Analysis on TDS Benefits / Perquisites - Section-194R of Income Tax Act

Analysis on TDS Benefits / Perquisites - Section-194R of Income Tax Act

Analysis of TDS Section 194R & TDS on Benefit or Perquisite

Businesses usually pass on certain benefits and perquisites to their stakeholders that are usually not traceable. However, the businesses take a deduction of the same as business expenditure. In order to streamline this activity, the government came up with a new TDS Section 194R in Budget 2022. Section 194R of the Income Tax Act will be effective from 1st July 2022.

What is TDS Section 194R?

Under TDS Section 194R shall be required to be deducted @ 10% by any person who provides any benefit or perquisite in excess of Rs. 20,000 to a resident, arising from the business or profession of such resident. TDS shall be deducted irrespective of whether the benefit or perquisite is convertible into money or not.

In case the benefit or perquisite is provided wholly in kind or partly in cash and partly in kind, still, the TDS shall be deducted from the entire value. If the cash portion is not sufficient to meet the TDS liability, then the person responsible for providing the benefit shall, before providing such benefit or perquisite, ensure that the tax required to be deducted has been paid in respect of such benefit or perquisite.

Non-Applicability of TDS Section 194R

TDS u/s 194R is not required to be deducted in the following cases:

  • When the aggregate value of benefits and perquisites provided or likely to be provided to a resident during the financial year does not exceed Rs. 20,000 or,
  • If the total sales, turnover or gross receipts of the Individual / HUF deductor providing the benefit or the perquisite does not exceed Rs. 1 crore in case of business or Rs. 50 lakhs in the case of the profession during the financial year immediately preceding the financial year in which such benefit or perquisite is provided.

The CBDT vide Circular No. 12 of 2022 dated 16th June 2022 released certain guidelines clarifying the implications of TDS under Section 194R. Let’s understand these guidelines in detail.

Guidelines of CBDT for Section 194R

The following questions were addressed in the CBDT guidelines on TDS u/s 194R:

Question 1. Is it necessary that the person providing benefit or perquisite needs to check if the amount is taxable under section 28(iv) of the Act, before deducting tax u/s 194R?

Answer: No. Section 194R only requires the person to deduct TDS @ 10%. It does not require the person to check whether the benefit or perquisite is taxable in the hands of the recipient or not. Income can also be taxed under other sections like Section 41(1) etc.

Question 2. Is it necessary that the benefit or perquisite must be in-kind under Section194R?

Answer: TDS under section 194R is required to be deducted whether the benefit or perquisite is in cash or in kind. Further, as per the provisions, the benefit or perquisite can also be partly in cash and partly in kind.

Question 3. Is there any requirement to deduct tax u/s 194R of the Act, when the benefit or perquisite is in the form of a capital asset?

Answer: The taxability of the benefit or perquisite in the hands of the recipient does not matter. Further, the guidelines highlighted various judgments where the courts held that the benefits or perquisites shall be taxable even if they are in the nature of the capital asset.

Question 4: Whether sales discounts, cash discounts, and rebates are benefits or perquisites under Section194R?

Answer: TDS Section 194R shall not be applicable to sales discounts, cash discounts, and rebates provided by the sellers to the customers. Further, TDS shall be deducted in the name of the recipient entity irrespective of who uses the benefit or perquisite.

It has also been clarified that the provisions of TDS Section 194R shall not apply to the benefits or perquisites provided to a government entity that is not carrying any business or profession, such as government hospitals.

Question 5. How is the valuation of benefit/perquisite required to be carried out under Section194R?

Answer: The benefit/perquisite should be valued on the basis of fair market value except in the following cases:

  • If the provider has purchased such benefit/perquisite before providing it to the recipient, then the purchase price should be the value of the benefit/perquisite.
  • If the provider manufactures such benefit/perquisite, then the price charged by the such manufacturer from the customers should be the value of such benefit/perquisite.

Further, GST should not be included in determining such value.

Question 6: Sometimes, a social media influencer is given a product of a manufacturing company so that he can use that product and make audio/video to speak about that product on social media. Is this product given to such influencers a benefit or perquisite?

