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  • Sridattha Charan

Section 194-O of the Income Tax Act: Deconstructing the Definitions

[Sridattha is a student at Symbiosis Law School, Pune.]

The Indian e-commerce industry has been on an upward growth trajectory and is expected to surpass the United States of America to become the second largest e-commerce market in the world by 2034. Considering the growing number of these e-commerce transactions, the Government of India recently introduced Section 194-O through the Finance Act 2020 under the Income-tax Act 1961 (Act).

Section 194-O of the Act states that an e-commerce operator shall deduct tax at the time of credit to the e-commerce participant at the rate of 1% on the gross amount of the sale of goods or services or both.

The provision was introduced in order to widen and deepen the tax net by bringing the e-commerce transactions under ambit of the tax deduction at source (TDS) provisions of the Act. However, the vagueness and ambiguity of the terminology used in the provision would create a multitude of implementation conundrums for the revenue department. A thorough understanding of the jurisprudence and the legislative intent is essential to comprehend the concepts of the provision.


Under Section 194-O of the Act, ‘e-commerce’, is defined as the supply of ‘goods or services or both’ which includes digital products and is supplied over an electronic or a digital network. Following the definition provided, e-commerce includes the supply of goods such as furniture or electronic products such as smartphones or even the supply of services such as the transport services provided by Uber or grooming services provided by UrbanClap through digital platforms.

The expression ‘goods and services or both’ has been adapted from the Central Good and Services Tax Act 2017 (CGST Act). The term ‘or both’ would describe a transaction which includes both the provision of goods and the furnishing of services or a transaction in which the supplied product has features of both goods as well as services.

On a prima facie reading of the provision, the use of the term ‘or both’ could appear to be unwarranted. However, it is pertinent to note the observations made by the Organisation for Economic Cooperation and Development (OECD) in the Base Erosion and Profit Shifting Action 1 Report. The OECD has reflected that the initial online retailing businesses had adopted the brick-and-mortar model through selling the traditional goods which were physical and tangible, such as books, on e-commerce platforms. Later, with the evolution of the e-commerce industry, online retailers began selling digital products and services. This included the sale of games, executable code, downloadable music and other services based on data processing. This sale of digital products and services increasingly blurred the line between goods and services as the business of online retailing developed. Therefore, the observation made be OECD suggests that the term ‘or both’ could be attributed to the grey area between goods and services.

E-commerce operator

Under explanation (b) of Section 194-O of the Act, an ‘e-commerce operator’ is defined as a person who ‘owns, operates or manages’ an electronic or a digital facility or the platform for the e-commerce.

In some situations, more than one person would be related to the functioning or the ownership of the e-commerce platform. In these scenarios, it would not be feasible to place the responsibility of withholding tax on all those persons collectively. Sub-section (1) of Section 194-O of the Act brings with it a pre-condition that the tax would be deducted only when the sale of goods or services of the e-commerce participant is carried out by an e-commerce operator specifically through ‘its’ electronic or digital facility or platform.

This provision can give rise to two different and contrasting interpretations. The first interpretation would be that the ‘owner’ of the e-commerce platform be obligated to withhold the tax. In this interpretation, the term ‘its’ has been given its general and literal connotation and denotes ownership. The second interpretation would be where the ‘owner’ of the e-commerce platform is not inevitably accountable or obligated to withhold the tax and the term ‘its’ has been given an appropriate and contextual meaning. The first interpretation would make the terms ‘owns’, ‘operators’ and ‘manages’ in the definition of ‘e-commerce operator’ superfluous or redundant. Therefore, the second interpretation would be the most suitable one to follow, keeping in mind the objective to widen and deepen the tax net on e-commerce transactions which the provision strives to achieve.

The analysis of the interpretation does not necessarily propose that the term ‘its’ would determine who would constitute an ‘e-commerce operator’ when different persons own, operate, and manage the e-commerce platform. This determination must on the basis of another consideration.

