The businesses usually provide certain benefits and perquisites and claim it as a deduction in the form of business expenditure. This opens the chances of tax leakage as the receiver of such benefits or perquisites often does not show it as their income. To tap this loophole, the government introduced a new TDS section – Section 194R that makes it mandatory to deduct TDS on such benefits and perquisites. Let’s understand this section in detail.
What is Section 194R?
As per Section 194R, if a person provides any benefit or perquisite arising from the business or profession conducted by such resident, then the benefit/perquisite provider shall ensure that TDS has been deducted @ 10% of the value or aggregate value of such benefit/perquisite. This section shall be applicable from 1st July 2022.
In case the benefit/perquisite provided is wholly in kind or partly in cash and partly in kind such that the cash portion is not sufficient to meet the TDS liability, then in such case, the deductor shall, before releasing the benefit or perquisite, ensure that the tax required to be deducted has been paid in relation to such benefit/perquisite.
Non-Applicability of Section 194R
Section 194R shall not be applicable in the following circumstances:
- Where the value or the aggregate value of benefit/perquisite provided or likely to be provided to such resident during the financial year does not exceed Rs. 20,000
- The person providing the benefit/perquisite is an individual or HUF whose total sales, turnover or gross receipts do not exceed Rs. 1 crore in case of business or Rs. 50 lakhs in case of the profession in the financial year immediately preceding the financial year in which such benefit/perquisite is provided.
CBDT Guidelines With Respect to Section 194R
Taxpayers and tax professionals had multiple queries in mind in relation to this newly inserted TDS Section 194R. Therefore, the CBDT released certain guidelines vide Circular No. 12 of 2022 dated 16th June 2022. Following are the detailed CBDT guidelines for Section 194R clarifying all the doubts of taxpayers and tax professionals:
Question 1. Is it necessary that the person providing benefit or perquisite needs to check if the amount is taxable under clause (iv) of section 28 of the Act, before deducting tax under section 194R of the Act?
Answer: No. Taxability of the amount is not a criterion for deducting TDS u/s 194R. Further, income can be taxable under other sections as well like Section 41(1) etc. As per Section 194R, the only requirement is to deduct TDS @ 10% while providing a benefit or perquisite.
Further, Section 195 stipulates the requirement of checking whether the payments made to non-residents constitute their income or not by inserting the sentence ‘any other sum chargeable under the provisions of this Act at the rates in force’. Further, ‘rates in force’ implies checking the tax rates applicable to provide the benefit of the DTAAs. As these requirements are not inserted for TDS under section 194R, therefore the deductor is not required to verify the taxability of income in the hands of the recipient.
This was also highlighted by the Supreme Court in the case of PILCOM vs. CIT West Bengal (Civil Appeal No. 5749 of 2012).
Question 2. Is it necessary that the benefit or perquisite must be in kind for section 194R of the Act to operate?
Answer: As per the provisions of Section 194R, the benefit or perquisite can be in:
- Cash or
- Kind or
- Partly in cash and partly in kind
There are no absolute criteria as to the mode of receipt of benefit or perquisite to attract the TDS liability. TDS u/s 194R shall be deducted irrespective of the mode in which the benefit or perquisite is received.
Question 3. Is there any requirement to deduct tax under section 194R of the Act, when the benefit or perquisite is in the form of a capital asset?
Answer: There is no requirement to check the taxability of the benefit or perquisite and the section under which it is taxable. Further, various courts have held that the benefits or perquisites shall be taxable even though they are in the nature of capital assets. This is because, even though their nature is of a capital asset, they are still the benefits or perquisites in the hands of the recipient.
Question 4: Whether sales discounts, cash discounts and rebates are benefits or perquisites?
Answer: Sales discounts, cash discounts and rebates reduce the purchase price of the customers. Logically, this should be considered as a benefit and therefore should be covered under Section 194R and consequently be liable to TDS. However, it would amount to a lot of difficulties for the sellers. Therefore, it has been expressly clarified that Section 194R TDS shall not be applicable on sales discounts, cash discounts and rebates provided by the sellers to the customers. However, this relaxation shall not apply in the following cases:
- When free samples are distributed by the sellers
- When a person provides incentives (other than rebates and discounts) in cash or kind such as cars, gold coins, TV, computers, mobile phone etc.
- When a trip is sponsored by a person for the recipient and his/her relatives for achieving certain targets
- When free tickets for a certain event are provided
- When free medicine samples are provided to the medical practitioners.
The above list is not exhaustive and is only indicative of the type of transactions that can invite TDS applicability under section 194R.
It is also clarified that the TDS shall be deducted in the name of the recipient entity irrespective of who uses the benefit or perquisite. This is because the benefit or perquisite can be used by the owner, employee or the director of the recipient entity or even the relatives who are not carrying the business or profession in their individual capacity. An illustration has been provided in the guideline to bring more clarity to this point:
Suppose, free medical samples have been provided to a doctor who is employed in a hospital. Therefore, TDS under section 194R shall be deducted in the name of the hospital and not in the name of the doctor. This is in substance, a benefit or perquisite provided to the hospital. The hospital may subsequently treat this as the perquisite provided to the doctor and deduct tax under section 192. This will thus be allowed as a deduction to the hospital as salary expenditure.
