FAQ’s on section 194R

The Finance Act, 2022 had inserted a new section 194R to the Income-tax Act, 1961 providing for deduction of tax at source (TDS) on benefit or perquisite in respect of business or profession. TDS under section 194R is applicable with effect from 1st July 2022. The text of Section 194R has been produced hereunder:

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

• 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:
  
  Provided further that the provisions of this section shall not apply in case of a resident where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to such resident during the financial year does not exceed twenty thousand rupees:
  
  Provided also that the provisions of this section shall not apply to a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.
• If any difficulty arises in giving effect to the provisions of this section, the Board may, with the previous approval of the Central Government, issue guidelines for the purpose of removing the difficulty.
• Every guideline issued by the Board under sub-section (2) shall, as soon as may be after it is issued, be laid before each House of Parliament, and shall be binding on the income-tax authorities and on the person providing any such benefit or perquisite.

Explanation – For the purposes of this section, the expression “person responsible for providing” means the person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof.]

Brief Background

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, the Finance Act 2022 inserted 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.

Provisions of Section 194R in brief:

Particulars	TCS u/s 194R
Deductor	Person providing such benefit or perquisite, or in case of a company, the company itself including the principal officer thereof
Deductee	Any Resident
Rate	10% of the value of such benefit or perquisite
Threshold Limit	Total Benefit Value > ₹ 20,000 per FY
Timing of Deduction	Before providing such benefit
Exceptions	Not applicable upon a person being an individual or a HUF, whose total turnover does not exceed Rs. 1 crore in case of business or Rs. 50 Lakh in case of profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, is provided by such person.

To remove difficulties in implementing the provisions of section 194R, the Central Board of Direct Taxes (CBDT) has issued Circular No.12/2022 on 16th June 2022 containing the guidelines in the form of questions/ answers. The Guidelines clear air on numerous vexed issues like taxability in recipient’s hands, nature of asset given, TDS compliance where cash component falls short, valuation, free medicines samples, sales discount and rebates, other incentives, out-of-pocket expenses, among others.

We have critically analyzed the provisions in depth and have prepared detailed FAQs covering possible practical scenarios and seek to address all the ambiguities that have creeped in the minds of the taxpayers.

Practical Frequently Asked Questions [FAQs] on applicability of Section 194R:

For deducting TDS, whether test of taxability u/s 28(iv) is required to be performed?

Applicability of section 194R is not directly linked to section 28(iv). Therefore, it is not necessary for the payer/ deductor to check the taxability of the sum in the hands of the payee u/s 28(iv). In this regard, CBDT has also clarified that the sum could also be taxable under any other sections like Section 41(1) without affecting the applicability of section 194R. CBDT has distinguished the principles governing TDS u/s 194R from the underlying principles operating for TDS u/s 195 where the payer is required to determine whether the sum being paid to the non-resident is indeed his income and hence taxable.

Thus, the payer has to deduct TDS u/s 194R if the benefits being paid fulfills the conditions specified under this section only, without considering its taxability in the hands of the recipient.

How to deduct tax where benefit is only in kind or benefit in cash is not sufficient to discharge TDS liability?

Proviso to sub-section (1) of Section 194R states 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.

In point no.2 above, how the ‘provider of benefit or perquisite’ shall ensure that appropriate tax has been paid by the recipient in respect of the benefit or perquisite?

In such a case, the 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 or perquisite has been deposited. However, it is the responsibility of the deductor to report this in the TDS return along with challan number.

CBDT has also provided an alternative in which the benefit provider may deduct the tax u/s 194R and pay to the Government out of his own pocket. However, such tax paid out of own pocket would also be considered as benefit or perquisite and calculation of tax payable shall be done after grossing up of taxable value.

Whether benefits or perquisites provided before 01-07-2022 shall also be considered for calculation of threshold limit of Rs. 20,000/- per financial year?

For deduction of tax, Section 194R provides for threshold limit of Rs. 20,000/- for each financial year. As such, for FY 2022-23, the benefit or perquisites provided from 01-04-2022 to 30-06-2022 shall also be considered for calculating the value of Rs. 20,000/-.

Here are some illustrations for obtaining better understanding of the threshold limits:

Illustrations 1: Benefits provided to a resident up to 30-06-2022 is Rs. 5,000:

1	Benefits provided up to 30-06-2022	Rs. 5,000
2	Benefits provided on or after 01-07-2022 up to 31-03-2023	Rs. 18,000

In this case, TDS u/s 194R shall be deducted on an amount of Rs. 18,000 i.e. the benefits provided up to 30-06-2022 shall also be considered for determining the threshold limit for deduction of Rs. 20,000. However, TDS shall not be applicable on benefits provided up to 30-06-2022 as section 194R becomes effective only from 01-07-2022.

Illustrations 2: Benefits provided to a resident is more than ₹ 20,000 up to 30-06-2022:

1	Benefits provided up to 30-06-2022	Rs. 25,000
2	Benefits provided on or after 01-07-2022 up to 31-03-2023	Rs. 60,000

In this case, TDS u/s 194R shall be deducted on an amount of Rs. 60,000. Again, TDS on an amount of Rs. 25,000 representing benefits provided up to 30-06-2022 shall not be deducted as Section 194R is applicable only from 01-07-2022.

