A Complete Analysis of Section 194R of Income Tax- [Updated]
Section 194R of the Finance Bill 2022 has proposed to add Section 194R to the Income Tax Act, 1961 . According to the memorandum with an explanation of the guidelines of the Finance Bill, the aforesaid amendment will come into force from 1 July 2022. However, the said section has been added from 1 April 2022.
The details of the applicability of the provisions and their background have been discussed in detail in the below-mentioned paragraphs.
Analysis of The Legal Provisions :
According to Clause (iv) of Section 28 of the Income Tax Act, 1961, the value of the perquisite or benefit, whether convertible into monetary terms or not, accruing from the business or by carrying on profession must be taxed as it will be considered as a business income on the part of the recipient of such benefit.
According to the proposal for Section 194R , any person who is responsible for providing to a resident any sort of perquisite or benefit, whether it may be convertible into monetary terms or not, accruing from the business or carrying on any profession, by any such resident, will, prior to providing such benefit to the such resident as the case may be, make sure that the tax deduction has been with regard to such benefit at the rate of 10% of the aggregate value of any such benefits.
Also Read; Section 194Q – Tax deduction on the purchase of goods and FAQs .
It is to be noted that, provided in such case where the benefit is wholly or partly in cash or kind as the case may be but such part cannot be considered sufficient to meet the liability of tax deduction with regard to the whole of the benefit or perquisite, the person who is responsible for providing the said benefit will, prior to providing such benefit to the such resident as the case may be, make sure that the tax has been paid with regard to such benefit or prerequisite.
Further, The provisions of this Section 194R will not be applicable in the case of the resident when the aggregate value or value of the benefit or perquisite provided or is about to be provided to a resident during a particular financial year is not more than Rs. 20,000.
Apart from that the provisions of this Section 194R are not applicable to a person who is an individual or Hindu Undivided Family (HUF), whose annual sales, annual turnover, or gross receipts are not more than Rs. 1 crore in case of income is generated through the business.
If the income is being generated from carrying on any profession then the threshold limit is Rs. 50,000 in a particular financial year immediately proceeding with the financial year in which the said benefit has been provided as the case may be.
Due to this aspect, this Section 194R of the Income Tax Act, 1961 and the expression provided as “person responsible for providing” means the person who is actually providing the benefit, or in case the provider is a company, the company can itself include the principal officer.
The Rationale of Section 194R of the Income Tax Act, 1961 :
The Hon’ble Finance Minister in the Budget 2022 introduced the aforesaid provision stating that it has been noticed for a long period of time that as part of a business promotion strategy, there has been a tendency on the businesses to transfer the benefits to its agents and such benefits obtained by the agents are taxable on the part of the agents.
In a view to keep track of such transactions, she proposed to provide tax deduction by the persons who are providing benefits, if the value or aggregate value of benefits provided exceeds Rs. 20,000 during a particular financial year.
According to the memorandum, the explanation of the Finance Bill, the below-mentioned aspects has been provided regarding Section 194R.
According to clause (iv) of section 28 of the Act, the value of the benefit or perquisite, whether it is convertible into monetary terms or not, accruing from business or carrying on from any profession has to be charged as business income on the part of the receiver of said benefit or perquisite.
In most cases, the receiver of the benefit or prerequisite does not report the benefit that it has received in its income tax return, which can lead to furnishing incorrect and false income particulars. The aforesaid amendment will come into force from 1 July 2022.
Thus, the provided provision for tax deducted at source is being added and put in place to detect the benefits or perquisites which may largely remain unaccounted for thus, it is not taxed despite being there for specific taxation provisions as a result of its nature of accountability.
Analysis of Section 194R :
Section 194R presently will bring wide compliance challenges for the businesses as well as professionals due to the involvement of different and multiple types of benefits and perquisites that are being extended to the distributors, agents, dealers, and channel partners. It is being done with an objective to earn incentives and motivate the team for business growth. The following are some of the common examples of benefits and perquisites;
✅ Gift Card and Gift Vouchers ✅ Gold Coins under Incentive Scheme ✅ Phones ✅ Vehicles ✅ Business Asset Usage Service ✅ Travel Packages
Considering the expression of the language used in respect of Section 194R and its specific association with clause (iv) of Section 28 in the memorandum, the following aspects can be deduced;
✅ That transactions through the issuance of credit notes would not be covered in the ambit of section 194R due to the following reasons:
✅ The expression used ‘whether convertible into monetary terms or not‘ which is already provided will be subject to TDS , irrespective of the fact that the benefit is able to convert the same into monetary form wholly or partly whether it may be in cash or kind.
In this regard, the Hon’ble Supreme Court is of the opinion that Section 28(iv) of the Act will be applicable, in case the income has arisen from business or profession and benefit is received must be in some other form instead of money.
The Benefit or Perquisite Obtained from Business or Exercise of A Profession are Only Included :
It is important that the benefit or perquisite is associated with the business or profession of the receiver and only then it will be included in this section, thus there must be a relationship exists between the business and receiver of the benefit provided.
Section 28(iv) aims at providing fringe benefits that can be availed apart from the consideration earned while carrying out any business or profession or doing business. Considering the same, it can be said that when the consideration is in paid format, Section 194R is applicable.
Goods or Assets Sold at a Discounted Price May Not 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.
To Comply with The Provisions of The Aforesaid Section 194R, The Taxpayer has to Ensure the Below-Mentioned Points:
✅ The tax deductor must make sure that TDS at the rate of 10% is deducted before providing any such benefit or perquisite.
✅ The tax deductor must deposit the tax deducted on or before the 7th day of the next month to the credit of the Central Government of India . It is to be noted the due date will be 30th April in the case of the month of March with the use of TAN .
✅ The deductor must File TDS Returns quarterly in Form 26Q on or before the specified due date as mentioned in the Act. ✅ The Deductor has to issue a certificate in respect of tax deducted in Form 16A at each quarter to the deductee. ✅ TDS may not be required in case the value of benefit or perquisite provided is up to Rs. 20,000 in a particular financial year.
Clarifications Required from Government :
Based on the above-mentioned analysis of the proposed provision of Section 194R and some of the common queries raised by the taxpayers, it can be understood that for the successful implementation of Section 194R, the Government of India has to clarify so many queries raised on different issues. Some of the issues are mentioned below;
✅ The terms ‘benefits’ as well as ‘perquisites’ have not been defined separately as the said words seem to be open-ended. For the purpose of Section 194R , it must have been defined separately to provide clarity on its scope and coverage.
✅ The basis for the determination of the value or aggregate value of benefit or prerequisite has not been clearly provided in case they cannot be converted into monetary value.
✅ In the case of non-monetary perquisites or benefits, the provider has not made the liability to make sure that the tax is paid in respect of benefit or prerequisite prior to releasing the said benefit or perquisites. The proposed provision is not clear in this regard as it does not provide details of how the provider will make sure of this aspect.
✅ Most of the time, the benefit or perquisites are extended on the behest of the employer to the employee; here the question is if these transactions will also be covered under the proposed Section 194R .
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Section 194R: Benefit or Perquisite in respect of Business/ Profession
The Union Budget 2022 introduced a new section for TDS. TDS under Section 194R relates to the deduction of tax on benefits or perquisites in respect of business and profession. The department mainly inserted this section to prevent the misreporting of income that individuals receive through perks or other non-monetary benefits from businesses or professions.
Applicability of Section 194R
Who shall deduct tds u/s 194r, purpose of section 194r, tds rate applicable on section 194r, non-applicability of tds u/s 194r, how to deduct tds from benefits or perquisites, tds certificate.
If any resident individual receives any gift, perks, incentive, or any other monetary or non-monetary benefit from a business or profession in cash, kind, or partially in cash and kind, and the value of such benefits or perquisites in monetary term exceeds INR 20,000 during the financial year to one beneficiary then this section applies to you.
