TAXATION • DIRECT TAXES The Chartered Accountant • January 2023 • Vol. 71 • pp. 55–58 (Journal pp. 767–770)

Overview of Section 194R

CA. Sandeep Raghavan

Member of the Institute • Contacts: sandeep.raghavan31@gmail.com | eboard@icai.in

Section 194R: Deduction of Tax on Benefit or Perquisite in Respect of Business or Profession

Section 194R was introduced by the Finance Act, 2022 and is applicable with effect from 1st July 2022. Before deep diving into Section 194R, we need to understand foundational legal concepts useful for interpreting Section 194R. For the purpose of understanding, we examine dictionary definitions, jurisprudence, and statutory definitions of the terms “Benefit” and “Perquisite” used in Section 194R.

Effective Date: Applicable on benefits or perquisites provided on or after 1st July 2022. Rate of TDS: 10% of the value or aggregate of the value of such benefit or perquisite.

1. Conceptual Foundations: “Benefit” and “Perquisite”

The Scope of “Benefit”

“‘Benefit’ is not limited to pecuniary gains, nor any particular kind of advantage; it refers to what is advantageous, whatever promotes prosperity or happiness, and what enhances the value of the property or rights of citizens as contradistinguished from what is injurious.”

The word benefit has a very wide import. It is not only connected with monetary, financial, or economic gains, but encompasses advantages and any kind of non-monetary gains.

The Scope of “Perquisite”

“‘Perquisite’ – Emoluments or incidental profits attached to an office or official position, beyond salary or regular fees.”

A perquisite is always connected to an office or official position. It represents something conferred in addition to regular salary or standard fees.

Perquisites Under Section 17(2) of the Income-tax Act (Inclusive Definition):

Section 17(2) provides an inclusive definition of perquisite in the context of employment:

(i) Value of any rent-free accommodation provided to the employee;
(ii) Value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;
(iii) Value of any benefit or amenity granted or provided free of cost or at a concessional rate to an employee;
(iv) Sum paid in respect of any obligation payable by the employee;
(v) Sum payable to a fund (other than a recognised provident fund or an approved superannuation fund) to effect an assurance on the life of the employee or to effect a contract for an annuity;
(vi) Value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at a concessional rate to the assessee;
(vii) The amount or aggregate of amounts of any contribution made to the account of the assessee by the employer:
(a) In a recognised provident fund;
(b) In the scheme referred to in sub-section (1) of Section 80CCD; and
(c) In an approved superannuation fund,
To the extent it exceeds seven lakh and fifty thousand rupees (Rs 7,50,000) in a previous year;
(viii) The annual accretion by way of interest, dividend, or any other amount to the balance at the credit of the fund or scheme referred to in sub-clause (vii); and
(ix) Value of any other fringe benefit or amenity as may be prescribed.

Rule 3 of Income-tax Rules: Prescribed Valuation of Benefits and Amenities

(i) Interest-Free / Concessional Loans: Loans extended to the employee or any member of his household.

(ii) Holiday Travel & Accommodation: Travelling, touring, accommodation, and related expenses paid, borne, or reimbursed by the employer.

(iii) Food & Beverages: Value of free food and non-alcoholic beverages provided by the employer to an employee.

(iv) Ceremonial Gifts & Vouchers: Value of any gift, voucher, or token provided on ceremonial or festive occasions.

(v) Credit Card Expenses: Expenses including membership fees and annual fees incurred by the employee/household on company-provided credit cards.

(vi) Club Expenditure: Payment or reimbursement of expenditure incurred in a club by an employee or member of his household.

(vii) Use of Movable Assets: Benefit resulting from use of movable assets (other than specified assets and other than laptops/computers).

(viii) Transfer of Movable Assets: Benefit arising from transfer of movable assets belonging to the employer directly or indirectly.

(ix) Residual Amenities: Value of any other benefit, amenity, service, right, or privilege determined based on cost to the employer.

Key Takeaway: Any emoluments or benefits included under Section 17(2) provided by an employer to employees are considered as Salary and subject to TDS under Section 192.

