Tax Deducted at Source (TDS) is a vital compliance mechanism under the Income-tax Act, 1961. It ensures tax collection at the earliest point of income generation. In an effort to expand the TDS net and bring greater transparency to high-value transactions in the business-to-business domain, Section 194Q was introduced by the Finance Act, 2021 and became effective from July 1, 2021. This provision specifically targets buyers making significant purchases of goods from resident sellers.
Section 194Q has been designed to ensure that tax is deducted at the time of purchase transactions, rather than relying solely on sellers to report and pay tax. It serves the dual purpose of early tax collection and reducing tax evasion through non-reporting of transactions.
Understanding the Legislative Intent of Section 194Q
The introduction of this section was aimed at plugging loopholes in the compliance framework relating to purchases and sales of goods, especially in cases where businesses make substantial payments to sellers without deduction of TDS. Section 194Q strengthens monitoring of high-value transactions and imposes a compliance obligation on buyers, ensuring they deduct tax before making payments to the seller.
It complements the provisions of Section 206C(1H), which requires sellers to collect tax on receipt of sale proceeds from buyers. However, Section 194Q places this responsibility on the buyer instead, thereby preventing any overlap or confusion.
Applicability of Section 194Q
Section 194Q applies when a buyer makes payments to a resident seller for the purchase of goods where the aggregate value of such purchases exceeds fifty lakh rupees in a financial year. The TDS is required to be deducted at the rate of 0.1 percent on the amount exceeding fifty lakh rupees.
The buyer must deduct tax at the time of credit of the sum to the account of the seller or at the time of payment by any mode, whichever is earlier.
Conditions for Applicability
Section 194Q becomes applicable only when all of the following conditions are fulfilled:
- There is a buyer and a seller involved in the transaction.
- The seller is a resident in India.
- The buyer’s turnover, gross receipts, or total sales from business exceeds ten crore rupees in the financial year immediately preceding the year in which the purchase is made.
- The total value of goods purchased from the seller exceeds fifty lakh rupees during the financial year.
Rate and Timing of Deduction
The rate of TDS under Section 194Q is 0.1 percent on the amount exceeding fifty lakh rupees in a financial year. The deduction must occur at the time of credit or payment, whichever is earlier. If the seller does not provide a valid Permanent Account Number (PAN), the rate of TDS increases to 5 percent as per Section 206AA.
The timing of deduction is crucial. Buyers are required to deduct tax even if the goods have not been delivered, as long as the liability has been credited to the seller’s account or payment is made. This ensures that the deduction obligation is triggered early and not postponed based on delivery schedules.
Who is a Buyer Under Section 194Q?
The definition of a buyer under this section is specific. A buyer is a person whose total turnover, gross receipts, or sales from business exceeds ten crore rupees in the financial year immediately preceding the current financial year. This turnover limit is to be determined based on the financial statements of the previous year.
The term ‘person’ includes individuals, Hindu Undivided Families, partnerships, LLPs, companies, cooperative societies, associations of persons, and bodies of individuals. The focus is on the turnover from business activity. Income from other heads, such as salary or capital gains, is not considered while determining this threshold.
Example for Better Understanding
Suppose a company, Alpha Pvt Ltd, had a turnover of fifteen crore rupees in FY 2021-22. In FY 2022-23, it purchases goods worth seventy lakh rupees from a resident seller, Beta Traders. Since Alpha’s turnover in the preceding year exceeded ten crore rupees and the value of purchases in the current year exceeds fifty lakh rupees, Section 194Q is applicable.
TDS will be required to be deducted at the rate of 0.1 percent on the amount exceeding fifty lakh rupees, which is twenty lakh rupees in this case. Therefore, Alpha Pvt Ltd must deduct TDS of ₹2,000 either at the time of credit to Beta Traders or at the time of payment, whichever is earlier.
Meaning and Scope of “Goods”
The term “goods” is not specifically defined under the Income-tax Act, 1961. Therefore, reference must be made to other laws to interpret its meaning. Two important legislations which provide relevant definitions are the Sale of Goods Act, 1930 and the Central Goods and Services Tax Act, 2017.
Definition under the Sale of Goods Act, 1930
As per this Act, goods include every kind of movable property other than actionable claims and money. It includes stocks, shares, growing crops, grass, and things attached to or forming part of the land that are agreed to be severed before sale.
