Section 194R: TDS on Benefits or Perquisites, arising out of Business or Profession

Deduction of tax on benefit or perquisite in respect of business or profession (Section 194R)

Section 194R: TDS @ 10% on Benefits or Perquisites, arising out of Business or Profession

The new section 194R mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source before providing such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident.

Rate applicable

IO% of the value or aggregate of value of such benefit or perquisite

Threshold limit

This deduction is not required to be made, if the value or aggregate of value of the benefit or perquisite provided or likely to be provided to the resident during the financial year does not exceed twenty thousand rupees.

Non-Applicability

The responsibility of tax deduction also does not apply to a person, being an Individual/Hindu undivided family (HUF) deductor, whose total sales / gross receipts / gross turnover from business does not exceed one crore rupees, or from profession does not exceed fifty lakh rupees, during the financial year immediately preceding the financial year in which such benefit or perquisite is provided by him.

Perquisites under Salary Head are Not Covered u/s 194R

The benefits or perquisites to be covered by this new section 194R are those perks, benefits, amenities, or facilities, in cash or kind, or in a combination of cash and kind, which a resident person enjoys, pursuant to, or in exercise of his business or profession, in lieu of the regular consideration payable to him, in monetary terms, in exercise of such business or profession.

Therefore, any benefits or perks (perquisites) given by the Company to its Directors and Employees, like ESOPs, Cars, Rent Free Accommodations, Free Tours, LTCs, Mobiles, Performance Linked Incentives etc. are not covered u/s 194R, as these are already subject to TDS u/s 192 under the Salary Head, of the Income Tax Act.

Guidelines issued by CBDT

The Central Board of Direct Taxes (CBDT) last week issued guidelines on the applicability of new TDS provisions regarding benefits received in a business or profession and said that such perquisites can either be in cash or kind or partly in both of these forms.

1. Need to check whether recipient is liable to pay tax on the benefits

The guidelines state that it is not required to check whether the amount is taxable or not in the hands of the recipient. The TDS provision u/s 194R shall apply even if the recipient of the benefits or perquisites does not report such receipt of benefits in their income tax return. Also, in case the benefits are taxable, it is not necessary to check the section under which it is taxable in the hands of the recipient.

2. Does it apply to benefits received in cash or kind?

The government also clarified that the benefits or perquisites on which TDS (Section 194R) needs to be deducted do not need to be only in kind.  It can either be in cash or kind or partly in both of these forms.

3. Requirement to deduct tax under section 194R of the Act, when the benefit or perquisite is in the form of capital asset?

The asset given as benefit or perquisite may be capital asset in general sense of the term like car, land etc. but in the hands of the recipient it is benefit or perquisite and has accordingly been held to be taxable. In any case, as stated earlier in point 1, the deductor is not required to check if the benefit or perquisite is taxable in the hands of recipient. 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. Also, many courts have held that benefits or perquisites are taxable even though they are in the nature of capital asset.

4. Whether sales discount, cash discount and rebates are benefit or perquisite?

No tax is required to be deducted under section 194R on sales discounts, cash discounts, and rebates allowed to customers and when additional quantities provided Free of Cost with the Basic Price (1 plus 1 or similar schemes).

This relaxation should not be extended to other benefits provided by the seller in connection with its sale. Following are some of the examples of benefits/perquisites on which tax is required to be deducted under section 194R of the Act (the list is not exhaustive):

• When free samples are provided
• 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.
• When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets
• When a person provides free ticket for an event
• When a person gives medicine samples free to medical practitioners.

Further it is clarified that Incentives in Cash or Kind given to any Director, Employee, Associate or Consultant of the Company by any Third Party, by virtue of the employment of such Director or Employee with the Company or by virtue of professional association of such Associate or Consultant with the Company. Third Party providing such Incentives or Benefits, to any Director, Employee, Associate or Consultant, will deduct TDS @ 10% u/s 194R, in the name of the Company, on deeming fiction basis.

