MoF: Request for clarity on applicability of TDS under S. 194-O of Income Tax Act on various services provided by ecommerce operator to ecommerce participant

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MoF: Request for clarity on applicability of TDS under S. 194-O of Income Tax Act on various services provided by ecommerce operator to ecommerce participant

Tejasvi

@tejasvi

June 5, 2024

Public Policy

As per proviso to S. 194-O(3) of Income Tax Act, 1961 (IT Act), a transaction in respect of which tax has been deducted by E-Commerce Operator (ECO) under S. 194-O(1) shall again not be liable for TDS under any other provision of Chapter XVII of IT Act; except for services pertaining to hosting advertisements or providing any services which are not in connection with the sale or services referred to in S. 194-O(1). Further, Central Board of Direct Taxes (CBDT), vide issue of Circular No. 20 of 2023, clarified the scope of exemption / exclusion under S. 194-O(3), by inter alia providing that ‘this exclusion will also apply to amount received by ECO for provision of services which are in connection with the main transaction of sale of goods/ provision of service/ both referred to in subsection (1) of section 194-O of the Act’.

In e-commerce marketplace, there are a host of services provided by ECO to Ecommerce participant (ECP) which necessarily facilitates sale transaction. An illustrative list of the said services is as follows:

Referral fee/ listing fee/ platform/ technology fee/ closing fee/ insights fees/ value added service fee: This includes fees charged by ECOs to enable sellers to use the platform's facilities, for facilitating transactions with buyers and boost their sales on the platform. This can be charged as a percentage of the sales value of the product, or a fixed fee based on the price of the product.
Deal fees: This includes fees charged to allow ECP to list/ feature its goods during certain days/ hours (especially during festive season), so as to ensure that the ECP achieves maximum sales through the eplatform. This is ordinarily charged as a fixed amount for each deal.
Inventory storage Fees: This includes fees charged by ECO to allow ECP to store its goods at designated warehouse operated by ECO, so as to ensure that goods are readily available for quick and efficient order fulfillment and to enable a seamless e-commerce sale. These are typically charged periodically (i.e., monthly/ quarterly), considering the volume of space occupied. However, the same is recovered from ECP only as and when the product is sold.
Weight handling fees, delivery service fees, shipping commission, fees for movement of goods between warehouse/ fulfillment center, postage, pick and pack fees: This includes fees charged by the ECO for transportation of goods from sellers’ warehouse/ from various fulfillment centers to customers’ location. This also includes other fees charged for weight handling, postage, etc. This ensures that products are readily available for quick and efficient order fulfillment and enables a seamless e-commerce sale. This is charged as a fixed fee per unit of products sold for packing/ transporting/ fulfillment of products on sale to customers, and the ECP is charged as and when the product is sold.

These fees (whether transaction linked or fixed in nature) are recovered from the seller once net proceeds from sale on the marketplace are realised by the seller on the marketplace. The costs relating to these services are subsumed in the pricing charged by ECP to their customers and are included in the gross amount of sales, on which TDS under S. 194-O is required to be deducted.

Circular No. 20 of 2023 dated 28 December 2023 has unequivocally clarified that any services provided by ECO to an ECP in connection with the transaction of sale shall not be further subjected to TDS. Para 3.2 of the Circular further explains the same by way of various illustrations.

Based on feedback from the industry, we have made a submission to Ministry of Finance highlighting that some of the sellers/ ECP, especially micro, small and medium vendors as well as retailers participating on the Open Network for Digital Commerce (ONDC) platform, seem to apply other TDS provisions contained in Part B of Chapter XVII of IT Act to services which are clearly exempt under S. 194-O(3) and as clarified by the Circular. This results in increased compliance efforts for ECOs such as tracking of large volume of withholding tax certificates, difficulty in reconciliation with form 26AS owing to huge volume of transactions reported in form 26AS, etc.

We have requested the government to:

Clarify that once applicable taxes under S. 194-O(1) of IT Act are withheld by an ECO on the gross amount of sale, no other withholding tax provisions shall apply on various types of services rendered by ECO to ECP, irrespective of whether the fees charged by ECO is transaction based or fixed fees and whether the same is explicitly mentioned on the invoice for sale of goods/ services or recouped separately by the e-commerce participant by way of a separate invoice. This is for the reason that the said services are inextricably availed by an ECP in connection to the main transaction of sale of goods or provision of services or both.
Additionally, an illustrative list of services (as mentioned above) which are in connection with the main transaction of sale of goods or provision of services or both, may be provided in the clarification itself, to address the apprehensions of various ECP’s (especially being micro, small and medium vendors/ retailers).

These clarifications will provide certainty, foster growth within the Indian e-commerce industry, and create a more conducive business environment for micro, small and medium vendors / retailers.

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Tejasvi

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