The Finance Act, 2022 introduced a new Section 194R under the Income-tax Act to provide for deduction of tax at source in respect of benefit or perquisite provided to a resident person.
Let’s understand the law on Section 194R.
Any person responsible for providing any benefit or perquisite, whether convertible into money or not, is required to ensure that the tax required to be deducted has been deducted in respect of such benefit or perquisite under Section 194R. The deductor can be a resident or a non-resident person.
It is to be noted that this provision is applicable with effect from 01-07-2022. Thus, the benefit or perquisite which has been provided on or before 30-06-2022, would not be subjected to tax deduction under this provision.
However, this provision shall not apply to an individual or a HUF whose total sales, gross receipts or turnover does not exceed Rs. 1 crore in case of business or Rs. 50 lakhs in case of the profession during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.
Explanation to Section 194R provides that the expression ‘person responsible for providing’ means the person providing such benefit or perquisite, or in the case of a company, the company itself, including the principal officer thereof.
The definition of ‘person responsible for paying’ as provided in Section 204 will not apply for the purposes of Section 194R. It means a person who has agreed to provide the benefit or perquisite and makes payment for the same to a third party shall be liable for deduction of tax and not the third party who actually provides or delivers the benefit or perquisite after accepting payment from the person who agrees to provide it. For example, a company agrees to arrange foreign tours for its dealers and distributors/agents who achieve specific targets. It is the company that has to comply with Section 194R, not the tour operator/hotels/airlines who, after accepting payment from the company, delivers the agreed/promised foreign tour to the dealers/distributors/accounts.
Tax is required to be deducted under this provision if the benefit or perquisite is provided to a resident person and it is arising from business or the exercise of a profession by such resident.
However, in the following situations, the tax shall not be deducted under this provision:
For example, if a business entity gifts valuable items, cars, etc., to its resident customers, no tax shall be deducted under Section 194R if a resident customer is not carrying on any business or profession.
The tax shall be deducted before providing benefit or perquisite to the resident person. There can be several stages in providing benefit/perquisite to the resident recipient. There cannot be one rule to determine the stage at which tax shall be deducted. It has to be understood in the context of the particular benefit or perquisite that is provided to the recipient. Before the point of ‘providing’ of benefit or perquisite is reached, it has to be ensured that tax is deducted.
For example, a company agrees to provide foreign tours to its dealers/distributors who achieve the target. The following stages are possible in the delivery of promised foreign tour:
In the above example, it seems prudent to deduct tax on reaching Stage (d): The tickets are handed over to dealer/distributor or emailed to him:
The person providing the benefit or perquisite has to ensure that tax has been deducted at the rate of 10% of the value or aggregate of the value of ‘such benefit or perquisite’. The rate shall not be further increased by surcharge and health & education cess as the deductee/recipient is a resident.
If the deductee does not furnish his PAN to the deductor, the tax shall be deducted at the rate prescribed under Section 206AA. However, if such deductee has not furnished the return of income for a specified period, the tax shall be deducted at the rate prescribed under Section 206AB. Where both the provision of Section 206AA and Section 206AB are applicable, that is, the deductee has neither furnished his PAN to the deductor nor has he furnished his return of income for the specified period, the tax shall be deducted at the rates provided in section 206AA or section 206AB, whichever is higher.
The assessee shall have no option to apply for a certificate of lower deduction or nil deduction under this provision, even if his estimated tax liability justifies such certificate. Similarly, the payee cannot plead for non-deduction of tax based on self-declaration in Form 15G or Form 15H.
The tax shall be deducted under this provision if the value or aggregate of the value of the benefit or perquisite provided or likely to be provided during the financial year exceeds Rs. 20,000. In such a situation, the tax will be deducted on the entire value of benefit or perquisite and not merely the excess of Rs. 20,000.
The CBDT has clarified that since the threshold of Rs. 20,000 is with respect to the financial year, calculation of value or aggregate value of the benefit or perquisite triggering deduction of tax under this provision shall be counted from 1 st April of the financial year. Hence, if the value or aggregate value of the benefit or perquisite provided or likely to be provided to a resident exceeds Rs. 20,000 during the financial year 2022-23 (including the period up to 30th June 2022), the tax shall be required to be deducted in respect of any benefit or perquisite provided on or after 01-07-2022.
No tax shall be deducted under this provision in the following circumstances.
Where the benefit or perquisite, is wholly in kind or partly in cash and partly in kind, but such part in cash is not sufficient to meet the liability of deduction of tax in respect of the whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite.
As it is the responsibility of the deductor to ensure that tax has been paid in respect of the benefit or perquisite, the liability may be discharged by:
In this respect, the CBDT has clarified that where the payee himself pays tax, the tax would be required to be paid in form of advance tax. The tax deductor may rely on 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. This would be then required to be reported in the TDS return along with the challan number. Form 26Q has included provisions for reporting such transactions.
Further, where the benefit provider deducts the tax under section 194R and pays to the Government, the tax should be deducted after taking into account the fact the tax paid by him as TDS is also a benefit under section 194R of the Act. Thus, it is suggested to compute the amount of TDS after grossing up the value of benefit or perquisite. In Form 26Q, it shall be shown as tax deducted on benefit provided.
The CBDT has clarified that the valuation would be based on fair market value of the benefit or perquisite except in following cases:-
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 Section 28(iv) of the Act. The amount could be taxable under any other section like Section 41(1) etc.
Section 194R casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @10%. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.
Unlike Section 195 where there is a requirement to check whether the sum payable to a person is chargeable to tax under the provision of the Income-tax Act or Double Taxation Avoidance Agreement (DTAA), no such requirement is there in section 194R. Hence, there is no requirement for the deductor under section 194R to verify whether the amount is taxable in the hands of the recipient or the section under which it is taxable.
