The Finance Act, 2022 has inserted w.e.f. 1-7-2022 a new TDS section 194R for deduction of tax @ 10%, on any benefit or perquisite, arising from business or profession, of a resident.
CBDT in its Circular no. 12 of 2022 dated 16 June 2022 has come out with the guidelines in the form of Q&As (Q1 to Q10) and has provided its directions for implementation of TDS provisions u/s 194R.
As a prudent businessman it will always be pertinent to follow the law in its “letter and spirit”, especially when it comes to the TDS provisions.
However Circulars intended to remove difficulties should not open the Pandora’s Box and create more difficulties, inviting unwarranted litigation. A few observations which need attention of the readers are placed below:
Intend of introduction of section 194R
Hon’ble Finance Minister in her Budget speech stated that:
Quote:
It has been noticed that as a business promotion strategy, there is a tendency on businesses to pass on benefits to their agents. Such benefits are taxable in the hands of the agents. In order to track such transactions, I propose to provide for tax deduction by the person giving benefits, if the aggregate value of such benefits exceeds Rs.20,000 during the financial year.
Unquote.
Further, the Memorandum explaining the Finance Bill 2022 expressly states that:
Quote:
As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income.
Accordingly, in order to widen and deepen the tax base, it is proposed to insert a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising 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.
Unquote.
Thus the genesis of section 194R lies in non-offering of income by the assessee under section 28(iv).
It is therefore pertinent to first understand the taxability of income under section 28(iv) which reads as:
Quote:
Profits and gains of business or profession.
28. The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession”,—
…
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;
….
Unquote.
Thus to tax any income as business income u/s 28(iv):
1. there has to be any benefit or perquisite arising;
2. the benefit or perquisite may be convertible into money or not; and
3. the benefit or perquisite is arising from business or the exercise of a profession
And ideally therefore, the TDS provisions u/s 194R will also depend on the above stated considerations only.
Although intention of section 194R is to unearth the benefits or perquisites in the hands of the resident assessee and to tax them as income under section 28(iv), the use of the word “income” has been consciously avoided (unlike section 195) in order to keep the TDS provisions simple and thus aptly clarified in Q1 that the deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Act.
The Circular however tries to cover cases other than section 28(iv) which for illustrative purpose has quoted “section 41(1) etc.”
Sub-section (2) of section 194R provides powers to CBDT (with prior approval of the Central Govt.) to issue guidelines for the purpose of removing the difficulty in giving effect to this section and not expanding the scope of this section.
Thus in my humble view, reference to “section 41(1) etc.” in the said Circular is beyond the intent of section 194R.
In response to the Q2, CBDT has expressed that Tax under section 194R of the Act is required to be deducted whether the benefit or perquisite is in cash or in kind. For this, attention to the first proviso to sub-section (1) of section 194R is drawn.
Can a proviso to a section expand the intent of the section?
In sub-section (1) to Section 194R the words used are, whether convertible into money or not, and the same words are being used in section 28(iv). On the plain reading if the benefits or perquisites were intended to be received in cash or money form, the question of whether convertible into money or not, does not arise and thus the words used “whether convertible into money or not” would become redundant, where the benefit or perquisite is received in cash or in money form.
In the interpretation of statutes, the courts always presume that the legislature inserted every part thereof for a purpose and the legislative intention is that every part of the statute should have effect.
The Hon’ble Supreme Court in the case of Commissioner vs. Mahindra and Mahindra Ltd., [2018] 404 ITR 1 (SC) held that… On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money.
Thus in the instant case the Hon’ble Apex Court has held that section 28(iv) does not apply to benefits or perquisites received in the form of money or cash.
Although main part of the enactment cannot be so interpreted as to render its proviso unnecessary or ineffective, a proviso does not travel beyond the provision to which it is appended.
In Dwarka Prasad vs Dwarka Das Saraf 1975 AIR 1758, 1976 SCR (1) 277 the Hon’ble Supreme Court has held that… A proviso must be limited to the subject matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. ‘Words are dependent on the principal enacting words, to which they are tacked as a proviso. To expand the enacting clause, inflated by the proviso, sins against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction.