Definition under the Central Goods and Services Tax Act, 2017
According to this Act, goods are all kinds of movable property excluding money and securities but include actionable claims, growing crops, grass, and items attached to land if agreed to be severed before supply.
Based on these definitions, a wide range of items may fall under the category of goods for the purpose of Section 194Q. This includes raw materials, finished goods, machinery, and capital goods.
Transactions Covered Under Section 194Q
The section applies only to transactions involving the purchase of goods. It does not apply to:
- Services rendered or availed
- Sale or purchase of immovable property
- Interest payments or loans
- Contracts for work or job work unless they involve transfer of ownership of goods
The focus is solely on purchases of tangible movable goods. Whether the purchase is for business use, resale, or capital investment does not affect the applicability of the provision.
Capital vs. Revenue Expenditure
An important clarification under Section 194Q is that the nature of goods purchased, whether for capital or revenue purposes, does not impact the TDS liability. Therefore, purchases of machinery or equipment for use in the business are also covered.
This broadens the scope significantly, as traditionally TDS was applicable only on revenue expenditures. With the implementation of this section, businesses must now include capital purchases within their TDS compliance framework.
Non-applicability in Certain Transactions
Section 194Q is not applicable in the following cases:
- If tax is already deductible under another section of the Income-tax Act
- If tax is collectible under Section 206C, other than transactions to which Section 206C(1H) applies
This ensures that the same transaction is not subjected to both TDS and TCS provisions, avoiding duplication. However, there is a specific rule that if both Section 194Q and Section 206C(1H) are applicable, then only Section 194Q will apply.
Clarifications Through Guidelines
To ease the implementation of this new provision and address operational difficulties, the Central Board of Direct Taxes has been empowered under sub-section (3) of Section 194Q to issue guidelines in consultation with the Central Government. These guidelines are binding on the income-tax authorities and persons responsible for deducting TDS.
One such guideline was issued through Circular No. 13/2021, dated 30 June 2021. It clarified several aspects including overlapping provisions with TCS, timing of deduction, and non-resident buyers. These clarifications are important for businesses to interpret and apply the provision accurately.
Treatment of Purchase Returns
In practice, purchase returns are a common occurrence. Since TDS under Section 194Q is deducted at the time of credit or payment, the deduction would have already occurred before the return happens.
In such cases, if the amount is refunded by the seller, the TDS already deducted may be adjusted against future transactions with the same seller. However, if the returned goods are simply replaced with new goods, no adjustment is needed as the transaction is still deemed complete. Proper documentation and reconciliation are essential to ensure that such adjustments are correctly reflected in the books of accounts and in TDS returns.
Applicability to Non-Residents
Section 194Q does not apply to a non-resident buyer unless the purchase transaction is effectively connected with a permanent establishment in India. A permanent establishment typically refers to a fixed place of business in India through which the non-resident carries out business operations.
If no such connection exists, and the transaction is purely offshore, the non-resident buyer is not liable to deduct TDS under this section. This ensures that only transactions having sufficient territorial nexus with India are brought under the purview of domestic tax law.
Computation of Turnover for Eligibility
The threshold limit of ten crore rupees in the preceding financial year must be computed based on audited financial statements. It includes total sales, gross receipts, and turnover from business activities. Income from other sources such as interest, dividend, or capital gains is not relevant.
It is important to note that for the purpose of computing this limit, adjustments required under Income Computation and Disclosure Standards or Section 145A are not applicable. The computation must be based on regular accounting practices followed in the preparation of financial statements.
Introduction to Practical Aspects of Section 194Q
Section 194Q was introduced with the objective of enhancing compliance and ensuring tax traceability at the time of business transactions. Once the basics of applicability are understood, the practical challenges arise in its implementation. Businesses must not only comprehend when and how TDS under Section 194Q applies, but also align their accounting, procurement, and vendor systems to ensure no default occurs.
We explore the operational, accounting, and reporting aspects of Section 194Q from the perspective of deductors and deductees, highlighting real-world scenarios, exceptions, and interlinkages with other TDS/TCS provisions.
Interplay with Section 206C(1H) – Who Has the Primary Responsibility?
