The Income tax department is becoming more and more innovative day-by-day in identifying income which escapes the clutches of tax. Section 194R is one such innovation. This Article covers a few challenging aspects of Section 194R apart from the ‘HENRY VIII Clause’ approach being adopted by the tax department in the recent years, among others.
- Section 194R – Purpose with examples – Finance Minister’s speech, Memorandum, Section & Circular (para 1).
- Too broad a Section – Absence of definition of ‘benefit’/‘perquisite’ and the guidelines issued aggravates challenges (para 2).
- Section 194R would apply only if the recipient is in business or profession (para 3).
- TDS U/s 194R would apply even if the expenditure is disallowed in the hands of the provider of benefit (para 4).
- Section 194R(2) – Removal of difficulties clause (‘HENRY VIII’ clause!) – Worse than a retrospective amendment (para 5).
- Conclusion (para 6).
1. PURPOSE OF SECTION 194R ALONG WITH EXAMPLES – FINANCE MINISTER’S SPEECH, MEMORANDUM, SECTION & CIRCULAR
In the Budget 2022-23 speech, the Finance Minister (FM) stated that the purpose of Section 194R of the Income tax Act, 1961 (Act) was to track business promotion related transactions. The Memorandum to the Finance Bill, 2022 (Memorandum) and the language of Section 194R turned out to be larger than just business promotion. The Circular No.12/2022 [F. NO. 370142/27/2022-TPL], dt.16-6-2022 portrays an even broader perspective to the Section. Based on the above, given below, a few examples that could attract the provisions of Section 194R.
A. Raj Kamal International (RKI), producer of the film VIKRAM gifts Lokesh Kanagaraj, the Director, a Lexus car. The gift received by the Director, in exercise of his profession, is a perquisite to be covered U/s 194R (Ms.Priyanka Chopra v. DCIT [2018] 169 ITD 1 (Mumbai)).
B. Soft Ltd., a software product company, issues free licence of its software worth Rs.1,00,000/- to Hard Ltd. for 6 months in order to promote its business. This is a benefit to Hard Ltd. and therefore Section 194R would be attracted.
C. The value of perquisites by way of residential premises, car, furniture and telephone provided by a firm/company to its partner/director would attract Section 194R (V.P. Warrier v. CIT [1990] 181 ITR 303 (Madhya Pradesh), CIT v. Subrata Roy [2016] 385 ITR 547 (All.)).
D. A Pharma company sponsors travel and accommodation of a Doctor from India for a medical conference held in the USA at a cost of Rs.4,50,000/-. In this case, there is a benefit provided by the Pharma Company on the Doctor and hence the former is required to deduct tax U/s 194R.
E. A Pharma company provides free sample medicines valued at Rs.60,000/- to a Doctor during a year. Although the Doctor would normally distribute the samples to his/her patients free of cost, it is treated as a benefit provided by the Pharma Co. and thereby attracts Section 194R.
2. A BROAD SECTION – ABSENCE OF DEFINITION OF ‘BENEFIT’/ ‘PERQUISITE’ & GUIDELINES ISSUED AGGRAVATES CHALLENGES
In the absence of definition in the law, Circular 12/2022 has portrayed the term ‘benefit or perquisite’ in a very broad manner…SO broad that it covers even Discounts and Offers, but for the exemption(!) provided in the Circular…SO broad that it covers reimbursements if the invoice is NOT in the name of the provider of ‘benefit’ (courtesy!: Circular 12/2022). Let us take an example to discuss how far it could be broadened. Lender & Co. extends an interest-free loan of Rs.10 Crores to Borrower & Co. Can the interest cost saved by Borrower & Co. be considered as a benefit provided by Lender & Co. for the purpose of Section 194R?
