This article is written by Almana Singh. This article explains the concept of tax deducted at source, specifically under Section 194R of the Income Tax Act, 1961 along with a thorough explanation of guidelines for removal of difficulties under sub-section(2) of Section 194R of the Income Tax Act, 1961. This article also discusses the key differences between TDS and TCS, the process of deducting TDS, exemptions under TDS and provisions in case of non-compliance of TDS along with relevant examples and case laws. 

Introduction 

Tax deducted at source (hereinafter referred to as “TDS”) is a direct taxation mechanism where the tax is deducted at the point of origin itself. This was introduced by the government with two primary objectives in mind. Firstly, under the taxation framework, there are two types of key periods under taxation law; the assessment year and the financial year. For instance, for the financial year of 2021-22, the taxes of this year will be deducted and assessed in the next year, i.e. 2022-23, which is known as the assessment year. TDS was introduced with the intent to address this delay and ensure a steady inflow of revenue to support the seamless working of social schemes and government operations. This allows the government to collect taxes on a monthly basis, which can then be used for public benefit and other essential goals. It is a common practice to exchange gifts between businesses and individual contractors or business-to-business. 

The recipient of these gifts is required to file an Income Tax Return under Section 28 of the Income Tax Act, 1961 (hereinafter mentioned as “the Act”) to declare the gift as an expense; however, it was a common practice to omit these transactions from tax returns, which led to tax evasion. To address these concerns, the Government of India introduced new provisions relating to TDS under the Finance Bill, 2022. It underwent several changes and was later passed by both houses while receiving the assent of the President of India on 30 March 2022. It was finally introduced as the Finance Act, 2022, which came into effect on 01 April 2022. 

The Finance Act, 2022 brought several changes to the TDS framework, the major one being the introduction of Section 194R. Given that Section 194R was a new provision and it might be difficult for the layman to understand, the Central Board of Direct Taxes, under the aegis of the Ministry of Finance, issued Guidelines for removal of difficulties under sub-section(2) of the Section 194R of the Income Tax Act, 1961 (hereinafter referred to as “guidelines”). 

Meaning of TDS

TDS is a system where tax is deducted from a payment before it reaches the recipient. The person making the payment is called the deductor, and the person receiving the payment is called the deductee. 

In this system, the deductor deducts a certain amount of tax from the payment and deposits it directly into the Central Government’s account. This ensures that the government collects tax at the time of transaction itself, rather than waiting for the recipient to pay it later. 

For instance, there occurs a transaction between A and B, and the nature of payment is professional fees where the specified rate of TDS is 10%, in accordance with the Act. A (the deductor) has to give Rs. 30,000 to B (the deductee), on which 10% TDS will be deducted, which amounts to Rs. 3000. Consequently, the net payment received by B would be Rs. 27,000. Now, Rs. 3000 deducted by A will be submitted directly to the Central Government. 

As previously discussed, the Government of India uses TDS as a tool to prevent tax evasion by deducting the taxes at the source or origin of the payment itself rather than deducting it upon receipt. It is to be noted that TDS is not applicable to every transaction or every individual. The Act gives different TDS rates to different categories of recipients, and in accordance with that, TDS has to be deducted.

Difference between TCS and TDS

A tax is collected at source (TCS) operates when a seller collects tax from the buyer at the time of the sale, specifically for certain goods. The seller then adds the tax amount to the sale price and deposits it with the concerned government. TCS is typically applicable to transactions involving goods such as timber, coal, or luxury vehicles. For TCS, the collected tax must be deposited with the government within 7 days from the end of the month in which the sale was made. Section 206C of the Act discusses about TCS.

TDS, on the other hand, is collected at the very origin of the income. It ensures that tax is deducted from payments such as salaries, interest, rent, and other specified incomes before the benefit is received by the recipient. This is to ensure that the government gets a steady flow of income. For TDS, the due date for depositing TDS with the government is the 7th of the month following the month in which TDS was deducted. 

Let’s understand the difference between TDS and TCS with illustrations.

A earns Rs. 1,20,000 annually. His employer Mr. X deducts Rs. 7250 as TDS from his salary and deposits it with the government. Later, A buys a luxury car of value Rs. 15,00,000. The dealership collects Rs. 15,000 as TCS at 1% and deposits it to the government.