If any business or profession is giving benefits or perquisites to any agent, channel partner, dealer, distributor, or any other person of an amount more than the specified amount during the financial year to one recipient then they are liable to deduct TDS under Section 194R.
However, it does not apply to the Individual/HUF to deduct TDS if the total sales don’t exceed INR 1 crore in the case of business and INR 50 Lakh in the case of a profession in the immediately preceding financial year.
The main purpose of introducing this section is to avoid tax evasion. Previously the businesses while giving the perks, benefits, and other non-monetary benefits to their dealers, partners, and other persons claimed it as a business expense while the person who is receiving such benefit was not showing this as their income.
For example- A cement manufacturing company gives non-monetary benefits like Motorcycle, electronic items, and leisure trips to their dealers if they achieve the specified targets.
In the above example, the company that has given benefits to its dealers was showing it as a business expense while the person who has received such benefit was not showing this as his income while filling the income tax return since it is in kind. So to avoid this misreporting of income the Income tax department has introduced this section 194R.
- This section came into effect on 1 July 2022 and the applicable TDS rate is 10%.
- Businesses or professionals should deduct TDS @10% if the monetary value of such gift or perquisites exceeds INR 20,000 during the financial year of each recipient.
- This section does not apply to the employees who are receiving any benefits from their employers i.e. (if an Employer-employee relationship exists) then it will be treated under Section 192 .
- If the recipient is a Non-resident then tax shall be deducted under Section 195 .
- If there is no business relationship then the tax will not be deducted.
The person providing such benefits or perquisites must ensure that they deduct and pay taxes for such items before releasing them.
The liability can be discharged by any of the below options:
- Payer either by grossing up the net amount or by paying the tax from his pocket.
- If the payee gives cash to the payer to meet the TDS liability and the deductor deposits the same.
- If the payee has a credit balance, the payer can deduct TDS from that and pay the net amount after deducting the TDS from the payee.
The Deductor of the tax shall issue a quarterly TDS certificate to the deductee in form 16A . The deductor can download form 16A from the Traces Account and also the deductee can see the same in their 26AS.
The deductor liable to deduct tax under Section 194R of the Income tax act shall file quarterly returns in form 26Q .
Yes, Section 194R is applicable from 01-07-2022. Furthermore, in calculating the threshold limit of INR 20,000, one should also consider the benefits received from 01-04-2022 to 30-06-2022.
One should calculate the price of benefits or perquisites based on the fair market value of such products.
No, we are reducing these discounts and rebates from the sale price, so we are not treating them as benefits or perquisites.
u/s 194 R the individual should pay tax as per the individual tax slab or it is only 10% flat rate
How will a reimbursement to employee who bought the gift using his corporate card and then sent the gift to client be treated u/s 194R. Reason I ask is while reimbursing, the company is debiting it’s P&L so it is company cost…could that be the rationale for T&E to also come under this section
I recieved two prizes in a contest , on which 90% of the amount was gifted as goods and 10% was deducted as TDS under section 149R. Now, I want to file ITR but I don’t know which ITR form should I file ? Kindly guide me.
194R mein received benifit mein ham itr mein kis coulm mein dikhayen aur Keya ye hamaare liye income hai
Commission paid to employees on sales. This is in addition to his salary on achieving targets. We have Deducted TDS under Section 194 H. Whether it should be deducted under Section 194R ??
If dealer who received some amounts and foreign tour on which TDS deducted u/s194 R and showing net profit under section 44 AD . Then this amount received to be shown as income from other sources? Because it won’t shown in GST returns.
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Last Updated on 1 month by Swapnil Agarwal
Home » Blog » Section 194R | Comprehensive Guide to TDS on Specified Benefits or Perquisites
Section 194R | Comprehensive Guide to TDS on Specified Benefits or Perquisites
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- Last Updated on 20 April, 2023
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Table of Contents
- Specified benefit/perquisite: Benefit or perquisite which if provided triggers provider’s (deductor’s) liability to deduct TDS under section 194R
- ‘Any benefit or perquisite’
- Meaning of ‘benefit’
- Meaning of ‘perquisite’
- Benefit/Perquisite vs. Consideration
- Benefit/Perquisite vs. Compensation
1. Specified benefit/perquisite: Benefit or perquisite which if provided triggers provider’s (deductor’s) liability to deduct TDS under section 194R
In order to trigger liability of deductor (benefit/perquisite provider) under section 194R to ensure that tax has been deducted, it is necessary that specified benefit/perquisite should have been provided by him to specified deductee. Benefit/perquisite shall be a specified benefit/perquisite only if it satisfies the following conditions:
(a) It is any benefit or perquisite;
(b) It may or may not be convertible into money;
(c) It (benefit or perquisite) may be in cash or kind or partly in cash and partly in kind. [Explanation 2 to Section 194R inserted by the Finance Act, 2023 with effect from 01-04-2023]
(d) It should arise from the carrying on of business or exercise of profession by the specified deductee (resident recipient satisfying certain conditions) ; and
(e) Value of such benefit or perquisite or the aggregate value of such benefits/perquisites provided during the financial year should not exceed ` 20,000.
Section 194R provides for deduction of tax from “any benefit or perquisite…”. Section 194R does not define the words “benefit” and “perquisite”. Nor are these words defined in section 28(iv). These words are also used in sub-clauses (iv) and (iva) of clause (24) of section 2 but are not defined by the said sub-clauses also.
2 .‘Any benefit or perquisite’
The word “any” in the phrase “any benefit or perquisite” casts the net far and wide and admits only those limitations that are imposed by the context. This is clear from the following decisions:
- The words “any one” in common conversation or literature are not infrequently used to mean “every one” — not one, but all. “In affirmative sentences, it asserts, concerning a being or thing of the sort named, without limitation as to which, and thus collectively of every one of them” (Oxford Dictionary) The Chief Inspector of Mines and another v. Lala Karam Chand Thapar etc. (1962) 1 SCR 9.The word “any” in the said case was suffixed by the word “one”, still the Court held that the words “any one” would mean “all” and not “one”. It is to be noted that in the present case in section 26(2) of RBI Act,1934, the legislature has not employed the word “one” after the word “any”. Therefore, the ratio in Lala Karam Chand Thapar(Supra) would all the more apply to the word “any” in section 26(2) of RBI Act,1934 [Vivek Narayan Sharma v. Union of India  146 taxmann.com 36 (SC)[02-01-2023]]
- “Anything said ….in Parliament” in Article 105 of the Constitution: The word “anything” is of the widest import and is equivalent to “everything”. The only limitation arises from the words “in Parliament” which means during the sitting of Parliament and in the course of the business of Parliament.- Banwarilal Agarawalla v. State of Bihar and others (1962) 1 SCR 33
- An argument was sought to be advanced that since Section 35 of the Foreign Exchange Management Act, 1999 uses the words “any decision or order”, only appeals from final order could be filed. The Court rejected the argument holding that “ In the instant case also when a right is conferred on a person aggrieved to file appeal from “any” order or decision of the Tribunal, there is no reason, in the absence of a contrary statutory intent, to give it a restricted meaning. Raj Kumar Shivhare v. Assistant Director, Directorate of Enforcement (2010) 4 SCC 772
- Word ‘any’ used 5 times in definition of ‘deposit’ in section 2(c) of MPID Act shows clear intent of the Legislature to cast far and wide the net of the regulatory provisions – State of Maharashtra v. 63 Moons Technologies Ltd.  137 taxmann.com 365 (SC)
- In Vivek Narayan Sharma v. Union of India  146 taxmann.com 36 (SC) [02-01-2023] wherein the legal validity of demonetisation of Rs. 500 and Rs. 1000 notes in 2016 by notification issued u/s 26(2) of RBI Act was challenged. It was contended that Section 26(2) route can be adopted to demonetize “ any series of bank notes of any denomination and not “all” series of bank notes of any denomination. The word in section 26(2) “Any” should be construed as “one” or “some” and not “all”. The Court rejected the above contention and held that the power available to the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes as “any” means “all” and not “one” or “some”. The Court further held that if the argument that the provisions of sub-section (2) have to be interpreted in a restricted manner, is to be accepted, it may, at times, lead to an anomalous situation. For example, if there are 20 series of a particular denomination, and if the argument of the petitioners is to be accepted, the Central Government would be empowered to demonetize 19 series of a particular denomination, leaving one series of the said denomination to continue to be a legal tender, which would lead to a chaotic situation.