E-commerce participant

Under explanation (c) of Section 194-O of the Act, an ‘e-commerce participant’ is defined as a person who is a resident of India, who sells the goods and provides the services (including digital products) through an e-commerce platform.

A non-resident does not come under the scope of an e-commerce participant since the definition explicitly refers to residents. Therefore, if a non-resident sells goods or services through an e-commerce platform, then the e-commerce operator would not be under an obligation to deduct tax on payments made to the e-commerce participant.


Under explanation (d) of Section 194-O of the Act, ‘services’ includes ‘fees for technical services’ and ‘fees for professional services’ following the definitions of the same provided under Section 194J of the Act.

The definition of ‘services’ in Section 194-O of the Act is an inclusive one. Services which do not come under the ambit of ‘professional services’ or ‘technical services’ would also be treated as ‘services’ for the purpose of this provision. Any other interpretation would not be in consonance with the objective sought to be achieved by Section 194-O of the Act.

Gross amount

TDS is to be made on the ‘gross amount’. The term ‘gross amount’ is not defined for the purposes of Section 194-O of the Act. In some business models, the e-commerce platform would raise an invoice on the customer for the price of the goods or service, delivery charges and sometimes, a convenience fee to facilitate faster delivery of the goods or services.

The purchaser would then transfer the charge which includes the delivery charge and the commission to the e-commerce operator. The e-commerce operator would then deduct its commission or service charge and facilitation fee and transfer the remaining amounts to the seller and the delivery partner. For the purposes of this provision, gross amounts would be the amounts collected by the e-commerce operator without making deductions. Therefore, for the seller, it would be the cost of the goods or service including the commission being collected by the operator, and for the delivery partner, it would be the delivery charges including the facilitation fee.

This interpretation of gross amount aligns with the rationale of Section of 194-O of the Act which is to widen the tax net. However, this interpretation would result in excessive and in certain cases double taxation since the gross amount includes the delivery fee, the commission, and the convenience fee charged by the platform. This does not form part of the payment made to the e-commerce operator, but in any case, has to be included in the gross amount on which the tax is levied and withheld. The e-commerce operator would further pay tax on the convenience fee collected, the commission earned and the facilitation fee from the delivery charges collected. This results in double taxation on the transactions undertaken by the e-commerce operator.

It is a well-settled of law of taxation that unless otherwise expressly provided, income cannot be taxed twice.[1] The Income Tax Department is duty-bound to demand and collect only legitimate tax dues, and deductions, wherever provided for by law, must be allowed.[2]

Moreover, the return of goods is a characteristic of the modern e-commerce platforms in India. This aspect would raise another issue regarding the actual and fictitious gross amount on which tax is levied and withheld. The gross amount will be varying with constant purchase and return of goods. The CGST Act explicitly allows such adjustment. However, Section 194-O of the Act does not contemplate such adjustment.

The way forward

The Central Board of Direct Taxes (CBDT) should, with the approval of the Central Government, issue guidelines for the purpose of removing the vagueness and abstruseness of the definitions provided under Section 194-O of the Act.

The CBDT should first expand the scope and differentiate between ‘owns’, ‘manages’, and ‘operates’ and further establish a criterion to determine the liability of the specific person responsible to withhold tax when different persons own, operate, and manage it. Second, the CBDT should expand the scope of ‘e-commerce participant’ to include non-residents as well. Lastly, the scope of ‘gross amount’ must be clarified and an adjustment mechanism must be introduced under the Act or through a CBDT circular to accommodate the concept of sales returns and cancellation of purchased orders.

If the issued guidelines successfully elucidate the concepts and clarify the definitions, the provision can accomplish its objective of widening and deepening of the tax net.

[1] Mahaveer Kumar Jain v. Commissioner of Income-tax, (2018) 404 ITR 738 (SC).

[2] Kedarnath Jute Mfg Co. Ltd v. Commissioner of Income-tax, 1971 AIR 2145.


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