the Central Government may exempt such transactions given under Section 194-Q.

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

Section 206C(1H) provides for the tax (TCS) collection on the sale of goods. CBDT further clarified that Section 206C(1H) shouldn't be applicable on securities transactions traded through recognized stock exchanges.

One needs to wait for CBDT's clarification in section 194Q, exempting such transactions because there is no one-on-one contract between the buyers and sellers, making TDS provisions unworkable in such a situation.

Should TDS be deducted on a purchase of immovable property by a developer?

Immovable property is not "goods." TDS shall be deductible on the consideration paid for the purchase of immovable property (other than agricultural land) under section 194-IA but not under this section; TDS is deductible under that section if consideration exceeds INR 50 Lakhs.

Is TDS applicable on the electricity transaction?

Section 194Q provides for the tax deduction on the payment made for the purchase of goods. The Apex Court, in the case of the State of Andhra Pradesh v. National Thermal Power Corporation (NTPC) (2002) 5 SCC 203, decided that electricity is a movable property though it is not tangible. It is 'goods.' Thus, we may conclude that one should deduct tax from the payment made regarding electricity transactions.

One can undertake trade in electricity through direct purchase from the company engaged in electricity generation or power exchanges. CBDT has clarified through Circular No. 17 of 2020 that the electricity transaction, renewable energy certificates, and energy-saving certificates traded via power exchanges registered under Regulation 21 of the CERC shall not be in the scope of TCS under Section 206C(1H).

In case of direct purchase from generating company, TDS will be deductible u/s 194Q. However, in consideration of purchase through power exchanges, it remains to be seen whether CBDT gives a similar exemption as granted from section 194-O and will provide section 206C(1H) from section 194Q also.

Should TDS be deducted on the software purchase?

The Supreme Court, in its decision of Tata Consultancy Services v. the State of A.P. [2004] 141 Taxman 132 (SC), ordered that Canned software (off the shelf computer software) are 'goods.' Therefore, purchase of Canned software (off the shelf computer software) is the purchase of 'goods and will be liable to TDS under this section even if buyer-entity capitalizes the same in its books. Purchase of customized or tailor-made software may be "services" and liable to TDS under section 194J or section 194-O.

Is TDS liable to be deducted on the purchase of Jewellery not connected with business?

Tax is to be deducted by a buyer whose total sales, gross receipts, or turnover from the business exceeds INR 10 crores during the preceding financial year. There is no condition for the purchase to be connected with the company only. Thus, if someone falls in the definition of the buyer, tax needs to be deducted; even the transaction may not connect to the business carried by him.

Jewellery, being a movable property, is covered under goods. There's no specific exclusion under Section 194Q for TDS deduction on the purchase of Jewellery. Thus, the tax shall be deductible on the purchase of Jewellery if it fulfils other conditions.

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

These expenses reflect the purchase invoice itself, they should form part of the purchase value, and TDS will be deductible. If they are charged through separate invoices and based on an actual, it should not form part of the purchase value for TDS deduction and computing the Rs. 50,00,000 threshold limit.

Whether buyer should deduct TDS on advance payment made to the seller?

The subject of TDS liability is "sum for the purchase of goods" and not "sum for goods purchased." The second expression would mean payment for completed purchases of goods where the buyer purchases by the delivery of goods by the seller. Advance payment is a sum for the "purchase of goods" as the purpose of payment is to buy goods and adjust the advance against the amount payable for the purchase. Therefore, the advance for payment of goods will attract TDS.

Whether amount given as a loan to the seller shall fall within the ambit of this provision?

A loan given by buyers is not a payment for the purchase of goods. Hence, there is no requirement for TDS deduction on loan extended by the buyer. However, if the seller settles such loan amount against purchased value at any future date, the liability to deduct TDS shall arise. The buyer shall deduct tax on the date on which participants agreed to adjust the loan amount against the outstanding liability.

Whether Inter Branch transfer goods fall under the ambit of TDS?

The TDS under this section must be deducted by any person, being a buyer responsible for making payment to the seller to purchase goods. Thus, the existence of two different parties as 'seller' and 'buyer' is a prerequisite to construe a transaction as a purchase. The condition of purchase is nullified in the case of inter-branch transfer. Therefore, provisions of this section shall not apply in the case of branch transfers.

What shall be the treatment of debit notes for computation of TDS?

As the tax is computed on the purchase value, the adjustment made to the seller's ledger by issuing the debit note will not impact the tax to be deducted. The position would remain the same if, after-tax deduction, the seller repays some consideration to the buyer. In such a situation, the buyer shall not reduce the purchase value with the amount so refunded or the debit note adjusted for TDS calculation.