Thus, any and every benefit or perquisite, whether in cash or in kind or partly in cash and partly in kind and whether convertible into money or not, will be covered by section 194R(1) The only limitations on the width of the expression “any benefit or perquisite” are the following limitations imposed by the section itself:
- The benefit or perquisite should be provided by any person to a resident.
- Not every advantage flowing to a resident recipient from person providing it can be treated as benefit or perquisite. What is received by recipient should be a “benefit or perquisite” within the ordinary connotation of the term. It is noteworthy that, unlike section 17(2), section 194R does not empower CBDT to deem anything as perquisite or benefit by rules notified.
- The “benefit or perquisite” should be one arising to recipient from business or exercise of a profession.
3. Meaning of ‘benefit’
Black’s Law Dictionary gives the following definitions of ‘benefit’:
benefit, n. (14c) 1. Advantage; privilege <the benefit of owning a car>. 2. Profit or gain; esp., the consideration that moves to the promisee <a benefit received from the sale>. Also termed legal benefit; legal value. Cf.
The following judicial definitions of the word “benefit” are note-worthy:
(a) The dictionary meaning of the word “benefit” is advantage or profit or anything contributing to the improvement of the condition. If a person derives any advantage, it can be said that he was benefited. If he gains something either monetarily or otherwise, it can be said that he was benefited. If he is able to improve his condition, it can be said that he has benefited to that extent. Thus, the word “benefit” implies an element of advantage, profit or gain . Considering all these aspects, the word “benefit” occurring in sub clause (iv) of section 2(24) would mean “any advantage, gain or improvement in condition” [ CIT v. Smt. Kamalini Gautam Sarabhai  208 ITR 139 (Guj.)];
(b) The word ‘benefit’ occurring in Section 2(24)(iv) would mean ‘any advantage, gain or improvement in condition’. The ‘benefit’ or ‘perquisite’ should be of material things of life. For the purpose of these provisions, it is immaterial whether the benefit or perquisite is convertible into money or not. The intention of the legislature is to tax any benefit if it is received by a director, etc., irrespective of the fact whether the benefit received was in the nature of capital, or whether there is any direct receipt in the transaction or whether there is any detriment to the company (provider of benefit) or not in the transaction [ Diwan Rahul Nanda v. Dy CIT 8(3)  25 SOT 454 (Mum.)];
(c) Assessees being directors and having substantial interest in a transport company, purchased certain buses from that company at their written down value which was much lower than their market value. Even if the benefit received by the director of the company is of capital in nature, it can be brought under the term ‘value of any benefit’ as contemplated under section 2(24)(iv). The difference between written down value of buses and their fair market value determined by the department could be treated as a benefit to assessees under section 2(24)(iv) [ CIT v. S. Varadarajan  89 Taxman 457 (Mad.)];
(d) Where assessees, i.e., directors of a company, got benefit in the form of repairs and renovations to their own apartments at the cost of the company, amount so spent was the value of benefit within the meaning of section 2(24)(iv) [ Diwan Rahul Nanda v. Dy. CIT  25 SOT 454 (Mum.)].
4. Meaning of ‘perquisite’
The term ‘perquisite’ is defined inclusively in section 17(2). It enumerates certain items that would be treated as ‘perquisite’ in the hands of employees for taxability as “salaries” and also certain items that would be perquisites but tax-free in the hands of employees. However, this definition applies to taxability under the head “Salaries”. Perquisites provided to employees would attract TDS under section 192 and not under this section. So, ordinary meaning of the word ‘perquisite’ needs to be explored for the purposes of section 194R.
In Owen v. Pook (Inspector of Taxes)  74 ITR 147, the House of Lords held that perquisite has a known normal meaning namely a personal advantage. The word could not apply to a mere reimbursement of a necessary disbursement. Lord Pearce observed as under:
- “The normal meaning of the word denotes something that benefits a man by going “into his own pocket.” It would be a wholly misleading description of an office to say that it had very large perquisites, merely because the holder had to disburse very large sums out of his own pocket and subsequently received a reimbursement or partial reimbursement of these sums. If a school teacher takes children out for a school treat, paying for them out of his (or her) own pocket, and is later wholly or partially reimbursed by the school, nobody would describe him (or her) as enjoying a perquisite. In my view, perquisite has a known normal meaning, namely, a personal advantage, which would not apply to a mere reimbursement of necessary disbursements. There is nothing in the section to give it a different meaning. Indeed, the other words of the section confirm the view that some element of personal profit is intended”
It is only when reimbursement is of expenses of the provider how/incurred by payee/recipient/deductee that it is not a perquisite.
The following definition of ‘perquisite’ as per Black’s Law Dictionary is noteworthy:
- perquisite (p;u-kwi-zit). (16c) A privilege or benefit given in addition to one’s salary or regular wages. – Often shortened to perk. [Cases: Officers and Public EmployeesC=>99.]
The above definition gives us the ordinary meaning of the word “perquisite”. The above definition was judicially noticed in Nirmala P. Athavale v. ITO  22 SOT 197 (Mum.). The Tribunal held as under:
(a) Where the assessee never charged any fee or remuneration for his imparting of knowledge and practising of values based on Shrimad Bhagawad Gita and also the assessee did not have any vested right to receive any kind of payment for these activities from his disciples/followers, the gift made by the followers, without being under any contractual or legal or customary obligations, cannot be treated as a consideration arising out of carrying of vocation;
(b) The other condition is that such benefit or perquisite should arise out of the exercise of business or profession. In the facts of the case, the Revenue has not established conclusively that the amount of gift arose to the assessee due to the exercise of vocation because such gifts have got no element of consideration being paid for services obtained by the followers/disciples;
(c) It is also noted that both the words ‘benefit’ and ‘perquisite’ refer to specific situations wherein receipt of revenue nature having attributes of income would be covered, and such attribute should exist from the very beginning. To illustrate this aspect, where a gift is made in lieu of paying consideration for services obtained and this fact is established, then such gift can fall within the provisions of section 28(iv) of the Act;
(d) It is clear that in the present case, there is no intention of circumvention of income on the part of the assessee or receiving income in other forms. Hence, provisions of section 28(iv) of the Act cannot be applied;
(e) The term ‘perquisite’ as per Blacks Law Dictionary means “privilege or benefit given in addition to one salary or regular wages” which means that it is an additional benefit and not a complete substitution of one’s income;
(f) As stated earlier, the assessee has never charged any consideration from his followers; hence, based on the above meaning, it cannot be termed as ‘benefit’ or ‘perquisite’ within the meaning of section 28(iv) of the Act.
5. Benefit/Perquisite vs. Consideration
The Tribunal’s decision in Nirmala P Athavala (Supra) appears to draw a distinction between “perquisite”/ “benefit” and “consideration”. Consideration cannot be regarded as perquisite/benefit. The alleged perquisite/benefit should be something distinct and over and above consideration.
FAQ. No. 3 of CBDT’s Circular No. 18/2022 , dated 13.09.2022, clarifies that if out of pocket expenses (reimbursement) are already part of the consideration in the bill on which tax is deducted under the relevant provisions of the Act, other than section 194R, in accordance with the Circular No. 715 dated 8th August 1995, there will not be further liability for tax deduction under section 194R of the Act.
