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Recently CBDT has issued Circular No.12/2022 dated 16th June 2022 to clarify and guide taxpayers on various issues in implementation of Section 194R of Income Tax Act 2022 enacted vide Finance Act 2022. Below is our Analysis on various impact, issues & challenges in implementation of Section 194R, for Trade & Industry –

Introduction:

The new TDS u/s 194R on Business Promotion Expenses shall be applicable from 1st July 2022 as follows. The following are the brief pointers on the provisions –

  • The TDS is applicable on Any Person Resident who is providing any benefit/perquisite to a Resident
  • The Benefit/Perquisite has to be in cash/kind and arising from BP,
  • TDS should be deducted at 10% on the value or aggregate of value of such benefit or perquisite:
  • TDS should be deducted before providing such benefit or perquisite
  • TDS applicable even when cash is not sufficient for payment of the same

Exceptions:

  • No TDS incase of benefit/perk per person is not more than 20,000 in a FY.
  • No TDS when deductor is an Individual/HUF in business/professional with turnover/receipts in business/professional below Rs.1Cr / Rs.50 Lakhs in Last
  • There must exist nexus between the business of the recipient resident & benefit provided to him. B2C benefits will not come under the purview of 194R/ 28(iv)

Impact:

  • The Recipient has to offer the Value of such Benefit/Perquisite for taxation in its ITR under PGBP u/s Section 28(iv) which provides for charging as PGBP the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession – However There is no requirement for deductor to verify the
  • Capital Asset – Thus, the deductor is required to deduct tax under section 194R of the Act in all cases where benefit or perquisite (of whatever nature) is provided.
  • Sales discount, cash discount and rebates – No 194R even though they are benefits. When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone etc., Section 194R shall be applicable
  • Buy one get one free – Section 194R shall not be
  • Free Samples –Section 194R would be applicable

Issues & Challenges

  • Reimbursement – Any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession – In this case TDS u/s 194R shall be applicable if the “invoice” is in the name of the service provider. If the “invoice” is in the name of the service recipient, then there is no applicability of
  • Dealer Conferences – in a case where dealer/business conference is held with the prime object to educate dealers/customers – there is no applicability of 194R.
  • 194R shall be applicable when –
    • Dealer Conferences are in the nature of incentives/benefits to select dealers/customers who have achieved particular targets
    • Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business
    • Expenditure incurred for family members accompanying the person attending dealer/business conference
    • Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such
  • What would be the Valuation for the Deductor is another It would involve disputes incase of both the total value disclosed as well as individual deductees
  • No TDS incase provider/recipient of the benefit/perquisite is a non-resident and/or recipient is a Non Resident
  • It would make the TDS returns bulkier

Section 194R TDS From 1st July 2022 Impact, Issues & Challenge

Examples

  • An insurance company decided to provide TV of 50000/- to an agent who clocks insurance premium Rs. 10 Lakhs in one quarter. Now, this will be subject to the TDS provision and the agent has to disclose in his ITR as PGBP
  • An Electronics company decided to offer the tour to Dubai for the dealer who makes the purchases 1 Crore in one year. Now, this will be subject to the TDS provision and TDS will be done on the basis of market value of the Dubai tour. The same has to be disclosed by the purchaser under PGBP
  • Tour packages given to health professionals by pharma companies for promoting their medicines. Incase this is not as per the Law for the doctors to receive, then even the Company will not be allowed deduction under PGBP for the

Relevant case laws:

  • Benefit/Perquisite has to be provided in Kind – Hon’ble Apex Court in the case of Mahindra & Mahindra Ltd has held that in order to invoke the provisions of section 28(iv) of the Income Tax Act, the benefit which is received has to be in some other form rather than in the shape of money. However as per Circular 12 of 2022, 194R would be applicable even incase the benefit is paid in
  • In David Dhawan [2005] 2 SOT 311 (Mumbai)/[2005] 92 TTJ 161 (Mumbai), it was held that when the person is travelling for performing the work and his family joins him at that place of temporary relocation, it cannot be regarded as a perquisite. However for the purpose of Section 194R, it would be regarded as a benefit/perquisite.

Other Key Matters

  • The CBDT has clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R.
  • The board has clarified that the valuation of benefit/perquisite shall be based on fair market value of the benefit or perquisite. However, if deductor has purchased the benefit/perquisite before providing it to the recipient. In that case, the purchase price shall be the value for such benefit/perquisite.
  • Further, if the deductor manufactures such items then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

Interplay with GST

From the point of view of GST, although certain AARs have held that GST would be applicable on benefits/perquisites in the nature of business promotion items provided to other persons, yet the same is debatable.

Critical Provisions for allowance of ITC/Non-Payment of Tax on business promotion items supplied –

  • They are not outward supply at all as they are not transferred/disposed off for a
  • They are not business assets. They are not purchased for generating future economic cash
  • They are not ‘gifts’ as there is a business purpose for the expenditure. The expenditure is incurred to promote/generate sales. They are not voluntary but incurred due to market requirement to generate demand.
  • They are at best moveable property for distribution and increasing
  • They are business expenditure like any other expenditure which are for furtherance of

Please find the below link for accessing the relevant Circular No 12 of 2022 dated 16th June 2022:

Section 194R of Income-tax Act, 1961 – Guidelines & FAQs

Watch Video on Section 194R

Author Bio

Mr. Vivek Jalan is a Fellow Member of the Institute Of Chartered Accountants of India (ICAI) ; a qualified LL.M (Constitutional Law) and LL.B. He is the Chairman of The Core Group on Indirect Taxes of The CII- Economic Affairs and Taxation Committee (ER); He is the Chairman of The Fiscal Affairs Com View Full Profile

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