A’s employer deducts the tax from his salary before paying him, which is before he receives the benefit of the payment. The TCS deducted by the car dealership collects the tax from A when he makes a payment which exceeds a certain amount. TCS is usually deducted by the government to ensure that it receives taxes on high-value transactions. 

Process of deducting TDS

Any individual can check the TDS deductions made by the deductor through Form 26AS. The deductee receives a TDS certificate from the deductor, which serves as proof of the TDS charged. For example, A will give a TDS certificate to B as proof of the Rs. 3000 TDS deduction. It is the responsibility of the deductor to deposit the TDS amount to the Central Government. Once the amount is deposited, it is reflected in the Form 26AS of the concerned individual, which is accessible through their e-filing account on the Income Tax Department’s website. Once the amount is reflected in Form 26AS, the deductee is allowed to claim a TDS refund or adjust it against the taxes payable in that assessment year.  

Provisions under Section 194R of Income Tax Act, 1961  

The introduction of Section 194R of the Act in the Union Budget, 2022 deals with TDS on the benefits and perquisites between companies, businesses, or individuals. Section 194R has three sub-sections, three provisos, and two explanations under it. 

Sub-section (1) 

Sub-section (1) states that any person who provides the resident with any benefit or perquisite arising from business or professional activities, regardless of whether it is convertible into money or not, must ensure that tax is deducted before providing the individual with such benefit or perquisite. The tax rate is set at 10% of the total value of the benefit or perquisite.

For instance, ABC Pvt. Ltd. was happy with the work done by B as a contractor and offered him a laptop worth Rs. 50,000 as a perquisite. Here, ABC is liable to deduct 10% TDS, i.e., Rs. 5000, before giving the laptop to the contractor. In this case, the deductor would be ABC Pvt. Ltd., and B would be the deductee.

Sub-section (1) has three provisos attached along with it. All of them have been briefed below for a thorough perusal. 

First proviso

The first proviso states that if the benefit or perquisite is given entirely in kind, or partly in cash and partly in kind, and the cash portion is insufficient to cover the tax liability, the deductor has to make sure that the required tax has been paid prior to releasing the benefit or perquisite.

For instance, if ABC Pvt. Ltd. provides a holiday package worth Rs. 1,00,000 to a consultant where 10% of the total value, i.e., Rs. 10,000 has to be paid as TDS and the consultant only receives Rs. 5000 as cash under the holiday package. The proviso states that in cases like these where the perquisite is in half cash and half kind, ABC will be liable to pay Rs. 10,000 TDS before the consultant receives the benefit of the holiday package. 

Second proviso 

The second proviso states that Section 194R does not apply if the total value of the benefits or perquisites provided to the individual during one financial year is less than or equal to Rs. 20,000. 

For instance, If ABC Pvt. Ltd. provided various benefits worth Rs. 15,000 to a resident during a financial year, Section 194R will not be applicable, and ABC will not be required to deposit any TDS on those benefits.

Third proviso 

The third proviso states that Section 194R is not applicable to individuals or Hindu Undivided families (hereinafter referred to as “HUF”) whose turnover does not exceed the Rs. 1 crore mark in the case of business and Rs. 50 lakhs in the case of the profession during the financial year immediately preceding the financial year in which the benefit or perquisite is provided. 

For instance, A is an individual business owner and her turnover of 2022-23 was Rs. 85 lakhs, according to the third proviso, she will be exempted from the provisions of Section 194R in the financial year 2023-24, even if she provided benefits or perquisites to a resident of India which exceeded the Rs. 20,000 maximum limit. 

Sub-section (2) 

Sub-section(2) states that if there is any difficulty in implementing the provisions of Section 194R, then the Central Board of Direct Taxes may issue guidelines with approval from the Central Government to resolve the concerns. It is to be noted that the Central Board of Direct Taxes had released guidelines related to Section 194R on 16 June 2022, which will be discussed in further parts of the article. 