Thus, FAQ No. 3 of CBDT’s Circular No. 18/2022 , dated 13.09.2022, distinguishes “consideration” from “perquisite”. If amount provided is “consideration”, then TDS would be deductible under other sections such as section 194C/section 194J/section 194H. If it is “perquisite”/“benefit” in addition to “consideration”, then, TDS will be deductible under section 194R.
FAQ No. 3 of CBDT’s Circular No. 18/2022 , dated 13.09.2022, is reproduced below for ready reference:
Question 3: Refer question No. 7 of the Circular No. 12 of 2022- Question No. 30 of CBDT Circular No. 715 dated 8th August 1995 clarifies that tax deduction under sections 194C and 194J is required to be made from the gross amount of bill including the reimbursement. A person has provided service to a Company and out of pocket expenses are charged by him to the Company along with service fee in the same bill. Company deducts tax under section 194J of the Act on both service fee component as well as on out of pocket expense in accordance with this circular. Is there a non-compliance with the provision of section 194R of the Act? Relevant portion of CBDT Circular No. 715 dated 8th August 1995 is as under: Question 30: Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses? Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source. If out of pocket expenses (reimbursement) are already part of the consideration in the bill on which tax is deducted under the relevant provisions of the Act, other than section 194R, in accordance with the Circular No. 715 dated 8th August 1995, it is clarified that there will not be further liability for tax deduction under section 194R of the Act. In the above example, out of pocket expense is part of the consideration in the bill for professional fee that is charged to the Company and the tax is deducted under section 194J of the Act on the entire consideration including on out of pocket expense. In such a case, the out of pocket expense is already included as part of professional fee. Hence, there is no further benefit/perquisite which requires tax deduction under section 194R of the Act.
5.1 Whether company which is manufacturer of capital goods needs to deduct TDS under section 194R on 2-year free maintenance services provided to buyer of capital goods?
Section 194R will not come into play merely because something is given, paid or provided unless it is a benefit or perquisite. Section 194R will not get triggered merely because some advantage flows from company to the recipient. Section 194R is triggered only when the advantage flowing from the Company to the recipient is a ‘benefit’ or ‘perquisite’ as distinguished from ‘consideration’ for what the recipient has done or promised to do.
If any and every advantage flowing to resident recipient, even if it be consideration, is to be treated as “benefit or perquisite”, then, probably, all other TDS sections except section 192 would be rendered otiose.
Clearly, the intention behind section 194R is not to replace all non-salary TDS sections with one omnibus non-salary TDS section of section 194R.
5.1.1 Where consideration for providing free maintenance services is factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods, is TDS deductible u/s 194R? – It is assumed that the consideration for providing free maintenance services is factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods. In such a situation, the operation and maintenance services cannot be considered in silos as a free supply of services. It can at best be treated as a supply of two goods or services for the price of one, and it cannot be treated as a benefit/perquisite but as a mixed supply of goods or services. Thus, it is a normal sale transaction and what is given by the company is rendering of services by way of consideration for price received. It is not the intention that normal sales, purchases and services transactions should be within the scope of section 194R since there are provisions for TCS on sale of goods u/s 206C(1H), TDS provisions for purchase of goods u/s 194Q and TDS provisions for payment for services u/s 194J/194C/194H.
In Owen v. Pook (Inspector of Taxes)  74 ITR 147, the House of Lords held that perquisite has a known normal meaning namely a personal advantage. The word could not apply to a mere reimbursement of a necessary disbursement. Lord Pearce observed,
“The normal meaning of the word denotes something that benefits a man by going “into his own pocket”. It would be a wholly misleading description of an office to say that it had very large perquisites, merely because the holder had to disburse very large sums out of his own pocket and subsequently received reimbursement or partial reimbursement of these sums. If a school teacher takes children out for a school treat, paying for them out of his (or her) own pocket, and is later wholly or partially reimbursed by the school, nobody would describe him (or her) as enjoying a perquisite. In my view, perquisite has a known normal meaning, namely, a personal advantage , which would not apply to a mere reimbursement of necessary disbursements. There is nothing in the section to give it a different meaning. Indeed, the other words of the section confirm the view that some element of personal profit is intended.”
The normal meaning of perquisite is something that goes into the recipient’s pocket. It follows as a corollary that if any amount is recovered from the recipient towards the cost of what is ‘provided’, there is no perquisite to the extent of recovery from the recipient.
The CBDT in Question 4 of Circular No. 12/2022 , dated 16-06-2022, has clarified that where free items are being offered with the purchase of some items, the seller and buyer record the transaction at the same value. In such a situation, there could be difficulty in applying the Section 194R provision. Thus, to remove such difficulty, the CBDT has clarified that no tax shall be required to be deducted in case of said transaction. This clarification may apply to a transaction where goods and services are supplied for one price.
Therefore, in view of the above, Section 194R has no application in this case.
5.1.2 Where consideration for providing free maintenance services is not factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods, is TDS deductible u/s 194R? – The position in Para 5.1 will not change even if no consideration for free maintenance services is recovered through the price build up of capital goods sold. These services are consideration given to buyer for his purchase of capital goods and are a sweetener for the deal. It is quite possible that buyer may not purchase the capital goods without such commitment of free maintenance services. Besides, this may fall within the ambit of Question 4 of Circular No. 12/2022 , dated 16-06-2022. Therefore, in view of the above, Section 194R has no application in this case.
6. Benefit/Perquisite vs. Compensation
Question arises whether on payment made against the performance guarantee to buyer, the Company needs to deduct tax under Section 194R? Whether answer will be different if the Company is offering free OMS for one/two years instead of payment?
Section 194R will not come into play merely because something is given, paid or provided unless it is a benefit or perquisite. Section 194R will not get triggered merely because some advantage flows from company to the recipient. Section 194R is triggered only when the advantage flowing from the Company to the recipient is a ‘benefit’ or ‘perquisite’. It is to be examined whether compensation/damages is in the nature of perquisite/benefit?
First of all, the payment against performance guarantee to buyer is consideration paid under contract with buyer whereunder seller had agreed to compensate the buyer if product does not perform to agreed/prescribed standards. Perquisite/benefit is distinct from consideration paid under a contract. Secondly, the nature of compensation and its distinction vis a vis a perquisite/benefit needs to be examined.
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Guidelines for implementation of provisions of Section 194R
Source: Circular No. 12 of 2022
The finance minister introduced section 194R via The Finance Act 2022 with an aim to track and tax the benefits or perquisites arising from business or profession. To bring more clarity to the newly introduced provisions, CBDT has issued certain guidelines which are as follows:
- The Deductor (person providing the benefit or perquisites) is not required to check, before deducting TDS, taxability of such perquisite in the hands of the recipient under section 28(iv) of the Act. Further, where such benefit is provided to a non-resident, TDS shall be required to be deducted u/s 195 of the Act irrespective of its taxability.
- Provisions of section 194R shall be applicable on all kinds of benefits or perquisites whether in cash or kind or partly in cash or partly in kind and shall include capital asset also (by virtue of interpretation in various cases decided).
- To reduce the likelihood of future litigation sales discount, cash discount and rebates are kept out of the scope of this section. However, if any other benefit is provided by the seller, it shall be treated as benefit or perquisite u/s 194R, for e.g., incentive given in the form of TV, Car, event tickets etc. are well within the scope of this section.
- Further, the deduction shall be made in the hands of the receiver and not the person benefiting from such perquisite.
- In case, where the benefit or perquisite is provided by the third party to an employee of the entity then TDS of the company shall be deducted u/s 194R by the third party and afterwards the company shall deduct TDS u/s 192 by treating such benefit as perquisite u/s 17 of the Act in the hands of the employee. These provisions shall not apply if benefits are provided to a government entity.
