Section 194R Income Tax Act: TDS on benefits or perquisite

As we are aware, the Government is trying to collect more and more data by way of TDS and SFT so that more tax net can be established. With this vision and aim, from 01/07/2022, new TDS provision has been inserted where, 10% TDS is required to be deducted in case of any perquisite or benefit provided to another person in cash or in kind where the value of such benefit or perquisite is above 20000/-.

History and related Legal Provisions

Section 28 (IV) of the Act:

The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession.

Section 194R of Income Tax Act:

(1) 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 profession, by such resident, shall, before providing such benefit or perquisite, as the case maybe, to such resident, ensure that tax has been deducted in respect or such benefit or perquisite at the rate of ten percent of the value or aggregate value of such benefit or perquisite.

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 the respect of 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:

Provided further that the provisions of 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 exceed twenty thousand rupees:

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 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.

(2) If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.

(3) 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 the income tax authorities and on the person providing any such benefit or perquisite.

Explanation:- For the purposes of this section ,the expression “person responsible for providing” means the person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof.

Noteworthy points

1. The benefit or perquisite recipient should be resident and the payer can be resident may not be resident. Let us analyse few situations.

2. Meaning of Benefit or Perquisite: Meaning of benefit or perquisite is not given in Section 194R. Can we borrow the meaning of perquisite from section 17 (2)? Yes, as per interpretation rules, where the meaning is given anywhere in act, the same can be borrowed. However one rider is here that Section 17(2) is for Salary and applicable to salary head only. Whereas the section 194R is applicable in case where the benefits or perquisites are arising from business or the exercise of profession. I.e. it is covered under chapter business and profession. Hence, the definition of section 17 (2) will be helpful or not only time will tell us. There are few examples which can be considered as benefit or perquisites arising from Business or exercise of profession is as under:

3. Foreign trip to the person in case of Achievement of Turnover/Target: We all are aware about the Supreme Court recent judgement on freebies to doctors by the pharma industries. However, if any free trip is sponsored by the businessman in case of specified turnover is achieved, then it will surely come under purview of Section 194R of the Income Tax Act and TDS will be applicable.

4. Winner of prize in case of online Games: In case of online games like Dream 11, if any winner wins the prizes then can it be covered u/s 194R? One can take a view that the same is not arise on the basis of business/ profession. However, the department can take strict view and disallow the thirty percent of value under section 40 (a) (ia) and to safeguard against the same if the TDS is done on safer side then one more controversy will arise where the recipient will get the Tax credit only if it has been included in the income of the recipient. Hence, if the TDS is deducted when no TDS is required, to get the credit of such TDS, the recipient will need to include the same in Income. However, it is questionable whether the recipient will get credit of TDS even if it is not included in income or the TDS amount will be the cost to the recipient. This will open Pandora box and litigation may be arise in future in this particular issue.

5. Turnover discount: Can Turnover discount be considered as benefit or perquisite? In our opinion No. It is surely arguable that the discount will reduce the value of supply, and it is not part of benefit. This is the same controversy is going on in GST. And the same issue will come in this section also. Cement and Consumer industries will be hit by this controversy.

6. Gifts in Diwali / Festival: Gifts, perks or benefits provided on some special occasions like festivals, marriage occasions, etc. to supplier, purchaser Will it be liable for TDS or not? It is clear that if the benefit/ perquisite is arise out of business or profession then only the same will be liable for TDS.

Let us check the question with different angle. If the gifts are given to employees in any occasion and if below 5000 then it is not taxable as per rule 3 of Income Tax Act. Hence, the value of gift will be considered as nil only if it is below 5000/-.  Hence, it is taxable and if we refer Section 192 then TDS is also applicable. The same ratio is applicable in Section 194R and TDS will be applicable in case of gifts / perquisites given to supplier and purchaser. However, another view can be taken where the TDS is deducted against the Sale under section 194H under Commission.

Consequences of Non Compliance

If the required TDS is not deducted or TDS deducted but not paid within time then interest is payable on applicable rate. If TDS is late deducted then interest @1% per month or part of the month is to be paid and if the TDS is deducted but not paid then 1.5% interest per month or part of the month. We are very much conversant with this interest provision.

Also, if the TDS not deducted or deducted and not paid till the due date of filing of return, Section 40 (a) (ia) can come into picture and thirty percent of benefit value can be disallowed. The section is reproduced as below.

Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profit and gains of business and profession”,-

………………..will

(ia) thirty per cent of any sum payable to a resident, on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139:……………

Section 194R provides the TDS is required to be deducted on the benefit or perquisites arising out of business/ profession. I.e. The assessee is going to claim the expenses as deductible expenses in profit and loss account and out of the same thirty present will be disallowed if the TDS is not deducted/ not paid according to section 40 (a) (ia).

In 3CD report, the auditor is required to disclose whether any sum is disallowable under section 40 (a) (ia) (supra). Hence, based on the comment on the auditor in 3CD, the CPC will process the return and automatically will disallowed the required portion as per act.

Conclusion

Utmost care is required to be taken by Assessee and Auditor both, in case of scrutinising the profit and loss account and if there is any benefit or perquisite are given in the course of Business/ Profession then TDS should be deducted accordingly. Also, it is expected from Government to clarify the meaning of benefits and perquisites to avoid future litigations.