If the seller has more than one units, whether purchases made from different departments need to be aggregated?

Where TDS is applicable, the deductee needs to furnish his PAN or Aadhaar number to the deductor, failing which the deductor must deduct tax at higher rates. Suppose the PAN or Aadhaar number is available, the threshold limit of INR 50 lakhs will be computed for each PAN or Aadhaar number; if different units of the seller are under the same PAN or Aadhaar number, the deductor shall aggregate all such amounts paid or payable to the companies or branches to compute INR 50 Lakhs limit.

Can a seller apply for the lower deduction certificate?

An assessee can apply to the A.O. for issuing a certificate for deduction of tax at lower rates. Deductor shall give such a certificate if the assessee's existing and estimated tax liability justifies lower tax deduction. Further, assessees can file the declaration to the nil tax deduction.

However, Finance Act, 2021 hasn't made any consequential amendments to section 197/section 197A to apply for a certificate for tax deduction at lower rates or to file a declaration for nil deduction regarding transactions covered under Section 194Q. Hence, the seller cannot approach the Assessing Officer to issue a certificate for a lower tax deduction or file a declaration for nil deduction regarding transactions covered under section194Q. Section 206C(1H) also disallows the buyer to apply for the lower or nil TCS certificate.

Will TDS under 194Q apply to the preference shares redemption by the company?

Preference shares are movable property and goods. In the case of Anarkali Sarabhai v. CIT [1997] 90 Taxman 509 (SC), the Court upheld that preference shares redemption is clearly 'sale' by the shareholder to the company and would come within the purview of 'transfer' given the following :

• Sections 77, 80, and 85 of the Co's Act, 1956 [now sections 67, 55, and 43 of the Co's Act, 2013] makes it clear that when a company redeems a preference share, what a shareholder here does is, to sell the shares to the company. Such transaction is nothing but the sale of the preference shares to the company by the shareholders.
• That's why after specifically laying down in section 77(1) of the Companies Act [now section 67(1) of the 2013 Co's Act] that no company will have the power to buy its shares, it's necessary to specify in sub-section (5) thereof [sub-section (4) of section 67 of the 2013 Act] that this provision will not affect the rights of a company to redeem any preference shares issued by the company.
• If the redemption of preference shares did not amount to sale, it would not be necessary to specifically provide about the restriction imposed upon the company regarding buying its shares will not apply to the preference shares redemption issued by the company.

Therefore, it would seem that if redemption proceeds to any preference shareholder exceed Rs. 50 Lakh limit, TDS under 194Q would apply as it amounts to the purchase of goods.

Will TDS under 194Q apply to the buyback of shares by the company? Will such kind of buyback amount to purchase of goods?

It would amount to the purchase of goods given the Supreme Court held in Anarkali Sarabhai v. CIT [1997] 90 Taxman 509. Besides section 68 of the Co's Act, 2013 dealing with buyback of shares refers to it as purchase in the section heading and the text of the provisions. However, domestic companies' buyback is subject to 20% tax under section 115QA, and the consideration is exempt from tax in the shareholder's hands under section 10(34A). So it will be a case of entirely tax-free income w.r.t TDS. Besides, section 115-QA(4) says that the tax paid by the company under this section shall be treated as final tax payment in respect of distributed income on buyback of shares. Given the above, it appears no tax under section 194Q shall be deductible on the buyback of shares. CBDT should clarify this in the removal of difficulties guidelines.

A company whose turnover is Rs.12 crores in the immediately preceding financial year buys Rs.75 Lakh capital goods from a supplier. The agreement with the supplier is 1 Lakh shares of the company whose fair market value is Rs.75 Lakh. Shall allot to the supplier as consideration? Will the TDS be deductible under Section 194Q?

Doubtless, if we go by the meaning of "purchase of goods," the purchase of goods and wordings "payment thereof by any mode" does not exclude payment in any kind. Shares issued in consideration for capital goods is payment in kind and clearly "payment thereof in any mode." TDS will be deducted while paying INR 75 Lakh to the supplier by any other mode or kind ( mode of allotment of shares, i.e. in types), whichever is earlier.

Does section 194Q apply to barter exchange of goods?

It appears so because of the words "payment thereof in any mode" used in section 194Q

Will section 194Q apply to a loan of material?

It so happens; suppose Builder X takes building material on loan from Builder Y. Builder X commits to replace to Builder Y the quantity taken when his stocks arrive. The loan is for the material. Section 194Q applies to the purchase of goods and not the loan for the material.

