• CA Shashank Goel

Getting Perks / Schemes?? Now subject to TDS deduction @ 10% u/s 194R

Updated: Jun 26

Before getting into the in-depth details of TDS @ 10% on Schemes and Benefits u/s 194R, lets go through the memorandum explaining the intentions behind introduction of this section:


“As per clause (iv) of section 28 of the Act, the value of any benefit or perquisite, whether convertible into money or not, arising from business or exercise of profession is to be charged as business income in the hands of the recipient of such benefit or perquisite. However, 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”

The intentions of the law makers behind the introduction of the above provision is clearly prevention of tax evasion with the most effective and time tested tool i.e. TDS. The introduction of this provision seeks to bring in a lot more disclosure thereby directly laying emphasis on accuracy of accounting and bookkeeping.


However, with the implementation of Section 194R small and medium businesses might face some issues, Like monitoring and recording every such transaction and increased cost of Book Keeping, for all such transaction which relate to distribution of Scheme & Incentives, holding dealer meets, spend money on social media influencers and secondly it might lead to blockage of working capital for these business in a complete pass-through / reimbursement arrangement.


This scheme will however boost frequency and amount of tax collection for government and shall work in line with TDS on purchase introduced in the earlier budget. The frequency of collection of tax would shift to monthly (due date of TDS deposit is monthly) from Quarterly (due date for advance tax payment is quarterly).


Now trying to simplify the provisions of the Act


Any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten per cent. of the value or aggregate of value of such benefit or perquisite

Q. What are the exceptions to the provisions under Section 194R?


However he shall not be liable to deduct TDS if:

  • if the deductor is Individual/Hindu undivided family (HUF), whose total sales / gross receipts / gross turnover from business does not exceed one crore rupees, or from profession does not exceed fifty lakh rupees, in the immediately preceding the financial year in which such benefit or perquisite is provided by him

or

  • the value of Benefit does not exceed twenty thousand rupees


Q. Whether person providing the benefit, deductor, needs to make sure that if the amount is taxable in the hands of recipient under the Income Tax Act?


A. No, the deductor has to deduct TDS on the value of benefit or perquisite exceeding Rs. 20000 irrespective off of the fact whether or not the scheme or the benefit is taxable in the hands of the recipient.


Q. How will the threshold of Rs. 20,000 for the collection of TDS be calculated as the provision of 194R is applicable from 1st July 2022?


A. The calculation of value or aggregate of value of the benefit or perquisite would include transactions from 1 st April, 2022. However, the benefit or perquisite which has been provided on or before 30th June 2022, would not be subjected to tax deduction under section 194R of the Act.


Q. Is it necessary that the benefit or perquisite must be in kind for section 194R of the Act to operate?


A. TDS as per Section 194K on benefits and perquisites is required to be deducted even if the benefit is wholly in Cash or partly in Cash or wholly in kind.


Q. Section 194R provides that 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 is required to 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 person be satisfied that tax has been deposited?


A. The Law makes it mandatory for a person providing benefit in kind to a recipient to deduct TDS U/S 194R of the Act, and the provider shall ensure that the tax has been paid by the recipient. The procedure for the same is laid down as follows:

  • The Recipient would pay tax in the form of advance tax.

  • The Tax Deductor may rely on a declaration along with a copy of the advance tax payment challan.

  • The Deductor would then required to be reported in TDS return along with challan number*

Alternatively, the Service / benefit provider may gross up the value of benefit and deposit the tax on his own. In which case such TDS shall also be included in the value of the benefit so provided. For Example: Lets assume that under a scheme the seller provides an air travel of 100,000 and decides to Pay Tax on his own account then the he shall be calculating the Value of benefit as 1,00,000/90%=1,11,111 and then he would deposit 11,111 as TDS U/S 194R


*The authorities are taking appropriate steps in the Form 26Q to include provisions for reporting such transactions


Q. What happens if the benefit is in form of a capital asset??


A. 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. Hence, TDS need to be deducted on the same.


Some Examples of benefits / incentives not of revenue nature as cited by the Income Tax Department:

  • The amount representing principal loan waived by bank under one time settlement scheme would constitute income falling under section 28(iv) relating to value of any benefit or perquisite, arising from business or exercise of profession. CIT v Ramaniyam Homes (P) Ltd (2016) 68 taxmann.com 289 (Mad)

