SECTION 194R – TDS on benefit or perquisite in respect of business or profession – Additional Guidelines for removal of difficulties under Section 194R(2) of the Income-tax Act, 1961
Introduction:
Section 194R was inserted in the Income Tax Act, 1961 vide the Finance Act, 2022 and was made applicable w.e.f. 1st July, 2022. There were a lot of practical difficulties which were faced by the stakeholders and to remove the same, the CBDT issued Circular No. 12/2022 on 16th June, 2022. However, instead of removing difficulties, additional practical issues were created by that Circular.
Recently, the CBDT has issued additional guidelines vide Circular No. 18/2022 dtd. 13th September, 2022, to remove difficulties under Section 194R.
Now, let’s have a look at the additional guidelines issued by the CBDT.
Benefit or perquisite in the form of capital asset:
Vide Circular No. 12/2022, it was clarified that the benefit or perquisite received by a recipient in the form of capital asset is also covered under the purview of this section. However, keeping in view the settlement schemes of banks and the hardship faced by banks as a consequence of such settlement/ waiver, it is clarified that one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with the borrowers by the following would not be subjected to TDS under this section:
(i) Public Financial Institution as defined in clause (72) of section 2 of the Companies Act 2013;
(ii) Scheduled Bank as defined in clause (ii) of the Explanation to clause (viia) of subsection (1) of section 36 of the Act;
(iii) Cooperative bank (other than a primary agricultural credit society) as defined III the Explanation to sub-section (4) of section 80P of the Act;
(iv) Primary co-operative Agricultural and Rural Development Bank as defined III the Explanation to sub-section (4) of section 80P of the Act;
(v) State Financial Corporation being a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporation Act, 1951;
(vi) State Industrial Investment Corporation being a government company within the meaning of sub-section (45) of section 2 of the Companies Act 2013, engaged in the business of providing long-term finance for industrial projects;
(vii) Deposit taking Non-Banking Financial Company as defined III clause (e) of the Explanation 4 to section 43B of the Act;
(viii) Systemically Important Non-Deposit Taking Non-Banking Financial Company as defined in clause (g) of the Explanation 4 to section 43B of the Act;
(ix) Public company engaged in providing long term finance for construction or purchase of houses in India for residential purpose and which is registered in accordance with the guidelines/direction issued by the National Housing Bank formed under National Housing Bank Act 1987;
(x) Asset Reconstruction Companies registered under section 3 of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Note: Further, it is pertinent to note that, this clarification is only for the purposes of section 194R of the Act. The treatment of such settlement/waiver in the hands of the person who had got benefitted by such waiver would not be impacted by this clarification. Taxability of such settlement/waiver in the hands of the beneficiary will be governed by the relevant provisions of the Act i.e., such settlement/ waiver shall be taxable as income in the hands of the beneficiary.
Reimbursement of out-of-pocket expenses:
Vide Circular No. 12/2022, it was clarified that, 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.
For instance, a consultant is rendering service to a person Mr. A for which he is receiving consultancy fee. In the course of rendering that service, he has to travel to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to Mr. A. Ordinarily, the expenditure incurred by the consultant is a part of his business expenditure which is deductible from the fee that he receives from Mr. A. Now if this travel expenditure is met by the Mr. A, it is a benefit/ perquisite provided by Mr. A to the consultant.
In case the invoice is obtained in the name of Mr. A and accordingly, if paid by the consultant, is reimbursed by Mr. A then in this case, the reimbursement made by Mr. A being the service recipient will not be considered as benefit/perquisite for the purposes of Section 194R of the Act.
If the invoice is not in the name of Mr. A and the payment is made by Mr. A directly or reimbursed, it is the benefit/perquisite provided by Mr. A to the consultant for which deduction is required to be made under Section 194R of the Act.
Further, vide Circular No. 18/2022, the above clarification is held correct on the contention that, if service provider incurs some expense in the course of rendering service to service recipient and the bill is in the name of service provider, then in substance (irrespective of the terms of the agreement) this expense is the liability of the service provider and not of service recipient. It is service provider who gets input credit of GST included in the expenses incurred by him. If it was the liability of the service recipient, then GST input credit would have been allowed to him (service recipient) and not to service provider.
However, keeping in view the concept of pure agent, the CBDT has made the following clarification:
If service provider incurs an expense as pure agent, then ITC under GST is allowed to service recipient and not to service provider. While the relationship between provider and recipient of service in respect of the main service is on a principal-to-principal basis, the relationship between them in respect of other ancillary services is that of a pure agent.
Under the GST Valuation Rules 2017 “pure agent” is given the following meaning:
“pure agent” means a person who
a) enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;
b) neither intends to hold nor holds any title to the goods or services or both, so procured or provided as pure agent of the recipient of supply;
c) does not use for his own interest such goods or services so procured; and
d) receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.
