Section 194R- TDS on Benefits or Perquisites: Emerging Facts and Issues

1. What is the scope of Section 194R?

Sec. 194R provides for deduction of tax at source on providing benefits or perquisites to a resident if such benefits or perquisites arise from carrying on of business or exercise of the profession. This section is applicable from July 01, 2022.

2. To whom Section 194R is applicable?

Section 194R is applicable to every person who is providing benefits or perquisites whether resident or non-resident (‘provider’) in excess of the threshold limit except specified individuals and HUFs exempted by the third proviso to section 194R.

3. Where the benefits or perquisites are provided to a Government Entity, is this section applicable?

This section is not applicable where the benefits or perquisites are provided to a Government entity, like a government hospital, not carrying on any business or profession.

4. What is the meaning of benefits or perquisites?

‘Benefits’ has not been defined under the Income-tax Act, 1961. The dictionary meaning of benefits is the advantage or profit or anything which is contributing to the improvement of existing conditions as decided in CIT v. Smt. Kamalini Gautam Sarabhai [1994] 208 ITR 139 (Guj.).

‘Perquisites’ has been defined under section 17(2) of Income-tax Act, 1961. Since it is an inclusive definition as defined under this section, it only lists down the items that should be covered in the form of perquisites under the head ‘Salary’. The literal meaning of perquisites as per Oxford’s dictionary is ‘something to which someone has a special right because of their social position’. Therefore, from this definition, it may be inferred perquisite denotes an income in addition to the main source of income.

5. What is the meaning of provider for the applicability of this section?

The term provider has not been defined either under section 194R or in guidelines issued by CBDT. However, in our view, ‘Provider’ in the restricted sense of section 194R should include a person who provides some benefit or perquisite to other people not being an employee either by himself or through a third party.

6. What is the meaning of recipient for the applicability of this section?

The term recipient has also not been defined neither under section 194R nor in guidelines issued by CBDT. However, in our view, ‘Recipient’ means a person who is not an employee since section 192 comes into play in the case of an employee. Further, he must be carrying on a business or exercising a profession and should have a business or professional relationship with the provider.

7. At which rate TDS is required to be deducted?

TDS is required to be deducted at the rate of 10% subject to sections 206AA and 206AB of the Income-tax Act, 1961.

8. At what rate, TDS will be deducted if the recipient has not furnished his PAN or has not furnished his return of income for a specified period as per section 206AB?

Section 194R has been introduced under Chapter XVIIB of the Income-tax Act, 1961 which covers all the sections pertaining to TDS. Since, section 206AA is applicable to the whole of Chapter XVIIB, hence Section 194R will also fall under the ambit of section 206AA. Therefore, in case of non-availability of PAN, TDS is required to be deducted at 20%.

Similarly, Section 206AB is applicable to the whole of Chapter XVIIB, and this section has not specifically excluded section 194R, hence Section 194R will also fall under the ambit of section 206AB. Therefore, in case of non-furnishing of return of income, TDS is required to be deducted at 20%.

9. Whether the recipient can apply for Low Deduction Certificate (‘LDC’) or No Deduction Certificate (‘NDC’) for Section 194R?

Section 197 provides that if the assessing officer is satisfied that the total income of the recipient justifies the deduction of income tax at any lower rate or no deduction of income tax, as the case may be, the officer shall on an application made by the assessee in this behalf, give to him such certificate as may be appropriate. Section 197 includes an inclusive list of sections for which the recipient can apply for LDC or NDC. Since section 197 for issuance of LDC or NDC has not been amended to include section 194R, it is inferred that recipient cannot apply for LDC or NDC.

10. At which time, TDS is required to be deducted on benefits or perquisites by the provider?

Section 194R provides that, before releasing the benefits or perquisites, the provider shall ensure that tax has been deducted in respect of such benefits or perquisites.

In our view, the company should deduct TDS at the time of booking of expenses in books of accounts or payment to vendor whichever is earlier subject to eventual availing of the benefit by the recipient. However, the timing of the deduction of TDS has not been explicitly clarified in department notification and clarifications provided so far, and is still a subjective matter depending on the facts and circumstances of each case.

11. What is the threshold limit for the deduction of TDS?

TDS is required to be deducted only if the value or aggregate value of benefits or perquisites provided to each beneficiary during the financial year exceeds INR 20,000.

