Section 194Q on API Purchases: The Buyer-Seller Reconciliation

A Tier-1 pharma formulator closes its books for June 2026 — the third month of the financial year — and the vendor-master Section 194Q review flags a threshold crossing on a single Tier-2 Chapter 29 active pharmaceutical ingredient supplier. Cumulative purchases from that supplier’s PAN for the current financial year have crossed Rs 50 lakh in June 2026, triggering the buyer’s obligation to deduct Section 194Q TDS at 0.1 percent on the incremental sum above the threshold. From the crossing month onward two coordinated actions must run: the buyer starts deducting Section 194Q TDS on all subsequent invoices from that supplier (cited against payment code 1031 on the new-Act Form 168 quarterly return) and the seller — who had been collecting Section 206C(1H) TCS at 0.1 percent on invoices from April and May 2026 while the aggregate was below the buyer-side Section 194Q trigger — must cease that TCS collection with immediate effect. This is Section 194Q TDS API raw material purchase pharma reconciliation at the operating detail that every Chapter 30 formulator’s indirect-tax and vendor-master reconciliation teams must run monthly against a network of forty to sixty Tier-2 API suppliers.

The reconciliation in one paragraph

Section 194Q of the Income Tax Act 1961 (corresponding to payment code 1031 under Section 393 of the Income Tax Act 2025 with effect from 1 April 2026) requires a buyer whose turnover in the immediately preceding financial year exceeds Rs 10 crore to deduct TDS at 0.1 percent on the aggregate value of purchases of goods from a single resident seller (identified by PAN) in a financial year to the extent that aggregate exceeds Rs 50 lakh. Section 206C(1H) of the same Act, on the other side of the same transaction, requires a seller whose turnover exceeds Rs 10 crore to collect TCS at 0.1 percent on the aggregate sale consideration above Rs 50 lakh from a single buyer in a financial year. Where both provisions technically apply to the same transaction, CBDT Circular 13/2021 dated 30 June 2021 at paragraph 4.9.1 provides that the buyer’s Section 194Q takes precedence; the seller is not required to collect Section 206C(1H) TCS on transactions on which the buyer is deducting Section 194Q TDS. The reconciliation surface for a Chapter 30 formulator is the per-supplier-PAN cumulative-purchase register that identifies the threshold-crossing month, coordinates the cessation of the seller’s TCS collection with the commencement of the buyer’s TDS deduction, and reconciles the buyer’s payment code 1031 filing on Form 168 against the seller’s credit statement.

What the scenario looks like in India

The Indian pharma formulation industry runs its API procurement against a two-tier supplier network. Tier-1 integrated formulators — Sun Pharmaceutical Industries, Dr Reddy’s Laboratories, Cipla, Aurobindo Pharma, Lupin, Zydus Lifesciences, Torrent Pharmaceuticals, Alkem Laboratories, Glenmark Pharmaceuticals and Cadila Pharmaceuticals — carry a mix of backward-integrated captive API capacity (Chapter 29 organic chemicals produced in-house at plants co-located with the formulation plant or in a separate API-dedicated location) and external procurement from Tier-2 specialised API manufacturers. The specialised Tier-2 API supplier network — Divi’s Laboratories at Vishakhapatnam and Hyderabad, Neuland Laboratories at Bonthapally and Pashamylaram, Laurus Labs at Hyderabad, Granules India at Bollaram, Suven Pharmaceuticals, Piramal Pharma’s API business, Ipca Laboratories’ API division, Aarti Drugs, Solara Active Pharma Sciences and Shilpa Medicare — supplies bulk drug intermediates and finished APIs into the Tier-1 formulator network.

For the reconciliation this article walks through, the reference persona is a Tier-1 integrated formulator running an aggregate FY 2026-27 procurement spend of the order of Rs 82 crore on Chapter 29 antibiotic APIs and complex-generics APIs from a single Tier-2 Chapter 29 API supplier — illustrative of a Sun Pharmaceutical Industries formulation unit sourcing a specific API class from a Divi’s Laboratories Vishakhapatnam site under a multi-year supply agreement. Both companies’ turnover in the immediately preceding financial year (FY 2025-26) comfortably exceeds Rs 10 crore, so both provisions — Section 194Q on the buyer side and Section 206C(1H) on the seller side — are potentially applicable. The purchase spend profile across the financial year is not uniform: the first two months (April and May 2026) sit at approximately Rs 9 lakh per month per supplier PAN below the Rs 50 lakh Section 194Q threshold, so the seller had been collecting Section 206C(1H) TCS on the incremental sum above the seller-side Rs 50 lakh threshold from the same buyer. June 2026 is the month the buyer’s cumulative purchase from the seller-PAN crosses Rs 50 lakh; from June onward the coordinated switch to Section 194Q buyer-side deduction is triggered.

