Section 194R TDS on reimbursement of freight, out of pocket expenses etc

TDS u/s 194R on reimbursement of expenses to supplier / service provider 

In Finance Act, 2022 new section 194R inserted for deduction of tax at source on benefit or perquisite in respect of business or profession. Subsequently, CBDT issued circular no 12/2022 dated 16.06.2022 for remove difficulties. 

In Question No. 7 of the said circular, CBDT clarifies that, reimbursement of out of expenses without supporting document in name of payee will be considered as perquisite/benefit for the purpose section 194R of the Act. 

Considering above clarification, the provision may have substantial impact across enterprises. let’s understand validity & impact of the above clarification only for reimbursement of out-of-pocket expenses. 

Validity of Circular 

Most of CBDT circular were issued basis the power conferred in section 119 of the act. It has been an accepted proposition that the circulars issued under section 119 of the act are binding only on the revenue but not the taxpayers and the judiciary. Further, the circulars, being delegated legislation cannot supersede the statutory provisions and impose a higher burden on the taxpayers. However, the guidelines issued u/s 194R are based on power conferred in section 194R(2) and 194R(3) itself. Thus, these guidelines are binding on taxpayers as well. However, few question emerges regarding enforceability and interpretation. 

Applicability of section 194R to reimbursement of out-of-pocket expenses. 

The words “reimbursements”, “benefit”, and “perquisite” are not defined in Income tax Act nor does circular 12/2022 define it. Therefore, we have to rely on common parlance connotation of the term and judicial definitions. 

In common terms for reimburse is “to pay back or refund” for reimbursement is “restoration of an equivalent for something paid or expended”. Reimbursement of expenses means that the expenses earlier incurred by a person on behalf of another are recovered as such. Ordinarily there is no element of profit in such reimbursement. The definition of reimbursement does not depend on in whose name the supporting documents are obtained. In simply means it is necessary expense incurred by another which is not his personal expenses, but expenses incurred on behalf. 

The word “benefit” is advantage or profit or anything contribution to the improvement of the condition. 

The word “perquisite” has known normal meaning, namely, a personal advantage, which would not apply to a mere reimbursement of necessary disbursements. 

There are case laws for other section of TDS wherein, it held that in absence of any profit element in reimbursement of out-of-pocket expenses TDS is not applicable. 

1)  Zephyr Biomedicals Vs Commission of Income Tax (2020).

2) Pee Cee Cosma Sope Ltd. Vs Jt. CIT (2013).

3) CIT Vs Kalyani steel ltd (2018).

4) Principal CIT Vs. National health & education society (2019)

5) CIT Vs. Zee Entertainment Enterprise Ltd (2018).

6) United hotels Vs ITO (2005)

7) ITO Vs Vishinda Diamonds (2013)

Section 190 of the act contains general provisions which apply to all TDS sections in Chapter XVII-B including section 194R. 

Section 190(1) Notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable by deduction at source or by advance payment, as the case may be, in accordance with the provisions of this Chapter. 

The expression “such income” would ordinarily relate to any amount which has an “income element” in it and not otherwise. By no stretch of imagination, pure reimbursement of out­of-pocket expense without profit element can be consider as Income / perquisite / benefits in hands of recipient. 

Applicability of section 194R to purely monetary perquisite/benefits 

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 per cent of the value or aggregate of 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 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: 

The word “any benefit or perquisite” would have roped in benefit and perquisites in cash as well as in-kind, but the words “whether, convertible into money or not” curtail the scope of the preceding word “any benefit or perquisite” it implies that, the benefit should be non­monetary. If the cash or monetary benefits or perquisite were intended to be covered, there was no need for the words “whether convertible into money or not” 

Above arguments are supported by following cases: 

1) CIT vs Mahindra & Mahindra

2) CIT vs Alchemic Ltd.

Where perquisite or benefit arising in business or profession of recipient, is wholly in money then it may anyways attract TDS under other sections. However, In Question No 2 of circular clarifies that, “this proviso clearly indicates the intent of legislature that there could also be situations where benefit or perquisite in cash or in kind or in partly in cash and partly in kind. 

While proviso to section 194B, first proviso to section 194R(1) and the proviso to section 194S use similar phraseology, there is difference in mail provision. While section 194B and section 194S(1) use the word “deduct”, section 194R(1) uses “ensure that the tax has been deducted. 

Section 194R does not cover a case where perquisite/benefit is only in cash. It covers only cases where perquisite is in kind or partly in kind. However, by circular it is clarified that, section covers all perquisite in cash or kind or both. Question arises here is, can delegated legislation circular supersede statutory provisions and impose a higher burden on the taxpayers? Nevertheless, these guidelines of CBDT cannot be challenged before AO and CIT(A). They can be challenged only in ITAT upwards in appeals. 

Conclusion: 

There are many legal problems in issued circular and there is contrary settled principal that on reimbursement of expense TDS is not applicable. Based on that, one my take contrary stand to circular and not deduct TDS u/s 194R on reimbursement of expense. However, an aggressive stand may end up litigation and all question of law related arguments might settle in ITAT or above. 

Moreover, reimbursement of expense without supporting documents should always added to value of goods / services and TDS under relevant sections 194C/194J/194Q need to deduct.

If one takes conservative stand and decide to deduct TDS on reimbursement of expenses, then summary of reimbursements are as under:

Situation	Condition	if below threshold
Reimbursement of out-of-pocket expenses without documentary proof.	It should be added to value of goods / services and TDS should be deducted under relevant section 194C/194J/194Q.	if total value of good / service is less than threshold provided in relevant section then deduct TDS u/s 194R on reimbursement value only.
Reimbursement of out-of-pocket expenses with documentary proof (not in name of deductee)	TDS under relevant section is not required to deduct in absence of similar circulars for relevant section. Deduct TDS u/s 194R for reimbursement of Expenses
Reimbursement of out-of-pocket expenses with documentary proof (in name of deductee)	No need to deduct TDS u/s 194 as per Question No 7 of circular.

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