Sub-section(3)

Sub-section (3) states that any guidelines issued by the Central Board of Direct Taxes under sub-section (2) must be laid before both the Houses of Parliament i.e., the Lok Sabha and the Rajya Sabha as soon as they are issued. These guidelines are binding on both the income-tax authorities and the person providing the benefit or perquisite. 

There are two explanations attached to Section 194R. Both are briefed below:

Explanation 01: Under this Section, the phrase “persons responsible for providing” refers to the individuals providing benefits or perquisites. In the case of a company, it includes the company itself and its principal officer. 

Explanation 02: This explanation provides a clarification that provisions of sub-section (1) apply to benefits and perquisites given in cash, kind, or a combination of both. 

For instance, if ABC Pvt. Ltd. gifts a bonus of Rs. 30,000 in cash and a gift voucher of Rs. 20,000 to their employee. The company is legally obliged to deduct TDS on the total value of Rs. 50,000, in accordance with explanation 02 of Section 194R, both cash and kind are considered under Section 194R.

Guidelines for removal of difficulties under sub-section (2) of Section 194R

After the Finance Act, 2022, was approved by the President of India, it was apparent that Section 194R was complex and challenging to understand. To combat this issue, the Central Board of Direct Taxes issued Circular No. 12 of 2022 on 16 June, 2022. The main objective was to remove the difficulties and clarify the provisions enshrined under sub-section (2) of Section 194R. This circular contains 10 questions, and the following section of the article explains in detail all the questions included in the circular. 

Whether the deductor needs to check if the amount is taxable under clause (iv) of Section 28 of the Income Tax Act, 1961, before deducting tax under Section 194R

To understand this question better, let’s first refer to clause (iv) of Section 28 of the Act. Section 28 talks about the income that is chargeable as an income tax under the head “Profits and gains of business or profession”, and clause (iv) states the value of any benefit or perquisite arising from business or the exercise of a profession whether (a) convertible into money or not, (b) in cash or in kind or partly in cash and partly in kind. 

The circular answers this question negatively, stating that the person providing benefit or perquisite is not required to determine whether the amount is taxable under clause (iv) of Section 28 or not. It is to be noted that the benefit or perquisite may be taxable under other sections such as Section 41(1). Section 194R imposes an obligation on the benefit provider to deduct tax at a rate of 10% before giving the benefit or perquisite to a resident without needing to ascertain whether the amount is taxable in the recipient’s hands or under which specific section it falls. 

Unlike Section 195 of the Act, which requires the deductor to verify whether the payment to a non-resident is income in the recipient’s hands because it involves deduction on any sum chargeable under the Act at the prevailing rates, Section 194R does not impose any such requirement. The term “rate in force” in Section 195 makes it necessary to verify the taxability under tax treaties as defined under Section 2(37A), but this requirement does not apply to Section 194R. Therefore, there is no need for the deductor to check the taxability of the amount in the recipient’s hands or the applicable section. 

An illustration would simplify the understanding even more. Let’s say ABC Pvt. Ltd. provides a car worth Rs. 5,00,000 as a perquisite to A, who is a consultant. Under Section 194R, ABC is required to deduct 10% TDS on the value of the car amounting to Rs. 50,000 before the car is provided to A. ABC Pvt. Ltd. has no liability to verify whether the car’s value is taxable under Section 28 clause (iv). On the contrary, if ABC Pvt. Ltd. was paying Rs. 5,00,000 to a non-resident consultant under Section 195, in this case, ABC would be required to determine if the said payment is chargeable to tax in the hands of the non-resident under the Act while also taking into consideration any tax treaties. 

Is there any bar on Section 194R which restricts the benefit or perquisite to just kind

The term “kind” refers to non-monetary benefits or perquisites such as goods, services, or other assets which are not direct cash payments. 

The Central Board of Direct Taxes answered in negative. A bare reading of the first proviso of sub-section (1) answers this question and states that under Section 194R, the tax must be deducted regardless of whether the benefit or perquisite is in cash, in kind or a combination of both. The proviso also covers situations where the benefit or perquisite is half in cash and partly in kind. It brings under its jurisdiction all the benefit and perquisite transactions either in kind or in cash. 