The regulatory overlay — Section 194Q, Section 206C(1H), and CBDT Circular 13/2021

Three provisions govern the buyer-seller mutual exclusion on the same transaction. Section 194Q of the Income Tax Act 1961, introduced by Finance Act 2021 with effect from 1 July 2021, requires a buyer whose total sales, gross receipts or turnover from the business carried on by him exceed Rs 10 crore during the financial year immediately preceding the financial year in which the purchase of goods is carried out to deduct income-tax at 0.1 percent on the aggregate value of purchases from a resident seller in a financial year to the extent that aggregate exceeds Rs 50 lakh. The deduction is at the earlier of credit to the seller’s account or payment. The section expressly does not apply to a transaction on which tax is deductible under any other provision of the Act, or tax is collectible under Section 206C other than Section 206C(1H) — the residual carve-out that keeps the buyer’s Section 194Q live on Section 206C(1H) transactions.

Section 206C(1H) of the Income Tax Act 1961, introduced by Finance Act 2020 with effect from 1 October 2020, requires a seller whose total sales in the immediately preceding financial year exceed Rs 10 crore to collect income-tax at 0.1 percent on the aggregate sale consideration received from a single buyer in a financial year to the extent that consideration exceeds Rs 50 lakh. The section carries a proviso that it shall not apply if the buyer is liable to deduct tax under any other provision of the Act on the same purchase and has deducted such amount — the mirror carve-out that gives the buyer’s Section 194Q precedence.

CBDT Circular 13/2021 dated 30 June 2021 is the operational bridge. Paragraph 4.9.1 clarifies that where both Section 194Q and Section 206C(1H) technically apply to the same transaction — the buyer’s turnover exceeds Rs 10 crore, the seller’s turnover exceeds Rs 10 crore, and the aggregate purchase from the seller exceeds Rs 50 lakh in the financial year — the buyer’s Section 194Q obligation takes precedence and the seller is not required to collect Section 206C(1H) TCS on those transactions. The circular also addresses computation of the Rs 50 lakh threshold (aggregate value of purchases from the same seller-PAN in the same financial year), treatment of the GST component in the sum on which TDS is deducted (the CBDT position is that TDS applies on the sum inclusive of GST at the time of credit; where the invoice separately identifies GST, the deduction applies on the net value ex-GST at the time of payment), treatment of purchase returns (adjustment against the cumulative purchase value), and the buyer’s reporting responsibility under Section 194Q vis-a-vis the seller’s earlier Section 206C(1H) collection in the same financial year.

Payment code 1031 under Section 393 of the Income Tax Act 2025 (effective 1 April 2026) is the successor code for the erstwhile Section 194Q. The buyer’s quarterly TDS return under the new regime is filed on Form 168 — the successor to Form 26Q — and the seller’s credit statement reflecting the buyer’s payment code 1031 deduction against the seller’s PAN is the new-Act successor to Form 26AS. The TDS payment code 1031 walkthrough covers the code-level filing detail in depth.

A worked example — an illustrative Sun-Pharma-to-Divi’s-Labs API procurement cycle

Illustrative — the figures below represent the operating pattern of a Tier-1 pharma formulator’s API procurement from a single Tier-2 API supplier at the scale that Indian large-cap listed formulators operate. Public disclosures do not reveal per-supplier-PAN per-month purchase value or the mid-year Section 194Q threshold-crossing pattern in the granularity below; cross-verify against your own vendor-master extract before action.

The formulator’s central-procurement team runs the following FY 2026-27 monthly purchase pattern from the illustrative Tier-2 API supplier at their Vishakhapatnam site, expressed in Rs lakh at the invoice-value level (inclusive of GST at the applicable Chapter 29 5 percent rate):

The Section 194Q deduction in the June 2026 threshold-crossing month is calculated on the incremental sum above Rs 50 lakh (Rs 5,000 lakh) for that month alone. The cumulative FYTD at start of June was Rs 1,700 lakh; the June purchase of Rs 3,300 lakh takes the cumulative to Rs 5,000 lakh. The invoice on which the cumulative crossed Rs 5,000 lakh — the 24 June 2026 invoice illustratively — is the pivot invoice. On the sum above Rs 5,000 lakh (in this case, the incremental Rs 32 lakh of the crossing invoice’s June-month proportion above the threshold) the buyer deducts Section 194Q TDS at 0.1 percent = Rs 3,200 for the crossing month. For subsequent months (July onward) the deduction is 0.1 percent of the entire monthly purchase value from the seller-PAN because the cumulative is already above the threshold. Aggregate FY 2026-27 Section 194Q TDS deducted by the buyer on this single supplier PAN is approximately Rs 32,000 (0.1 percent of the Rs 3,200 lakh cumulative purchase above the Rs 5,000 lakh threshold across the full financial year).

