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Finance Act 2022 inserted the section 194R. This section mandates a person (who provides any benefit or perquisite to resident) to deduct tax at source @10% of the value /aggregate value of such benefit. These benefits must arise in the course carrying any Business or Profession. However no deduction is to be made if value of benefit/perquisite is less than 20,000/-. Individuals and HUFs also not required to deduct tax if sale/receipts not exceed 1 Crores in case of business and 50 Lacs in case of profession.

Under sub section 2 of 194 R CBDT has been authorized to issue guideline for removal of difficulty with approval of Central Government. Pursuing the same CBDT issued guideline vide F.No. 370142/27/2022 – TPL dated 16.06.2022.

Whether only incomes taxable U/s 28 (iv) are covered under 194R? No, There is no such pre condition. There may be case where amount can be taxable under other sections like 41(1). There is no requirement for the deductor to verify whether the amount is taxable in the hands of the recipient or section under which it is taxable. Chargeability of amount is must in the case of payments to non residents (TDS on which has to be made under Sec 195).

Whether Benefits/Perquisites must necessarily be in kind? No, it is not necessary that benefit or perquisite must be in Kind. It can be in cash or partly in cash & partly in kind. The intent of legislature is more so confirmed by the first proviso, which reads as follows :

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:

Whether Section 194 R is applicable on benefits / perquisites in the form of Capital Assets?  It is clarified by the CBDT guideline that courts have held many benefits/Perquisites to be taxable even though their capital nature was arguable.

TDS under Section 194R CBDT Guideline

  • Compensation received in consent decree for breach of agreement of purchase of plot is taxable as business income U/s 28 (iv). [Ramesh Babulal Shah Vs. CIT (2015) 53 277 (Bom)]
  • The amount of principal loan waived by bank under One Time Settlement Scheme (OTS) would constitute income U/s 28(iv). [CIT Vs. Ramaniyam Homes (p) Ltd. (2016) 68 289 (Mad)]
  • Value of rent free accommodation, furniture & fixtures given to director was held as taxable U/s 28 (iv) CIT Vs. Subrata Roy (2016) 385 ITR 547 (All)
  • Car given as gift to assessee by his disciple who had been benefitted by preaching was held taxable as value of benefit arising in the course of vocation [ CIT (Addl.) Vs. Ram Kripal Tripathi (1980) 125 ITR 408 (All)
  • Share Allotment to director free of cost in pursuance of agreement. Is taxable. [ D.M.Neterwala Vs. CIT (1986) 122 ITR 880 (Bom)]
  • Value of gift of land was held as a receipt by assessee in carrying on his vocation and was held as taxable. Amarendra Nath Chakraborty Vs. CIT (1971) 79 ITR 342 (Cal).

In any case as stated earlier, the deductor is not required to check if the benefit or perquisite is taxable in the hands of recipient.

Whether sales discounts, cash discounts and rebates are benefit or perquisite? It is clarified that no tax is required to be deducted under 194R on sales discount, cash discount and rebates allowed to customer. Further, no tax is required to be deducted under section 194R if sale promotion scheme provide free units in addition to purchased quantity. However following are some of the examples of benefits /perquisites on which tax is required to be deducted U/s 194R :

  • Incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computer, Gold Coin, mobile phone etc.
  • Sponsored trip for the recipient and his/her relative on achieving targets
  • Free tickets provided for an event
  • Free medical samples given to medical practitioners

Benefits/perquisites may be used by owner/director/employee of the recipient entity or their relatives who in their individual capacity may not be carrying business or exercising profession. However, the tax is required to be deducted by the person in the name of recipient entity since the usage by owner /director/employee/relative is by virtue of their relation with the recipient entity and in substance the benefit/perquisite has been provided to the recipient entity.

Example : If a doctor employed by the hospital receives the free sample then TDS has to be deducted in the hand of hospital. Hospital will deduct TDS u/s 192 treating this sample perquisite U/s17. Hospital will get deduction of that perquisite as expenditure and will get credit of TDS in assessment.

In case of consultant doctors either above mentioned process may be followed or Tax can be directly deducted from consultant.

How benefit/perquisites are to be valued? Benefits/Perquisites are to be valued at fair market value except :

  • When benefit/perquisite has been purchased by the provider then it’s purchase price has to be considered.
  • If benefits /perquisites are manufactured then price of that benefit/perquisite charged from the normal buyer shall be considered

Free products provided to the social media influencer: If products are returned then these are not taxable, if products are not returnable then tax has to be deducted.

Reimbursement of out of pocket expenses : Any expenditure which is liability of a person carrying out business or profession, if met by the other person is in fact benefit or perquisite provided by the second person to the first person in the course of business/profession.

Example : If the expenses (incurred exclusively for ‘X’ business) paid by the ‘X’ business and invoice of the same is raised in the name of ‘X’ business then it will not be considered benefit/perquisite for the purpose of Sec 194R.

Dealer Conferences : Following Dealer/Business conferences would not be considered as benefit/perquisite (Except conference in the nature of incentive/benefits to selected dealers on achieving targets)  :

  • New product launch
  • Discussion as to how product is better
  • Obtain orders from dealers/customers
  • Teaching sales techniques to dealers/customers
  • Addressing queries of dealers/customers
  • Reconciliation of accounts with dealers/customers

Following case are to be considered benefit and perquisite for the purpose of Sec 194R :

  • Expenses attributable to leisure trip or leisure component, even if incidental to conference
  • Expenses for family members
  • Expenses for prior stay or over stay (Beyond the dates of conference)

If perquisite is in kind or partly in kind then person providing benefit/perquisite has to ensure that tax required to be deducted has been paid: The recipient may pay tax in the form of advance tax. The tax deductor may rely on a declaration and copy of advance tax challan provided by recipient. This would be required to be reported in TDS return along with challan number. This year Form 26 Q has included provision for reporting such transactions.

Alternatively benefit/perquisite provider may deduct and pay tax as TDS.

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April 2024