If the benefit or perquisite in question is a capital asset, is there a need to deduct taxes under Section 194R

A capital asset is generally any asset held by a person regardless of connection to business or profession. It includes property of any kind, whether movable or immovable, tangible or intangible, such as land, buildings, machinery, vehicles, patents, trademarks, etc. Capital assets are typically acquired for long-term usage and are not intended for immediate sale or consumption. 

The guidelines made it clear that the need to deduct taxes under Section 194R arises even if the benefit or perquisite is a capital asset. 

It has already been established that there exists no obligation for the deductor to determine whether the benefit or perquisite is taxable in the recipient’s hand and, if so, under which specific section it is taxable. This is also applicable when the benefit and perquisite in question is a capital asset and it falls under the purview of Section 194R. The guidelines referred to several case laws and emphasised the fact that even though the nature of benefit or perquisite may be capital assets, the courts have opined that it will still be taxable. 

The judgements referred to by the guidelines have been briefed below. 

Ramesh Babulal Shah vs. CIT (2015)

Facts

In this case, Ramesh Babulal Shah (the taxpayer) entered into a contract on 2nd January 1979, to buy a plot of land in Dahisar, Bombay, for Rs. 3,54,576, and he had to pay Rs. 25,000 as a deposit. However, he was not given possession of the land. Subsequently, the same seller made another agreement with a third party on 21st December 1979, to develop the same land. Ramesh Babulal Shah initiated a lawsuit and sought interim relief, which was rejected by both the single judge and the division bench. Then, an appeal was filed in the Supreme Court of India, but later it was reprimanded back to the Bombay High Court. 

During the ongoing proceedings, a consent decree was issued, and Ramesh received a sum of Rs. 35,00,000 in the relevant assessment year, which he invested in units of the Unit Trust of India. Ramesh contended that the sum of Rs. 35,00,000 in question should be treated as capital gains, but the Income Tax Officer classified it as business income under Section 28(iv) of the Income Tax Act, 1961. 

Issues

The issue involved in this case was whether the sum of Rs. 35,00,000 received by Ramesh under the consent decree should be categorised as business income or capital gains.

Judgement 

The Income Tax Tribunal held that Ramesh’s transaction was business income, and the Bombay High Court concluded that the Tribunal’s findings were based on facts and that the legal principles applied were well-established. The court found no significant legal question that needed to be addressed and reiterated the Tribunal’s judgement and held that the sum of money in question would be categorised as business income under Section 28(iv) of the Income Tax Act, 1961.

CIT vs. Ramaniyam Homes (P) Ltd. (2016)

Facts 

In this case, the assessee filed an income tax return for the assessment year 2006-07, admitting a total loss of Rs. 2,42,20,780. The case was put under scrutiny by the Assessing Officer who found out that the assessee was indebted to Indian Bank. Indian Bank proposed a One Time Settlement scheme under which the total amount payable was Rs. 10.50 crore, but the assessee paid only Rs. 93,89,000 by the stipulated date. The Assessing Officer was of the opinion that the entire interest waived by the bank should have been shown as income under Section 41(1) of the Income Tax Act, 1961. 

The Assessing Officer treated the difference of Rs. 1,20,67,406 as income under Section 28(iv). The Commissioner of Income Tax (Appeals) nullified the addition of Rs. 1,67,74,868 and held that a mere acceptance of the One Time Settlement without complying with the substantive terms does not give a vested right of waiver. The Income Tax Appellate Tribunal upheld the Commissioner’s decision and noted that the term loan was used by the assessee for acquiring capital assets, and, hence, could not be taxed under Section 28(iv). 

Issues

• Whether the amount representing the principal loan amount waived by the bank under the One Time Settlement scheme received during the course of business is taxable?
• Whether the waiver of the principal amount would constitute income falling under Section 28(iv) of the Income Tax Act, 1961?

Judgement 

The High Court of Madras held that the waiver of the principal amount does constitute taxable income under Section 28(iv) of the Income Tax Act, 1961. The Madras High Court also made a reference to the case of Iskraemeco Regent Limited vs. CIT (2010) which stated that Section 28(iv) has no application to loan transactions and the waiver of the principal amount of the loan cannot be treated as income within the meaning of Section 2(24). Consequently, the appeal was dismissed and the decision of the Income Tax Appellate Tribunal was reaffirmed by the Madras High Court that the waiver of principal amount used for acquiring capital assets is taxable under the Income Tax Act, 1961. 