Now when the sub-section (1) of section 194R does not envisage deduction of tax where the benefit or perquisite is received in the form of money, can the first proviso to the same expand its scope to include the benefits and perquisites partly in cash and partly in kind, needs to be examined by the competent authorities.
As regards Q3, the Board has rightly stated that as discussed in Q1 there is no need to check whether the benefit or perquisite is in the nature of income , it is aptly clarified that the same also need not be checked for capital asset as well, while withholding Tax u/s 194R.
In Q4, the Board has in order to remove the difficulties, rightly allowed sales discount (which apparently means trade discounts), cash discounts and rebates to remain out of scope of section 194R.
The Board has further given an illustration where the seller sells 10 items for Rs.12 each and gives 2 items free on the 10 items. Again to remove the difficulties such type of situations are proposed to be kept out of the ambit of TDS u/s 194R. The board has however further clarified that in case of “free samples” the above relaxation would not apply.
In an illustrative list (which is not exhaustive) the Board has stated that TDS will be applicable where medicine samples free are given to medical practitioners.
Let’s discuss this case. The containers (box or the strips) which contains free samples are always marked with “Physician’s sample—Not to be sold” (clause 30[(ix)] of sub-rule (1) of rule 96 of The Drugs and Cosmetics Rules, 1945). The medical practitioner is legally barred from selling the said samples. Thus the medical practitioner does not make any benefit or perquisite on receiving and distribution of “free medical samples”. On the other hand where 2 items are given free on purchase of 10 items, the 2 items are saleable and that the business can make the earnings out of it. It is therefore humbly submitted that the Board may re-consider the non-applicability of TDS provisions on “free samples” especially in case of medical free samples.
In Q7 the Board has dealt with TDS provisions on reimbursement of out of pocket expenses. The Circular has very nicely articulated the meaning of expenditure attracting the TDS provisions as: 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.
So in the Contract for appointment of a consultant the Company states that it would be their responsibility to take the Consultant to the desired place of work at their cost and expenses, and shall either arrange for tickets or shall reimburse the same, the Consultant will not be “liable” to incur any expenses towards the traveling costs and hence TDS u/s 194R will not get attracted.
As a trade practice, whenever a Contract says “Consultants fees + out of pocket expenses at actuals”, the service receiver actually undertakes the liability of all out of pocket expenses actually incurred by the service provider in rendering the services, whether the invoice for the same is in the name of service provider or service receiver. However third-party invoice to claim the reimbursement, is a must. However, when a consultant claims reimbursement of expenses towards ink and paper used in the process of rendering his opinion, the same is his liability and obligation which is met by the service receiver.
Let’s try to draw an analogy between a consultant and an employee. If employee visits the Tax Department for assessments and appeals (which now has become faceless) and takes a cab, does the cab charges added to the employee salary as benefit or perquisite u/s 17(2)? Similarly, when the consultant also visits the same Tax Department for the same purpose from his office, what benefit or perquisite he gets by traveling in a cab? The consultant in this case gets reimbursement not because the Company wants to provide him with some benefit or perquisite but the Company reimburses on account of its contractual obligation towards the consultant, for the same. So if the contract provides for reimbursement, there is no question that the liability of service provider is taken over by the service receiver, irrespective of the fact whether the third-party invoice is in the name of service provider or service receiver.
Further the case of reimbursement does not attract any tax in the hands of recipient u/s 28(iv). Firstly because it is a cash receipt and secondly it is P&L neutral. Even if the amount of reimbursement is credited in the hands of the service provider, the same is also allowed as his/her business expenditure u/s 37(1). The dictionary meaning of the word “reimbursement” is to make restoration or payment of an equivalent amount.
There is practically no case where the service receiver undertakes to reimburse the service provider, if not agreed for. Hence the illustration provided in the Circular appears to be inappropriate. Further doing the hair-spitting as to invoice is in the name of service provider or service receiver, for a revenue neutral case is unwarranted.
CBDT may like to provide more clarifications in times to come, else, it will be left to the Judiciary to interpret as to whether the intention of the Legislature is expressed appropriately in the given section and as to whether it’s intended implementation being done properly by the Executive.
Author Bio
Very good article and informative