- Valuation of benefits or perquisite would be based on fair market value of such benefit or perquisite. However, where the provider of the benefit has purchased the perquisite before providing it to the recipient, such purchase price shall be considered as the value of the perquisite and where the provider is the manufacturer itself, value of the perquisite shall be the price generally charged from its customer.
- Note: GST shall not be included for the purpose of valuation of perquisite, i.e., amount shall be exclusive of GST.
- Where the manufacturing company provides its product to a social media influencer for promotional purposes, the applicability of TDS u/s 194R shall arise where the product is retained by such influencer or viceversa if returned.
- In case of reimbursement of expenses to a service provider, if invoice reimbursable of expense is in the name of the deductor availing such services, such reimbursement shall not be treated as the benefit u/s 194R and in cases where it is not in the name of the deductor, it shall be treated as benefit u/s 194R.
- Where a conference is arranged to educate the dealers about the product of the company, same shall not be treated as benefit or perquisite, to the extent the purpose of such conference is limited to educate the dealers. In case the company is incentivizing the dealer in any other way, it shall be covered within the ambit of section 194R.
- Where the benefit provided is in kind, then the deductor is obligated to ensure that the tax has been paid to the credit of the government. The beneficiary shall deposit advance tax and will share a declaration along with advance
- tax challan with the deductor. The deductor shall file its Form 26Q using such challan. However, where the provider decides to deposit TDS on its own, the amount of TDS paid by the provider shall also be treated as the benefit u/s 194R i.e., the value shall be grossed up.
- Threshold of Rs. 20,000 shall be considered on all transactions from 01.04.2022. However, TDS shall only be deducted on transactions which shall arise from 01.07.2022.
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Demystifying CBDT Circular No. 18/2022 on Section 194R: TDS on benefits and perquisites
Our speakers shared insights and practical implications on the recent CBDT Circular No. 18/2022 dated 13 Sep 2022.
The session deep dive into the following aspects:
- Recap of Provisions of section 194R introduced by the Finance Act, 2022 and CDBT Circular No. 12/ 2022 dated 16 June 2022
- Waiver of loan by banks
- Reimbursement of expenses to “pure agent”
- Reimbursement of out of pocket expenses
- Expenses on dealer conferences
- Eligibility to claim depreciation/expense deduction in respect of benefit received
- Clarification on 194R applicability to bonus and rights issue
- Implementation and practical challenges likely to be faced by the industry
- Vikas Aggarwal - Direct Tax Head, Novartis
- Sameer Gupta - Tax Leader, EY India
- Anish Thacker - Partner, Tax & Regulatory Services, Indian member firm of EY Global
- Ravikant Kamath - Partner, Knowledge and Solutions, EY India
- Amit Bothra - Partner, Indirect Tax, EY India
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Guidelines for implementation of Section 194R of the Income-tax Act (ITA), 1961
Updated on : Sep 5th, 2022
Scope and coverage of Section 194R
- Deductor is not required to check whether the benefit or perquisite is taxable in hands of the recipient under any of the provisions of the Income Tax Act.
- No requirement to check whether the amount itself is taxable or not
- Wholly in cash
- Wholly in kind
- Partly in cash and partly in kind
- Benefit or perquisite can also be in the form of providing a capital asset (for example, car, land, etc.)
Sales discounts, cash discounts, and rebates
- Sales discount, cash, discounts, and rebates allowed to customers from the listed retail price represents a lesser realisation of the sale price itself. To that extent, the purchase price is also reduced. Logically, these are benefits but in order to remove the potential difficulty for the seller, no TDS is required to be deducted on sales discounts, cash discounts, or rebates allowed to customers.
- Freebies provided on purchases of some items, (for example, one item free on purchase of four items) are not to be subjected to Section 194R
- When a person gives incentives (other than discount, rebate) in the form of cash or kind such as a car, television, computer, gold coin, mobile phone, etc.
- Sponsoring a trip for the recipient and his/her relatives, upon achieving certain targets
- Providing a free ticket for an event
- Providing free medical samples to doctors
Valuation of perquisite or benefits
The valuation would be the fair market price (FMV) of benefit/perquisite except in the following cases:
- If the provider has purchased the benefit/perquisite, then the purchase price shall be taken as the value for TDS purposes
- If the provider manufactures such items given, then the price that it charges to customers for such items shall be taken as the value for TDS purposes
- Goods and Services Tax (GST) will not be included for valuation purposes
Social media influencer
As per the guidelines, determining if there is a benefit or not will depend on the facts of the case:
- If the product given to the social media influencer is returned, there is no benefit and hence, no TDS u/s 194R
- However, if the product is retained, then it would be in the nature of benefit or perquisite
Reimbursement of out-of-pocket expenses
- If any expenditure (which is the liability of the person carrying on business) is met by or reimbursed by some other person, then the same would be regarded as a benefit or perquisite for the person who had the primary liability of incurrence. For example, travel expenses reimbursed by the client of the consultant would be regarded as a benefit or perquisite liable for TDS.
- However, no requirement for TDS if travel bills are in the name of the client, paid by the consultant, and thereafter reimbursed by the client.
- Launch of a new product
- Obtaining orders from dealers/ customers
- Teaching new sales techniques to dealers
- Addressing queries of dealers
- Reconciliation of accounts
- Should not be for select dealers who have achieved targets
- Also, expenses attributable to a leisure trip, leisure component for sponsoring family members or for priority stay or overstay liable for TDS
Benefit or perquisite in cash is not sufficient to meet the TDS
Deductor satisfaction related to the tax being deposited when the benefit or perquisite is in kind or partly in kind and cash is not sufficient to meet the TDS
- The recipient may pay the tax in the form of advance tax. The deductor may rely on a declaration provided by the recipient along with the copy of the advance tax challan, or
- The tax should be deducted by the deductor after taking into account that the tax has been paid by him/her as TDS under Section 194R is also a benefit for the recipient
Computing the threshold of Rs 20,000
- While Section 194R is applicable from July 1, 2022, for the purpose of checking the threshold of Rs 20,000 include the benefit or perquisite provided on or before June 30, 2022
- No TDS is required to be deducted on the amounts paid within the period from April 1, 2022, to June 30, 2022
Example 1: An individual is provided benefits of Rs 8,000 up to June 30, 2022. Furthermore, benefits provided on or after July 1, 2022, up to March 31, 2023, is Rs 15,000.
The TDS under Section 194R would be deducted on Rs 15,000 as benefits provided up to June 30, 2022, shall also be taken into account for consideration of the threshold of Rs 20,000 for the deduction. However, no TDS will be applicable on Rs 8,000.
Example 2: An individual is provided benefits of Rs 22,000 up to June 30, 2022. In addition, benefits provided on or after July 1, 2022, up to March 31, 2023, is Rs 50,000.
The TDS under Section 194R shall be deducted from Rs 50,000. However, TDS on Rs 22,000 shall not be deducted as the applicability of Section 194R is effective from July 1, 2022 onwards.
Example 3: An individual is provided the benefit of Rs 55,000 up to June 30, 2022. However, after this, no benefit is provided from July 1, 2022, up to March 31, 2023.
In this case, no TDS under Section 194R shall be deducted. It doesn’t matter if the benefits provided up to June 30, 2022, is more than the threshold of Rs 20,000.
Benefits provided to employees of the recipient entity
The benefits or perquisites may be used by the owner, director or employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business or engaged in a profession.
TDS is deducted by the person in the name of the recipient entity. For example, a free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under Section 194R is required to be deducted by the company in the hands of the hospital.
Benefits provided to employees by the employer
The employer (entity) shall treat this as a benefit or perquisite given to its employees under Section 17 and deduct tax under Section 192 of the ITA.
The employer can seek credit of TDS under Section194R by furnishing its tax return.