The provision of section 194R of the Act shall not apply if the benefit or perquisite is being provided to a Government entity, like Government hospital, not carrying on business or profession.

5. Valuation of the benefit/perquisite

The fair market value (FMV) of the benefit or perquisite provided to the recipient shall be used for valuation purposes. However, if the benefit or perquisite is purchased before providing it to the recipient, it will be valued based on its purchase price. If the benefit or perquisite is manufactured, it must be valued based on the price charged to the customers.

GST is to be excluded from the Purchase Value or Fair Market Value of such Benefit or Perquisite, for the Purpose of TDS Deduction.

6. TDS Implication on Transactions with Social Media Influencers/Artists/Brand Ambassadors 

Whether this is benefit or perquisite will depend upon the facts of the case. In case of benefit or perquisite being a product like car, mobile, outfit, cosmetics etc. and if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act.

7. TDS on reimbursement cost incurred by service provider 

Reimbursement of out-of-pocket (travelling and conveyance, boarding and lodging) expenses to the auditors/ consultants by the recipient of service (company), where the Invoice of such out of pocket expenses, is not in the name of the company. Deduction of TDS @ 10% on Actual Cost Basis, if applicable, or on Fair Market Value of Such Out of Pocket Expenses, if the aggregate value of such incentive exceeds Rs. 20,000/- in a year.

However, if the Invoice as raised by such travelling or boarding agency, of such out of pocket expenses is in the name of Company, then No TDS u/s 194R is applicable.

Customary gifts to business/ professional associates on festive occasions, celebrating successful completion of projects would be subject to deduction of TDS as per section 194R of the Act.

8. TDS Implication on Transactions with Dealers, Distributors, Channel Partners

The expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for the purposes of section 194R of the Act in a case where dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects:

• new product being launched
• discussion as to how the product is better than others
• obtaining orders from dealers/customers
• teaching sales techniques to dealers/customers
• addressing queries of the dealers/customers
• reconciliation of accounts with dealers/customers

However, such conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets.

Incentives in Cash or Kind given to Dealers, Distributors, Channel Partners  based on Target Completion would be subject to deduction of TDS @ 10% on Fair Market Value of such incentives in cash or kind, or on Purchase Value, if acquired.

Further, in the following cases the expenditure would be considered as benefit or perquisite for the purposes of section I 94R of the Act:-

• Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer /business conference.
• 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 conference.

9. If the benefit/perquisite is in kind or partly in kind (and cash is not sufficient to meet TDS) then the person responsible for providing such benefit or perquisite is required to ensure that tax required to be deducted has been paid in respect of the benefit or perquisite, before releasing the benefit or perquisite. How can such person be satisfied that tax has been deposited?

The requirement of law is that if a person is providing benefit in kind to a recipient and tax is required to be deducted under section 194R of the Act, the person is required to ensure that tax required to be deducted has been paid by the recipient. Such recipient would pay tax in the form of advance tax. The tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/perquisite has been deposited. This would be then required to be reported in TDS return along with challan number. This year Form 26Q has included provisions for reporting such transactions.

In the alternative, as an option to remove difficulty if any, the benefit provider may deduct the tax under section 194R of the Act and pay to the Government. The tax should be deducted after taking into account the fact the tax paid by him as TDS is also a benefit under section 194R of the Act. In the Form 26Q he will need to show it as tax deducted on benefit provided.

10. Calculation of the threshold limit

Since the threshold of twenty thousand rupees is with respect to the financial year, calculation of value or aggregate of value of the benefit or perquisite triggering deduction under section 194R of the Act shall be counted from 1^st April, 2022. Hence, if the value or aggregate value of the benefit or perquisite provided or likely to be provided to a resident exceeds twenty thousand rupees during the financial year 2022-23 (including the period up to 30th June 2022), the provision of section 194R shall apply on any benefit or perquisite provided on or after 1^st July 2022.

The benefit or perquisite which has been provided on or before 30^th June 2022 would not be subjected to tax deduction under section 194R of the Act.