Tax Alert | Delivering Clarity 1 July 2021

Guidelines issued for tax deduction on purchase of goods The Central Board of Direct Taxes has issued guidelines (vide Circular No. 13 of 2021 dated 30 June 2021) in relation to applicability of tax deduction provisions on purchase of goods under section 194Q of the Income-tax Act, 1961 which come into effect from 1 July 2021

Background: • Finance Act, 2021 (FA 2021) had introduced a new section 194Q under the Income-tax Act, 1961 (ITA) with effect from 1 July 2021. As per section 194Q of the ITA, a buyer, responsible for paying any sum to any resident seller for purchase of any goods (of value or aggregate value exceeding INR 5 million), is required to deduct / withhold tax at 0.1% of such sum exceeding INR 5 million. The buyer is required to deduct tax at source (TDS) at the time of credit (to the account of resident seller) or payment (to the resident seller), whichever is earlier. Buyer is defined as a person whose total sales or gross receipts or turnover from the business carried on by him exceeds INR 100 million during the financial year immediately preceding the financial year in which the purchase of good is carried out. • Representations were made to the Central Board of Direct taxes (CBDT), for issuing guidelines for removing certain difficulties faced by the taxpayers. In light of the same, the CBDT has issued guidelines vide Circular No. 13 of 2021 dated 30 June 2020 (Circular) in respect of withholding tax (TDS) under section 194Q of the ITA. The Circular has also tried to remove certain difficulties in implementing the provisions of sections 194-O (relating to TDS on payment of certain sums by e- commerce operator to e-commerce participant) and 206C(1H) of the ITA (relating to tax collection at source from sale of certain goods).

Highlights of the Circular: The Circular has issued the following key clarifications with respect to applicability of section 194Q, 194- O and 206C(1H) of the ITA:

Applicability on transactions carried through various exchanges: The provisions of section 194Q of the ITA would not apply to:

• Transactions in securities and commodities traded through recognised stock exchanges (RSE)1 or cleared and settled by the recognised clearing corporations (RCC)2 including RSE or RCC located in International Financial Service Centre (IFSC)3. • Transactions in electricity, renewable energy certificates (REC) and energy saving certificates traded through power exchanges registered in accordance with Regulation 21 of Central Electricity Regulatory Commission (CERC).

Calculation of threshold of INR 5 million for the Financial Year 2021-22: The following clarifications have been provided with respect to calculation of threshold of INR 5 million for FY 2021-211 and TDS requirement for advance paid before 1 July 2021 and sum credited thereafter. • Calculation of threshold The calculation of sum for triggering TDS under section 194Q of the ITA would be computed from 1 April 2021, as the threshold of INR 5 million is with respect to the previous year. Accordingly, if a buyer has already credited or paid INR 5 million or more up to 30 June 2021 to a seller, the TDS provisions under section 194Q of the ITA would apply on all credit or payment during the Financial Year 2021-22, on or after 1 July 2021, to such seller. • Credit or payment prior to 1 July 2021 Section 194Q of the ITA mandates buyer to deduct TDS on credit of sum in the account of seller or on payment, whichever earlier. Accordingly, if either of the two events had happened before 1 July 2021, that transaction would not be subjected to the provisions of section 194Q of the ITA.

Adjustment for Goods and Services Tax (GST), purchase returns: • GST When tax is deducted at the time of credit of amount in the account of the seller, and in terms of the agreement or contract between the buyer and the seller, the component of GST comprised in the amount payable to the seller is indicated separately, TDS would need to be deducted under section 194Q of the ITA without including such GST component.

1 RSE shall have the meaning as given under Clause (ii) of Explanation 1 to section 43(5) of the ITA [viz. a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified by the Central Government for this purpose]. 2 RCC shall have the meaning as given under Clause (i) of the Explanation to section 10(23EE) of the ITA [viz. the meaning under clause (o) of sub-regulation (1) of regulation 2 of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 made under the Securities and Exchange Board of India Act, 1992 (15 of 1992) and the Securities Contracts (Regulation) Act, 1956 (42 of 1956). 3 IFSC shall have the meaning as given under section 2(q) of the Special Economic Zones Act, 2005.

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 would not be possible to identity that payment with GST component of the amount to be invoiced in future. • Purchase return Considering that tax is deductible on earlier of payment or credit, TDS under section 194Q of the ITA would have already been done at before purchase return. Accordingly, in case of such purchase returns where the money is refunded by the seller, such TDS on purchase returns can be adjusted against next purchase against the same seller. However, such adjustment of taxes would not be required in case where the purchase returns is replaced by goods by the seller.

Applicability of section 194Q to a non-resident buyer: The provisions of section 194Q of the ITA would not apply to a non-resident whose purchase of goods from seller (resident in India) is not effectively connected with permanent establishment of such non- resident in India. It has been clarified that "permanent establishment" shall mean to include a fixed place of business through which the business of the enterprise is wholly or partly carries on.

