Section 194R: TDS on Benefit or Perquisite of Business or Profession w.e.f 1st July 2022

Clause 58 of Finance Bill, 2022 deals with section 194R which expressly states this change will take effect from 1^st July 2022, though the section has been inserted from 1^st April 2022.

Section 28(iv) of the Income Tax Act, 1961 provides that 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.

Thus, through this, it is very well cleared that such benefits, perquisites and incomes were always taxable whether received in cash or kind but nobody was paying taxes. For Example - Free Medicine Samples Received by Doctors, Free IPL Tickets, Foreign Flight Ticket received in the course of business or profession are income and should be disclosed in the income tax return.

The words of Finance Minister while presenting Financial Budget 2022 '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 20,000 during the financial year.'

Therefore, to keep a check on tax revenue leakage, Government of India has brought in the Provision of TDS (Tax deducted at Source) on such Income.

Section - 194R states that

“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.”

Analysis of Section - 194R

1. The TDS is applicable on Any Resident who is providing any benefit/perquisite to another Resident and 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.

2. In context of section 28(iv), it is held that words "benefit" or "perquisite" are to be read together. Normally, the term "perquisite" denotes

• meeting out of an obligation of one person by another person either directly or indirectly or
• provision of some facility or amenity by one person to another person and from the very beginning,

the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. In this view of the matter, the word "benefit" has also to be interpreted in the same manner i.e., at the time of execution of the business transaction, the one party should give to the other party some irretrievable benefit or advantage. The benefit or perquisite referred to in this new section 194R is not the perquisite u/s 17(2), under the head salary income, paid or payable by the employer to employees, as for that perquisite u/s 17(2), another TDS section 192 is already there. The benefits or perquisites proposed to be covered by this new section 194R are those perks, benefits, amenities, or facilities, probably in kind, or in a combination of cash and kind, which a resident person enjoys, pursuant to, or in exercise of his business or profession, in lieu of the regular consideration payable to him, in monetary terms, in exercise of such business or profession.

Note: Also, such gifts, perks or benefits provided on some special occasions like festivals (Example - Diwali sweets), marriage occasions, etc. may not liable for tax deduction at source, as section 194R contemplates to cover only those benefits or perquisites, which arise out of business or profession.

3. The Benefit/Perquisite has to be in kind and arising from Business & Profession (BP), Pure money payment transactions will not be covered under Section 194R.

• Expression used “whether convertible into money or not” would mean that benefit, which is provided will be liable for TDS, irrespective of whether the benefit is capable of conversion into money form or not. First provision to section 194R also provides for cases where benefit is wholly in kind, benefit is partly in kind and partly in cash and in no case talks about benefit wholly in money. Honorable Supreme Court was of the view that for section 28(iv) of the Act to be applicable, income must arise from business or profession and the benefit, which is received, has to be in some other form rather than in the shape of money. [THE COMMISSIONER VERSUS MAHINDRA AND MAHINDRA LTD.]

4. TDS should be deducted at 10% on the Value or Aggregate of Value of such Benefit or Perquisite.

5. TDS should be deducted before providing such benefit or perquisite and No TDS in case of benefit/perks per person is not more than 20,000 in a Financial Year and for calculating Aggregate limit of Rs. 20,000 financial year is to be considered as a whole and not period after 01/07/2022.

6. No TDS is to be deducted when deductor is an Individual/HUF in business/professional with turnover/receipts in business/professional below Rs.1 Crore / Rs.50 Lakhs.

FREQUENTLY ASKED QUESTIONS

1. Whether Credit Notes for Post Sales Discounts will attract TDS under this Section?

Sales discount or rebates allowed to wholesale dealers or customers from the listed retail price or incentives given to distributors for meeting sales targets (including free goods given as incentive to distributors for achieving certain sales and cash incentives adjustable against future supplies) or bonus points given to credit card customers or similar benefits and rewards may be clarified as not constituting benefit or perquisite since they are ordinary selling expenditure and/or represent discount to the selling price. Thus, TDS under section 194R will not be Applicable in this case.

Similarly, Fringe Benefits Tax (FBT) was introduced from 2005 to tax fringe benefits enjoyed by employees through a surrogate measure of specified percentage of expenditure incurred by the employer under different accounting heads. However, it was withdrawn in 2009 recognizing that FBT caused significant compliance burden for the industry. Now, to compensate all these type of expenditures Taxes on the same have been levied under Section 194R.

CBDT in its Circular No. 8/2005 dated 29 Aug 2005 in context of erstwhile Fringe Benefits Tax had clarified that the following benefits constitutes ordinary selling expenses and/or reduction from sales price and hence not liable to FBT: -

• Sales discount or rebates allowed to wholesale dealers or customers from the listed retail price
• Incentives given to distributors for meeting sales targets (including free goods given as incentive to distributors for achieving certain sales and cash incentives adjustable against future supplies)
• Bonus points given to credit card customers

2. Whether Samples Distribution will be classified as Benefit/Perquisite? OR Whether Goods or Assets Sold at a Discounted Price be Covered Under This Section?

Under the provisions of section 28(iv), it is stated that real income is taxable and not hypothetical income which can be termed as accrued on the purchase of an asset or good at a lower price than the earlier purchase price. Considering the same, the provisions of TDS must be applicable only in case there is an actual benefit or perquisite.

But in the Case of The State Vs Eskayef Ltd. Free medical samples distributed to doctors as a sales promotion measure. In Fringe Benefits Tax regime, it was clarified that free samples of medical and other products distributed to doctors, trade or consumers was liable to Fringe Benefit Tax. Similarly, it was clarified that freebies like tattoos, cricket cards or similar products, to trade or consumers was liable to Fringe Benefit Taxes. The free samples are customary business practice to increase the awareness of the company's products. There is no element of personal benefit for the recipient like doctor who dispenses them to his patients. Similarly, the cost of freebies like tattoos, cricket cards or similar products is embedded in the price of the main product. They are a kind to special discount for making a product popular.

3. Whether Non-Cash Benefits like extra quantity of goods, Overseas Trips, etc. Under any schemes will attract TDS u/s 194R?

Different Cases are as Follows:

• Travelling, touring, accommodation provided for holiday availed by employee or any other person linked with the business, it is clarified that if official tour is extended as vacation, expenditure incurred on vacation will be treated as perquisite. If family member accompanies employee on official tour, expenditure on family member is treated as perquisite. Thus, expenditure incurred on official tour for employee is not treated as perquisite.
• Credit card expenses incurred wholly and exclusively for official duties is not treated as perquisite.
• Club payments incurred wholly and exclusively for official duties or health club, sports and similar facilities provided uniformly to all employees by the employer is not considered as perquisite.
• Use of employer's assets like laptops and computers is not considered as perquisite
• Expenses on telephone expenses including mobile phone is not considered as perquisite.
• In case of provision of asset or interest-free/concessional loan, it may be clarified that it will be regarded as business perquisite only if the recipient does not use the asset or the loan for business purposes. Alternatively, with a view to avoid double taxation, it may be clarified the amount taxed as perquisite can be claimed as deduction by way of depreciation allowance for asset or revenue deduction for others.

4. Whether TDS to be deducted on an unconditional benefit not arise out of Business Relationship?

TDS is to be deducted in such case only if unconditional benefit is arising out of business relationship. If it doesn't arise out of Business Relationship then TDS will not be charged. As this is the main requisite of the section that perquisite or benefits must be arise out of Business Relationships.

CASE LAWS