The Supreme Court takes the same view in the case of PILCOM vs. CIT [2020] 116 taxmann.com 394 (SC) in reference to the deduction of tax under Section 194E. It was held by the Hon’ble Supreme Court that tax is to be deducted under section 194E at a specific rate indicated therein and there is no need to see the taxability under DTAA or the rate of taxability in the hands of the non-resident.
The first proviso to section 194R(1) provides that where the benefit or perquisite is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite, the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or prerequisite.
This proviso clearly indicates the intent of the legislature that there could also be situations where benefit or perquisite is in cash or the benefit or perquisite is in kind or partly in cash and partly in kind. Thus, section 194R of the Act clearly brings in its scope the situation where the benefit or perquisite is in cash or in kind or partly in cash or partly in kind.
It has been held by the various courts that benefits or perquisites shall be taxable in the hands of the recipient even if they are in the nature of the capital asset. The following judgments are noteworthy in this respect:
Thus, it can be seen that the asset given as benefit or perquisite may be a capital asset in a general sense of the term like car, land, etc. but in the hands of the recipient it is benefit or perquisite and, accordingly, section 194R shall also apply in such cases.
Sales discounts, cash discounts or rebates allowed to customers from the listed retail price represent lesser realization of the sale price itself. To that extent purchase price of customer is also reduced.
Logically these are also benefits though related to sales/purchase. Since TDS under section 194R of the Act is applicable on all forms of benefit/perquisite, tax is required to be deducted. However, it is seen that subjecting these to tax deduction would put sellers in difficulty. To remove such difficulty it is clarified that no tax is required to be deducted under section 194R of the Act on sales discounts, cash discounts, and rebates allowed to customers.
However, at the same time, it has been clarified in the CBDT Circular that this relaxation should not be extended to other benefits provided by the seller in connection with its sale.
To illustrate, the following are some of the examples of benefits or perquisites on which tax is required to be deducted under section 194R (the list is not exhaustive):
Where free items from the stock of the seller are being offered with the purchase of some items, the CBDT has clarified that Section 194R shall not apply in such a case.
For instance, if the seller offers 2 items free with the purchase of 10 items. In substance, the seller is actually selling and the buyer is buying the 12 items at a price of 10 items. Thus, the seller and buyer record the transaction at the same value. In such a situation, there could be difficulty in applying section 194R provision. Hence, to remove the difficulty it is clarified that on the above facts no tax is required to be deducted.
The CBDT has clarified where the benefit or perquisite is used by the owner, director, or employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession, the tax shall be required to be deducted in the name of recipient entity since the usage by owner/director/employee or relatives thereof is by virtue of their relation with the recipient entity and in substance, the benefit or perquisite has been provided to the recipient entity.
To illustrate, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under section 194R is required to be deducted 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. Thus, in substance, the benefit/perquisite is provided to the hospital.
The hospital may subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under Section 17 and deduct tax under Section 192. In such a case it would be first taxable in the hands of the hospital and then allowed as deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the hospital. The hospital can get credit of tax deducted under section 194R by furnishing its return of income.
Similarly, if the doctor is not an employee of the hospital but rather working as a consultant in the hospital. In this case, the benefit or perquisite provider may deduct tax under section 194R with the hospital as recipient and then the hospital may again deduct tax under section 194R for providing the same benefit or perquisite to the consultant doctor. To remove the difficulty, as an alternative, the original benefit or perquisite provider may directly deduct tax under section 194R of the Act in the case of the consultant doctor as a recipient.
Here, it is to be noted that the threshold limit of Rs. 20,000 shall be required to be seen with respect to the recipient entity. For instance, if a pharmaceutical company provides benefit of worth Rs. 5000 to 10 doctors working as an employee in a hospital. The value of benefit would be seen with respect to the hospital and not the doctors. Thus, the aggregate value of the benefit provided in this case Rs. 50,000 and, accordingly, the tax shall be required to be deducted.
The provision of section 194R shall not apply if the benefit or perquisite is being provided to a Government entity, like a Government hospital, not carrying on business or profession.
The CBDT has clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R.
The CBDT has clarified that if the social media influencer returned the product like Car, Mobile, Outfit, Cosmetics, etc. to the entity after using it for rendering his services, i.e., social media influence, then it will not be treated as a benefit or perquisite for the purposes of section 194R. However, if the product is retained by the social media influencer then it will be in the nature of benefit/perquisite, and tax is required to be deducted accordingly under section 194R.
The CBDT has clarified that if the expenditure in respect of which the reimbursement is made is invoiced in the name of the person who is making the reimbursement then it shall not be treated as benefit or perquisite for the purpose of section 194R. However, if the invoice is not in the name of the person making the reimbursement, then it shall be treated as a benefit or perquisite for the recipient, and, accordingly, tax shall be deducted under section 194R.
CBDT’s circular seems to suggest that even if the reimbursement is made on a cost-to-cost basis, it would attract TDS under section 194R if the expenditure in respect of which reimbursement is made is not invoiced in the name of the person making the reimbursement.
The CBDT has clarified that the expenditure pertaining to deafer/business conference would not be considered as benefit or perquisite for the purposes of section 194R in a case where dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects:
However, such conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets. Further, in the following cases the expenditure would be considered as benefit or perquisite for the purposes of section 194R:
1 Ramesh Babulal Shah v. CIT (2015) 53 taxmann.com 277 (Bom)
2 CIT (Addl) v. Ram Kripal Tripathi [1980] 4 Taxman 149 (Allahabad)
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