Additional Commissioner of Income Tax vs. Ram Kripal Tripathi (1980)

Facts 

In this case, the assessment year in question was 1965-66. The taxpayer, Ram Kripal Tripathi, made income from selling books, farming, and delivering discourses on Vedanta. He purchased a car for Rs. 16,100 and claimed that it was financed by contributions from his followers. The car was registered in his name, but he argued that it was a gift to facilitate his travels for preaching and not personal benefit. The Assessing Officer included the amount spent on the car as part of taxable income and treated it as a benefit arising from his professional activities. 

Issues

• Whether the receipt of the car constitutes a “benefit” under Section 28(iv) of the Income Tax Act, 1961?
• Whether Ram Kripal Tripathi was engaged in a profession within the meaning of Section 28 (iv) of the Act?

Judgement 

The Allahabad High Court held that Ram Kripal Tripathi was indeed carrying on a profession which fell under Section 28(iv) due to his regular discourses on Vedanta, which were considered as vocational activities. The Allahabad High Court also determined that the car received by Ram Kripal Tripathi was funded by his disciples and was a benefit that arose from his professional conduct. It was not merely a relief from travel expenses but a tangible benefit linked to his professional activities. Thus, the value of the car was taxable under Section 28(iv) as part of his income. The High Court also noted that the entire income was taxable and not just a part of it. 

Amarendra Nath Chakraborty vs. CIT (1971)

Facts 

In this case, in the assessment year 1958-59, the appellant is a religious teacher of the Satsang movement. Charubala Dasi in December 1957, made a gift of a piece of land in Calcutta valued at Rs. 40,000. The Income Tax Officer considered the land as a professional income, which was estimated to be Rs. 60,000, and included it in the appellant’s taxable income. The Appellate Assistant Commissioner agreed with this view. The Tribunal reduced the land’s value to Rs. 42,500 but upheld its inclusion under the appellant’s business income. 

Issues

The central issue was whether the value of the land received by the appellant constituted taxable income. More specifically, whether the gift of land was related to the appellant’s professional activities as a religious teacher or was a personal gift made out of natural affection. 

Judgement 

The Calcutta High Court upheld the Tribunal’s decision and affirmed that the gift’s value was taxable. The court gave a reasoning that the gift, while voluntary, was given in appreciation of the spiritual benefits the donor received from the appellant. Thus, it was a professional receipt and not to be exempted under Section 4(3)(vii) of the Income Tax Act, 1922. The High Court noted that the gift was directly connected to the appellant’s professional vocation as a preacher. 

Whether sale discounts, cash discounts and rebates come under the umbrella of benefits and perquisite

Sale discounts, cash discounts, or rebates offered to customers reduce the actual sale price. These reductions can technically be seen as benefits since they lower the purchase price for the customer. Section 194R states that TDS should be deducted from all forms of benefits or perquisites. However, deducting tax on these types of discounts would cause practical difficulties for sellers, and this would go contrary to the larger objective of TDS, which is the welfare of the masses. The guidelines clarified this issue and affirmed that no TDS is required under Section 194R on sale discounts, cash discounts, or rebates given to consumers. For instance, imagine a store offering a 10% discount on a product at Rs. 1000. Here, the customer will have to pay Rs. 900 after the discounts. Although the customer benefits from paying less, the seller need not deduct tax on this Rs. 100 discount under Section 194R. This exception makes transactions less complicated for the seller. 

The guidelines referred to a situation where the seller might give a buy-one-get-one deal on purchases. Consider a situation where a seller offers a deal to buy 10 items, and get 2 more for free. Although it may seem like the buyer is getting a benefit from those 2 extra items, in reality, the seller is selling 12 items for the price of 10. If each item costs Rs. 12, then the total price of 12 items would be Rs. 120, in accordance with the seller’s offer. The buyer is supposed to record the purchase as Rs 120 for 12 items in his books too. Since applying Section 194R in situations like these is complicated, and to make things easier, these situations are exempted from the purview of TDS. It is emphasised that there is no exemption when it comes to free samples, and TDS will apply. 

