Section 194R: Tax Deducted at Source on benefits or Perquisites

Tax Deducted at Source on benefits or Perquisites (Section 194 R), applicable from 1^st July 2022

Preamble

Till the introduction of this Section, the Benefits or Perquisites given by the Companies to the Various persons like, Sales Team, Doctors in case of Pharma Companies, Agents in case of many FMCG or B2B Companies, Leisure Trip to the certain class of Agents, Pre or post Stay before or after the conference meetings etc. Companies were claiming as an expense, but it was going untaxed in the hands of the receiver of the benefits. To curb this, Honorable FM in her speech informed that such transactions would have 10% TDS unless it is below Rs. 20000/- in a year. This is applicable from 1^st July 2022.

Section 194R in Detail

The new section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @ 10% of the value or aggregate of value of such benefit or perquisite, before providing such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident.

This deduction is not required to be made, if the value or aggregate of value of the benefit or perquisite provided or like ly to be provided to the resident during the financial year does not exceed twenty thousand rupees.

The responsibility of tax deduction also does not apply to a person, being an Individual/Hindu undivided family (HUF) deductor, whose total sales / gross receipts / gross turnover from business does not exceed one crore rupees, or from profession does not exceed fifty lakh rupees, during the financial year immediately preceding the financial year in which such benefit or perquisite is provided by him.

Sub-section (2) of section 194R of the Act authorizes the Board to issue guidelines, for removal of difficulties, with the approval of the Central Government. These guidelines are required to be laid before each House of Parliament and are binding on the income-tax authorities and the person providing the benefit or perquisite.

Now let us go thru the guidelines issued by way of Circular No. 12 of 2022 dated 16^th June 2022. There are 10 Questions they have given as a most likely questions and given the clarification on the same. These are as listed and explained below:

1. Whether Payer need to check whether the Benefits/Perquisites given is falling under section 28 (iv)?

No. The deductor is not required to check whether the amount paid as perquisites will be taxable in the hands of Receive under section 28 (iv). Section 194R of the Act casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @10%. There is no further requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.

2. Whether it should only in Kind?

The intent of legislature that there could also be situation where benefit or perquisite is in cash or the benefit or perquisite is in kind or partly in cash and partly in kind. Thus, section 194R of the Act clearly brings in its scope the situation where the benefit or perquisite is in cash or in kind or partly in cash or partly in kind.

3. Whether TDS is deductible even in case benefit is given in case benefit/ perquisites is given by way of Capital Assets?

Yes. The deductor is required to deduct tax under section 194R of the Act in all cases where benefit or perquisite (of whatever nature) is provided. So even in case of Capital Assets, TDS will be attracted.

4. Whether sales discount, cash discount, and rebates are also covered under section 194R?

It is very cumbersome to calculate TDS Sales Discount, Cash discount, One Item free on Two purchase etc. So although it is a benefit, this is kept aside the ambit of section 194R.

5. What is the Valuation Rule in case of benefit/perquisites?

• If the benefit/Perquisites provide has purchased and then issued, Purchase cost.
• If the benefit/Perquisites provide has manufactured and then issued, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

6. What about Products given for promotion of a product by a manufacturer?

In case the product is used for promotion purpose and kept by the person, it will be treated as perquisites and tax is required to be deducted accordingly under section 194R of the Act.. If the Product is returned to the Benefit provider, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act.

7. Whether Reimbursement of expenses incurred by Service provider in course of rendering Service is benefit/perquisites?

There are two cases in this.

1. If the Invoice is in the name of Company (Say "X") and paid by the receiver of the benefit ( Say "Consultant") and then taken as reimbursement, it will not be treated as perquisites.
2. If the Invoice is not in the name of "X" and it is paid by consultant or reimbursed from "X", it will be taken as a perquisites for which deduction is required to be made under section 194R of the Act.

8. Whether dealer conference is benefit/perquisites?

If the same is given to the masses, no benefit/ Perquisites. If it is to the class of People, then it will be taken as perquisites.

The expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for the purposes of section 194R of the Act in a case where dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects:

• 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

However, such conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets. Further, in the following cases the expenditure would be considered as benefit or perquisite for the purposes of section 194R of the Act:-

• 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.

9. What about TDS collection/Payment in case the benefit is given in Kind and Cash and cash is not enough to cover the TDS?

It is the responsibility given to the receiver of the benefit to arrange fund in case it is in kind to provide for payment of TDS in advance and inform the payer of benefits/perquisites about the same.

10. How the limit of twenty thousand is to be computed for the FY 2022-2023?

• Threshold is Rs. 20000/- for the year. So it is to be calculated from 01/04/2022 to 31/03/2023.
• The benefit or perquisites has been provided on or before 30^th June 2022, would not be subjected to tax deduction under section 194R of the Act.
• Provision of Section 194R shall apply with effect from 01/07/2022.

Conclusion

It is advisable to maintain proper data of such transactions where the benefits/perquisites are passed on to the certain people like agents, Doctors, Sales Reps etc. so that TDS can be deducted and the expenses can be claimed. Although it is difficult but advisable to open various accounts in the accounting system in to fetch the attention of the deductor of TDS to separate it out such transactions from normal transactions to avoid the issues of lapse in payment of TDS under section 194R.

Disclaimer: Although due care is taken, it is prepared for general knowledge purpose and not for specific use. The readers, are advised to take proper note of the same and advised to take specific advice before acting on the same. One should not act upon the information contained in this article without obtaining expert's and professional advise. Further no representation or warranty ( express or implied ) is given as to the accuracy or completeness of the information contained in this article