However, if the doctor is a consultant and not an employee of the hospital, still Section 194R TDS should be deducted by the seller in the name of the hospital. The hospital shall then deduct TDS u/s 194R as perquisite provided to the consultant doctor. Alternatively, a relaxation has been provided where TDS can also be deducted by the seller directly in the name of the recipient u/s 194R.
Further, the provisions of Section 194R shall not be applicable to the benefits/perquisites provided to a government entity not carrying any business or profession (e.g. government hospitals).
Question 5. How is the valuation of benefit/perquisite required to be carried out?
Answer: The valuation of benefit/perquisite should be based on fair market value except where –
- The benefit/perquisite provider has purchased such benefit/perquisite – the value of such benefit/perquisite should be its purchase price.
- The benefit/perquisite provider manufactures such benefit/perquisite – the value of such benefit/perquisite should be the price that such provider charges from its customer.
The GST amount will not be included for the valuation of benefit/perquisite u/s 194R.
Question 6: Many a times, a social media influencer is given a product of a manufacturing company so that he can use that product and make audio/video to speak about that product in social media. Is this product given to such influencer a benefit or perquisite?
Answer: There are two scenarios possible in this situation:
- If the social media influencer returns the product to the manufacturing company, then it should not be considered as a benefit/perquisite.
- If the social media influencer does not return the product to the manufacturing company, then it should be considered as the benefit/perquisite provided by the manufacturing company to such social media influencer and thus liable to TDS under section 194R.
Question 7: Whether reimbursement of out-of-pocket expenses incurred by a service provider in the course of rendering service is benefit/perquisite?
Answer: If any expenditure, being the liability of the person conducting the business, is met by another person, then it should be considered as the benefit/perquisite provided by such person meeting the expenditure to the person carrying on the business. Let’s understand this with a practical example:
Suppose Mr. B is carrying on a business and hires a consultant for some official work. The consultant incus certain expenditure including boarding, travel etc. while performing his duties. Now, there can be two scenarios for determining the applicability of Section 194R TDS:
- The invoices for expenditure incurred are in the name of the consultant but paid or reimbursed by Mr. B:
In this case, it would be considered as benefit/perquisite provided by Mr. B to the consultant as the invoices are in the consultant’s name however expenditure is met by Mr. B.
- The invoices for expenditure incurred are in the name of Mr. B but are currently paid by the consultant and then reimbursed by Mr. B:
In this case, it shouldn’t be considered as a benefit/perquisite provided by Mr. B to the consultant as the invoices are in the name of Mr. B and therefore, it casts the responsibility on Mr. B to bear the expenditure.
Question 8: If there is a dealer conference to educate the dealers about the products of the company - Is it benefit/perquisite?
Answer: If there is a dealer or business conference, then educating the dealers about the products shouldn’t be considered as a benefit/perquisite if this is usually done for the following purposes:
- a 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
However, such a conference shall not be for the select dealers/customers who have achieved particular targets. Further, such conference would be considered as a benefit/perquisite attracting TDS u/s 194R in the following cases:
- Expense for leisure trip or component, even though incidental to the dealer/business conference.
- Expenditure incurred for family members who accompany the person attending dealer/business conference
- Expenditure on participants of dealer/business conference before and beyond the dates of such conference.
Question 9: Section 194R provides that if the benefit/perquisite is in kind or partly in kind (and cash is not sufficient to meet TDS) then the person responsible for providing such benefit or perquisite is required to ensure that tax required to be deducted has been paid in respect of the benefit or perquisite, before releasing the benefit or perquisite. How can such a person be satisfied that tax has been deposited?
Answer: As per the provisions of Section 194R, if the benefits or perquisites are provided in kind or partly in cash and partly in kind and the cash portion is not sufficient to meet the TDS liability, then the person providing the benefit/perquisite should ensure that the tax required to be deducted has been paid by the recipient. The recipient can pay the tax in form of advance tax and the tax deductor can rely on the copies of the advance tax payment challan and a declaration from the recipient that tax has been deposited. This should be reported in the TDS return in Form 26Q along with the requisite challan number.
Alternatively, the benefits provider may deduct and pay tax to the government. However, the tax amount paid by the benefit provider should also be considered as a benefit for the purpose of Section 194R. The same should be reported as tax deducted on the benefit provided in Form 26Q.
Question 10. Section 194R would come into effect from the 1st July 2022. The second proviso to section 194R(1) of the Act provides that the provision of this section does not apply where the value or aggregate of the value of the benefit or perquisite provided or likely to be provided to a resident during the financial year does not exceed twenty thousand rupees. It is not clear how this limit of twenty thousand is to be computed for the Financial Year 2022-23?
Answer: The threshold limit of Rs. 20,000 should be considered from 1st April 2022. Therefore, if the value or the aggregate value of the benefit provided exceeds Rs. 20,000 during the financial year 2022-23 (including that up to 30th June 2022), then TDS as per Section 194R should be deducted on benefits/perquisites provided on or after 1st July 2022. Further, it has been expressly clarified that benefits/perquisites provided on or before 30th June 2022 should not be subjected to TDS u/s 194R.
Author : Dipen
Date : 24-Jun-2022