One of the most debated and practically challenging aspects of Section 194Q is its interaction with Section 206C(1H). While both sections aim to widen and deepen the tax base, their simultaneous applicability could lead to confusion in determining responsibility.
- Section 206C(1H) mandates TCS collection by the seller from the buyer if turnover exceeds Rs. 10 crore and sales exceed Rs. 50 lakh to a buyer.
- Section 194Q mandates TDS deduction by the buyer if buyer’s turnover exceeds Rs. 10 crore and purchases from a seller exceed Rs. 50 lakh.
In cases where both buyer and seller meet these thresholds, precedence is given to Section 194Q. This means if the buyer is liable to deduct TDS under Section 194Q, the seller is not required to collect TCS under Section 206C(1H).
To ensure clarity and avoid duplication:
- Buyers must assess their obligation under Section 194Q first.
- Sellers should verify if the buyer is deducting TDS before proceeding to collect TCS.
Scenarios Where Section 194Q Applies Despite Other TDS Provisions
Section 194Q primarily applies to purchase of goods and is not overridden by most other TDS provisions except those specifically dealing with such transactions. However, some confusion exists in transactions involving:
- Works contracts: May fall under Section 194C if they involve labour plus material.
- Composite supply of goods and services: Judgment must be made regarding the dominant nature of the transaction.
- Import transactions: Not covered under Section 194Q.
Section 194Q does not apply where:
- The transaction is already subject to TDS under other sections such as 194C, 194H, or 194J for service elements.
- TDS or TCS provisions are already in force and have been executed properly.
Exemptions from TDS under Section 194Q
Certain transactions and entities are exempt from TDS under Section 194Q. These include:
- Purchases from non-residents where income is not taxable in India.
- Transactions in securities and commodities through recognised stock exchanges or clearing corporations.
- Purchases of electricity, renewable energy certificates, or energy-saving certificates traded through power exchanges.
Further, central and state governments, RBI, and certain notified institutions may be excluded from the purview of this provision.
Treatment of Advance Payments and Credit Purchases
Another practical dilemma arises in the treatment of advance payments. Section 194Q requires deduction of TDS at the time of credit or payment, whichever is earlier.
This has the following implications:
- If advance is paid to a seller before invoice or supply of goods, TDS must be deducted at the time of advance.
- In credit purchases, TDS is to be deducted at the time of crediting the seller’s account.
For example, if the buyer pays Rs. 30 lakh as advance and later purchases goods worth Rs. 60 lakh, TDS must be deducted once cumulative purchases exceed Rs. 50 lakh. Deduction must occur on the amount exceeding Rs. 50 lakh i.e., Rs. 10 lakh in this case.
Accounting and Bookkeeping Considerations
Implementation of Section 194Q requires modifications to ERP and accounting systems. The following measures are generally necessary:
- Vendor master data must capture PAN and turnover status of vendors.
- Systems should monitor cumulative purchases to track the Rs. 50 lakh threshold.
- TDS ledgers must be updated to reflect deductions made under Section 194Q.
- Reports must be generated for filing of quarterly TDS returns.
The amount deducted under Section 194Q is reflected under Form 26Q. TDS certificates under Form 16A must be issued quarterly to vendors.
Treatment Where PAN is Not Furnished by Seller
As per Section 206AA, if the seller fails to furnish PAN, TDS is deductible at 5 percent instead of 0.1 percent. This makes it imperative for buyers to collect PAN details from vendors.
Important consequences include:
- Increased TDS liability for the buyer.
- Potential disputes from vendors due to lower realization.
- Non-reflection of TDS in Form 26AS of seller unless PAN is correctly provided.
To avoid compliance risks, vendors must be required to provide PAN at the onboarding stage.
Examples Illustrating Applicability of Section 194Q
Example 1 – Single Invoice Crossing Threshold
Company A has a turnover of Rs. 12 crore. It purchases goods worth Rs. 60 lakh from Vendor X in one invoice. Since the threshold of Rs. 50 lakh is crossed in a single transaction:
- TDS is deductible on Rs. 10 lakh at 0.1 percent.
- TDS = Rs. 1,000.
- Deduction must be made at the time of booking or payment.
Example 2 – Multiple Transactions Crossing Threshold Cumulatively
Company B purchases goods worth Rs. 20 lakh, Rs. 15 lakh, and Rs. 25 lakh in three transactions in a financial year from Vendor Y.