  • Value of rent free accommodation, furniture and fixtures given to director was held as taxable under section 28(iv). CIT v Subrata Roy (2016) 385ITR 547 (All)

  • Where a car was given to an assessee by his disciple, who had been benefited from his preaching, the value of car was held to be taxable in the hands of the assessee being a receipt from the exercise of the vocation carried on by him. CIT (Addl) v Ram Kripal Tripathi (1980) 125 ITR 408 (All)

  • The assessee was a director of a company. In terms of an agreement with the promoters, shares were allotted to the director. On these facts, it was held that the shares received by the director were benefit or perquisite received from a company by the director and it was a benefit assessable to tax. D. M. Neterwala v CIT (1986) 122 ITR 880 (Bom)

  • Value of gift of land was held as a receipt by the assessee in carrying on of his vocation and was held as taxable. Amarendra Nath Chakraborty v CIT (1971) 79 ITR 342 (Cal)

Q. Whether sales discount, cash discount and rebates are benefit or perquisite?


A. Even though sales discount, cash discount, Volume Discounts, rebates and items given as a part of scheme i.e. goods (which form part of his stock in trade) offered by seller free with purchase, it does not fall under the definition of Benefit / perk, hence, no tax is required to be deducted on the same.


Q. Then what happens if a seller gives free samples?


A. This relaxation is not applicable on free sample given by seller to the buyer. In which case the seller / deductor will be liable to deduct TDS on free samples given


Q. What are the different scenario's when the seller would have to mandatorily deduct TDS??


A. Some of the popular use cases are as below:

  • Person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone etc.

  • When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets

  • When a person provides free ticket for an event

  • When a person gives medicine samples free to medical practitioners

Q. But the benefits of free trip, or a mobile phone or any other electronic goods were given to the Partner / director and not the Firm / Company. Will it still be taxable?


A. The 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.


Example: The tax is required to be deducted under section 194R of the Act if the benefit or perquisite is provided to a doctor who is working as a consultant in the hospital. In this case the benefit or perquisite provider may deduct tax under section 194R of the Act with hospital as recipient and then hospital may 4 again deduct tax under section 194R of the Act for providing the same benefit or perquisite to the consultant. To remove difficulty, as an alternative, the original benefit or perquisite provider may directly deduct tax under section 194R of the Act in the case of the consultant as a recipient.


Q. How will someone value the non-monetary perquisites?


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

  1. 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 for such benefit/perquisite.

  2. 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 for 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.


Q. Many a times, 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 in social media. Is this product given to such influencer a benefit or perquisite?


A. Whether this is benefit or perquisite will depend upon the facts of the case. In case of benefit or perquisite being a product like car, mobile, outfit, cosmetics etc and if the product is returned to the manufacturing company after using for the purpose of rendering service, then it will not be treated as a benefit/perquisite for the purposes of section 194R of the Act. However; if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act.


Q: Whether reimbursement of out of pocket expense incurred by service provider in the course of rendering service is benefit/perquisite?


A. Expenses, Invoices in the name of Service provider / Seller, reimbursed in the course of business / profession are to be subjected to TDS deduction.

Expenses, Invoiced in the name of Service recipient / Buyer, shall not be subjected to TDS deduction.


Q. What happens If there is a dealer conference to educate the dealers about the products of the company - Is it benefit/perquisite?


A. No it will not be considered as benefit/perquisite for the purposes of section 194R of the Act. However. the prime objective of such conference should be:

  • new product being launched

  • discussion as to how the product is better than others

  • obtaining orders from dealers/customers

  • teaching sales techniques to dealers/customers

  • addressing queries of the dealers/customers

  • reconciliation of accounts with dealers/customers

Further, in the following cases the expenditure would be considered as benefit or perquisite for the purposes of section 194 R of the Act:-

  1. Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer / business conference.

  2. Expenditure incurred for family members accompanying the person attending dealer / business conference

  3. Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such conference.

To read the circular Click here!!

circular-no-12-2022
.pdf
Download PDF • 1.94MB
 

This article is based upon author's understanding newly imposed TDS u/s 194R. In case you have any queries or suggestion feel free to reach out to us.


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