TDS ON BENEFITS OR PERQUISITES UNDER NEWLY INSERTED SECTION 194R–A GAME CHANGER

by CA Muskan Garg 

“A person doesn’t know how much he has to be thankful for until he has to pay taxes on it.”

INTRODUCTION

The Income-tax Act, 1961 incorporates provisions for Tax Deduction at Source (TDS) with the objective of collecting tax from the very source of income itself i.e., at the instance when income arises or is paid. Over time with the successive expansion of the scope and extent of TDS it has become a major source of direct tax revenue and also an instrument in the hands of the Government to detect and prevent tax evasion. 

The Government has been resorting to frequent legislative amendments and executive actions in this direction. As a further step in this direction, the Finance Act 2022 has introduced a new section 194R under the Income Tax Act, 1961 dealing with deduction of tax on benefits or perquisites in respect of business or profession. This newly inserted section which has come into effect from 1^st July 2022, will tremendously increase complexity for accountants and professionals while also multiplying the compliance burdens for assesses.

Broadly the provisions of the newly inserted section can be summarised as under:

• Tax is required to be deducted of tax at source @10%, by any person, providing any benefit or perquisite, exceeding Rs. 20,000/- in value, in a year, to a resident, arising from the business or profession of such resident; 

• Tax is required to be deducted at source on the entire value if the threshold of Rs. 20,000/- has been crossed i.e. if a benefit of Rs. 30,000/- has been given then TDS will be deducted on the entire amount of Rs. 30,000/- and not on Rs. 10,000/-;

• Person providing such benefit or perquisite has to deduct tax at source before providing such perquisite/ benefit to the recipient or in case of company, the company itself including the principal officer thereof will deduct TDS on such benefit;

• The benefit or perquisite referred to in this new section 194R does not include a perquisite u/s 17(2), under the head salary income, paid or payable by the employer to employees, since, in that case   liability to deduct tax at source would be u/s 192;

• The items envisage to be covered by this new section 194R are those perks, benefits, amenities, or facilities, probably in kind, or in a combination of cash and kind, which a resident person enjoys, pursuant to, or in exercise of his business or profession, in lieu of the regular consideration payable to him, in monetary terms, in exercise of such business or profession. However, later vide the circular (discussed below) CBDT has stated that taxability of such benefit in the hands of recipient shall not be taken into consideration.

• Individuals or HUF’s whose total sales does not exceed Rs. 1 crore in case of business or Rs. 50 lakhs in case of profession in the immediately preceding FY in which such benefit or perquisite is provided are not liable to deduct .

The reasons, rationale and objective behind the new section 194R has been elaborated in the memorandum explaining Finance Bill, 2022 as follows –

As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.

Accordingly, in order to widen and deepen the tax base, it is proposed to insert a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising of a profession by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent of the value or aggregate of value of such benefit or perquisite. For the purpose of this section, the expression ‘person responsible for providing’ has been proposed to mean a person providing such benefit or perquisite or in case of a company, the company itself including the principal officer thereof.

UNDERSTANDING AND IMPLEMENTING SECTION 194R

The new section has come up with numerous issues like:

• The need or otherwise to check the taxability of the benefit or perquisite in the hands of the recipient;
• The tax effect of the benefit in case a capital asset has been given as a perquisite;
• Whether this section is applicable on trade/cash discounts and rebates;
• Compliance with the section in a case where cash component of the benefit/perquisite falls short;
• Valuation of benefits or perquisites which are wholly/partially in kind;
• Taxability of free samples distributed by the companies; etc. etc.

CLARIFICATIONS

As has been the recent practice, in order to clarify the provisions and remove such difficulties in implementing the provisions of section 194R, the CBDT has issued Circular No.12/2022 on 16^th June 2022containing guidelines in the form of questions/answers which are summarised below:- 

1. For deducting TDS u/s 194R, is it necessary to check the taxability of such benefit/ perquisite u/s 28(iv) of the Act?

Based on the explanatory memorandum explaining Finance Bill 2022, as mentioned above also, it was expected that TDS u/s 194R would apply only to benefits/ perquisites which are taxable in the hands of the recipient under section 28(iv) as business income. 