- On the third transaction, total purchases reach Rs. 60 lakh.
- TDS is deductible on Rs. 10 lakh only.
- No deduction is required on the earlier two transactions.
Example 3 – Advance Payment before Supply
Company C makes an advance payment of Rs. 55 lakh to Vendor Z.
- Since advance exceeds Rs. 50 lakh, TDS applies on Rs. 5 lakh.
- TDS = Rs. 500 (0.1 percent of Rs. 5 lakh).
Quarterly Return Filing and Reporting Requirements
Buyers are required to file quarterly TDS returns under Form 26Q. This form includes information about:
- PAN of deductee
- Amount paid or credited
- Date of deduction
- Amount of tax deducted
Due dates for filing Form 26Q are as follows:
- Q1 (Apr–Jun): 31st July
- Q2 (Jul–Sep): 31st October
- Q3 (Oct–Dec): 31st January
- Q4 (Jan–Mar): 31st May
TDS certificates in Form 16A must be issued within 15 days from the due date of filing return.
Non-Compliance and Consequences for Buyers
Failure to comply with provisions of Section 194Q may lead to:
- Disallowance of 30 percent of purchase expense under Section 40(a)(ia).
- Levy of interest under Section 201(1A) for non-deduction or late payment.
- Penalty under Section 271C for failure to deduct TDS.
- Penalty under Section 234E for late filing of TDS return.
Therefore, buyers must ensure that TDS is deducted timely and deposited before the due date (7th of the following month).
Challenges in Implementation Faced by Businesses
Several operational and interpretational challenges arise, such as:
- Identification of vendors from whom cumulative purchases exceed Rs. 50 lakh.
- System automation to track thresholds.
- Confusion regarding treatment of debit notes, returns, and discounts.
- Handling vendor disputes over reduced payments.
- Manual corrections in quarterly returns due to mismatches.
In practice, companies often designate internal teams or consultants to monitor threshold breaches and maintain TDS compliance reports.
Circulars and Clarifications by CBDT
The Central Board of Direct Taxes has issued clarifications from time to time to resolve ambiguities. Some key clarifications include:
- TDS is not required under Section 194Q in transactions already covered under other TDS sections.
- Threshold of Rs. 50 lakh applies per vendor per financial year.
- Section 194Q does not apply to import transactions.
- TDS must be deducted on net invoice value (excluding GST), if separately mentioned.
These clarifications have reduced confusion and aligned practice with legislative intent.
Integration with Goods Return and Credit Note Scenarios
In some situations, goods purchased may be returned due to defects or rejection. The question arises whether TDS deducted earlier can be reversed.
As per prevailing interpretation:
- TDS once deducted cannot be reversed merely because goods were returned.
- The only option is for the deductee to claim credit in their income tax return.
- Credit notes issued by the seller do not affect TDS already deposited.
To mitigate such issues, buyers may delay deduction until actual delivery or invoicing wherever possible.
Introduction to Practical Scenarios and Industry-Specific Interpretations
While the foundational provisions of Section 194Q provide a framework, real-world implementation often brings several challenges and ambiguities. Businesses across industries face unique circumstances where interpretation becomes crucial. This section delves into such practical issues, exceptions, clarifications, and judicial commentary surrounding Section 194Q.
When Buyer and Seller Are Both Covered Under TDS and TCS Provisions
Section 194Q and Section 206C(1H) of the Act often overlap since both provisions apply to transactions involving purchase and sale of goods. This results in confusion about who should deduct or collect tax.
The Central Board of Direct Taxes (CBDT) clarified that where Section 194Q is applicable to a buyer, it shall override Section 206C(1H) relating to the seller’s obligation to collect tax at source. Hence, the buyer shall deduct TDS, and the seller shall not collect TCS in such overlapping situations. However, it is crucial to establish that the buyer’s turnover exceeded Rs. 10 crore in the previous year, and the purchase value from a particular seller exceeded Rs. 50 lakh in the current year.
Timing of Deduction – On Payment or Credit, Whichever Is Earlier
Section 194Q mandates that tax be deducted at the time of credit of the amount to the account of the seller or at the time of payment, whichever is earlier. The timing becomes complex in cases where advance payments are made, or goods are returned after booking entries.
