Section 194R provisions in a simplified manner with related FAQ’s

The Finance Act, 2022 had inserted a new section 194R to the Income Tax Act, 1961 providing for deduction of tax at source (TDS) @ 10% on the benefit or perquisite paid to a resident businessman or professional arising from its business or profession, and the provision of this section is applicable from 1^st July, 2022.

The legal extract of the provision is given below:-

Section 194R(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 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 at the rate of ten percent of the value or aggregate of value of such benefit or perquisite.

Provided that in 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 of cash is not sufficient to meet the liability of deduction of tax in 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 resident where the aggregate 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 provision of this section shall not apply to individual or HUF whose gross receipts or turnover does not exceed one crore rupees for business or fifty lakhs rupees for profession during the financial year immediately preceding the financial year in which such benefit or perquisite is provided by such person.

Section 194R(2):- If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of Central Government, issue guidelines for the purpose of removing the difficulty.

As soon as the provision was incorporated by Finance Act, 2022, various issues related to which person are covered, how the value is determined etc. is arise. Accordingly, the CBDT, vide Circular No. 12/2022 dated 16.04.2022, issued guidelines under sub-section (2) of section 194R of the Income Tax Act which is explained question wise below:

1. Whether the person responsible for providing benefit or perquisite needs to check taxability u/s 28(iv) before deducting TDS? – No, the deductor is not required to check whether the benefit or perquisite is taxable in the hands of recipient or not under sec 28(iv) of the Act, as sec 194R casts an obligation on the person responsible for providing any benefit or perquisite to deduct TDS @ 10%. In this regard, the CBDT said the amount could be taxable under any other section like se 41(1) etc. without affecting the applicability of sec 194R.

2. It is necessary that for deduction of TDS u/s 194R the benefit or perquisite must be in kind? – No, it is not necessary the benefit or perquisite must be in kind if any transaction is made in cash, it will also covered by the circular. Though, the provision of section is not clear on this issue but we may draw the inference form the first proviso of section 194R(1) of the Act which provides that there could be a situation where benefit or perquisite is in cash or the benefit or perquisite is in kind or partly in cash and partly in kind. Thus, section 194R may beings in its scope the situation where the benefit or perquisite is in cash.

3. Is there any requirement to deduct TDS when the benefit or perquisite is provided in form of capital asset? — Yes, the benefit or perquisite given as capital asset will be taxable in the hands of recipient as benefit or perquisite. Further, courts have held that many benefits or perquisites to be taxable even though they are in the nature of capital asset. Therefore, deductor is required to deduct TDS @ 10% on all the benefit or perquisite provided by them.

4. Whether sales discount, cash discount and rebates are covered under benefit or perquisite? – No, both the discounts and rebates are not covered under the benefit or perquisite, except the nature provided below: 

a. any incentive is given in form of car, TV, computers, etc.

b. any person sponsors a trip for his/her recipient and relative upon achieving certain target.

c. providing free ticket for an event.

d. any benefit or perquisite provided to the owner/director/employee of the recipient entity.

e. free sample of medicines provided to the employee/consultant of the hospital.

However, the provisions of this section are not applicable if any benefit or perquisite is provided to any Government Entity not carrying on any business or profession.

5. How is the valuation to be carried out for the benefit/perquisite paid to the recipient for the purpose of this section? – It would be valued at Fair Market value except in below mentioned two cases:- 

a. when the provider purchased the benefit or perquisite before providing to the recipient, in that case it will be valued at purchase price.

b. When the provider manufactures such items before providing to the recipient, in that case it will be valued at the price it charges for its customers.

 Further, GST will not be included for the purpose of valuation of benefit or perquisite for TDs u/s 194R of the Income Tax Act.

6. Whether any product is given to social media influencer to use that and make video/audio on the same will be included in the benefit or perquisite? – Yes, any product is given to a social media influencer for use and making of any video/audio is liable for deduction of TDS u/s 194R unless such product is returned back to the company after using for the purpose of rendering service.

 7. Reimbursement of out of pocket expenses incurred by the service provider in the course of providing service is benefit or perquisite? – Yes, if the invoice of expenses which is reimbursed by the service recipient to the service provider is in name of the service provider then it will be treated as benefit or perquisite provided to the service provider, but if it is in the name of service recipient and the payment is made directly or indirectly by the service recipient then it will not be treated as benefit or perquisite provided to the service provider.

 8. Is Dealer conference to educate the dealers about the products is benefit or perquisite? – No, it would not be considered as benefit or perquisite if its prime objective is to educate the dealers/customers about any of the following or similar aspects:

a. new product being launched

b. discussion as to how the product is better than others

c. obtaining orders from dealers/customers

d. teaching sales techniques to dealers/customers

e. addressing queries of the dealers/customers

f. reconciliation of accounts with dealers/ customers

But it would be considered as benefit or perquisite if expenditure incurred is for family members accompanying the person attending conference or prior stay or overstay beyond the dates of the participants or its family members or is in the nature of incentives/benefits to select dealers/customers who have achieved certain targets. 

9. How the deductor be satisfied that the tax has been deposited when the benefit or perquisite is in kind or partly in kind and cash is not sufficient to meet the TDS ? – The government has given two options which are mentioned below:-

a. the recipient would pay tax in the form of advance tax and deductor may rely on a declaration provided by the recipient along with the copy of advance tax challan. This will be reported in the Form 26Q of TDS return or

b. the tax should be deducted by the deductor after taking into account the fact that the tax paid by him as TDS under sec 194R is also a benefit for recipient. This will be reported in the Form 26Q of TDS return.

10. How to compute the threshold limit of Rs. 20,000/- ? – As the section is applicable from 01.07.2022, but for the purpose of checking the threshold limit of Rs. 20,000/- we have to include the benefit or perquisite provided on or before 30^th June 2022 although we don’t have to deduct any TDS on the amounts paid within the period from 1^st April 2022 to 30^th June 2022.