ANALYSIS OF TDS PROVISIONS UNDER SECTION 194R

1. Background

Section 28(iv) provides that the value of any ‘benefit’ or ‘perquisite’ received, whether convertible into money or not, arising from business or the exercise of a profession, would be assessable as income under the head “Profits and gains from business or profession”.  However, at practical level, the taxpayers do not report the receipt of benefit or perquisites as income under section 28(iv), especially those in kind. Therefore, such income used to remain out of tax net. To curb such practice, Finance Act, 2022 proposed to introduce section 194R. This is clear from the following extracts from Budget Speech of FM and Memorandum to Finance Bill

Para 137 of Finance Minister Budget Speech

137. 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 Rs. 20,000 during the financial year.

Extract from Memorandum to Finance Bill

“Section 28(iv) provides that value of 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 recipient of such benefit or perquisite. In many cases such recipient does not report the receipt of benefits in their return of income leading to furnishing of incorrect particulars of income”

However, Guidelines issued for section 194R by CBDT in Circular 12 of 2022 (hereinafter referred to as “Circular 12/22”) delinks the provisions of section 194R from Section 28(iv). Question 1 raised in Circular 12/22 is as below:

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

In response to above question, the CBDT has clarified that deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of recipient under section 28(iv). The CBDT has further stated that 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.

Thus, Circular 12/22 makes applicability of section 194R independent of taxability under section 28(iv).  On a plain reading of section 194R, the position adopted by CBDT appears correct. This is for the reason that section 194R does not make reference to provisions of section 28(iv). Even otherwise, under TDS provisions the payer does not evaluate the taxability in the hands of the recipient, unless specifically provided for as in section 195.

2. Key Provisions

The obligation to withhold taxes under section 194R would arise on satisfaction of following conditions:

• Obligation is on any person responsible for providing any benefit or perquisite, whether convertible into money or not.
• The benefit or perquisite should be provided to a resident.
• The benefit or perquisite should arise from business or the exercise of a profession, by such resident.
• Obligation is to ensure that tax has been deducted.
• Obligation is to be fulfilled before providing such benefit or perquisite.
• The TDS rate is 10% with a threshold of INR 20,000 per recipient per annum.
• Any person responsible for providing benefit or perquisite, other than a person being an individual or a HUF, whose total sales, gross receipts, or turnover does not exceed INR 1 Cr. in case of business or INR 50 Lakhs in case of profession, during immediately preceding financial year is liable to deduct TDS.

Important aspects of section 194R are analysed below:

3. Meaning of ‘providing’

The obligation to withhold taxes under section 194R is on any person responsible for providing any benefit or perquisite, whether convertible into money or not. The word ‘provided’ means making it available for the use of the assessee. Whether the assessee actually uses them or not is irrelevant[i]. It was held that no benefit is provided until the benefit in question becomes available to be enjoyed by the taxpayer in respect of which a charge to tax can arise[ii].

The meaning of “providing” has to be understood in the context of a particular benefit or perquisite that is provided to the recipient resident. For example, different stages of providing of benefit / perquisite of foreign tour to dealer are as below:

1. A provision is made in the accounts of the provider-company for the estimated cost of foreign tours to those dealers/distributors, who achieved target as of balance sheet date.
2. The provider-company makes payment to the tour operator and books the foreign tour.
3. The tickets are then handed over/emailed to the dealer/distributor.
4. Departure of dealer / distributor to a foreign destination.
5. Return of dealer / distributor from the foreign destination.

It can be said that at stage C, the benefit or perquisite is made available to the dealer/distributor. At stage D, the dealer/distributor starts enjoying the benefit or perquisite and enjoyment completes at stage E. TDS obligation cannot attract at stage A and B.

The obligation is to deduct TDS before providing such benefit or perquisite. In my view, TDS should be done anytime before stage C in the above example.

4. Meaning of ‘benefit or perquisite’

The phrase ‘benefit or perquisite’ is not a defined term. In such circumstances, general meaning of these words can be considered. Black’s Law Dictionary defines the expression “benefit” to mean advantage; profit; fruit; privilege. The Gujarat HC observed that the word “benefit” implies an element of advantage, profit or gain. Considering all these aspects, the word “benefit” occurring in S.2(24)(iv) would mean any advantage, gain or improvement in condition[iii].

The expression ‘perquisite’ is defined, by the Webster’s Dictionary, as ‘any casual emolument, fee or profit attached to an office or position’. Black’s Law Dictionary defines perquisite as “a privilege or benefit given in addition to one’s salary or regular wages – often shortened to perk[iv].”

Question 3 raised in Circular 12/22 is as below:

Is there any requirement to deduct tax under section 194R of the Act, when the benefit or perquisite is in the form of capital asset?

In response to above question, placing reliance on the decisions in context of section 28(iv), the CBDT concluded that capital asset is taxable in hands of recipient and subject to TDS u/s 194R.