For instance, if a buyer pays an advance for goods before the invoice is issued, TDS must be deducted at the time of payment. If the transaction is later cancelled or goods are returned, the deducted tax cannot be refunded by the buyer but can be claimed by the seller in their return of income.
Non-Resident Buyers and TDS Obligations
A key consideration is whether a non-resident buyer is liable to deduct TDS under Section 194Q. According to CBDT guidelines, a non-resident whose purchase is not effectively connected with a permanent establishment in India is not required to deduct TDS under this section.
However, if the non-resident buyer has a permanent establishment or business connection in India, and their turnover from Indian operations exceeds Rs. 10 crore, the applicability of TDS under Section 194Q needs to be examined carefully.
Transactions Through Exchanges or E-Commerce Platforms
Another practical issue is the applicability of TDS under Section 194Q on transactions executed through recognised stock exchanges, commodity exchanges, or e-commerce portals.
CBDT has clarified that Section 194Q shall not apply to:
- Transactions in securities and commodities traded through recognised stock exchanges.
- Transactions in electricity, renewable energy certificates, and energy saving certificates traded through registered power exchanges.
- Transactions carried out through e-commerce operators where TDS is already applicable under Section 194-O.
These exemptions aim to reduce administrative complexity and avoid multiple deductions on the same transaction.
Goods Returned or Discount Given After Deduction of TDS
In commercial practice, goods may be returned after invoicing and TDS deduction, or discounts may be offered post-sale. Once TDS is deducted and deposited, there is no mechanism in the law to reverse or adjust the deduction for subsequent commercial adjustments.
The seller, however, can claim credit for the TDS deducted in the return of income and can also report the adjusted turnover in their books for correct tax computation. Businesses are advised to reconcile TDS with actual sales to avoid reporting mismatches.
No TDS if Tax is Deductible Under Any Other Provision
Section 194Q does not apply where the transaction is already subject to tax deduction under any other provision of the Income-tax Act. For example, if a purchase of goods involves a composite contract for work and labour, and tax is deductible under Section 194C, then Section 194Q will not apply again on the same transaction.
This helps avoid duplication in tax compliance and simplifies deductor responsibilities in composite or service-based contracts.
Impact on Books of Accounts and Reporting in TDS Returns
The deduction under Section 194Q must be reflected correctly in the books of accounts of the buyer. It is necessary to maintain vendor-wise details of purchases exceeding Rs. 50 lakh, and ensure that TDS is deducted and deposited timely. Non-compliance could lead to interest, penalty, and disallowance of expenditure under Section 40(a)(ia).
In Form 26Q, specific sections are allocated for reporting TDS under Section 194Q, and PAN details of the seller must be accurately reported. Errors in quoting PAN or non-deduction of tax may result in penalties or mismatches in Form 26AS or AIS.
Common Mistakes and Practical Errors in Application
Several common errors are observed in implementation of Section 194Q:
- Deducting tax on the total purchase amount, instead of on the amount exceeding Rs. 50 lakh.
- Applying the section to transactions carried out before 1st July 2021, when it became effective.
- Failing to identify sellers whose aggregate purchases exceed the Rs. 50 lakh threshold across multiple invoices.
- Deducting tax even when TDS is already applicable under another section.
Proper training, software configuration, and internal controls can help minimise these compliance issues.
Judicial Pronouncements and Tribunal Rulings
Although Section 194Q is relatively new, some judicial trends have started to emerge in terms of interpretation and scope.
In one matter, the Hon’ble Income Tax Appellate Tribunal (ITAT) held that when the buyer has sufficient evidence to demonstrate that TDS was not deductible under Section 194Q due to lack of applicability criteria, disallowance under Section 40(a)(ia) cannot be made merely on procedural grounds.
In another case, a tribunal accepted the seller’s claim for TDS credit, even though the buyer had delayed depositing it by a few weeks, considering the substance of the transaction. These rulings indicate that while procedural compliance is important, the overall intention and eligibility parameters are equally relevant in determining the applicability of Section 194Q.
Case Studies – Application Across Sectors
Case Study 1: Manufacturing Industry
A manufacturing company with turnover of Rs. 15 crore in the previous year purchases raw material worth Rs. 1 crore from a vendor in the current year. Since the value exceeds Rs. 50 lakh, the company is liable to deduct TDS on Rs. 50 lakh at 0.1%. The company credits the vendor’s account in July and pays the invoice in August. TDS is required to be deducted in July itself, at the time of credit.