Benefits provided to a consultant to a company
The person providing the benefit or perquisite to a consultant of the entity may treat the entity as the beneficiary and deduct TDS under Section 194R. Then such an entity can further deduct TDS under Section 194R for providing the same benefit or perquisite to the consultant. However, the person providing the benefit or perquisite at its option may also directly deduct the TDS of that consultant.
Inclusion of Goods and Services Tax (GST)
GST will not be included for the purposes of valuation of benefit or perquisite for TDS under Section 194R.
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CBDT Guidelines/ FAQs on TDS u/s 194R on Provision of Benefits/ Perquisites
To help stakeholders who are experiencing problems with TDS under Section 194R(2) on the provision of Benefits/Perquisites, CBDT has released guidelines and frequently asked questions (FAQs).
With regard to the TDS on the provision of benefits and perks under Section 194R(2) of the Income-tax Act of 1961, the CBDT has issued the first set of guidelines and frequently asked questions (FAQs) in Circular 12/2022. Later, CBDT released additional FAQs and guidelines in Circular 18/2022 to address questions about TDS on the provision of benefits and perks under Section 194R(2) and to provide clarification.
It should be noted that a new section 194R has been added to the Finance Act of 2022 and is effective as of July 1st, 2022. Any person who gives a resident a benefit or perk in the course of their employment is required by the new section 194R to withhold tax at source at a rate of 10% of the value of the benefit or perk before giving it to the resident, whether the benefit or perk is convertible into money or not.
In exercising the authority granted, the CBDT has issued guidelines/ FAQs to assist stakeholders in resolving issues relating to TDS under Section 194R(2) on the Provision of Benefits/ Perquisites.
CBDT Income Tax Circular 12/2022 dt. 16/06/2022: Guidelines/ FAQs for removal of difficulties in TDS on Provision of Benefits/ Perquisites u/s 194R(2) of the Income-tax Act, 1961
CBDT Income Tax Circular 18/2022 dt. 13/09/2022: Additional Guidelines/ FAQs for removal of difficulties in TDS on Provision of Benefits/ Perquisites u/s 194R(2) of the Income-tax Act, 1961
The Company is sponsoring Trip for their dealers through the tour operators. The company is paying amount to Tour operator for the airline, accomodation and many more. under sec 194R tds deduction will be against the tour operator or dealer account as payment is directly being paid to tour operator. Tour operator will provide invoice after charging 5% tcs.
As a consultant I have to travel, will my Train and air tickets booked by me fall under 194R because tickets cannot be issued in the name of my organization?
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Section 194R – TDS on Benefits/Perquisites
Jun 19, 2022
100 likes | 156 Views
"Article analyses Section 194R incorporating the clarifications of CBDT vide Circular u211612/2022 dated 16.6.2022. SECTION 194Ru200a-u200aTDS ON BENEFIT / PERQUISI"<br>TaxGuru is a platform that provides Updates On Amendments in Income Tax, Wealth Tax, Company Law, Service Tax, RBI, Custom Duty, Corporate Lawu00a0, Goods and Service Tax etc.<br>To know more visit https://taxguru.in/income-tax/section-194r-tds-benefits-perquisites.html
SECTION 194R – TDS ON BENEFITS/PERQUISITES https://taxguru.in/income-tax/section-194r-tds-benefits-perquisites.html Article analyses Section 194R incorporating the clarifications of CBDT vide Circular No. 12/2022 dated 16.6.2022. SECTION 194R – TDS ON BENEFIT / PERQUISITE TO RESIDENT BY PERSON HAVING INCOME FROM BUSINESS/PROFESSION Applicable from 1.7.2022 Applicable to Any person having income from business and profession except: Individuals/HUF with turnover from business less than Rs.1 crore or profession less than Rs.50 lakhs in preceding financial year Limit applicable Rs. 20,000 in aggregate including the provision made in the period 1.4.2022 to 30.6.2022 However, provision of 1.4.2022 to 30.6.2022 not liable for TDS Rate applicable 10% Nature of payment for TDS deduction under Section 194R Any benefit or perquisite provided in cash or kind paid to a resident Recipient The entity to whom the benefit is given irrespective of whoever enjoys it such as director, partner, employee, relative, etc. Time of deduction for TDS deduction under Section 194R Prior to payment to recipient
Discharge of TDS liability under Section 194R Due payment 7th of the next month date of Type of payment Who will pay Proof of payment Amount on which tax to be deducted Cash Payer TDS Certificate Cash given Recipient Prior from payer to receipt Advance tax challan Fair Market Value of benefit/perquisite OR Kind or partly in kind and partly in cash 7th of the next month Fair Market Value of benefit/perquisite INCLUDING the amount of TDS paid Payer TDS Certificate Fair Market Value of benefit/perquisite in kind If purchased by payer then FMV will be purchase price If manufactured by payer then selling price will be the FMV Types of payments considered as benefit/perquisites Whether or not perquisite Payment type Capital assets such as car, land, etc. Sales discount/Cash discount/Rebates to customers Free Samples Offering more items at the price of fewer items Incentives such as car, TV, phone, gold Sponsoring vacations for recipient or his/her relatives Providing free tickets to events Medicine samples free to medical practioneers Social media influencer if they retain the product Social media influence if the return the product Out of pocket expenses incurred by service provider with invoice in name of service RECIPIENT Out of pocket expenses incurred by service provider with invoice in name of service PROVIDER YES NO YES NO YES YES YES YES YES NO NO YES
All Dealer GENERAL conferences to educate dealers/customers for new products, teaching sales techniques, addressing queries, reconciliation of accounts, etc. Dealer conference for specific participants selected on the basis of achievement of targets, etc. Leisure component of general dealer conferences Expenses of accompanying family at general dealer conferences Expenses of prior/subsequent stay of participants at general dealer conferences NO YES YES YES YES
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Impact Assessment of CBDT Circular on TDS on Benefits or Perquisites u/s 194R
- Mayank Mohanka
- | Income Tax - Articles - Featured
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- 20 Jun 2022
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Scope & Coverage of Section 194R
Section 194R: TDS @ 10% on Benefits or Perquisites, arising out of Business or Profession
- In the Finance Act 2022 , a new TDS section 194R , has been inserted in the Income Tax Act, and which has been made applicable e.f. 1.7.2022 .
- This new section 194R requires deduction of tax at source @ 10%, by any person (resident or non resident), providing any benefit or perquisite, whether convertible into money or not, exceeding Rs. 20,000 in value in a year, to a resident, arising from the carrying out of any business or exercise of any profession by such resident recipient.
- The provisions of this section shall not apply if the benefit or perquisite provider is 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.
Clarificatory Circular by CBDT
The Apex body CBDT has come up with a Clarificatory Circular No. 12 of 2022-Income Tax, dated 16.6.2022 , containing clarificatory guidelines in the form of ‘Ten Question-Answers’, on newly inserted provisions concerning applicability of TDS on Benefits or Perquisites, u/s 194R of the Income Tax Act. The CBDT Circular provides that:
1. TDS u/s 194R is to be deducted @ 10%, w.e.f. 1.7.2022, irrespective of whether the Benefit or Perquisite is Taxable or Not in the hands of the Recipient.
2. TDS u/s 194R is to be deducted on Purchase Value (Actual Cost Basis) of such Benefit or Perquisite, if such benefit or perquisite has been purchased before giving the same to recipient, and in other cases, on Fair Market Value of such Benefit or Perquisite.
3. GST is to be Excluded from the Purchase Value or Fair Market Value of such Benefit or Perquisite, for the Purpose of TDS Deduction.
4. TDS u/s 194R is to be deducted if the Aggregate Value of the Benefit or Perquisite is in excess of Rs. 20,000/-, in a Year, per Recipient.
5. For FY 2022-23, the Value of Benefit or Perquisite given in the Period from 1.4.2022 to 30.6.2022, will be counted and considered for determining the threshold limit of Rs. 20,000 in a year, but TDS u/s 194R will not be deducted on such Benefits or Perquisites. TDS u/s 194R will be deducted only on those Benefits or Perquisites which are provided or given on or after 1.7.2022.