The guidelines referred to several illustrative situations where the exemption from TDS is not applicable to benefits or perquisites offered by sellers. 

• Incentives: If a seller provides incentives, such as a car, TV, computer, gold coin, or mobile phone, these are considered benefits, and TDS will be applicable. 
• Sponsored trips: When a seller sponsors a trip for the recipient or their relatives to achieve certain targets or other company-related goals, these trips will also come under the purview of TDS.
• Free event tickets: If a seller provides free tickets to an event, TDS will be deducted. 
• Free medical samples: When the seller gives free medical samples to medical practitioners, TDS will be deducted. 

It may be noted that even if the said benefits are used by the owner, director, employee, etc the TDS must be made in the name of the recipient entity. The reason behind this is that the benefit provided to the recipient entity was due to the relationship between the provider and the entity. To simplify this with an illustration, imagine there is a company selling electronics, and they offer a free mobile phone to a retailer because he performed well and met all the required targets. Even though the mobile phone might be used by the retailer’s director, the company is still required to deduct TDS under Section 194R because the benefit is linked to a business transaction. Similarly, if a pharmaceutical company gives free medicine samples to a hospital and the samples are further given to a doctor who is an employee at the hospital, the TDS must be deducted in the name of the hospital and not the doctor because this is considered a benefit that arose from the relationship between the deductor pharmaceutical company and the hospital.  

The situation would be different if a doctor was a consultant instead of an employee at the hospital and the pharmaceutical company could give the doctor free samples. In this scenario, the pharmaceutical company will directly deduct the TDS of the doctor under Section 194R, bypassing the hospital. 

The guidelines also clarified that the provision of Section 194R will not be applicable to government entities, like government hospitals.

How is the value of benefit or perquisite under Section 194R determined for the purposes of tax deductions

When calculating the value of a benefit or perquisite for tax deduction under Section 194R of the Act the value of the same is typically based on the fair market price. A fair market price refers to a price at which an asset or service would trade in an open, and competitive market. It is the price that a willing buyer would pay to a willing seller, with both parties having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell. 

However, there are certain specific cases where different rules apply:

1. Purchased item: If the benefit or perquisite was bought by the deductor before giving it to the recipient, then the amount paid will become the value of TDS. For instance, a company gives an employee a mobile phone that was bought for Rs. 50,000 (excluding GST). This Rs. 50,000 will be considered the value of the benefit for the purposes of TDS. 
2. Manufactured item: If the provider produces or manufactures the item being given as a benefit or perquisite, then the value to be used for the purposes of TDS will be the usual selling price of that item. For instance, a company that manufactures watches gives one of its watches to a customer. If the watch is typically sold for Rs. 10,000 then this will be the amount excluding GST that will be considered for the purposes of tax deduction under Section 194R. 

Please note that the value for TDS is considered without considering any GST in the calculations.

When a social media influencer is given a product by a company to use and promote, will the product be considered a benefit or perquisite under Section 194R of the Income Tax Act, 1961

The classification of the product as a benefit or perquisite under Section 194R of the Act hinges on a few specific circumstances. If a product such as a car, mobile phone, outfit, or cosmetics is returned to the manufacturing company after being used solely for promotional purposes, it will not be considered a benefit or perquisite under Section 194R. However, if the influencer keeps the product for personal usage once the promotion is done then it will be deemed as a benefit or perquisite, and the manufacturing company will be legally required to deduct TDS in accordance with Section 194R while also keeping in mind the threshold limit. 

If a service provider uses money out of his pocket in the due course of rendering a service, is this covered under benefit or perquisite

Whether the reimbursement of out-of-pocket expenses constitutes as a benefit or perquisite under Section 194R depends on the specific circumstances of the reimbursement. 

If a service provider, such as a consultant, incurs extra expenses like travel, boarding or lodging while rendering services to a client, these expenses are typically considered the service provider’s business expenses. If the expenses are paid directly by the service provider, then they will be deductible from the income earned from providing the services provided to the client. In this situation, the reimbursement by the client does not count as any benefit or perquisite under the provisions of Section 194R because the expenses are incurred wholly or exclusively for the purposes of rendering the service. 