The GST valuation rules provide that expenditure incurred as a pure agent, will be excluded from the value of supply, and thus also from aggregate turnover. However, such exclusion of expenditure incurred as a pure agent is possible only if all the conditions required to be considered as a pure agent and further conditions stipulated in the rules are satisfied by the supplier in each case. The supplier would have to satisfy the following conditions (in addition to the condition required to be satisfied to be considered as a pure agent) for exclusion from the value as under:
i. the supplier acts as a pure agent of the recipient of the supply, when he makes payment to the third party on authorization by such recipient;
ii. the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
iii. the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.
Hence, if the above conditions are satisfied, reimbursement of out-of-pocket expenses shall not be treated as benefit/perquisite for the purpose of section 194R.
TDS under section 194C & 194J:
Vide this circular, it is clarified that if tax is deducted u/s 194C or 194J and the invoice amount is inclusive of the out-of-pocket expenses incurred by the service provider, i.e., if TDS is charged u/s 194C or 194J on the gross amount (which includes out-of-pocket expenses), then, in such a case, there is no further benefit/perquisite which requires tax deduction under section 194R of the Act.
Dealer conference to educate the dealers about the products of the company:
Vide Circular No. 12/2022, it was clarified that the expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for the purposes of Section 194R of the Act in case where dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects:
(i) new product being launched
(ii) discussion as to how the product is better than others
(iii) obtaining orders from dealers/customers
(iv) teaching sales techniques to dealers/customers
(v) addressing queries of the dealers/customers
(vi) reconciliation of accounts with dealers/customers
However, in context of the same and keeping in view the representations received, the followings questions are answered by the department:
(i) is there a requirement that all dealers must be invited in the conference?
It is not necessary that all dealers are required to be invited in a dealer/business conference for the expenses to be not considered as benefit/perquisite for the purposes of tax deduction under section 194R of the Act.
(ii) what if dealers arrive one day before and leave one day after?
Expenditure on participants of dealer/business conference for days which are on account of over stay prior to the dates of conference or beyond the dates of such conference would be considered as benefit/perquisite for the purposes of section 194R of the Act. However, a day immediately prior to actual start date of conference and a day immediately following the actual end date of conference would not be considered as over stay.
(iii) how to identify benefit against individual dealers in a group activity?
There may be expenses during such dealer/business conference which need to be classified as benefit/perquisite and tax is required to be deducted under section 194R of the Act. However, there may be practical difficulties in identifying such benefit/perquisite to actual recipient due to the fact that it is a group activity and reasonable allocation is not possible.
In order to remove practical difficulties, it is clarified that if benefit/perquisite is provided in a group activity in a manner that it is difficult to match such benefit/perquisite to each participant using a reasonable allocation key, the benefit/perquisite provider may at his option not claim the expense, representing such benefit/perquisite, as deductible expenditure for calculating his total income. If he decides to opt so, he will not be required to deduct tax under section 194R on such benefit/perquisite and therefore he will not be treated as assessee in default under section 201 of the Act. Thus, in such a case he must add back the expenditure, representing such benefit/perquisite, to calculate his total income if such expenditure is debited in the account.
Claiming depreciation:
Company “A” gifts a car to its dealer “B” and deducted tax on this benefit under section 194R of the Act. Dealer “B” uses this car in his business. Will he get deduction for depreciation in calculating his income under the head “profits and gains of business or profession”?
Once Company “A” has deducted tax on gifting of car in accordance with section 194R of the Act (or released the car after dealer “B” showed him payment of tax on such benefit) and dealer “B” has included this benefit as income in his ITR, it would be deemed that the “actual cost” of the car for the purposes of section 32 of the Act shall be the amount of benefit included by dealer “B” as income in his income-tax return. Hence, dealer “B” can get depreciation on fulfilment of other conditions for claiming depreciation.
Applicability of Section 194R on Embassy/High Commissions:
The provisions of section 194R are not applicable on benefit/perquisite provided by an organization in scope of The United Nations (Privileges and Immunity Act) 1947, an international organization whose income is exempt
under specific Act of Parliament (such as the Asian Development Bank Act 1966), an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign state.
Whether issuance of bonus share/right share is a benefit or perquisite:
It is clarified that the tax under section 194R of the Act is not required to be deducted on issuance of bonus or right shares by a company in which the public are substantially interested as defined in clause (18) of section 2 of the Act, where bonus shares are issued to all shareholders by such a company or right shares are offered to all shareholders by such a company.
Disclaimer: The author is based in Jabalpur and is a Practicing Company Secretary dealing in Corporate, Legal & Taxation services. The information contained in this write up, as provided by the author, is to provide a general guidance to the intended user. The information should not be used as a substitute for specific consultations. Author recommends that professional advice is sought before taking any action on specific issues.
The author can also be reached at cstanveersaluja@gmail.com.
Author Bio
Very nicely explained the intricacies of the new provision & its latest guidelines.