TDS/TCS Applicability on Transfer of Unlisted Shares - Part 2: Controversies / Issues
May 18th, 2025
Direct Tax
A. About the Author:
CA Dhruv Shah is a Partner at Ambavat Jain & Associates LLP, where he heads the practice of FEMA and International Taxation.
CA Ami Shah is a member of Ambavat Jain & Associates LLP, overseeing Taxation and FEMA-related assignments.
B. Opening Note:
We had published Part 1 of our article on 30-Dec-2024. It provided an understanding on applicability of TDS under section 194Q and TCS under section 206C(1H) of the Income-tax Act,1961 on the transfer of unlisted shares. Click here to read part 1 - https://ajallp.in/showBlog/8/tdstcs-applicability-transfer-unlisted-shares-sections
After publishing Part 1, we received many case specific enquiries. This helped us understand various controversies and issues arising in certain practical situations. To make it more comprehensive for the readers, we are publishing Part 2, wherein we are discussing controversies and issues in certain practical situations.
Please note that the provisions of Section 206C(1H) were in effect until 31-Mar-2025. In line with the Finance Bill 2025, presented on 01-Feb-2025, it was proposed that the provisions of Section 206C(1H) will no longer be applicable from 01-Apr-2025, aiming to simplify business operations and reduce compliance burdens.
Therefore, the understanding of Section 206C(1H) outlined below is applicable only for transactions undertaken until 31-Mar-2025, while the applicability of Section 194Q will continue unchanged as before.
C. Controversies and Issues in certain Practical Situations
1. Only those persons engaged in business activities are covered; regular investors are not included
1.1. Section 194Q & 206C(1H):
1.1.1 The obligation to deduct tax under Section 194Q lies with the “Buyer”. The obligation to collect tax under Section 206C(1H) lies with the “Seller”.
1.1.2 The terms Buyer and Seller as defined in respective sections are a person whose total sales, gross receipts or turnover from the business carried on by him exceed ten crore rupees during the financial year immediately preceding the financial year in which the purchase / sale of goods is carried out, not being a person, as the Central Government may, by notification in the Official Gazette, specify for this purpose, subject to such conditions as may be specified therein.
1.2. Conclusion:
1.2.1 Both sections define a “person” as a buyer or seller based on the total sales, gross receipts or turnover “from the Business carried on by that person”.
1.2.2 Therefore, only persons engaged in business activities are covered under the scope of these sections.
1.2.3 A person who is merely making regular investments and not actively carrying on any business activity will not fall within the ambit of these sections.
1.2.4 Hence, as per our understanding, a regular investor will not be classified as a Buyer or a Seller under these provisions. Thus, these sections will not be applicable to the regular investor.
2. If an investor is engaged in any business activities, the section applies regardless of whether the shares are related to the business.
2.1. Section 194Q & 206C(1H):
2.1.1 The sections are triggered when a payment is being made for the purchase / sale of goods.
2.1.2 The person responsible for complying is defined as a buyer or seller whose total sales, gross receipts, or turnover from business carried on by him exceed ₹10 crore during the financial year immediately preceding the year of transaction.
2.1.3 The terms "goods" and "business" have distinct meanings in this context.
2.1.4 Tax deduction is triggered by the payment / receipt for purchase / sale of goods, and the INR 10 crore threshold from the previous financial year determines whether the buyer / seller qualifies under the definition of "buyer" or “seller”.
2.1.5 Therefore, compliance under section 194Q / 206C(1H) is required regardless of whether the underlying shares formed part of the buyer's / seller’s business.
2.2. Example:
2.2.1 An investor is engaged in the business of selling computers. Additionally, he regularly invests into and sells shares as a separate activity.
2.2.2 This gives rise to two distinct aspects: (1) the business of selling computers and (2) the investment in shares as an independent activity.
2.2.3 The gross receipts or turnover from the computer business carried on by him will be considered to determine whether the investor qualifies as a buyer or seller under section 194Q and 206C(1H) respectively.
2.2.4 The investment in shares may trigger the applicability of these sections. The shares could potentially fall within the meaning of "goods", subject to prescribed exemptions (as discussed in Part 1 of the Article).
2.2.5 Accordingly, the provisions of Section 194Q or 206C(1H) may apply, subject to the fulfilment of other prescribed conditions.
3. These provisions apply exclusively to cases involving purchase and sale. Transactions such as gifts, settlements in trusts, pledges, mortgages, and similar arrangements would not be covered.
Section 194Q and Section 206C(1H) of the Income Tax Act, 1961 are specifically designed to address tax deduction and collection at source for transactions involving the purchase and sale of goods.
3.1. Both sections explicitly use the term "purchase" and "sale" of goods. The focus is on transactions where goods are exchanged for monetary consideration.
3.2. Gifts, settlements in trust, pledges, and mortgages do not fall under the definitions of "purchase" or "sale" of goods as intended by the sections. These transactions may generally not involve the transfer of goods for monetary consideration.