Case Study 2: E-Commerce Transactions
A company purchases office supplies through an e-commerce platform where the platform deducts TDS under Section 194-O. In such a case, Section 194Q shall not apply on the buyer, as deduction has already been made by the e-commerce operator.
Case Study 3: Cross-Border Purchases
An Indian entity places a purchase order worth Rs. 75 lakh with a foreign supplier having no permanent establishment in India. Section 194Q does not apply as the seller is a non-resident without any taxable presence in India. However, care must be taken to ensure that such transactions are properly documented.
Compliance Calendar and Due Dates
Timely deposit of TDS is critical for compliance under Section 194Q. The deducted tax must be deposited by the 7th of the following month. Quarterly TDS returns (Form 26Q) must be filed as per the following schedule:
- For April–June: 31st July
- For July–September: 31st October
- For October–December: 31st January
- For January–March: 31st May
In addition, TDS certificates (Form 16A) must be issued to sellers within 15 days of the due date of filing the TDS return.
Penalties and Consequences for Non-Compliance
Failure to deduct or deposit TDS under Section 194Q can lead to various consequences:
- Interest under Section 201(1A) at 1% for non-deduction and 1.5% for non-payment.
- Disallowance of 30% of the expenditure under Section 40(a)(ia).
- Penalty equal to the amount of TDS under Section 271C.
- Prosecution provisions in serious cases under Section 276B.
To avoid such implications, businesses must maintain robust TDS tracking systems and conduct periodic compliance reviews.
Best Practices for Businesses and Accountants
To ensure smooth implementation of Section 194Q, the following best practices are advisable:
- Maintain a vendor master with turnover and PAN validation.
- Reconcile purchase registers monthly to track threshold limits.
- Automate deduction and payment processes to reduce manual errors.
- Educate procurement and finance teams about TDS triggers.
- Respond timely to notices or discrepancies highlighted by the department.
Industry-Specific Considerations and Exemptions
Certain industries face unique scenarios:
- In real estate, purchase of construction material from multiple vendors may exceed thresholds quickly.
- In the automobile sector, vehicle purchases by dealers may involve TDS if other conditions are met.
- In the pharmaceutical sector, transfer of inventory between group companies must be carefully analysed for applicability.
Clarifications from the CBDT continue to evolve, and businesses should monitor circulars, and notifications for updated guidance.
Conclusion
Section 194Q of the Income-tax Act has introduced a significant compliance responsibility for buyers of goods by mandating the deduction of tax at source on purchases exceeding specified monetary thresholds. This provision, brought into effect from July 1, 2021, is a part of the government’s broader agenda to ensure better traceability of high-value transactions and to widen the tax base. While it has undoubtedly brought increased transparency and reporting discipline, it has also resulted in greater complexity for taxpayers, particularly businesses engaged in large-scale procurement.
Understanding the interplay of Section 194Q with related provisions such as Section 206C(1H), Section 194-O, and other TDS/TCS sections is crucial to ensure that businesses do not face the risk of double deduction or non-compliance. The provisions of non-obstante clauses, precedence rules, and exceptions must be carefully reviewed to determine the applicability in each transaction.
Proper record-keeping, PAN verification of sellers, timely deposit of deducted TDS, issuance of TDS certificates (Form 16A), and accurate filing of quarterly TDS returns are essential components of compliance under Section 194Q. Non-compliance may result in disallowance of expenses under Section 40(a)(ia), interest, penalties, and prosecution consequences.
The case laws and departmental circulars further clarify grey areas and reinforce the need for a proactive and cautious approach in determining liability under this section. As the law continues to evolve, businesses must adapt their internal systems, vendor onboarding processes, and ERP software to automate and streamline TDS computation and deduction procedures.
In essence, Section 194Q reinforces the need for real-time compliance and accountability in business transactions. Its successful implementation requires both legal understanding and practical readiness. Businesses, professionals, and compliance teams must keep pace with legislative amendments, judicial precedents, and administrative guidance to ensure error-free and timely compliance. With adequate preparation and systematization, the compliance burden can be managed efficiently while also contributing to a more transparent tax environment.