However, if the client directly pays for these expenses or reimburses the service provider without the invoice being made in the name of the client, then the reimbursement might not be considered a benefit or perquisite. This is because the payment made by the client could be seen as an obligation of the service provider, thereby benefiting the service provider. In these cases, the tax may need to be deducted under Section 194R. 

For instance, there is a consultant who is hired by company X to provide advisory services. As a part of his service, he has to travel to another city, incurring large travel and accommodation expenses. These expenses are necessary for the consultant to fulfil his contractual obligations to X. Now there are two scenarios: 

Scenario 1: The consultant pays his expenses, and the invoices are in the name of X and later, X reimburses the consultant. In this case, the reimbursement is not considered a benefit or perquisite under Section 194R as the expenses incurred are solely for the purposes of providing the services to X, and the invoices of the same are in the name of X. 

Scenario 2: The consultant pays for these expenses, but the invoices are in his own name. Later, X reimburses the consultant. Here, the reimbursement could be treated as a benefit or perquisite, and the tax may need to be deducted under Section 194R since the reimbursement is not directly tied to an expense invoiced in the name of X. 

Conclusively, the determination of whether reimbursement of out-of-pocket expenses is a benefit or perquisite depends on whose liability the expenses represent and how the invoicing and payments are structured. 

Whether the expenditure on a dealer conference is considered a benefit or perquisite under Section 194R of the Act

Expenditure on a dealer or business conference is generally not considered a benefit or perquisite if the primary purpose of the conference is to educate dealers about the company’s products or services. This will include aspects such as:

1. Launching of a new product; 
2. Discussing products advantages; 
3. Obtaining orders from dealers;
4. Teaching sales techniques; 
5. Addressing dealer queries;
6. Reconciliation of accounts.

However, it is emphasised that there are certain types of expenses which will be considered as benefits and perquisites for the purposes of tax deduction under Section 194R. 

1. Leisure expenses: Costs related to leisure activities or components even if it is incidental to the conference. For instance, a conference might include sight-seeing or a recreational activity, these activities would be treated as incidental to the conference where the primary goal is to promote a certain product or service being provided. 
2. Family expenses: Costs for family members who accompany the attendees. 
3. Extended stay: Expenses for the dates before or after the official dates of the conference. 

Here is an illustration to simplify the concept, let’s say there is a company which hosts a conference to educate the dealers about a new product line. The conference includes sessions on product features, sales techniques and addressing dealer questions. The costs of the conference, including the sessions and materials, will not be considered as a benefit or perquisite under Section 194R. However, if the conference includes a leisure trip, covers expenses of extra family members and involves a stay which is beyond the stipulated dates of the conference, these additional expenses will be viewed as benefits or perquisites, and TDS will be deducted in accordance with the provisions of Section 194R of the Act. 

How is a person supposed to confirm that the tax has been deposited

Section 194R states that if the benefit or perquisite is in kind or partly in kind and there is not enough cash to meet the TDS requirement, the person providing the benefit must ensure that the tax has been paid before the benefit is released. When a benefit is provided in kind and tax needs to be deducted under Section 194R, the responsibility lies with the benefit provider or the deductor to ensure that tax has been paid before the benefit is delivered. 

The guidelines refer to a process that has been briefed below:

1. Advance tax payment by recipient: The recipient of the benefit needs to pay the tax through advance tax. To confirm that the tax has been deposited, the benefit provider can ask the recipient for a declaration along with a copy of the advance tax payment challan. 
2. Documentation and Reporting: The benefit provider should then record this declaration and challan number in the TDS return, which is Form 26Q. This is done to cross-check that the tax has been duly paid. 
3. Alternate option: The benefit provider can directly deduct the tax under Section 194R and pay it to the government. In this case, the provider should consider the tax deducted as a benefit under Section 194R and report it in the Form 26Q as tax deducted on the benefit provided. 

For instance, there is a company A which provides a laptop that is a benefit in kind to an influencer as a part of their promotional deal. The value of the laptop is Rs. 1,00,000 and tax needs to be deducted at 10% which would be equal to Rs. 10,000. 