Illustrations 3: Benefits provided to a resident is more than ₹ 20,000 up to 30-06-2022 but no benefit provided on or after 01-07-2022:

1	Benefits provided up to 30-06-2022	Rs. 60,000
2	Benefits provided on or after 01-07-2022 up to 31-03-2023	Nil

In this case, no TDS u/s 194R shall be deducted as no benefit has been provided on or after section 194R becomes effective. It does not matter if the threshold of Rs. 20,000 has been breached because of benefits provided up to 30-06-2022.

on an amount of Rs. 60,000. Again, TDS on an amount of Rs. 25,000 representing benefits provided up to 30-06-2022 shall not be deducted as Section 194R is applicable only from 01-07-2022.

Whether TDS is required to be deducted where benefit is in the form of a capital asset?

Section 194R does not discriminate on the basis of nature of benefit or perquisite being provided. Therefore, the nature of asset given as benefit or perquisite is not relevant and even capital assets given as benefit or perquisite are covered within the scope of Section 194R. In the guidelines provided by CBDT, it has categorically used the phrase ‘of whatever nature’ to define the nature of benefit or perquisite for fastening TDS liability on the payer.

Whether TDS is required to be deducted on Sales Discount, Cash Discount & Rebates given to customers?

Sales discounts, cash discount or rebates (collectively called as discount) allowed to customers from the listed retail sale price represents reduction in purchase price for the customers. Although, the discounts given may fall within the definition of benefit or perquisite given to the customers, the CBDT vide its guidelines has clarified that no tax is required to be deducted u/s 194R on discount allowed to customers. This relaxation has also been extended to ‘Buy 1 Get 1 Free’ schemes.

Having said this, the CBDT has also clarified that such a relaxation shall not be construed to be applicable on all forms of discounts or benefits given to customers. For illustration purposes, CBDT has listed down the following cases where TDS u/s 194R shall be deducted:

• Where free samples are given by sellers.
• 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.

Where benefits are provided to employees of the recipient entity, in whose name TDS should be deducted?

The benefits or perquisites may be used by owner / director/ employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or exercising a profession. In such a scenario, 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 relationship with the recipient entity and in substance the benefit/perquisite has been provided by the person to the recipient entity.

For example, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. Therefore, the TDS u/s 194R of the Act is required to be deducted by the company in the hands of hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital.

Where TDS on benefits provided to employees is deducted in the hands of employer, what shall be treatment of the same to be done by the employer?

In such a scenario, the employer shall treat this benefit/perquisite as the perquisite given to its employees (if the person who used is an employee) u/s 17 of the Act and deduct tax u/s 192 of the Act. In such a case, it’d be first taxable in the hands of the hospital and then allowed as deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the employer. The employer can get credit of tax deducted u/s 194R of the Act by furnishing its tax return.

In a situation described in Point No. 6, whether threshold for deduction of TDS shall be considered in respect of benefits provided to each employee or for the employer as a whole?

Where benefits/ perquisites are provided to employees due to them being in a particular employment and thus, TDS being deducted in the hands of the employer, the threshold of Rs. 20,000 provided in the section shall be considered in respect of a particular employer and not for each employee to whom benefits is being provided.

Whether treatment shall be same where benefit is provided to a particular person by virtue of his association with a particular organization as a consultant but not as an employee?

The tax is required to be deducted u/s 194R of the Act if the benefit or perquisite is to a person who is working as a consultant of the employer. In this case also, the provider of benefit or perquisite may deduct tax u/s 194R of the Act treating the organization as a recipient and then such deemed recipient organization may again deduct tax u/s 194R of the Act for providing the same benefit or perquisite to the concerned person. However, the provider of benefit at its option may also directly deduct the TDS of that consultant.

How the valuation of benefit or perquisite required to carried out?

The valuation of the benefit or perquisite would be based on fair market value of the benefit or perquisite except in following cases:

• The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case the purchase price shall be the value for such benefit/perquisite.
• The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

Whether GST is to be included in the value of benefit or perquisite for deduction of TDS?

GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act. Thus, the TDS need to be deducted on value exclusive of GST.

Whether TDS is required to be deducted on the value of products given for promotion to social media influencers?

Where products forwarded to such social media influencers are returned the manufacturing companies upon promoting them, then no TDS is required to be deducted. However, where such products are retained by them, then it will be in the nature of benefit/perquisite and the manufacturing company is required to deduct TDS u/s 194R.

Whether TDS is required to be deducted u/s 194R on out of pocket expenses incurred by service provider in the course of rendering services?

It is a matter of fact that any expenditure, which is the liability of a person carrying out business or profession, if met by the other person is a benefit/perquisite provided by the second person to the first person in the course of business/profession.

However, if the expenditure is incurred by the first person but the invoice for that is issued in the name of second person, thus demonstrating the fact that the liability to incur such expense was on the shoulders of the second person carrying on business or profession, then in such case, amount reimbursed subsequently to the first person shall not become his benefit or perquisite and no TDS u/s 194R shall be deducted.

Whether expenses incurred on arrangement of a conference or event to educate or inform dealers, shall be construed as benefit or perquisite for such dealers?

In this particular subjective matter, CBDT has clarified that such an expense shall not be construed as benefit or perquisite if such a conference has been organized for the following illustrative reasons:

• 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

Further, CBDT has clarified that such a conference must not be in the nature of incentives or benefits to select dealers or customers who have achieved particular targets.

Also, for removing any grey areas in applicability of TDS in such cases, CBDT has clarified that TDS u/s 194R would be attracted in following cases:

• 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.

Thus, it appears from CBDT’s clarification that expenditure would not fall in the category of benefit or perquisite only if is directly connected to and absolutely necessary for the business or profession of the organizer. Any undue advantage not absolutely necessary for the business or profession shall fall within the definition of benefit or perquisite and TDS u/s 194R is applicable on the same.