Section 206C was inserted in the IT Act by way of the Finance Act, 1988.^[1] It was introduced as a consequence of Section 44AC of the IT Act, which was titled “Special provision for computing profits and gains from the business of trading in certain goods”. This Section has gained importance in recent times owing to an amendment made by the Finance Act, 2020, whereby sub-section (1H) was inserted to levy tax collection at source (‘TCS’) on sale of goods in certain cases.^[2]

As per this amendment, every person, being a ‘seller’, who receives any amount as consideration for the sale of goods in aggregate, of INR 50 lakhs or more in a financial year (other than certain specified goods (as an example, goods exported outside India, alcoholic liquor, motor vehicles etc.), is required to collect from the ‘buyer’ a sum equal to 0.1% of the sale consideration exceeding INR 50 lakhs as TCS (where the buyer provides its permanent account number, otherwise the rate of TCS shall be 1%).^[3]

Given the wide amplitude of this provision, one of the issues that has arisen is whether compliance of this provision is required in respect of shares held as investment.^[4] Since TCS on shares is an added liability for the buyer, as it will be collected by the seller over and above the sale consideration, this issue assumes an even greater significance, especially in cases of high-value transactions.

The term ‘seller’ has been defined to mean a person whose total sales or turnover, from the business carried on by him, exceeds INR 10 crores, during the financial year immediately preceding the financial year in which the sale of goods is carried out. In our view, it could be argued that on a plain reading of the provision, this obligation would need to be discharged only if the seller engages in the business of sale of shares. Support for this proposition may be derived from the fact that the section itself deals with “profits and gains from the business of trading”. Accordingly, sale of shares held as a capital asset/investment should be excluded from the ambit of Section 206C(1H) of the IT Act.

Importantly, the TCS collected by the seller is available as a credit to the buyer against its final income-tax liability and therefore, on a conservative basis, the sellers may insist on complying with this section. However, from a buyer’s perspective, especially in the cases involving non-residents, this would mean that in order to claim such credit/ refund, the buyer would be required to undertake additional compliances as prescribed under the IT Act, such as filing its income-tax return in India.

[1]  (1988) 171 ITR 53 (Statute).

[2]  It may be noted that similar to section 206C(1H), a new section 194-Q has also been inserted in the IT Act recently. This section 194-Q imposes a withholding tax obligation on a buyer on purchase of goods in certain cases. The above write-up, however, does not seek to discuss issues pertaining to section 194-Q or its inter-play with section 206C(1H).

[3]  In the absence of any guidance whether non-resident sellers are excluded from the purview of this section, it appears that this TCS obligation shall apply to non-resident sellers as well.

[4]  The Government has issued Circular No. 17, dated September 29, 2020, which seeks to exempt transactions in listed shares in certain cases from the applicability of section 206C(1H). This seems to suggest that all kinds of shares were intended to be covered under section 206C(1H). However, this Circular does not provide any clarity as to whether a sale of unlisted shares would be covered under the ambit of section 206C(1H), especially, where such shares were held as an investment.