Section 194R – A Few Guidelines and practical challenges in complying with such Guidelines
Introduction: Finance Act 2022 inserted a new section 194R in the Income-tax Act, 1961 (“the Act”) with effect from July 1, 2022. This section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ 10% of the value or aggregate of value of such benefit or perquisite, before providing such benefit or perquisite.
Circulars 12 and 18 of 2022 were issued as guidelines for removal of difficulties which in turn seems to have opened up a lot of differences in opinions and created room for litigations. A few of the practical challenges have been discussed here.
Answer to Q1 of Circular 12: The deductor need not check whether the benefit or perquisite is taxable in the hands of the receiver under any other section of the Act.
Practical challenge 1: In a scenario where taxes are deducted under Section 194R but the corresponding amount is not taxable in the hands of the receiver, section 199 r.w.r 37BA states that credit for taxes deducted at source shall be available to the assessee in respect of the assessment year for which such income is assessable. There has been no amendment to this Rule 37BA. This might open avenues for litigations if the tax authorities deny the TDS credit when the corresponding income is not offered to tax.
Answer to Q8 of Circular 12: Expenditure pertaining to business conference for educating the dealers/customers in the following / similar aspects are exempt from section 194 R:
(i) new product being launched
(ii) discussion as to how the product is better than others
(iii) obtaining orders from dealers/customers
(iv) teaching sales techniques to dealers/customers
(v) addressing queries of the dealers/customers
(vi) reconciliation of accounts with dealers/customers
Practical challenge 2: Assessees shall maintain the details of the nature and purpose of the conferences held and agenda of business discussed at such conference.
The following expenditure would be considered as benefit or perquisite for the purposes of section 194R of the Act: –
(i) Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/ business conference.
(ii) Expenditure incurred for family members accompanying the person attending dealer/business conference
(iii) Expenditure on participants of dealer/business conference days which are on account of prior stay or overstay beyond the dates of such conference.
Practical challenge 3: Even if the assessee genuinely maintains the details of the business conference, we are not certain on whether they will be able to contest that it was not a leisure trip and how to identify the cost of business conference attributable to the leisure component. Similarly, the methodology to identify the cost of business conference attributable to the family members might also be a challenge.
Further, how to identify / allocate the benefit derived by a particular dealer in such a group activity?
Answer to Question 4 of Circular 18: “In order to remove these practical difficulties, it is clarified that if benefit/perquisite is provided in a group activity in a manner that it is difficult to match such benefit/perquisite to each participant using a reasonable allocation key, the benefit/perquisite provider may at his option not claim the expense, representing such benefit/perquisite, as deductible expenditure for calculating his total income. If he decides to opt so, he will not be required to deduct tax under section 194R and therefore he will not be treated as assessee in default under section 201 of the Act”.
Practical challenge 4: For assessees who spend a significant amount of their expenses on such business promotion shall be ready to face the disputes.
Considering an assessee hires an event manager to conduct its business conference, event management services are already subject to TDS under section 194J. In such a case, would section 194 R would prevail over the existing section 194J? Tax to be deducted under which section first?
Answer to Question 5 of Circulars 12: The value of the benefit/perquisite would be based on Fair Market Value (FMV). In case of a purchased benefit/ perquisite, purchase price of such benefit/ perquisite. In case of a manufactured benefit/ perquisite, price charged to customers shall be the value of such benefit/ perquisite. This value shall not include GST.
Practical challenge 5: Let’s assume a few scenarios –
Scenario 1: In case of a vehicle manufacturing company, distributors / dealers are its customers. Will the price charged by the Company to its distributors / dealers be accepted as FMV?
Scenario 2: In case of a company who manufactures and sells its product through wholesalers as well as retailers, price at which the product is sold to wholesalers and retailers would be different. In such case, which price must be adopted?
Scenario 3: In case a company distributes free samples of its product which is yet to be launched to its dealers what should be the price assigned to such product as there is no FMV available.
Answer to Question 1 of Circular 18: Waiver or settlement of loan by the bank may be an income to the person who had taken the loan. Subjecting such a transaction to tax deduction under section 194R of the Act would put extra cost on such bank, as this would require payment of tax by the deductor in addition to him taking a haircut already. Hence, to remove difficulty, it is clarified that one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with the borrowers by the following* would not be subjected to tax deduction at source under section 194R. *This includes scheduled banks and public financial institutions.
Practical challenge 6: Could the same exemption be extended to provision for bad and doubtful debts created by companies (though not in the business of financing), where the amount is already overdue, and the Company is unable to collect the same?
Key Takeaways: As stated in the Introduction, the Circulars are only for removing difficulties in implementation of provisions of section 194R of the Act and does not impact the taxability of income in the hands of the recipient which shall be governed by the relevant provisions of the Act.
We have tried to highlight a few intricacies of taxation and the importance of staying updated on evolving tax laws and their timing, ensuring compliance for avoiding any unforeseen tax liabilities. Please note that tax laws are subject to change, and it’s advisable to consult with tax experts for the latest guidance.