Analysing this example, would require reference to the provisions of Section 28(iv) which charges the value of any ‘benefit/perquisite’ arising from business or a profession to tax. This is the Section that the Memorandum refers to while explaining the purpose of Section 194R and hence of relevance. In the above example, considering the provisions of Section 28(iv) in isolation, the interest-free loan is not a benefit/perquisite to Borrower & Co. since notional/hypothetical income cannot be brought to tax.
However, Circular 12/2022 has clarified that for the purpose of deduction of tax U/s 194R, the deductor need NOT verify if the income is taxable U/s 28(iv). This leaves the taxpayer to look at Section 194R independently, without reference to Section 28(iv), from a single perspective – Whether a benefit/perquisite is being provided as per Section 194R?
In my view, in the above example, there is a benefit provided by Lender & Co. in the form of an interest-free loan to Borrower & Co. for the purpose of Section 194R. The tone in which CBDT has drafted Circular 12/2022 prompts me to view so (can anybody ever imagine that trade discounts, ‘buy one get one free’ offers etc., which are in the normal course of business, are ’benefits’ and it had to be at the mercy of a Circular to be exempt?!!!)
In the absence of definition in the law or precedents and the manner in which Section 194R is interpreted in Circular 12/2022, one can expect a fresh round of litigation on what is ‘benefit’ or ‘perquisite’ for the purpose of Section 194R.
Similar to the above example, there could be more questions which could arise in the context – Whether a tenant providing interest-free deposit to the landlord is a benefit to the latter? Can services rendered by a CFO of a parent company to a subsidiary company without a cross-charge be treated as a ‘benefit’ provided by the parent? Whether an extended credit period for a sale by a taxpayer to its customers (as compared to regular credit period) is a benefit for the purpose of Section 194R?
3. SECTION 194R WOULD APPLY ONLY IF THE RECIPIENT IS IN BUSINESS OR PROFESSION
Although the language of Section 194R is not appropriately worded on this, it is understood that the recipient to whom the benefit is provided for the purpose of Section 194R should be in business or profession. The provisions of Section 194R are not applicable if, for example, ABC Ltd. donates 100 bags of cement to a Charitable trust or DEF Ltd. provides 500 bags of rice to the Trust as a part of its CSR initiative.
4. TDS U/S 194R WOULD APPLY EVEN IF THE EXPENDITURE IS DISALLOWED IN THE HANDS OF THE PROVIDER OF BENEFIT
Even if an expenditure is disallowed in the hands of a taxpayer, the provisions of Section 194R would apply if such expense results in a benefit envisaged in the said Section. For example, a pharma company gifts gold coins worth Rs.40,000/- to each Doctor in a medical conference. Although the expenditure on the gifts is disallowed U/s 37 in the hands of the pharma company, the benefit to the Doctors would still be subject to deduction of tax at source U/s 194R.
5. ‘HENRY VIII CLAUSE’–WORSE THAN RETROSPECTIVE AMENDMENT
Section 194R(2), reproduced below, empowers the Board to issue guidelines:
“(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.”
In this context, the Board issued Circular No.12/2022 clarifying many aspects of Section 194R. Is the Circular binding on the taxpayer? Yes, the Circular is binding on the taxpayer IF it is to remove difficulties to give effect to the Section (Section 194R(2) & 194R(3)). Also, the guidelines is binding IF issued by the Board with the previous approval of the Central Government and laid before each House of Parliament. It is a recent phenomenon that such ‘removal of difficulties’ clause are present in the Income Tax law (Section 206C(1-I), 194O(4), 194Q(3)). Stung by the Courts in the past, where it was held that Circulars issued by the Board are binding only on its subordinates and not on taxpayers, the tax administrators have become smarter by getting the authority of law to issue ‘binding’ Circulars.
Whose ‘difficulty’ is referred to in Section 194R(2) – whether the tax department’s or taxpayers’? It is both. If a guideline is issued to remove the taxpayer’s difficulty, it is welcome. However, if it is removal of difficulty to protect revenue, it is apprehensive. Circular 12/2022 has made such apprehension come true. Let us take a look at a few samples from the Circular:
Χ Q&A 1: The Memorandum referred to income U/s 28(iv), for the purpose of TDS U/s 194R, however the Circular clarified that taxability or otherwise U/s 28(iv) is not a precondition for the TDS. The Circular has also extended the TDS liability to Section 41(1), !!