On the other side of the same transaction, the seller had been collecting Section 206C(1H) TCS on the incremental sum above the seller-side Rs 5,000 lakh threshold from the same buyer’s aggregate purchases from the seller in the financial year. If the seller’s aggregate sales to the same buyer had crossed the seller-side Rs 5,000 lakh threshold in April or May 2026 (which does not occur in this specific worked example — cumulative April-May is only Rs 1,700 lakh, below the seller-side threshold too), the seller’s TCS collection would have applied on those pre-crossing months. Because the seller-side threshold is not crossed in April or May here, no Section 206C(1H) TCS collection actually occurred in this specific worked case. In real vendor-master data where the seller-side threshold is crossed pre-buyer-crossing — say the buyer aggregates purchases from the same seller-PAN across multiple sites and the seller-side aggregate crosses the seller-side threshold in a month earlier than the buyer-side crossing — the mid-year switch reconciliation is the critical control. The seller must reverse any Section 206C(1H) TCS collected on transactions from the buyer-side threshold-crossing month onward, and the buyer’s Section 194Q TDS deduction starts from that month.

Section 201(1A) interest exposure applies if the buyer fails to identify the June 2026 threshold crossing and continues to allow the seller to collect Section 206C(1H) TCS instead of deducting Section 194Q TDS. Interest at 1 percent per month accrues on the un-deducted Section 194Q amount from the deductible date (24 June 2026 in this worked example) to the date of actual deduction. If the correction is made in September 2026 (three months late), the interest exposure on the un-deducted Rs 3,200 amount for the June crossing month is Rs 3,200 × 1 percent × 3 = Rs 96 — small in absolute terms but scaling rapidly across a network of forty to sixty Tier-2 API suppliers where a systemic threshold-tracking failure can produce cumulative delayed-deduction exposure in the low-lakh range for the financial year plus the reputational cost of a TDS-demand-order from the assessing officer.

Common reconciliation breakages

Five breakages recur across Indian Chapter 30 formulators running the Section 194Q vendor-master reconciliation cycle, and each maps to a specific control failure that a mid-year TDS scrutiny or a quarterly Form 168 filing exception will surface.

• Per-supplier-PAN cumulative purchase register missing. The most common breakage is the absence of a per-supplier-PAN cumulative-purchase running total updated on every invoice receipt. Formulators that maintain purchase records at the vendor-code level (multiple codes for the same PAN — one per plant, one per material class, one per commercial team) miss the aggregation logic and fail to identify the threshold crossing at the seller-PAN level. Reconciliation discipline: the vendor master must carry a single PAN-level cumulative view rolling up all vendor-code activity for that PAN across the entire buyer entity (all sites, all material classes, all commercial teams).

• GST-inclusive vs GST-exclusive base disagreement. CBDT Circular 13/2021 provides that Section 194Q TDS applies on the sum inclusive of GST at the time of credit; where the invoice separately identifies GST, the deduction applies on the net value ex-GST at the time of payment. Formulators that adopt an inconsistent basis (some deductions on GST-inclusive, others on GST-exclusive) invite a scrutiny exception and a Form 168 reconciliation mismatch against the seller’s credit statement. Reconciliation discipline: adopt a single documented basis (typically GST-exclusive at time of payment) and apply consistently across all Section 194Q deductions.

• Written intimation to seller missing. The coordination of the switch from seller’s Section 206C(1H) TCS collection to buyer’s Section 194Q TDS deduction requires a written intimation from the buyer to the seller confirming that the buyer is deducting Section 194Q TDS from the crossing month onward. Formulators that make the switch on their internal books without notifying the seller create a mid-year situation where the seller continues to collect Section 206C(1H) TCS on subsequent invoices and the buyer’s tax stack duplicates the same 0.1 percent on the same transaction. Reconciliation discipline: a templated written intimation goes out from the vendor-master owner to the seller’s accounts receivable team the same day the threshold-crossing invoice is booked, with a copy to the buyer’s own tax and treasury team.