12. Whether benefits or perquisites provided during Apr-Jun’ 22 will be considered for threshold limit?

Benefits or perquisites provided during Apr-Jun’ 22 will be considered for the threshold limit but such benefits or perquisites will not be subjected to TDS.

13. Whether TDS is required to be deducted from benefits or perquisites provided to non-residents?

Section 195 provides for the deduction of tax at source if the income of non-resident is chargeable to tax in India. If the benefits or perquisites provided to non-resident is chargeable to tax, then, TDS under section 195 is required to be deducted.

14. What type of benefits or perquisites are covered under this section?

Benefits or Perquisites may be in cash or in kind or partly in cash and partly in kind whether convertible into money or not. There were divergent views on the same however the same has been clarified vide Finance Bill 2023 which clearly stated that TDS is applicable irrespective of whether the benefit or perquisite is in cash or in kind or partly in cash and partly in kind.

15. How the provider will deduct the TDS where the benefits or perquisites provided are in kind?

Where the benefits or perquisites provided are in kind or partly in cash and partly in kind but such part in cash is not sufficient to meet the tax liability, then, the provider shall before releasing such benefits or perquisites ensure that the tax required to be deducted has been paid in respect of such benefits or perquisites.

• Option A (Advance Tax Challan): The provider may rely on a declaration along with an advance tax payment challan provided by the recipient confirming that the tax required to be deducted on such benefits or perquisites has been deposited. Challan details provided by recipient have to be reported in Form 26Q by the provider.
• Option B (Grossing-Up): Alternatively, the provider may also bear the burden of TDS by applying the principle of grossing up in such a situation.

16. Whether the provider is required to check benefits or perquisites are taxable in the hands of the recipient?

No, the Provider is not required to check whether the benefits or perquisites are taxable in the hands of the recipient and under which head of income it is taxable. Provider shall deduct TDS irrespective of the fact that benefits or perquisites are taxable or not.

17. Whether TDS will be applicable to providing benefits or perquisites to an employee?

Section 194R will be applicable only where benefits or perquisites are received in the course of business or exercise of the profession. Therefore, TDS under section 194R will not be applicable. However, TDS will be deducted under section 192 on benefits or perquisites provided to an employee.

18. What if benefits or perquisites are provided to customers who are end users?

TDS under section 194R will not be applicable as Section 194R provides for deduction of TDS only if benefits or perquisites arise from carrying on business or exercise of the profession. Since, end users are purchasing the product for their personal consumption and not for any business purpose, therefore in our view any benefits or perquisites received in lieu of that will not be covered under the purview of section 194R.

19. Benefits or Perquisites received are in the form of capital assets. Is this section applicable?

Yes, CBDT vide Circular No. 12 of 2022 dated June 16, 2022 has clarified that this section is applicable even if Benefits or Perquisites received are in the form of capital assets.

20. How is the valuation of benefits or perquisites carried out?

Section 194R is silent on valuation. However, CBDT vide Circular No. 12 of 2022 dated June 16, 2022 provides for the valuation of benefits of perquisites. GST will not be included for the purpose of valuation. Valuation will be based on fair market value (FMV) except in the following cases:

• If the provider has purchased benefits or perquisites, then purchase price shall be the value of benefits or perquisites.
• If the provider manufactures them, then the price it charges to its customers.

21. What is the meaning of ‘Fair Market Value’ (FMV) for the purpose of Section 194R?

Section 194R and Circular No. 12/2022 issued by CBDT have not defined FMV. It is defined under section 2(22B) of the Income-tax Act, 1961. In short, the FMV of a Capital Asset is:

• The price that a capital asset will fetch on sale in the open market.
• If it is not feasible to determine FMV from the above mentioned method, it will be determined with the rules made under Income-tax Act, 1961.

22. Whether sales discount, cash discount or rebates allowed to customers are benefits or perquisites?

No, it is clarified that sales discount, cash discount or rebates from listed retail prices allowed to customers are not benefits or perquisites since the cost of free items sold is already built in the cost of the sold article for which the price is charged.

There are schemes like Buy 1 and Get 1 Free which are also not covered as benefits or perquisites. Additional free items of the same item which is sold will be treated as a discount.

23. Whether free samples are benefits or perquisites?

Yes, free samples provided are covered benefits or perquisites.

24. What are the examples of benefits or perquisites liable for the deduction of TDS?

• (i) Incentives in the form of cash or kind such as car, TV, computer, gold, mobile phones etc.
• (ii) Sponsorship of a trip for the recipient and his/her relative upon achieving the target.
• (iii) Free tickets for an event.