2. Legislative Rationale & Statutory Characterization as “Income”

Rationale from Finance Minister’s Budget Speech 2022-23:

“It has been noticed that as a business promotion strategy, there is a tendency on businesses to pass on benefits to their agents. Such benefits are taxable in the hands of the agents. In order to track such transactions, I propose to provide for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds ₹ 20,000 during the financial year.”

Statutory Clauses of Section 2(24): Benefits and Perquisites as “Income”

Under Section 2(24) of the Income-tax Act, the terms benefit or perquisite are integrated across multiple clauses:

Section 2(24)(iii): The value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of Section 17.

Section 2(24)(iiia): Any special allowance or benefit (other than perquisite included under sub-clause (iii)) specifically granted to the assessee to meet expenses, necessarily and exclusively for the performance of the duties of an office or employment of profit.

Section 2(24)(iv): The value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by the director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid.

Section 2(24)(iva): The value of any benefit or perquisite, whether convertible into money or not, obtained by any representative assessee mentioned in clause (iii) or clause (iv) of sub-section (1) of Section 160 or by any person on whose behalf or for whose benefit any income is receivable by the representative assessee (the “beneficiary”) and any sum paid by the representative assessee in respect of any obligation which, but for such payment, would have been payable by the beneficiary.

Section 2(24)(vd): Explicitly incorporates “the value of any benefit or perquisite taxable under clause (iv) of Section 28.”

Section 28(iv) of the Income-tax Act:

“the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.” as income chargeable to income tax under the head “Profits and gains of business or profession”.

Legal Conclusion: Benefit or perquisite is unconditionally recognized as “Income” under Section 2(24) and is chargeable to tax under Section 28(iv). Section 194R operates as the statutory withholding machinery to capture and track this income before it is received or enjoyed by the beneficiary.

3. Perquisite Demarcation: Section 192 vs. Section 194R

A critical practical question arises: When benefits or perquisites are provided, under which section must tax be deducted—Section 192 (Salaries) or Section 194R (Business/Profession)?

Section 192 (Employment Purview)

Perquisites defined in Section 17(2) (clauses i to viii) provided by an employer to employees constitute “Salaries”. The employer is liable to deduct TDS under Section 192 based on applicable individual slab rates.

Scope: Restricted strictly to the employer-employee relationship and statutory items enumerated within Section 17(2).

Section 194R (Business / Partner Purview)

Benefits or perquisites provided to dealers, channel partners, distributors, or professionals outside the employer-employee nexus are governed exclusively by Section 194R at a flat withholding rate of 10%.

Crucial Nuance: Also covers emoluments outside Section 17(2) provided to valuable employees (e.g., luxury hotel stays booked as general business expenses where not treated as monetary salary).

4. Decoding Section 194R: Clause-by-Clause Analysis

Section 194R(1): The Primary Charging Mandate

“Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise 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 percent of the value or aggregate of the value of such benefit or perquisite.”

Recipient: Must be a Resident individual/entity.

Nature: Convertible into money or not (purely non-monetary included).

Nexus: Arising from business or exercise of profession.

Rate of TDS: 10% of the value or aggregate value.

First Proviso to Section 194R(1): Benefits Wholly or Partly in Kind

“Provided that in a case where the benefit or perquisite, as the case may be, 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.”

Statutory Responsibility Cast: The First Proviso explicitly casts responsibility upon the person responsible for providing such benefit, not upon the recipient providing services. The provider must obtain proof of Advance Tax / Challan payment from the recipient, or alternatively bear and gross up the tax itself, before releasing the benefit.

Second Proviso to Section 194R(1): The ₹20,000 Annual Exemption Threshold

“Provided further that the provisions of this section shall not apply in case of a resident where the aggregate value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not exceed twenty thousand rupees.”

Provides a statutory de minimis safe harbour: No TDS applies if the aggregate value of benefit/perquisite provided or likely to be provided to a resident does not exceed Rs. 20,000 in a financial year. Once this threshold is crossed, TDS applies on the entire value.

Third Proviso to Section 194R(1): Business / Professional Turnover Limits for Individuals & HUFs

“Provided also that the provisions of this section shall not apply to a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of 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.”

Individual / HUF in Business:

Turnover/Gross receipts must exceed Rs. 1 Crore in the preceding financial year.