Answer: If the product is returned to such a manufacturing company after providing the service, then it should not be treated as a benefit/perquisite. However, where such a product is retained by such social media influencers, then it should be treated as a benefit/perquisite and TDS shall be deducted accordingly.

Question 7: Whether reimbursement of the out-of-pocket expenses incurred by the service provider in the course of rendering service is benefit/perquisite?

Answer: Any expenditure that is a liability of the person carrying on the business, if met by another person is the benefit or perquisite provided by the second person to the person carrying on the business. It can be understood with a simple example:

Suppose a consultant is providing certain services to Mr. X. He incurs certain expenditures in relation to providing such services. Therefore, the applicability of TDS u/s 194R is as follows:

  1. If invoices for the expenses are in name of the consultant and are directly paid/reimbursed by Mr. X: Liable to TDS u/s 194R
  2. If invoices for the expenses are in name of Mr. X, however, paid by the consultant and later reimbursed by Mr. X: Not liable to TDS u/s 194R

Question 8: If there is a dealer conference to educate the dealers about the products of the company - Is it benefit/perquisite?

Answer: Normally it shouldn’t be considered as a benefit/prerequisite for the purpose of TDS Section 194R as the prime object of such conference is:

  1. promote a new product being launched
  2. discussion as to how the product is better than others
  3. obtaining orders
  4. teaching sales techniques
  5. addressing queries
  6. reconciliation of accounts

However, it should be ensured that the conference is not only for those dealers or customers who have achieved specified targets. Also, in the following cases, liability to deduct TDS u/s 194R shall get attracted:

  1. The expense incurred for leisure trips
  2. Expenditure incurred for family members accompanying the person attending the conference
  3. Expenditure on participants of dealer/business conference for days prior and beyond the dates of such conference.

Question 9: As per TDS Section 194R, if the benefit/perquisite is in kind or partly in kind (and cash is not sufficient to meet TDS) then the person responsible for providing such benefit or perquisite shall ensure that tax required to be deducted has been paid in respect of the benefit or perquisite, before releasing the benefit or perquisite. How can such a person be satisfied that tax has been deposited?

Answer: The law requires that in the above case, the person providing the benefit/perquisite shall ensure that the tax required to be deducted has been paid by the recipient. Such recipients should pay the advance tax in relation to such benefit/perquisite. The tax deductor can rely on the declaration and a copy of the challan for advance tax payment provided by the recipient.

Alternatively, the provider of benefits may also deduct the tax and pay to the government where the tax amount paid by such benefit provider should also be considered as a benefit provided u/s 194R.

Question 10. Section 194R would come into effect from the 1st July 2022. The second proviso to section 194R(1) of the Act provides that the provision of this section does not apply where the value or aggregate of the value of the benefit or perquisite provided or likely to be provided to a resident during the financial year does not exceed Rs. 20,000. It is not clear how this limit of Rs. 20,000 is to be computed for the FY 2022-23?

Answer: The value or aggregate value of the benefit provided during the FY 2022-23 should be counted from 1st April 2022. Therefore, if the value or aggregate value of the benefit/perquisite provided exceeds Rs. 20,000 (including for the period till 30th June 2022), then TDS section 194R shall be applicable for benefits/perquisites provided on/after 1st July 2022. Further, the benefit/perquisite provided on or before 30th June 2022 would not be subjected to TDS u/s 194R. Let’s understand this with a simple example:

Practical Example for TDS u/s 194R

Suppose, Mr. A regularly provides benefits to his consultant. Until 30th June 2022, the total value of benefits provided amounted to Rs. 15,000. After 1st July 2022, Mr. A provided a further benefit of Rs. 10,000 to the consultant. Therefore, TDS u/s 194R shall become applicable as the limit of Rs. 20,000 has been exceeded. However, TDS should be deducted only on Rs. 10,000 and not on the benefits of Rs. 15,000 paid before 30th June as it has been specifically excluded. Even if the benefits before 30th June would have been Rs. 25,000, still it won’t be subject to TDS. Only the amount paid on or after 1st July 2022 would be subject to TDS under section 194R.

Following were the implications of the newly applicable TDS Section 194R. In case of any queries, please feel free to contact the ASC Group.

Also, Read: Section 206AB and 206CCA – Compliance Check Functionality of Income Tax


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