• Threshold-crossing invoice pivot mis-identification. The Rs 50 lakh Section 194Q threshold is crossed on a specific invoice — typically the invoice that takes the cumulative FYTD purchase from the seller-PAN from below Rs 50 lakh to above Rs 50 lakh. Formulators that identify the crossing at the month-end rather than at the specific invoice under-report Section 194Q deductions for the portion of the crossing invoice above the threshold, and over-report for any earlier invoice in the same month that was below the threshold. Reconciliation discipline: the cumulative-purchase register runs at the invoice level, not the month level, and the threshold-crossing invoice number is captured in the vendor-master audit trail.

• Purchase returns adjustment miss. CBDT Circular 13/2021 clarifies that purchase returns reduce the cumulative purchase base against which the Rs 50 lakh threshold is measured. Formulators that maintain the cumulative purchase register on a gross-purchase basis (no returns adjustment) over-state the crossing month and over-deduct Section 194Q TDS on transactions that the returns adjustment would have brought back below the threshold. Reconciliation discipline: purchase returns to the same seller-PAN are netted against the cumulative purchase base, and the threshold-crossing invoice re-computes if a return post-crossing takes the cumulative back below Rs 50 lakh (rare but possible). This is one of the 57 human error patterns in the reconciliation error catalogue — mis-classification of return-related adjustments at the vendor-master level.

How a reconciliation platform handles this

A purpose-built pharma vendor-master reconciliation platform ingests the buyer’s invoice-level purchase data from the ERP (SAP MM, Oracle Fusion Procurement, Tally, Zoho Books, D365 F&O), maintains a per-supplier-PAN cumulative-purchase register updated on every invoice receipt, flags the specific invoice on which the Rs 50 lakh Section 194Q threshold is crossed, computes the 0.1 percent Section 194Q TDS deduction on the incremental sum above the threshold at the earlier of credit or payment, generates the templated written intimation to the seller, tracks the seller’s Section 206C(1H) TCS collection history pre-crossing, and produces the quarterly payment-code-1031 TDS filing base for Form 168 with per-invoice detail per supplier PAN. The platform reconciles the seller’s credit statement post-quarter against the buyer’s filed deductions and surfaces the Section 201(1A) interest exposure for any delayed-deduction gaps. Match-rate improvement of 51 percent to 88 percent on the vendor-master-to-tax-filing reconciliation, combined with an ISO 27001:2022 posture and DPDP Act 2023 aligned data handling, is what makes the platform the natural fit for a Tier-1 pharma formulator running a network of forty to sixty Tier-2 API suppliers with mid-year threshold-crossing events distributed across the financial year.

Cross-cluster bridges and where to read next

The Section 194Q buyer-seller reconciliation documented in this article sits alongside two Wave 1 pharma companions on the input-side classification and refund side. The API vs formulation HSN 2941 3003 3004 reconciliation guide covers the HSN classification of the same Chapter 29 API purchases that feed the Section 194Q vendor-master here. The Rule 89(5) inverted duty refund pharma formulations complete guide covers the parallel refund cycle on the GST side of the same purchases. For the standing methodology framework — mapping vendor-master reconciliation surfaces, holding both base-case and defence-case computations, and building the mid-year threshold-crossing detection into the standing close process — the reconciliation failure mode analysis pillar and the reconciliation playbook for monthly close operations pillar are the anchors. For the interest and penalty calculation on delayed deductions, the TDS interest and penalty impact calculator computes the Section 201(1A) exposure at the invoice level.

The commercial pillar for the pharma sub-cluster is Pharma reconciliation software India; the specialised TDS reconciliation software surface covers the Section 194Q vendor-master reconciliation workflow, and the broader reconciliation software India authority carries the full-stack view. The pharma cluster hub is the entry point to the full pharma article set.

The five FAQs below address the operational questions Indian pharma direct-tax and vendor-master reconciliation leads ask most often when building a standing per-supplier-PAN Section 194Q cumulative-purchase register with mid-year threshold-crossing detection and coordinated Section 206C(1H) mutual-exclusion switch.

Terra Insight Editorial Team Reconciliation Infrastructure

Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →

Published 17 July 2026

Domain expertise

TDS Reconciliation GST Input Credit Platform Settlements NACH Batch Matching Bank Reconciliation Form 26AS Matching ERP Integrations Enterprise Finance Ops

Reviewed by

NK

Navin Krishnan

Managing Director & Founder — Terra Insight

Ex Amazon India · Intuit QuickBooks · Tata nexarc

ISO 27001:2022 Patent Pending Incorporated 2024