Individual / HUF in Profession:

Gross receipts must exceed Rs. 50 Lakhs in the preceding financial year.

Corporate Entity Rule: In the case of a Company, LLP, or Firm, there are no turnover thresholds! Every corporate transaction satisfying the conditions of Section 194R is mandatorily subject to TDS.

Section 194R(2) & 194R(3): CBDT Powers to Remove Difficulties

Section 194R(2): Grants the Central Board of Direct Taxes (CBDT) statutory powers to issue guidelines (with prior Central Government approval) for the purpose of removing any difficulty arising in giving effect to the provisions of Section 194R.

Section 194R(3): Mandates that every guideline issued by the Board under sub-section (2) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on both the income-tax authorities and the person providing such benefit or perquisite.

5. Timing of Deduction: “Before Releasing” & Dual TDS Operation

Standard TDS provisions (such as Section 194J, 194C, 194H) mandate deduction “at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier”. In stark contrast, Section 194R introduces a structural shift: tax must be deducted “before releasing the benefit or perquisite”. This distinction leads to unique situations where two distinct TDS provisions apply to the same underlying commercial arrangement.

PRACTICAL CASE STUDY Automobile Manufacturer ‘Company A’ Dealer Incentive Scheme

Suppose Company ‘A’, an automobile manufacturer, achieves its desired sales targets and decides to pass benefits to its successful dealers in a non-monetary manner.

Stage 1: Hotel Booking in September

Company ‘A’ books hotel rooms in its own name in September for Christmas week holiday packages. At this stage, when Company ‘A’ makes payments or credits the hotel in its books of account, it is legally obligated to deduct TDS under Section 194C (Contractor) or Section 194I (Rent).

Stage 2: Passing on Benefits to Dealers in November

In November, Company ‘A’ officially informs dealers that they have been selected for the Christmas week holidays. The benefit is effectively passed in November. Therefore, TDS under Section 194R must be deducted again in November before releasing the benefit.

Stage 3: Bearing Non-Monetary Tax Liability

Because the benefit is purely non-monetary (holiday stay), the dealer does not receive cash from which tax can be deducted. Hence, under the First Proviso, Company ‘A’ must ensure TDS is deposited (either recovered from dealer or borne by Company ‘A’ itself and grossed up).

Alternative Scenario: In-House Hotel Asset

If Company ‘A’ already owned the hotel resort and permitted its dealers to enjoy stay privileges, there would be no intermediate payment to third-party hotels (no Section 194C/194I). In that case, only Section 194R would apply upon conferring the benefit.

6. Cross-Border Scenarios: Non-Resident vs. Resident Interactions

The author resolves two vital cross-border tax withholding dilemmas arising under Section 194R:

(i) Benefit Provided by a Non-Resident to a Resident

Section 194R applies to “Any person responsible for providing to a resident…”. The text does not restrict the provider to being an Indian tax resident.

Verdict: Section 194R is fully applicable. A non-resident providing business benefits to an Indian resident dealer/consultant is liable to comply with Section 194R withholding requirements.

(ii) Benefit Provided by a Resident to a Non-Resident

Because Section 194R(1) strictly covers benefits provided “to a resident”, it has no application when the recipient/beneficiary is a non-resident.

Verdict: Section 194R is NOT applicable. However, the resident provider must examine taxability under the Act / DTAA and deduct TDS under Section 195 on the value of the benefit provided if chargeable to tax in India.

Quick Reference Summary: Section 194R Compliance Matrix

Parameter	Rule / Statutory Provision	Legal Reference
Effective Date	1st July 2022	Finance Act, 2022
Rate of TDS	10% of value / aggregate value	Section 194R(1)
De Minimis Exemption	Rs. 20,000 per financial year per resident	Second Proviso to 194R(1)
Individual / HUF Thresholds	Preceding FY Turnover > Rs. 1 Cr (Business) / Rs. 50 Lacs (Profession)	Third Proviso to 194R(1)
Corporate Providers	No turnover threshold; liable on all qualified transactions	Section 194R(1)
Timing of TDS	Before releasing the benefit or perquisite	Section 194R(1) & 1st Proviso
Non-Resident Beneficiary	Section 194R not applicable; subject to Section 195 if taxable	Section 195