“If Government were to be a farmer, then Tax deduction at source (TDS) provisions are its cash crops”.
TDS, as a concept, was introduced under Income-tax Act by the government to collect income at its very source itself rather than waiting for the taxpayers to pay tax. This enables ease of tax collection, tracking, and gathering of information during the year in which transaction is carried instead of waiting for the assessment to be conducted.
Time and again, TDS provisions have been used widening and deepening of tax base such that defaulters can be trailed as well as persuaded to file their tax returns
One more time, the Finance ministry brought a new category of payment within the net of tax deduction whereby provision of benefits or a perquisite exceeding Rs. 20,000 to a resident (arising from business by such resident recipient) during a financial year, is to be subjected to TDS at the rate of 10 percent. These provisions do not apply to certain individuals or HUF who are not subject to tax audit and this amendment will take effect from 1 July 2022.
Further, it is supplemented by a proviso to say that in case the benefit / perquisite is in kind, the payer to ensure that the tax has been paid in respect of such benefit / perquisite. In the event that benefit / perquisite is partly in cash and partly in kind, but cash part is insufficient to meet TDS liability, then too the payer is required to ensure the tax payment at the time of provision of such benefit / perquisite.
The charge for taxation of business perks is already created under section 28(iv) of the Act and is accordingly taxable as business income of the recipient. While there is no reference to section 28(iv) under the text of the proposed section 194R in the Finance Bill, the explanatory memorandum does intend to import the transactions falling within the scope of section 28(iv) of the Act.
The intention of the government seems to be bringing the benefits passed on by the businesses to their agents with the tax tentacles to plug revenue leakages in self-obedience.
At this juncture, let us understand each of the phrases used under the proposed framework of section 194R
Any person responsible for providing to a resident
A person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof
Any benefit or perquisite
The term ‘perquisite’ is defined under the context of salary income provides an inclusive definition which normally denotes meeting of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person. The ‘benefit’ is an advantage or useful effect that something has – The Oxford Dictionary. ‘Benefit’ used under section 28(iv) as well as section 194R is wider that the term ‘perquisite’.
The words ‘benefit’ or ‘perquisite’ used in section 28(iv) of the Act, have to be read together and would draw colour from each other. From the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. Thus, the word “benefit” has also to be interpreted in the same manner i.e., at the time of execution of the business transaction, one party should give to the other party some irretrievable benefit or advantage – Helios Food Improvers P. Ltd v. Dy CIT (2007) (14 SOT 546) (TMum)
Whether convertible into money or not
It is not the actual receipt of money, but the receipt of a benefit or perquisite, which has a monetary value, whether such benefit or perquisite is convertible into money or not, which is what is covered by section 28(iv) of the Act – Commissioner of Income tax, Chennai vs Ramaniyam Homes (P) Ltd  68 taxmann. com 289 (Madras HC) as affirmed by SC
This would mean that benefit which is provided will be liable for TDS, irrespective of whether the benefit is capable of conversion into money form or not. Once the benefit itself is provided in the form of money – then provision is not attracted. In the context of section 28(iv) of the Act, the Supreme Court in the case of Mahindra & Mahindra Ltd (2018) 93 taxmann.com (SC) has upheld that the benefit which is received has to be in some other form rather than in the shape of money. Importantly, the perquisite / benefit should not be a hypothetical and it must accrue in law to the recipient CIT vs Excel Industries 258 ITR 295 (SC)
The proviso to section 194R refers to provision of benefits which are either in ‘kind’ or ‘party cash and partly kind’. In such cases it is the obligation of the provider to ensure that the tax is paid.
On a conjoint reading with section 194R, the explanatory memorandum to Finance Bill 2022, section 28(iv) of the Act along with its available jurisprudence, it makes it clear that the proposed TDS provisions to be applied in relations to only to non-cash perquisites having a monetary value.
Arising from business or the exercise of a profession, by such resident
The fringe benefits availed in addition to contractual considerations earned in carrying out business or profession is taxed as business income under the head ‘Profits and gains from business and profession’ under section 28(iv) of the Act. The solitary objective of section 28(iv) is to tax benefit obtained as quid-pro-quo for the services rendered.
For the purposes of applying proposed section 194R too, the benefits / perquisite provided by the provider should be arising from the business or profession by the person receiving it. Thus, it is of paramount importance that the receiver gets a right to receive the fringe benefits as an obligation on the part of the provider, and the benefit so provided should have a direct nexus with the business carried on or services provided by the recipient of such benefits. Where, the taxpayer receives a benefit without carrying out any business activity, it would not be taxable under this section.
Notably, section 28(1) of the Act creates a charge on profits and gains from business or profession, whereas section 28(iv) of the Act creates charge on perquisite / benefits received in kind (whether it can be converted into money or not). Capital receipts are not taxable under section 28(iv) of the Act.
Now, let us understand the applicability of the proposed withholding tax provisions with the help of certain examples:
|1||Volume discount or trade discount provided by the supplier of raw material to the purchaser as a price adjustment||Commercially, the volume discounts are provided as a result of negotiation by the seller to the purchaser and ultimately gets adjusted from the sales price. Such discounts are arising out of pure contractual arrangements and are not in the nature of fringe benefits arising from the business of the purchaser,
Rather, these are promotional schemes which are arising from the business of the seller and benefiting seller to generate bulk sales volumes. Ideally, the proposed TDS provision should not be triggered in such case.