25. What if benefits or perquisites are provided to an entity and used by the owner, employees or directors of the recipient entity?

Sometimes, the benefits or perquisites are provided to an entity which are used by the owner, employees or director of the recipient entity, in their individual capacity who may not be carrying on any business or profession. In such cases, the provider shall deduct TDS in the name of the entity.

26. Where the products are given to social media influencers for advertisement, will it amount to benefits or perquisites?

Where the products are given to social media influencers for advertisement and the said product is returned by him/her after rendering the services, then it will not amount to benefit or perquisites. But if the product is retained after rendering services, it will amount to benefit or perquisites and TDS under section 194R will be applicable.

27. Whether free samples of medicines provided to doctors is in the ambit of section 194R?

Where free samples are provided to doctors, the following three scenarios apply:

• Doctor employed in hospital: Pharma company will deduct TDS in the name of the hospital under section 194R; further, the hospital will deduct TDS of the doctor under section 192.
• Doctor consultant in hospital: Pharma company will deduct TDS in the name of the hospital under section 194R; further, the hospital will deduct TDS of the doctor under section 194R.
• Doctor runs own clinic: Pharma company will deduct TDS directly in the name of the doctor under section 194R.

28. Where gifts are given to brand ambassadors, will they come under the ambit of section 194R?

Gifts received by brand ambassadors are received by him/her in the course of the exercise of his/her profession and are taxable under section 28(iv). TDS will be deducted under section 194R.

29. Whether reimbursement of out-of-pocket expenses falls within the purview of section 194R?

There are two distinct scenarios for reimbursement of out-of-pocket expenses:

• Invoice in name of service provider: Where the service provider receives the invoice in his name and payment is done by the recipient directly or reimbursed, then such reimbursement will be considered as benefits or perquisites and TDS will be deducted under section 194R.
• Invoice in name of service receiver (Pure Agent): Where the invoice is in the name of the service receiver and he has reimbursed the same to the service provider (in case service provider has made the payment), the reimbursement made by the service recipient will not be considered as benefit/perquisite.

30. Whether expenditure incurred by an entity on dealer or customer conference falls within the purview of section 194R?

CBDT vide Circular No. 12 of 2022 dated June 16, 2022 has clarified that expenditure incurred by an entity on conferences would be considered as benefits or perquisites only if the conference is arranged for selected customers or dealers.

31. Whether non-monetary benefits given to a partner fall within the purview of section 194R?

In the case of Perizad Zorabian Irani v. PCIT [2022], Bombay High Court has held that income earned from a partnership firm as a working partner cannot be said to be from carrying on the business. Hence, it is clear that the partner is not engaged in business; only the firm is engaged in business. Therefore, TDS under this section is not applicable to benefits given to the partner.

* However, in the case of professional firms, partners are always having a certificate from a recognised professional body; in our view, it is advisable to deduct TDS under section 194R.

32. What are the challenges that India Inc. will face in the practical implementation of this section?

• Accounting & Inventory Overhead: Earlier, industries providing gifts, free samples or incentives recorded all expenses under the single heading of business promotion expenses. Under Section 194R, the provider must maintain detailed records of every recipient for tax deduction purposes and maintain complete inventories of receipt and distribution of goods.
• Operational Gridlock in Kind Benefits: Where benefits/perquisites are provided in kind, the recipient must pay tax as advance tax and provide a copy of the challan and declaration to the provider. It is practically not feasible to obtain challans and declarations from all recipients. Furthermore, uncertainty persists regarding the tax treatment where the recipient has carried-forward business losses or is an un-assessed loss-making entity.

33. What are the changes proposed in Finance Bill 2023?

The Bill proposes to clarify by way of insertion of an Explanation to Section 194R to provide that TDS provisions will be applicable irrespective of whether benefit or perquisite is in cash or in kind or partly in cash and partly in kind.

34. Is there any penalty introduced under the Income Tax Act for non-deposition of TDS to be paid by the provider of benefit or perquisite?

The Bill proposes to amend Section 271C by inserting a new sub-clause under sub-section (1)(b) to enable penalty on the provider of benefit or perquisite in case he fails to pay TDS where he is required to pay in case cash is not sufficient to meet the liability of TDS as provided in the first proviso of Section 194R(1).