Perquisites under Salary Head are Not Covered u/s 194R
- The benefits or perquisites to be covered by this new section 194R are those perks, benefits, amenities, or facilities, in cash or 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.
- 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.
- Therefore, any benefits or perks (perquisites) given by the Company to its Directors and Employees, like ESOPs, Cars, Rent Free Accommodations, Free Tours, LTCs, Mobiles, Performance Linked Incentives etc. are not covered u/s 194R, as these are already subject to TDS u/s 192 under the Salary Head, of the Income Tax Act.
TDS Implication on Transactions with Dealers, Distributors, Channel Partners
TDS Implication on Transactions with Auditors/Consultants
TDS Implication on Transactions with Social Media Influencers/Artists/Brand Ambassadors
TDS Implication on Deeming Basis On Incentives given by Third Parties to Company’s Director/Employee/Consultant
Some Controversial Interpretations in CBDT Circular
In exercise of the power conferred by section 194R(2) of the Income Tax Act, the CBDT, has issued the following guidelines, in its Circular No. 12/2022, dated 16.6.2022 :
1. Section 194R requires deduction of TDS on any Benefit or Perquisite, irrespective of whether such amount is taxable in the hands of recipient or not and also irrespective of the falling of such income, in any particular section of the Income Tax Act or not.
It is imperative to note here that the Memorandum explaining the provisions of the Finance Bill 2022 specially and categorically required the deduction of tax at source u/s 194R of the Income Tax Act, only in respect of those Benefits or Perquisites which are in the nature of business income falling under section 28(iv) of the Income Tax Act.
However, the captioned CBDT Circular No. 12/2022, dated 16.6.2022 , containing the clarificatory guidelines on TDS provisions in section 194R, takes a complete U turn and departure from the above reproduced Legislative Intent of the Parliament in bringing about this new TDS section 194R and in the very First Question contained in it, clarifies that the requirement of deduction of TDS u/s 194R on any benefit or perquisite arising out of any business or profession of a resident Indian will arise, irrespective of whether such benefit or perquisite is in the nature of any business income under section 28(iv) of the Income Tax Act, or not.
- In fact, in the said Question No. 1, the CBDT Circular goes to the extent of clarifying that 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% and as such 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.
- In arriving at this conclusion, the CBDT Circular relies upon the Hon’ble Supreme Court Judgement in the case of PILCOM vs. CIT West Bengal (Civil Appeal No. 5749 of 2012), requiring the deduction of TDS u/s 194E of the Act, in respect of Non Resident Sportsmen or Sports Association, irrespective of whether such sum is taxable in the hands of the recipient or not. The CBDT Circular also tries to bring out a distinction between the language used in section 195 and section 194R of the Act, to infer that as the expression ‘rates in force’ as used in section 195 has not been used in section 194R of the Act, therefore, there is no requirement to check the aspect of taxability of such income in the hands of the recipient.
- However, it is pertinent to mention here that both sections 195 and section 194E of the Act are applicable in respect of Non-Resident Recipients, whereas section 194R of the Act is applicable on a Resident Recipient of any Benefit or Perquisite, and as such this analogy as brought about by the CBDT Circular seems to be vague and ambiguous, and as such requires reconsideration.
2. Section 194R requires Deduction of TDS on any Benefit or Perquisite, either in Kind, or Cash or a Combination of Both.
- In its second question, the CBDT Circular clarifies that tax under section 194R of the Act is required to be deducted irrespective of whether the benefit or perquisite is in cash or in kind, by virtue of the language used in first proviso to section 194R.
- It is imperative to mention here that as discussed supra, the Explanatory Memorandum to the Finance Bill 2022, envisaged the applicability of TDS deduction u/s 194R of the Act, only in respect of business income falling under section 28(iv) of the Income Tax Act, and the Hon’ble Supreme Court in the Mahindra & Mahindra Case 93 taxmann.com 32 (SC) has categorically held that only business income represented in Kind, are taxable u/s 28(iv) of the Act. Thus, as a natural corollary, it was inferred that requirement of deduction of TDS u/s 194R of the Act, will arise only in respect of those benefits or perquisites, which are in kind.
- However, as the CBDT Circular in its question no 1 has clarified that applicability of section 194R of the Act, will arise even in those cases which are not covered by section 28(iv) of the Act, and as such, in a way has negated the reliance on the hon’ble Supreme Court judgement in the case of Mahindra & Mahindra, as discussed supra.
3. Section 194R requires Deduction of TDS on any Benefit or Perquisite, even a Capital Asset
- In Question No. 3, the CBDT Circular has clarified that it can be seen that the asset given as benefit or perquisite may be capital asset in general sense of the term like car, land etc but in the hands of the recipient it is benefit or perquisite and has accordingly been held to be taxable. 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. Thus, 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
- As discussed in point no 1 and 2 above, the CBDT Circular, on one hand, has categorically clarified that TDS u/s 194R will be required to be deducted on any benefit or perquisite, irrespective of whether such benefit is taxable as business receipts u/s 28(iv) of the Act or not.
- However, interestingly, on the other hand, in its Question No. 3, CBDT has relied upon several judgements of the Hon’ble High Courts, wherein it has been held that business income falling u/s 28(iv) of the Act is taxable, even if the same is a Capital Asset like the judgements of Ramesh Babulal Shah v CIT (2015) 53 taxmann.com 277 (Born), CIT v Rainaniyam Homes (P) Ltd (2016) 68 taxmann.com 289 (Mad), CIT v Subrata Roy (2016) 385ITR 547 (All), in clarifying that TDS is required to be deducted on any benefit or perquisite, even if it is a Capital Asset.
- Therefore, the CBDT Circular very conveniently adopts the Cherry-picking approach of relying upon some selective judgements rendered in the context of very same section 28(iv) of the Act, the applicability of which section has been tried to be made redundant in Question No. 1 of the very same CBDT Circular.
4. TDS u/s 194R is to be Deducted in some cases, even if the Recipient in his individual capacity, is not carrying on any business or profession
- In Question No. 4 of the said CBDT Circular, it has been further clarified that these 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 on business or exercising a 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 by the person to the recipient entity.
- To illustrate, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under section 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. Thus, in substance, the benefit/perquisite is provided to the hospital. The hospital may subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under section 17 of the Act and deduct tax under section 192 of the Act. In such a case it would 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 hospital. Hospital can get credit of tax deducted under section 194R of the Act by furnishing its tax return. It is further clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (1) of section 194R of the Act is also required to be seen with respect to the recipient entity.
- Thus, a deeming fiction of obtainment of any benefit or perquisite not arising out of carrying out of any business or profession in the individual capacity of the recipient, but by virtue of his employment, has been provided by the CBDT Circular, for the applicability of the TDS provisions as contained in section 194R of the Act.
5. Applicability of TDS u/s 194R on Reimbursement of Out of Pocket Expenses
- In Question No. 7, the CBDT Circular has clarified that TDS u/s 194R would be required to be deducted even on Out of Pocket Expenses, being incurred by the Service Provider, and being reimbursed to him by the Service Recipient, if the Bill/Invoice of such Out of Pocket Expenses, is not in the name of Service Recipient.
- However, if the Invoice/Bill of such Out of Pocket Expenses is in the name of Service Recipient, then TDS provisions u/s 194R would not be applicable.
- This treatment of applicability of deduction of TDS u/s 194R, even on Out of Pocket Expenses, being incurred by the Service Provider and being reimbursed by the Service Recipient, on Cost to Cost basis, if the Bill of such Out of Pocket Expenses is not in the name of Service Recipient, is clearly contradictory to the legislative intent of bringing in this TDS section 194R by the Legislature, as in such cost to cost basis reimbursement of out of pocket expenses, no benefit or perquisite is arising in the first place to attract TDS levy u/s 194R.