3.3. Therefore, such transactions or arrangements are outside the scope of Section 194Q and Section 206C(1H), as they do not meet the criteria of "purchase" or "sale" of goods for monetary consideration.
4. Would Buy-back be covered in the ambit?
4.1. Companies are absolved from payment of buy-back distribution tax for buy-back undertaken on or after October 1, 2024. The income arising from such buybacks is treated as a deemed dividend under Section 2(22)(f) of the Income-tax Act, 1961. This income is taxable in the hands of the shareholders under the head "Income from Other Sources."
4.2. Accordingly, companies are required to withhold tax at source under Section 194 (for resident shareholders) or Section 195 (for non-resident shareholders), as applicable.
4.3. In light of the above treatment, the provisions of Section 194Q and Section 206C(1H) shall not apply to such buy-back transactions. Reason – TDS is already getting withheld under other provisions.
5. Where Non-resident is selling to Resident. What would happen if Non-resident were claiming exemption under DTAA.
5.1. Where a Double Taxation Avoidance Agreement (DTAA) exists between India and the country of the non-resident, the provisions of the DTAA apply to the extent they are more beneficial to the taxpayer (as per Section 90 of the Act).
5.2. If the DTAA provides an exemption or lower rate of tax for the type of income earned then the non-resident can claim the benefit of such provisions.
5.3. Accordingly, TDS to be withheld by the resident only to the extent the income is taxable in India under the DTAA. In other words, due benefit offered DTAA should be given.
6. Listed shares sold under off-market deal.
6.1. Shares are classified as 'goods' under the Sale of Goods Act, 1930. Therefore, TDS/TCS provisions apply to the sale of shares and securities, provided other prescribed conditions are met.
6.2. The CBDT vide circular no. 13/2021, dated June 30, 2021 (“Circular 13/2021”) and circular no. 17/2020, dated September 29, 2020 (“Circular 17/2020”) has clarified that tax under section 194Q / 206C(1H) would not be required to be deducted / collected in cases where securities and commodities are traded through recognised stock exchanges or cleared and settled by a recognised clearing corporation, including recognised stock exchanges or recognised clearing corporation located in the International Financial Service Centre;
6.3. Thus, as per the above mentioned Circulars, though tax would not be required to be deducted for “on market sale of shares and securities”, by implication, it would seem that all other transactions pertaining to off-market sale/ purchase of shares and securities, including shares of private and unlisted public companies, would be covered within the ambit of section 194Q or 206C(1H).
6.4. Though, there is no clarity on whether the term ‘goods’ under section 194Q, includes securities or not, the Circular suggests that the tax department may require buyers to withhold tax on off market sale of shares and securities by resident sellers, subject to provisions of section 194Q.
6.5. Thus, if the listed shares or shares of private and unlisted companies are transferred through off-market transactions, the provisions of TDS under section 194Q or TCS under section 206C(1H) shall apply, subject to the threshold limit.
7. What happens in case of Primary Issue of Unlisted shares?
7.1. As per Section 2(7) of SOG Act, 1930, ‘Goods’ means every kind of movable property other than actionable claims & money and includes Stock & Shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.
7.2. In case of a primary issue, shares are issued directly by the company to investors in exchange for consideration. This is a capital-raising activity rather than a sale of goods.
7.3. The transaction does not involve the transfer of pre-existing goods but the creation of a new asset (the shares) by the company. The issuance of shares involves the creation of a new financial instrument rather than the transfer of pre-existing movable property.
7.4. The primary issue of shares is aimed at mobilizing capital for the company's use, not the exchange of goods for commercial purposes. This differentiates it from sales transactions.
7.5. Income from the sale or transfer of shares (in a secondary market) is treated as either capital gains or business income. However, the primary issuance of shares is viewed as a means of raising capital, not as an income.
7.6. Thus, the primary issuance of unlisted shares does not qualify as "goods" and, consequently, does not fall within the scope of Sections 194Q and 206C(1H) of the Income-tax Act, 1961.
8. Does transfer of shares of unlisted companies in dematerialized form fall under the ambit of CBDT Circular No. 13 and 17?
8.1. The CBDT vide circular no. 13/2021, dated June 30, 2021 (“Circular 13/2021”) and circular no. 17/2020, dated September 29, 2020 (“Circular 17/2020”) has clarified that tax under section 194Q / 206C(1H) would not be required to be deducted / collected in cases where securities and commodities are traded through recognised stock exchanges or cleared and settled by a recognised clearing corporation, including recognised stock exchanges or recognised clearing corporation located in the International Financial Service Centre;
8.2. Shares of unlisted companies in dematerialized form are not traded on recognized stock exchanges or cleared/settled through recognized clearing corporations. Therefore, they fall under the scope of Section 194Q and 206C(1H), subject to other prescribed conditions.
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