However, as per CBDT Circular No. 12/2022 dated 16.06.2022, the deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Act.  The CBDT circular highlights that section 194R does not have any requirement whereby the  deductor needs to verify the taxability in hands of recipient akin to  Section 195 of the Act (withholding tax  in case of a non-resident recipient). 

• Is there any requirement to deduct tax under section 194R of the Act, when the benefit or perquisite is in form of capital asset?

CBDT has clarified that section 194R does not differentiate on the basis of nature of benefit or perquisite provided. Accordingly, the nature of asset given as benefit or perquisite is not relevant and even a capital asset given as a benefit or perquisite is covered within scope of section 194R.

This clarification has been brought into place to counter the argument that receipt of capital asset is a capital receipt not chargeable to tax under the head business or profession. However, CBDT has relied upon several judgements of various Hon’ble High Courts, wherein it has been held that business income falling u/s 28(iv) of the Act is taxable, even if the same is a Capital Asset in clarifying that TDS is required to be deducted on any benefit or perquisite, even if it is a Capital Asset.

This will cover scenarios, wherein organisations gift jewellery, cards, appliances, etc. to their customers, consultants and so on.

• Whether sales discount, cash discount and rebates are benefits or perquisite?

The CBDT vide the said circular has clarified that no tax is required to be deducted u/s 194R on discounts allowed to customers. This relaxation has also been extended to ‘Buy 1 Get 1 Free’ schemes. Having said this, the CBDT has also been clarified that such a relaxation shall not be construed to be applicable on all forms of discounts or benefits given to customers. 

For illustration purposes, CBDT has listed down the following cases where Tax will be liable to be deducted at source u/s 194R:

• Free samples given by sellers (even GST is leviable on distribution of free samples);
• Incentives (other than discount, rebate) given in form of cash or kind, such as car, TV, computers, gold coins, mobile phone etc., irrespective of whether given over and above cash discounts, etc.;
• Sponsorship of a trip for the recipient and his/her relatives upon achieving certain targets;
•  Providing free tickets for an event;
• Giving medicine samples free to medical practitioners.

• Where benefits are used by the employees/relatives/directors of the recipient entity or in whose name TDS should be deducted?

CBDT has further clarified that the benefits or perquisites may be used by any of the owners / directors/ employees of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession.

In such a scenario, tax is required to be deducted by the person who is providing the benefit/perquisite with reference to the recipient entity since the usage by owner/director/employee is by virtue of their relationship with the recipient entity and in substance the benefit/perquisite has been provided by the person to the recipient entity.

This is particularly relevant in case of medical practitioners; wherein free medicine samples may be provided by a company to a doctor who is an employee of a hospital. In such a case tax is to be deducted u/s 194R of the Act by the company in the hands of hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital.

The hospital shall subsequently treat this benefit/perquisite as the perquisite given to an employee (if the doctor who used it is employee of the hospital) under section 17 and deduct tax under section 192 of the Act. In a case where doctor is associated with the hospital in a professional capacity, then Tax u/s 194R shall be deducted twice, i.e., once when company will deduct TDS of the hospital and secondly when hospital will deduct TDS of the doctor.

It has been further clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (1) of section 194R of the Act is also required to be seen with respect to the recipient entity and not with reference to each employee/relative/director.

• Valuation of benefit or perquisite:

In this regard the CBDT has clarified that where the benefit or perquisite provider:

• has purchased the benefit or perquisite before providing it to the recipient, the purchase price
• manufactures such items, the Selling Price that it charges to its customers for such items.

shall be the value for such benefit/perquisite.

In Other cases: Fair Market Value (FMV) shall be the value for such benefit/perquisite.

provided.

     It has been further clarified that GST will not be included for the purpose of valuation of benefit/ perquisite for TDS u/s 194R of the Act. Thus, tax need not be deducted on value exclusive of GST.

• Whether TDS is required to be deducted u/s 194R on account of pocket expenses incurred by service provider in the course of rendering services?

It is a matter of fact that any expenditure, which is the liability of a person carrying out business or profession, if met by another person is a benefit/perquisite provided by the second person to the first person in the course of the exercise of his business/profession. 