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Very good compilation of application of section 194R i.e. in is applicable between two business participators one is the provider and the other one is receiver i.e. perquisites specified under the head salary not covered by this provisions.
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How China Built BYD, Its Tesla Killer
The leading Chinese electric vehicle company, with origins as a battery maker, has posted two years of million-car growth in sales.
Credit... Gilles Sabrié for The New York Times
By Keith Bradsher
Keith Bradsher, who has covered China’s auto industry since 2002, reported from Shenzhen, China.
- Feb. 12, 2024
China’s BYD was a battery manufacturer trying its hand at building cars when it showed off its newest model in 2007. American executives at the Guangzhou auto show gaped at the car’s uneven purple paint job and the poor fit of its doors.
“They were the laughingstock of the industry,” said Michael Dunne, a China auto industry analyst.
Nobody is laughing at BYD now.
The company passed Tesla in worldwide sales of fully electric cars late last year. BYD is building assembly lines in Brazil, Hungary, Thailand and Uzbekistan and preparing to do so in Indonesia and Mexico. It is rapidly expanding exports to Europe. And the company is on the cusp of passing Volkswagen Group, which includes Audi, as the market leader in China.
BYD’s sales, over 80 percent of them in China, have grown by about a million cars in each of the past two years. The last automaker to accomplish that in even one year in the American market was General Motors — and that was in 1946, after G.M. had suspended passenger car sales during the four preceding years because of World War II.
“BYD’s growth is unlike anything the industry has seen in many decades,” said Matt Anderson, curator of transportation at the Henry Ford Museum in Dearborn, Mich.
Based in Shenzhen, the hub of China’s electronics industry, BYD has shown how Chinese carmakers can tap the country’s dominance of electrical products. No company has benefited as much from China’s embrace of battery-electric cars and plug-in gasoline-electric cars. These vehicles together make up 40 percent of China’s car market, the world’s largest, and are expected to be more than half next year. Like most Chinese automakers, BYD doesn’t sell its cars in America because Trump-era tariffs remain in place, but BYD does sell buses in the United States.
BYD is leading China’s export push in electric cars, and is rapidly building the world’s largest car carrier ships to transport them. The first of the ships, the BYD Explorer No. 1, is on its maiden voyage from Shenzhen with 5,000 electric cars on board, and is expected to arrive in the Netherlands by Feb. 21.
With China’s and BYD’s success has come more scrutiny.
Elon Musk, the chief executive of Tesla, warned about the strength of Chinese electric car exports in a company earnings call in January. “Frankly, I think if there are not trade barriers established, they will pretty much demolish most other companies in the world,” he said.
The rapid gains by BYD and other Chinese automakers in Europe have prompted a European Union investigation of Chinese government subsidies and could result in tariffs. BYD’s annual reports show a total of $2.6 billion in government assistance from 2008 through 2022. And that does not include other help, like making sure that taxi companies in BYD’s hometown buy only BYD electric cars.
BYD declined to comment about subsidies. In a statement, the company said the BYD Explorer No. 1, its new ship, “signifies a significant milestone for BYD as it expands into international markets and contributes to the development of the global new-energy vehicle industry.”
China has built enough factories to make more than twice as many cars as its market can buy. That has led to a price war in China, particularly between BYD and Tesla, with discounting that has inflicted heavy losses. One of BYD’s newest models, the subcompact Seagull, starts at less than $11,000.
A real estate crisis and a falling stock market are now making Chinese consumers warier about buying a car at all. But BYD’s low manufacturing costs have left it in a better position than most rivals to survive any long slowdown in sales and industry shakeout.
BYD’s chairman, Wang Chuanfu, founded the company in 1995 to make batteries for Motorola and other consumer electronics companies. He had studied at Central South University in Changsha , an elite institution famed for battery chemistry research. But he dreamed of making cars.
In 2003, BYD bought a factory in Xi’an that was building gasoline-powered cars. But the company had trouble at the start, gaining an early reputation for building clunkers. In a visit to the factory in 2006 , a large repair area at the end of the assembly line was clogged with newly built cars that already needed more work.
BYD’s sales grew as the Chinese market soared. Warren E. Buffett bought a nearly 10 percent stake for $230 million in 2008, giving BYD not just a cash infusion but also global cachet. The same year, Mr. Wang promised to start exporting battery-electric cars to the United States within two years.
But electric cars at the time cost a lot to build and had limited range, and Mr. Wang had to scotch his plans to enter the American market. In an interview in 2011, he second-guessed his emphasis on battery-electric cars. Automakers should focus on gasoline-electric hybrids, he declared. He added, “There is still tremendous potential in the Chinese market for electric cars.”
By 2012, car production in China had caught up with demand. Buyers became choosier. BYD’s car sales and stock price plunged as multinationals offered more stylish models. Industry executives and analysts questioned whether BYD had a future.
But Mr. Wang proceeded to make two risky bets that paid off.
In 2016, he hired Wolfgang Egger, a prominent Audi designer, who in turn hired hundreds more car engineers with bold tastes. They completely redesigned BYD’s models.
Mr. Wang also figured out how to replace the industry’s standard chemicals in rechargeable lithium batteries — nickel, cobalt and manganese — with cheaper iron and phosphate. But early batteries made from the inexpensive chemical compounds ran out of juice quickly and had to be recharged after even short trips.
In 2020, BYD introduced its Blade batteries, which closed most of the so-called range gap with nickel-cobalt batteries at a fraction of what they cost.
Tesla began making and selling large numbers of cars in China the same year, and enthusiasm for electric cars swept the nation. BYD was ready with inexpensive battery chemistries and Mr. Egger’s new designs.
Tesla also began using lithium iron phosphate batteries in less expensive models. BYD still sells mostly cheaper cars with lower range, while Tesla mostly sells costlier cars with more range.
The Swiss bank UBS found last year that a BYD Seal electric hatchback sedan cost 35 percent less to make than a slightly smaller Volkswagen ID.3 of similar quality made in Europe. The savings came only partly from the cheaper lithium iron phosphate batteries.
BYD makes three-quarters of the Seal’s parts. Like Tesla, BYD uses only a few electronic systems in each car. By contrast, VW outsources up to two-thirds of its components. BYD also has benefited from lower labor costs in China, although those have risen as factories compete to hire skilled workers .
BYD now has its own walled town in Shenzhen, a southeastern city next to Hong Kong. An airport-style monorail carries workers from 18-story company apartments to BYD’s office towers and research labs.
Liu Qiangqiang, an engineer at the Shenzhen center, said the staff of his car development team had almost tripled since he joined the company from General Motors 15 months ago.
“The pace is fast,” he said.
After dismissing autonomous driving a year ago, BYD swung into action when the consumer electronics companies Huawei and Xiaomi introduced cars with considerable autonomous driving abilities. Mr. Wang announced in January that BYD had 4,000 engineers working on assisted driving, a limited form of autonomous technology that works mainly on highways and large roads, and would invest $14 billion in the technology.
BYD has a lingering advantage over Tesla: Mr. Wang’s decision by 2011 to develop plug-in hybrid cars, which account for nearly half of BYD’s sales.
Li Jingyu, a salesman at a BYD dealership in Shenzhen, said many families bought a hybrid as their first car so they could drive at Lunar New Year back to their ancestral villages. Most villages in China now have chargers, Mr. Li said, but not enough for the throngs of visiting drivers at Lunar New Year, which started on Friday night.
“People are just worried,” he said, “about the waiting time.”
Li You and Joy Dong contributed reporting and research.
Keith Bradsher is the Beijing bureau chief for The Times. He previously served as bureau chief in Shanghai, Hong Kong and Detroit and as a Washington correspondent. He has lived and reported in mainland China through the pandemic. More about Keith Bradsher