Section 194Q vs Section 194C: Which Applies When You Buy Goods from a Contractor?
0.1% TDS applies under Section 194Q when a buyer with turnover above ₹10 crore buys goods worth over ₹50 lakh in a year from one seller, while 1% or 2% applies under Section 194C where goods form part of a work contract. If 194C applies, 194Q does not, and seller-side TCS under Section 206C(1H) is excluded.
HRA Research Desk
Chartered Accountant · Harun Raaj & Associates
0.1% TDS applies under Section 194Q of the Income-tax Act, 1961 when a buyer whose turnover exceeded ₹10 crore in the preceding financial year purchases goods worth more than ₹50 lakh in a financial year from a single seller, while 1% or 2% TDS applies under Section 194C where goods are supplied as part of a work contract. The two sections are mutually exclusive: if the payment is for "work" under 194C, 194Q does not apply — and seller-side TCS under Section 206C(1H) drops out wherever TDS applies.
New w.e.f. 01-07-2021: Section 194Q introduced TDS at 0.1% on purchases of goods by eligible buyers — transactions that previously escaped 194C. If 194C applies (a work contract), 194Q does not, and seller-side TCS under Section 206C(1H) drops out.
What the law actually requires
Section 194Q was inserted by the Finance Act, 2021 with effect from 1 July 2021 to catch pure purchase-of-goods transactions that had no "work" element and therefore escaped 194C. Section 194C, which is much older, taxes payments to contractors for carrying out work — a category the statute defines inclusively to cover construction, carriage, catering, advertising, broadcasting and the manufacture/supply of a product according to the customer's specification using material purchased from that customer.
The priority rule: "work" beats "goods"
Where a contract includes the supply of materials as part of carrying out a work — a contractor who builds a shed using steel and cement she sources herself, a caterer who supplies food as part of a catering contract — the payment is for work under 194C, not a purchase under 194Q. The test is the substance of the contract: is the seller primarily supplying a deliverable under a work arrangement, or are you simply buying goods in a purchase-and-sale?
The practical consequence of getting this right: if 194C applies, 194Q does not. You never stack both. A contract for fabrication of machinery using materials supplied by the customer is 194C (2% if the fabricator is a firm/company — s.194C definition of "work" covers manufacture per customer's specification only where material is purchased from the customer); buying identical machinery off the shelf from a dealer, or contracting a fabricator who uses their own material, is generally a sale of goods and falls in 194Q (0.1%) / s.206C(1H) TCS territory for eligible buyers.
The TCS layer: Section 206C(1H)
The seller has a mirror obligation. Under Section 206C(1H), a seller whose turnover exceeded ₹10 crore collects TCS at 0.1% on sale consideration received from a buyer, on the amount exceeding ₹50 lakh in a year — unless the buyer is already liable to deduct TDS under any provision of Chapter XVII-B on that transaction (194Q, 194C, 194H, 194J, etc.). Once buyer-side TDS is triggered under any such provision, seller-side TCS under 206C(1H) drops out. In practice:
- If the buyer deducts TDS (194C or 194Q), the seller does not collect TCS.
- If the buyer does not deduct (for example, the buyer is a small entity below the 194Q turnover test), the seller collects TCS at 0.1%.
A buyer that wrongly assumes the seller will collect TCS, and does not deduct 194Q itself, ends up with neither deduction nor collection — and the expense is at risk of a 30% disallowance under Section 40(a)(ia).
Worked example: Velocity Components Pvt Ltd
Velocity Components Pvt Ltd is a machinery manufacturer with FY 2025-26 turnover of ₹26 crore. In FY 2026-27 it makes three purchases:
Note the difference in scale: ₹3,000 TDS on an ₹80 lakh purchase (0.1% of the ₹30 lakh excess over ₹50 lakh) versus ₹90,000 on a ₹45 lakh work contract (2% of the whole). Misclassifying the fabrication as a "purchase" would drop TDS to nil — s.194Q is triggered only on the excess over ₹50 lakh per seller, and a ₹45 lakh purchase sits below that threshold. So the short deduction is the entire ₹90,000, which a Clause 34 check in the tax audit would expose.
Practical implications
- The ₹50 lakh base is the excess, not the whole. Under 194Q, TDS is on the purchase value in excess of ₹50 lakh in the year from that seller. Track purchases seller-wise, not in aggregate, because the threshold is per seller.
- Confirm whether you are a 194Q buyer at all. The ₹10 crore turnover test looks at the preceding financial year. A company that crosses ₹10 crore in FY 2025-26 becomes a 194Q deductor from 1 April 2026.
- Material-in-work-contract is 194C. A work contract that consumes materials is not split into "goods" and "work" unless the invoice does so. If the invoice is silent, the whole payment is characterised by the dominant nature of the contract.
- Do not double-deduct, and do not double-collect. Stacking 194C and 194Q is wrong; paying TDS while the seller also collects TCS on the same transaction is also wrong. The section elected by the buyer and the TCS status reported by the seller must reconcile in Form 26AS.
FAQ
Is TDS under 194Q on the whole purchase or only the excess?
Only the excess over ₹50 lakh in a financial year from that seller. Purchases of ₹80 lakh attract TDS on ₹30 lakh at 0.1% = ₹3,000.
We buy goods AND give work contracts to the same vendor. Do we apply both sections?
Yes, on separate payments — but never both on the same payment. A work contract with a material element is 194C; a standalone goods purchase is 194Q.
Our turnover is ₹8 crore. Do we deduct under 194Q?
No. 194Q requires the buyer's turnover to exceed ₹10 crore in the preceding financial year. But check 194C for work contracts and seller-side TCS under 206C(1H) on your purchases.
The seller wants to collect TCS under 206C(1H) instead of us deducting 194Q. Is that allowed?
No. If you are liable to deduct 194Q, the seller must not collect TCS. The buyer's obligation takes priority; the seller's TCS applies only where the buyer is not liable to deduct.
What is the rate on a work contract with an individual contractor?
1% under Section 194C when the payee is an individual or HUF; 2% when the payee is a firm, LLP, company or AOP. 194Q's 0.1% applies only to pure goods purchases by an eligible buyer.
Do we register the seller's PAN before paying?
Yes. Deduct at 20% under Section 206AA if the seller's PAN is not furnished or is inoperative. Verify PANs on the income tax portal before the first payment of the year.
Sources
- Section 194Q, Income-tax Act 1961 (inserted by Finance Act 2021, w.e.f. 01-07-2021)
- Section 194C, Income-tax Act 1961 (work contracts)
- Section 206C(1H), Income-tax Act 1961 (seller-side TCS, inserted by Finance Act 2020, w.e.f. 01-10-2020)
- Sections 40(a)(ia), 206AA
Use the TDS rate finder to check the section and rate before paying a supplier. For a TDS compliance audit of your company, visit pvtltd.co.
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See Also
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