However, if the expenditure is incurred by the first person (consultant) but the invoice for that is issued in the name of second person (service recipient), thus demonstrating the fact that the liability to incur such expense was on the shoulders of the second person carrying on business or profession, then in such case, amount reimbursed subsequently to the first person shall not become his benefit or perquisite and no tax shall be liable to be deducted at source u/s 194R.

In short, it can be summarised as under:

Invoice in the name of	Expense paid by	Liability to deduct TDS?
Consultant	Company (Paid by company directly)	Yes
Consultant	Consultant (Reimbursed by company)	Yes
Company	Consultant	No
Company	Company	No

• Whether expenses incurred on arrangement of a conference or event to educate or inform dealers, shall be constructed as benefit or perquisite for such dealers?

In case where expenses are incurred on organising  a conference or event to educate or inform dealers, the CBDT has clarified that such an expense shall not be construed as a benefit or perquisite if such a conference has been organized for the following illustrative reasons:

• new product being launched; 
• discussion as to how the product is better than others; 
• obtaining orders from dealers/customers;
• teaching sales techniques to dealers/customers; 
• addressing queries of the dealers/customers ;
• reconciliation of accounts with dealers/customers .

Also, for providing clarity, CBDT has clarified that section 194R would stand attracted in following cases:

• expenses attributable to leisure trip or leisure component, even if it is incidental to the dealers/business conference;
• expenditure incurred for family members accompanying the person attending dealer/business conference;
• expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference.

• What will be the scenario in case where the company provides benefit to its customers on achieving particular sale targets, etc.

As per the said circular issued by CBDT, tax shall be deducted u/s 194R as the same is in the nature of benefit/incentive/perquisite, etc.

• How the ‘provider of benefit or perquisite’ shall ensure that appropriate tax has been paid by the recipient in respect of the benefit or perquisite provided in kind or partly in kind (and cash is not sufficient to meet TDS)?

With regard to benefits/ perquisites provided wholly in kind or partly in kind (with the cash component not sufficient to meet TDS liability) the following two possible scenarios have emerged :

(i)         Without Grossing Up – The benefit provider can ask for a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/perquisite has been deposited.However, it is the responsibility of the deductor to report this in his TDS return along with challan number

(ii)         With Grossing Up – Alternatively, benefit provider may deduct tax under section 194R and pay to the government after grossing up the amount of benefit or perquisite so given, considering that tax so paid on behalf of the recipient is also his benefit/perquisite.

1. Whether benefits or perquisites provided before 01-07-2022 shall also be considered for calculation of threshold limit of Rs. 20,000/- per financial year?

For purpose of deduction of tax, Section 194R provides for threshold limit of Rs. 20,000/- for each financial year. 

Thus, for the purpose of calculation of the threshold limit, the benefit already provided upto 30.06.2022 shall also be considered.

e.g.:  The amount of benefit provided upto 30.06.2022 is worth Rs. 35,000/- (which already exceeds the threshold specified in section 194R). Thereafter, if another benefit is given for Rs. 5,000/-, then tax shall be deducted on Rs. 5,000/- u/s 194R as the threshold of Rs. 20,000/- has already crossed. It may be noted that  tax shall be deducted only on Rs. 5,000/- and not on the entire amount of Rs. 40,000/- (Rs. 35,000/- + Rs. 5,000/-) as the said benefit was given  before the provisions of section 194R came into force.

CONCLUSION

The introduction of the said section by itself seems to be at odds with the Government’s avowed objective of promoting “ease of doing business” and endevavour to improve India’s ranking on the global index on this count and the “taxpayers charter” unveiled with so much fanfare by the Income-tax Department.

The problems seem to have only been compounded by the circular issued by the CBDT which, by itself, seems to conflict with the letter and spirit of the enactment and is at cross-purposes with legislative intention by seeking to expand its scope beyond what was legislatively envisaged. 

In the process it seems to strike at the basic divisions of functions, duties and responsibilities between the legislature, judiciary and the executive requires an urgent relook. That apart, this new provision will only lead to complexities in compliance with far reaching implications and has the potential to lead to increased litigation in the near future.

[This article has been written by CA Muskan Garg, Tax associate, Ashwani & Associates, Ludhiana and has been overlooked by CA Sanjeeva Narayan, Managing Partner, Ashwani & Associates, New Delhi]

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