|2.||Cash discount||Cash discount are monetary lumpsum discount given by the seller of goods to the buyer upon immediate payment of the entire consideration. This forms part of the contractual arrangement between the parties and hence should fall out of scope of section 194R which proposes to tax only benefit / perquisite in kind based on the discussion in the proceeding paragraphs.|
|3||Sponsored tour provided to agent for achieving a sales target||Such tours are in addition to the regular commission received by the agent. Availing of sponsored tour by the agent has a direct nexus with his business of acting as a sales agent falling within the rigours of section 194R and shall be subject to TDS @ 10%. In the absence of any exclusion provided for tax deduction under any other section (say under section 194H as commission), the reduced TDS rate applicable under any other provision may not apply.|
|4||Promotional schemes (buy one get one offer) passed on to the distributors||Such schemes are provided by the product manufacturer to the distributor who shall ultimately be passing on the end customers. These are part of the contractual arrangement and is included in the total consideration. Also, such free products cannot be construed as provided in lieu of the business of the distributor it is more so necessary to be given by the manufacturer for distributing the products manufactured.|
|5||Provision of rent-free accommodation to the consultant of business||This should qualify as perquisite under section 28(iv) as well as shall be liable to TDS the proposed provisions|
|6||Making family travel arrangements for the director of a film as per the contract||An incurrence of expenditure by a production company on travel of director along with his family is only towards protecting its business interest in sustaining creative productivity on the part of director by making available a congenial environment (stay with his family). Accordingly, it shall be possible to contend that the payment for travel is not covered by section 28(iv) or be construed as perquisite attracting TDS.|
|7||Benefits given by employer to employee||The perquisites arising to employees are separately taxable under the head salary and are subject to TDS under section 192 of the Act. Hence, such employer-employee transactions should fall outside of the scope of the proposed section 194R.|
|8||Provision of watch worth Rs. 40 lakh as a gift from a company for which the tax payer had undertaken advertisements and promotional activities on remuneration basis.||Receipt of watch has a direct nexus with the advertising business of the recipient. This would qualify as a perquisite of business under section 28(iv) of the Act. Consequently, it shall fall within ambit of proposed section 194R.|
|9||Promotional scheme-providing gift card or meal cards to distributors.||One might argue that gift cards are equivalent of money but not legal tender ‘money’ . Hence, such gift cards may fall within the scope of the proposed provisions if it crosses the threshold limit of Rs.20,000.|
|10||Merchant Shareholding Programme (MSP)/ Teacher SOP (TSOPs)||MSP is a scheme in a marketplace, wherein the merchants are offered shares instead of commission, or cash discounts. Merchants are offered to participate as owners of the business they nurture. Similarly, TSOP are teachers’s shareholding scheme, where teachers get to be owners of the teaching institution in response to their teaching skills. When merchants or teachers are offered promotion by offer of shares of their respective businesses, it is a benefit in kind and can trigger the implications under the proposed section 194R|
|11||Rewards for meeting program conditions offered by market places (for eg. less than 10% return, defect free delivery, percentage of on time deliveries)||Rewards are benefit in kind\cash paid on set criteria to induce return free, defect free delivery, timely delivery and hence the proposed section 194R shall get attracted.|
|12||Referral fee to new sellers||It may be possible to take a position that since the referral is paid purely in cash, it falls outside the context of perquisite under section 28(iv) of the Act and consequently not subject to TDS under the new provision (reference to the Supreme Court decision in the case of Mahindra and Mahindra)|
|13||Whether partly in cash and partly kind transactions be covered for the purposes of deduction of tax at source under section 194R?||
It is contemplated that where “benefit or perquisite” is provided “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 to ensure that tax has been paid in respect of the benefit or perquisite.
The wordings of the section suggest that in case of composite payment (in cash as well as kind) the proposed provisions under section 194R will get triggered on the aggregate amount.
Nevertheless, replying on the Supreme Court judgement purely cash transactions shall fall outside of radar of the proposed TDS provisions.
An another interesting question arises as to once the perquisite / benefit is received, how to value such perks for the purposes of TDS compliance. It is highlighted that the proposed section 194R does not provide a method of valuation of such benefit or perquisite. However, Rule 3(4) of the Income-tax Rules, 1962 dealing valuation of salary perquisite provides that cost to the employer should be considered as a value of the perquisite. However, if there is a time gap in incurrence of expenditure and provision of benefit, there might be issue of valuation. Similarly, if the acquirer of the benefit and his cost is different than the provider of the benefit, then market value of such benefit or perquisite could be considered. Thus the provider of the ex-gratia perks not only plunges into characterisation of receipts in the hands of the recipient but also its value determination.
The cornerstone of the proposed amendment is to ensure that tax on the benefits / perquisite which has a direct nexus with the business of the recipient are collected at the source itself for not only blocking revenue leakages but also garner the revenues exchequer and encourage compliance. Conversely, it may result into an un-intended consequences such as disallowance of TDS on sales promotion schemes, dispute as to whether the benefits are contractual or ex-gratia, valuation etc which would affect the working capital inflow of the businesses. The Memorandum provides that this amendment will take effect from 1 July 2022. Accordingly, businesses have time up to June 2022 to scrutinise their promotional spends, incentive/ referral schemes and review contractual arrangement to assess the impact of the proposed provisions.
The Central Board for Direct Taxes (CBDT) may consider to issue Frequent Asked Questions (FAQ) and clarify that the cash benefits are out of the scope of the proposed section 194R and provide a guidance on the basis on how benefit / perquisite in kind may be valued (for eg. based on the procurement cost, manufacturing cost etc). From the tax payers’ standpoint, it will be necessary to review the contractual terms, promotional/ discount schemes, its approval mechanism, nexus with the business of the recipient and the cost of benefits provided to various stakeholders.
Authors: Mansi Mehta-Senior Manager, Latha Sherlekar- Tax Senior from Deloitte Haskins & Sells LLP