Applicability of section 194Q of the ITA to a seller or section 206C(1H) of the ITA to a buyer, whose income is exempt: • Section 194Q of the ITA The provisions of section 194Q of the ITA would not apply on purchase of goods from a seller, who as a person is exempt from income-tax under the ITA (like person exempt under section 10) or under any other Act passed by the Parliament (like Reserve Bank of India Act, etc.). • Section 206(1H) of the ITA Similarly, provisions of section 206C(1H) of the ITA would not apply to sale of goods to a buyer, who as a person is exempt from income tax under the ITA (like person exempt under section 10) or under any other Act passed by the Parliament (like Reserve Bank of India Act, etc.). The above clarifications will not apply if only part of the income of the buyer or the seller, as the case may be, is exempt.

Applicability of section 194Q of the ITA on advance payments: The provisions of section 194Q of the ITA would apply to advance payment made by the buyer to the seller, as these provisions apply on payment or credit whichever is earlier.

Applicability of section 194Q to buyer in the year of incorporation:

As per section 194Q of the ITA, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding INR 100 million during the financial year immediately preceding the financial year in which the purchase of good is carried out. As this condition would not be satisfied in the year of incorporation, the provisions of section 194Q of the ITA would not apply in the year of incorporation.

Applicability of section 194Q of the ITA to buyer, if turnover from business is INR 100 million or less: A buyer may have turnover or gross receipts exceeding INR 100 million but total sales or gross receipts or turnovers from business may be INR 100 million or less. As per section 194Q of the ITA, a buyer is required to have total sales or gross receipts or turnover from the business carried on by him exceeding INR 100 million during the financial year immediately preceding the financial year in which the purchase of good is carried out. Hence, the sales or gross receipts or turnover from business carried on by him must exceed INR 100 million. The turnover or receipts from non-business activity is not to be counted for this purpose.

Cross application of sections 194Q, 194-O and 206C(1H) of the ITA: • Relevant provisions ─ Section 194-O of the ITA (relating to TDS on payment of certain sums by e-commerce operator to e-commerce participant) As per section 194-O(3) of the ITA “…a transaction in respect of which tax has been deducted by the e-commerce operator under sub-section (1), or which is not liable to deduction under sub- section (2), shall not be liable to tax deduction at source under any other provision of this Chapter”. ─ Section 206C(1H) of the ITA (relating to tax collection at source from sale of certain goods) As per second proviso to section 206C(1H) of the ITA, “the provisions of this sub-section shall not apply, if the buyer is liable to deduct tax at source under any other provision of this Act on the goods purchased by him from the seller and has deducted such amount”. ─ Section 194Q of the ITA (relating to TDS on purchase of certain goods) As per section 194Q(5) of the ITA, “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 sub- section (1H) of section 206C applies.” • Interplay between section 194-O and 194Q of the ITA ─ If tax has been deducted by the e-commerce operator on a transaction under section 194-O of the ITA [including transactions on which tax is not deducted on account of section 194-O(2) of the ITA], that transaction would not be subjected to TDS under section 194Q of the ITA.

─ If a transaction is both within the purview of section 194-O as well as section 194Q of the ITA, TDS has to be done under section 194-O and not under section 194Q of the ITA. • Interplay between sections 194-O and 206C(1H) of the ITA ─ Section 206(1H) provides exemption from tax collection at source if the buyer has deducted tax at source on goods purchased by him. The said exemption would also cover a situation where instead of the buyer the e-commerce operator has deducted TDS on that transaction of sale of goods by seller to buyer through e-commerce operator. ─ If a transaction is both within the purview of section 194-O as well as section 206C(1H) of the ITA, tax is required to be deducted under section 194-O of the ITA. Once the e-commerce operator has deducted the tax on a transaction, the seller is not required to collect the tax under section 206C(1H) of the ITA on the same transaction. The primary responsibility is on the e-commerce operator to deduct TDS under section 194-O of the ITA and that responsibility cannot be condoned if the seller has collected the tax under section 206C(1H) of the ITA [as the rate of TDS under section 194-O of the ITA is higher than the rate of tax collection at source under section 206C(1H) of the ITA]. • Interplay and applicability between sections 194Q and 206C(1H) of the ITA If a transaction is both within the purview of section 194Q of the ITA as well as section 206C(1H) of the ITA, the tax is required to be deducted under section 194Q of the Act. The transaction would come out of the purview of section 206C(1H) of the ITA after tax has been deducted by the buyer on that transaction. Accordingly, the seller is not required to collect the tax under section 206C(1H) of the ITA on the same transaction. However, if, for any reason, tax has been collected by the seller under section 206C(1H) of the ITA, before the buyer deducts TDS under section 194Q of the ITA on the same transaction, such transaction would not be subjected to tax deduction again by the buyer. The said concession has been provided, since tax rate of deduction and collection are same under section 194Q and 206C(1H) of the ITA.

Comments: These guidelines will provide clarity to taxpayers while applying the TDS provisions under section 194Q of the ITA as well as transactions coming under common purview of sections 194Q and / or 194-O and / or 206C(1H) of the ITA.

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