There are two ways of tax deduction in this case:

Scenario 1: Here the tax is paid by the recipient, where the influencer pays the tax amount of Rs.10,000 through advance tax and provides Company A with the challan receipt. Company A then reports that in their TDS returns and confirms that the taxes have been duly paid before the laptop was handed over to the influencer. 

Scenario 2: Here the tax is deducted by the provider, and if company A chooses to deduct the Rs. 10,000 tax by themselves, they pay this amount to the government and report it in Form 26Q. 

In both of these cases, the benefit provider has to ensure compliance with the provisions of  Section 194R by either obtaining proof of advance tax payment or deducting and paying the tax themselves. 

How was the Rs. 20,000 threshold limit supposed to be calculated for the financial year 2022-23

Section 194R came into effect from 01 July 2022. The second proviso to sub-section(1) stated that the provisions of Section 194R do not apply if the value or aggregate value of the benefits or perquisites provided or expected to be provided to a resident during the financial year does not exceed the twenty thousand rupees. The question dealt with confusion as to how the Rs. 20,000 limit was to be calculated for the financial year 2022-23. 

The guidelines suggested that since the threshold of Rs. 20,000 pertains to the entire financial year, the value or aggregate value of the benefits or perquisites which are considered for deductions under Section 194R of the Act should be calculated from 01 April, 2022. Therefore, if the value or aggregate value of benefits or perquisites provided or likely to be provided to a resident exceeds Rs. 20,000 during 2022-23 (including the period up to 30 June 2022), the provisions of Section 194R will apply to any benefits or perquisites provided on, or after 01 July 2022. However, any benefits or perquisites provided on or before 30 June 2022 will not be subjected to tax deductions under Section 194R of the Act.   

Here is an illustration, let’s suppose there is a company ABC which provided a benefit to Mr. X on 15 April 2022, of value Rs. 10,000 and another benefit of Rs. 15,000 on 15 July 2022. The total benefit for that year would be Rs. 25,000 which exceeds the threshold limit of Rs. 20,000 under Section 194R and the provisions of TDS will be applicable. The guidelines clarified that TDS will be deducted only on the benefits provided on or after 01 July 2022. For ABC and Mr. X, TDS will be deducted on the transaction worth Rs. 15,000 which happened after 01 July 2022. 

Exemptions from TDS under Section 194R of Income Tax Act, 1961

There are certain situations where Section 194R is not applicable which are briefed below:

1. When the total value of benefits and perquisites in a financial year is less than Rs. 20,000.
2. For individuals and Hindu Undivided Families (HUF) whose business income is below Rs. 1 crore or whose professional income is below Rs. 50 lakhs, Section 194R does not apply. 

Non-compliance of TDS provisions

If a person or entity responsible for providing benefits or perquisites under Section 194R fails to deduct the applicable TDS on benefits or perquisites, they violate Section 271C of the Act. According to Section 271C, if a person fails to deduct the whole or part of the tax as required under Chapter XVII-B (which includes Section 194R), they will be liable to pay a penalty. The penalty will be equal to the amount of tax which was supposed to be deducted. 

Suppose a company provides a perquisite worth Rs. 50,000 to a resident client but fails to deduct the TDS as mandated under Section 194R. Due to the non-compliance of the provision, the company will be held liable under Section 271C and could be penalised an amount equal to the TDS that should have been deducted on Rs. 50,000. 

Conclusion

The article explores Section 194R, which was introduced under the Act in 2022 and targets TDS on benefits and perquisites. This section sets a Rs. 20,000 threshold for TDS on such benefits, applying a 10% rate when the value exceeds the set limit in a financial year. While Section 194R addresses the important issue of tax compliance, it also introduces administrative challenges. The constant need to track and accurately value kind benefits adds complexity for individuals and businesses. 

This extra burden can be demanding as it requires diligent bookkeeping and timely TDS deductions. Despite this, the benefits of Section 194R outweigh the drawbacks. This Section ensures a more consistent revenue influx for the government which, in turn, supports broader objectives by streamlining government schemes and goals.  

References

• https://kcmehta.com/assets/pdf/KCM-Guide-Section-194R-CBDT-Circulars.pdf

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