DEDUCTION OF TAX ON BENEFIT OR PERQUISITE IN RESPECT OF BUSINESS OR PROFESSION [SECTION 194R]
Section 194R of the Income Tax Act, 1961 specifies the provisions for deduction of tax on benefits or perquisites in respect of business and profession. This section is inserted vide the Finance Act 2022. However, this section is made effective from 1st July 2022.
Analysis of Provisions of Section 194R
Applicability: 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. [194R(1)].
Rate of TDS: 10% of the value or aggregate of value of such benefit or perquisite [194R(1)].
When such benefit or perquisite
- is wholly in kind or,
- partly in kind and partly in cash, but such part of cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite,
then, 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. [1st Proviso to Sec 194R(1)]
Ensuring the tax has been paid means:
• that he has collected the amount equivalent to amount of TDS from payee or
• he on his own paid the TDS or
• the payee has made payment of such TDS amount.
Non-applicability of this section: However, this section shall not apply:
In case of a resident where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not Rs. 20,000. [2nd Proviso to Sec 194R(1)]
- And the to a person being 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 profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, is provided. [3rd Proviso to Sec 194R(1)].
Points to be noted:
Inspired by Circular No. 12/2022 dated 16.06.2022 & Circular No. 18/2022 dated 13.09.2022
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?
No. 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.
Is it necessary that the benefit or perquisite must be in kind for section 194R of the Act to operate?
Tax under section 194R of the Act is required to be deducted whether the benefit or perquisite is in cash or in kind. 1st proviso to 194R(1) clearly indicates the intent of 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.
Is there any requirement to deduct tax under section 194R of the Act, when the benefit or perquisite is in the form of capital asset?
Yes, deductor has to deduct tax even if the benefit or perquisite is in the form of capital asset. The deductor is required to deduct tax under section 194R of the Act in all cases where benefit or perquisite (of whatever nature) is provided.
Whether sales discount, cash discount and rebates are benefit or perquisite?
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 seller to difficulty. To remove such difficulty, it is clarified that no tax is required to be deducted under section 194R of the Act on sales discount, cash discount and rebates allowed to customers.
There could be another situation, where a seller is selling its items from its stock in trade to a buyer. The seller offers two items free with purchase of 10 items. In substance, the seller is actually selling 12 items at a price of 10 items. In such a situation, again there could be difficulty in applying section 194R provision. Hence, to remove difficulty it is clarified that on the above facts no tax is required to be deducted under section 194R of the Act. It is clarified that situation is different when free samples are given and the above relaxation would not apply to a situation of free samples.
This relaxation should not be extended to other benefits provided by the seller in connection with its sale. Following are some of the examples of benefits/perquisites on which tax is required to be deducted under section 194R of the Act (the list is not exhaustive):
• When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone etc.
• When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets
• When a person provides free ticket for an event
• When a person gives medicine samples free to medical practitioners.
It is further clarified that these benefits/perquisites may be used by owner/ director /employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession. However, the tax is required to be deducted by the person in the name of recipient entity since the usage by owner /director/employee/relative is by virtue of their relation with the recipient entity and in substance the benefit/perquisite has been provided by the person to the recipient entity.
The provision of section 194R of the Act shall not apply if the benefit or perquisite is being provided to a Government entity, like Government hospital, not carrying on business or profession.
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?
Whether this is benefit or perquisite will depend upon whether benefit or perquisite [being a product] is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act.
How is the valuation of benefit/perquisite required to be carried out?
The valuation would be based on fair market value of the benefit or perquisite except in following cases: -
• The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. [In that case the purchase price shall be the value for such benefit/perquisite.
• The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.
It is further clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act.
Whether reimbursement of out-of-pocket expense incurred by service provider in the course of rendering service is benefit/perquisite?
Any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.
Let us assume that a consultant is rendering service to a person "X" for which he is receiving consultancy fee. In the course of rendering that service, he has to travel to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to "X". Ordinarily, the expenditure incurred by the consultant is part of his business expenditure which is deductible from the fee that he receives from company "X". In such a case, the fee received by the consultant is his income and the expenditure incurred on travel is his expenditure deductible from such income in computing his total income. Now if this travel expenditure is met by the company "X", it is benefit or perquisite provided by "X" to the consultant.
However, sometimes the invoice is obtained in the name of "X" and accordingly, if paid by the consultant, is reimbursed by "X". In this case, since the expense paid by the consultant (for which reimbursement is made) is incurred wholly and exclusively for the purposes of rendering services to "X" and the invoice is in the name of "X", then the reimbursement made by "X" being the service recipient will not be considered as benefit/perquisite for the purposes of section 194R of the Act. If the invoice is not in the name of "X" and the payment is made by "X" directly or reimbursed, it is the benefit/perquisite provided by "X" to the consultant for which deduction is required to be made under section 194R of the Act.
It has been brought to the notice that in GST, if service provider incurs an expense as "pure agent", then GST input credit is allowed to service recipient and not to service provider. Therefore, it is clarified that amount incurred by service provider as a pure agent for service recipient, and afterwards reimbursed, would not be treated as benefit/perquisite for the purpose of section 194R of the Act.
It is further been clarified that if such out of pocket expenses incurred are charged in the bill by service provider and TDS on such amount is deducted by service recipient u/s 194C or 194J, there is no further requirement of deducting tax u/s 194R.
If there is a dealer conference to educate the dealers about the products of the company - Is it benefit/perquisite?
The expenditure pertaining to dealer/business conference would not be considered as benefit/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:
• 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 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 of the Act: -
• Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/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.
Section 194R would come into effect from the 1st July 2022. While computing for threshold of Rs.20,000 p.a., will the period of 1st April to 30th June to be considered?
Since the threshold of twenty thousand rupees is with respect to the financial year, calculation of value or aggregate of value of the benefit or perquisite triggering deduction under section 194R of the Act shall be counted from 1st April, 2022.
However, the benefit or perquisite which has been provided on or before 30th June 2022, would not be subjected to tax deduction under section 194R of the Act.
Company "A" gifts a car to its dealer "B" and deducted tax on this benefit under section 194R of the Act. Dealer "B" uses this car in his business. Will he get deduction for depreciation in calculating his income under the head "profits and gains of business or profession"?
Once Company "A" has deducted tax on gifting of car in accordance with section 194R of the Act (or released the car after dealer "B" showed him payment of tax on such benefit) and dealer "B" has included this benefit as income in his income tax return, it would be deemed that the "actual cost" of the car for the purposes of section 32 of the Act shall be the amount of benefit included by dealer "B" as income in his income-tax return. Hence, dealer "B" can get depreciation on fulfillment of other conditions for claiming depreciation.
Whether Embassy/High Commissions are required to deduct tax under section 194R of the Act?
For the removal of difficulty it is clarified that the provision of section 194R is not applicable on benefit/perquisite provided by
• An organization in scope of The United Nations (Privileges and Immunity Act) 1947
• An international organization whose income is exempt under specific Act of Parliament (such as the Asian Development Bank Act 1966)
• An embassy
• A High Commission, legation, commission, consulate and the trade representation of a foreign state.
Whether issuance of bonus share/right share is a benefit or perquisite if issued by a company in which the public are substantially interested as defined in clause (18) of section 2 of the Act and whether tax is required to be deducted under section 194R of the Act?
It is clarified that the tax under section 194R of the Act is not required to be deducted on issuance of bonus or right shares by a company in which the public are substantially interested.
CA Pranay Jain is a young and aspiring Chartered Accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain
CA Pranay Jain