The fallout of above view was whether once income is taxed, whether recipient can claim depreciation on the valuation taken as base for the purpose of section 194R. This aspect was clarified in Question 5 of Circular 18/22. The CBDT has clarified that once the benefit is included as income in the tax return by the recipient, the amount of benefit included by recipient as income shall be deemed to be actual cost of the asset for the purpose of section 32 of the Act and same would be eligible for depreciation.

5. Meaning of ‘whether convertible into money or not’

Section 194R(1) provides for withholding obligation on provision of benefit or perquisite, whether convertible into money or not. This provision is similar to provisions of section 28(iv). The Supreme Court in the case of Mahindra and Mahindra (2018) 404 ITR 37 (SC) has held that in order to invoke the provision of section 28(iv), the benefit which is received has to be in some other form rather than in the shape of money. If this interpretation is adopted, it would mean that for TDS under section 194R to be attracted the benefit or perquisite should be in kind.

However, in response to Question 2 of Circular 12/22, the CBDT has responded that Tax under section 194R is required to be deducted whether benefit or perquisite is in cash or in kind. The CBDT relied on the proviso to section 194R to state that section 194R clearly brings within its scope the situation where the benefit or perquisite is in cash or in kind or partly in cash or partly in kind.

Clearly the issue is debatable, but from the perspective of Deductor it would be wise to follow the guidelines given by the CBDT given the draconian consequences of non-deduction. Even otherwise, as per the provisions of section 194R(3), the guidelines are binding on the Deductor.  

6. Meaning of ‘arising from’ business or profession

The perquisite or benefit should “arising from” business or the exercise of a profession by the recipient. Else, S. 194R is not attracted.

Black’s Law Dictionary gives the following meaning of the words “arising from” – To spring up, originate, to come into being or notice; to become operative, sensible, visible, or audible; to present itself.

In the context of 28(iv), the HC observed that “To attract S. 28(iv), it is necessary that the benefit should arise from the business. That is to say, the benefit or perquisite should have originated from and be intimately connected with the business which the assessee was doing. The benefit or perquisite should spring up or come into being because of the business which the assessee was doing[v].” In ITO v. Undavalli Constructions [2021] 191 ITD 749 (Visakh), the expression “arising from” in S. 28(iv) was interpreted as proximate cause or nexus.

Thus, it can be said that to attract TDS u/s 194R, the benefit / perquisite should spring up or come into being to the recipient resident because of the business or profession, which he is carrying on, and not because of the business of the provider /deductor entity. The benefit or perquisite shall originate from and should be intimately connected with the business/profession of the recipient resident for section 194R to be attracted.

7. Ensure that tax has been deducted

Section 194R provides that it should be ensured that tax has been deducted in respect of such benefit or perquisite. Possible situations for payment of TDS liability are as follows:

• Cash component is sufficient to discharge TDS liability.
• Payment by Payer by grossing up and paying tax out of his pocket.
• Payee give cash to the Payer to meet the TDS liability.
• Debiting TDS under section 194R to the account of the payee, if Payee has a credit balance, so that amount will be paid net of TDS under section 194R, whenever credit balance is paid to the payee.
• Payee himself pays advance tax and gives challan to the payer.

In response to Question 9 of Circular 12/2022, the CBDT, in the context of benefit/perquisite being in kind or partly in kind (and cash is not sufficient to meet TDS), has provided that the recipient would pay tax in the form of advance tax. The CBDT has clarified that the tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/perquisite has been deposited. This would be then required to be reported in TDS return along with challan number. Form 26Q has been modified to include provisions for reporting such transactions.

In the alternative, CBDT has provided an option that the benefit provider may deduct the tax under section 194R of the Act and pay to the Government after grossing up.

However, no clarification is given on other options, which in my view, are also legitimate options to comply with provisions of section 194R.

8. Valuation of benefit or perquisite

The section does not lay down any provision with respect to valuation of benefit or perquisite for the purpose of section 194R. However, in response to Question 5 of Circular 12/22, the CBDT has laid down the following guidelines.

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

               i.             The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case, the purchase price shall be the value of such benefit/perquisite.

               ii.            The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value of such benefit/perquisite.

It is further clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act.

9. Conclusion

Provisions of section 194R will have wide impact on the way business is carried on. Every Assessee will have to evaluate schemes offered to dealers/distributors and document applicability of section 194R. Unfortunately, Circulars intended to remove difficulties have not answered all the issues and new issues have emerged from the interpretation placed by CBDT.  Timely intervention is required from the CBDT to resolve multiple issues arising from implementation of section 194R.

---

[i] CIT v Bawa Singh Chauhan (1984) 16 taxman 180 (Delhi)

[ii] Templeton (Inspector of Taxes) v Jacobs (1997) 224 ITR 1 (Ch.D)

[iii] CIT v. Smt. Kamalini Gautam Sarabhai (1994) 208 ITR 139 (Guj)

[iv] Nirmala P. Athawale v. ITO (2009) 118 ITD 373 (Mum)

[v] Agra Chain Manufacturing Co. v. CIT (1978) 114 ITR 840 (All)