How does a loan for material differ from barter?

In barter, it is not the same item in the same quantity that is given back. In loan of the same material quantity of same material taken is given back to the loaner.

Does TDS under section 194Q apply to the redemption of units by Mutual Fund exceeding INR 50 Lakhs in a financial year to a unitholder? Can it be said to be a "purchase of goods" by the Mutual Fund?

Consequent to the abolition of Dividend Distribution Tax, the Finance Act, 2020 inserted section 194K w.e.f 1-4-2020 to levy TDS @ 10% on the dividend/income paid by the Company or Mutual Fund to its share or unitholder if the amount of such dividend or income exceeds five thousand rupees in a financial year.

In response to queries received after the presentation of Finance Bill, 2020 in Parliament, CBDT had clarified that "an M.F shall be required to deduct 10% TDS only on payment of dividend and no tax shall be required to be deducted by the Mutual Fund on income which is like capital gains. If needed, shall be proposed in the relevant provision". Accordingly, section 194K clarifies that no TDS will be deductible by Mutual Funds on payment of income like capital gains transactions. There have been no changes to section 194K by Finance Act, 2021 to require TDS deduction by Mutual Fund deduction of units. Therefore, though units can be considered goods, this will not attract TDS under section 194Q on redemption of units by M.F. One expects CBDT will clarify this aspect in the removal of difficulties under section 194-Q.

M/s ABC & Co., partnership firm, invoiced goods worth INR 60 Lakh on 15.07.2021 to Partner A's proprietory business A & Co. and debited partner's capital account as drawings. The turnover of A & Co. was INR 12 crores in F.Y. 2020-21. ABC & Co., turnover in F.Y. 2020-21 was INR 70 crores. Is ABC & Co. liable to collect TCS u/s 206C (1H)? Is A & Co. liable to deduct TDS under section 194Q?

VIEW 1:

The firm and its partners are unique & separate legal entities for income tax purposes under the Act with different PANs. Therefore, there can be a purchase/sale transaction between the firm and its partner.

If we go by the plain reading of 'purchase of goods", there is the purchase of goods & the words "payment thereof by any mode" makes clear that payment can be by way of debit by the firm to the capital account of a partner for the price of goods. So, TDS u/s 194Q is attracted as far as A & Co. is concerned as its turnover exceeds INR 10 crores in immediately preceding financial year. The firm is bound to collect TCS under section 206C(1H) as its turnover exceeds INR 10 crores in the last financial year.

If TCS is required u/s 206C(1H) as well as TDS u/s 194Q, then on that transaction, only TDS u/s 194Q shall be carried out. Since both provisions apply in the present situation, ABC & Co. will not collect TCS, and only A & Co. will deduct TDS u/s 194Q.

VIEW 2:

If goods drawings can be considered as a purchase by partner and sale by the firm, there would have been no need to insert section 9B in the Act by Finance Act, 2021 for clarifying that any receipt of stock in trade by a partner from the firm in connection with its dissolution/reconstitution shall be considered to be a transfer of stock in exchange by the firm to partner. Therefore, we can argue that drawings by a partner from a firm cannot be treated as "purchases" to fall under TDS u/s 194Q.

M/s ABC & Co., a partnership firm, settled its retiring partner's accounts by transferring stock-in-trade of FMV INR 60 lakhs on 15.07.2021 to his proprietorship concern A & Co. The turnover of A & Co. was INR 12 crores in F.Y. 2020-21. ABC & Co., turnover in F.Y. 2020-21 was INR 70 crores. Is ABC & Co. liable to collect TCS u/s 206C(1H)? Is A & Co. liable to deduct TDS under section 194Q?

As the firm has given stock-in-trade to a retiring partner to settle his capital account ledger, it is undoubtedly "in connection with reconstitution of the specified entity." It is thus a deemed transfer under section 9B newly inserted in the Act by Finance Act, 2021. This transfer would amount to a deemed sale by the firm and considered purchases by A & Co. If a transaction falls under TCS u/s 206C(1H) and TDS under 194Q, then on that transaction, the purchaser will deduct TDS u/s 194Q only. Since both provisions apply in the present situation, ABC & Co. will not collect TCS, and only A & Co. will deduct TDS u/s 194Q. Purchases will be debited, and proprietor A's Partner capital account will be credited by A & Co. At this point, TDS of 0.1% would have to be deducted on 0.1% of INR 10 Lakh (assuming that A & Co. and ABC & Co. does not have any other purchase-sale dealings during the F.Y.).

A & Co. would need to deduct TCS here @ 0.1% of Rs.60 lakhs.