Χ Q&A 2: In the context of Section 28(iv), Courts# have held that the benefit/perquisite should be non-monetary. However, Circular 12/2022 extended this to cash transactions, citing Proviso to Section 194R(1), which never dealt with such monetary benefits.
# CIT v. Mahindra And Mahindra Ltd. [2018] 255 Taxman 305 (SC), CIT v. Alchemic (P.) Ltd. [1981] 130 ITR 168 (Gujarat), Ravinder Singh v. CIT [1994] 205 ITR 353 (Delhi).
Χ Q&A 3: The Circular placed reliance on CIT v. Ramaniyam Homes (P) Ltd [2016] 384 ITR 530 (Mad.) (reversed by the Apex Court in CIT v. Mahindra And Mahindra Ltd. [2018] 255 Taxman 305 (SC)), Allahabad’s High Court’s decision in CIT Subrata Roy [2016] 385 ITR 547 (All.), which were not relevant to ‘perquisite in the form of capital assets’.
Χ Q&A 4: By treating even trade discounts and offers as benefits/ perquisites and later exempting it from the clutches of Section 194R, the Board has given a very broad meaning for ‘benefit/perquisite’, and scope for a fresh round of litigation.
The Circular is so microscopic and illogical that a benefit provided to an employee of another concern should be treated as benefit provided to the said concern for compliance U/s 194R.
Χ Q&A 7: Section 194R would be attracted on reimbursements, if invoice is not in the name of the person who reimburses the same. Too harsh a compliance provision for a case which does not involve any revenue.
Χ Q&A 8: Section 194R would be attracted if dealer conferences towards new product launch, discussions etc. is for the ‘benefit of select dealers’. Can’t a dealer conference, in the interest of business, be restricted to a select dealers?
The presence of ‘HENRY VIII clause’* in the law is a serious concern to the taxpayer. The concern is because of the Board’s proximity to ‘Lawmaking’. Such proximity could lead to issuance of Circulars, as and when required, which could expand the law beyond its intentions. The taxpayers have evidenced this in the past. Although the guidelines issued by the Board should be placed before the Parliaments, for all practical purposes, the tax-ignorant legislators will merely pass it (‘…Laws which are not properly debated, later add to burden on judiciary because people file cases challenging those laws…’ – a recent speech by Chief Justice N.V Ramana). When the tax administrators can, at worst, wait for the next budget to remove difficulties for them, if any, such powers conferred on the Board is excessive and totally unwarranted.
* Nicknamed as the ‘HENRY VIII clause’ to indicate executive autocracy. HENRY VIII was an autocratic king of England in the 16th century who enforced his will and got his difficulties removed by using instrumentality of a service parliament for the purpose of removing the difficulties that came in his way.
The ready-to-use boundless powers vested on the Board U/s 194R(2) to issue guidelines for ‘removing the difficulty’ could be much worse than the infamous retrospective amendments – For instance, a guideline could be issued after 5 years ‘clarifying’ a provision in favour of the tax department. A single Circular 12/2022 has exposed how the Board could (mis)use the weapon and provide way for litigation. One should wait and watch on the future amendments which could provide for such a ‘HENRY VIII’ clause.
6. CONCLUSION
The lack of clarity in the Section and excessive powers being conferred on the Board, as discussed above, are a matter of concern. With the changing times, better laws would evolve only if the stakeholders are appropriately engaged before/after its implementation. The taxpayers’/business perspective would produce better laws, lesser litigations and instil peace of mind in the taxpayers. Today, taxpayers are ready to pay appropriate taxes/comply with the laws. It is only the lack of clarity and the suspense that really bothers them.
*****
Author Bio
