Section 194R TDS or Tedious?

by Varun Mirkhelkar
by Varun Mirkhelkar

Senior Associate, Direct Tax

In order to increase the taxbase & to bring a larger number of assessee's under the tax net, the government has inserted a new section 194R in the Income-tax Act, 1961 ('Act') through the I Finance Act, 2022, effective July 1, 2022

In order to increase the taxbase & to bring a larger number of assessee’s under the tax net, the government has inserted a new section 194R in the Income-tax Act, 1961 (‘Act’) through the Finance Act, 2022, effective July 1, 2022. 
Section 194R mandates a person to withhold tax at source (‘TDS’) at 10% on providing any benefit or perquisite, whetherin cash or kind , to a resident arising during the course of business and profession.
The liability to deduct TDS arises when the aggregate value of benefit/perquisite provided/ likely to be provided during the financial year (‘FY’) exceeds INR 20,000/-.
However, the provisions of this section does not apply to an individual/ Hindu Undivided Family (‘HUF’) whose total sales/receipts/turnover from the business does not exceed INR 1 crore or from profession does not exceed INR 50 lacs in the immediately preceding FY or If the aggregate value of the benefit or perquisite provided or likely to be provided to the resident during the financial year does not exceed Rs. 20,000/-
The Central Board of Direct Taxes (‘CBDT’) vide circular dated June 16, 2022 has issued certain guidelines in this regard :
i. The Deductor is not required to check the taxability of perquisites or benefits in hand of the recipient.

ii. The benefit/perquisite can be in the form of cash or kind;

iii. Any sales discount, cash discount, or rebate on the sale of any product, shall not form part of the perquisite or benefit & consequently, section 194R would not apply in that case.

iv. The FMV of perquisites or benefits in kind shall be used to value them. However,
a. If such perquisite/benefit is purchased by the deductor, the purchase price shall be the value of such benefit/perquisite
b. If the deductor is manufacturer of such benefit/perquisite, the price charged to it’s customers shall be the value of such benefit/perquisite.
Goods & Service Tax (‘GST’) will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act.

v. If a sample copy of a product is given to social media influencers for the purpose of shooting and that product is duly returned to the Deductor after giving his services, then there would be no TDS liability. Whereas, after services, if products are kept with influencers, then TDS under section 194R would be deducted.

vi. Reimbursement of out-of-pocket expenses to a service provider would be considered a perquisite/r benefit. and TDS under section 194R would be required to be withheld. However, if invoices for such expenses are in the name of the deductor itself, then TDS is not required to be deducted.

vii. If perquisites or benefits are in kind, the deductor shall take a declaration and a copy of the corresponding advance tax challan from the recipient. The Deductor must report the challan number while filing his TDS return.

viii. The limit of INR 20,000 has to be calculated from April 1, 2022, and the liability to withhold the tax would arise only on the transactions that accrued after July 1, 2022.

Compliance:

i. The deductor has to pay the TDS so deducted under section 194R to the credit of the Central Government by the 7th Day of the next month. 

ii. Particulars of TDS deducted, deductee details etc. to be provided in Form 26Q which is to be filed quarterly.

For better understanding on the applicability of section 194R, please see below a few illustrations: 

i. Mr. X runs a trading business in the garment industry. He provides various incentives to its agents to boost sale targets. During FY 2022-23, Mr. X provides free tickets for an event to Mr. A- its resident agent with the highest turnover. Does this benefit/perquisite come under the purview of section 194R?

Answer: – Yes. There is a benefit/perquisite (free tickets for an event) provided by a person (Mr. X) to a resident (Mr. A) on account of business or exercise of profession carried on by such resident. Therefore, it can be concluded that the benefit provided to him is on account of business or exercise of profession by Mr. A to Mr. X.

 

ii. Company XYZ is a trader in the automobile industry that manufacturers and sells motor vehicles. It has recently launched an electric vehicle. It provides a free test drive to its prospective customers. Does this benefit/perquisite come under the purview of section 194R?

Answer: – No. Free test drive does not arise on account of business or exercise of profession. The customers are end consumers of the motor vehicle and do not engage in any business or profession to avail such benefit. Therefore, any benefit provided to end consumers do not fall under purview of 194R.

iii. Company ABC is a pharmaceutical company. It has administered a new drug and to obtain recognition it distributes free samples to Dr. S a medical practitioner. Does this benefit/perquisite come under the purview of section 194R if:
Dr. S is an employee at XYZ Private Hospital.
Dr. S is a consultant at XYZ Private Hospital.

Answer: – Situation I – there are two tranches of benefits/perquisites provided.
Tranche A: Company ABC and XYZ Private Hospital = other than “employer-employee relationship”. Therefore, 194R is attracted.
Tranche B: XYZ Private Hospital and Dr. S = “employer-employee relationship”. Here section 192 is attracted instead of 194R.
Situation II – the two tranches of benefits/perquisites provided constitutes to other than “employer-employee relationship” only. Therefore, 194R is attracted to both tranches.

iv. Ms. B is a social media influencer who promotes various brands to its followers. Company DEF is a luxurious handbag brand who wishes to market its product through influencer marketing. Company sends its handbags to Ms. B to promote the brand. What are the implications under section 194R?

Answer: – The nature of benefit provided by the company is wholly in kind (supply of handbags). Therefore, the implications are stated hereunder if:
Handbags sent on return basis – No tax deduction u/s 194R.
Handbags are not sent on return basis – Tax deduction u/s 194R @10%.

  1. Chargeability of Section 194R under various scenarios: –

Value of benefit/ perquisite up to 01.04.2022

Value of benefit/ perquisite from 01.07.2022

Total value for FY 2022-23

Value on which TDS charged @10%

Rs. 15,000/-

Rs. 18,000/-

Rs. 33,000/-

Rs. 13,000/-

Rs. 2,00,000/-

Rs. 15,000/-

Rs. 2,15,000/-

Rs. 15,000/-

Rs. 65,000/-

Nil

Rs. 65,000/-

No tax on benefits provided prior to 01.07.2022.

  1. T is the auditor of Company DEF having branches all over India. As per assurance engagement, Mr. T travels to different cities to audit the branches. Mr. T incurs certain lodging and boarding expenditure that are later re-imbursed by Company DEF. What are the implications of section 194R?

Name on Invoice

Expenditure paid By

Reimbursed by Company

Implications

Mr. T

Mr. T

Yes

Section 194R is Applicable

Mr. T

Company DEF

NA

Section 194R is Applicable

Company DEF

Mr. T

Yes

Section 194R is not Applicable*

* It is important to note that the expenditure that are re-imbursed are incurred wholly and exclusively to provide assurance services by Mr. T.

Circular attached -1

Circular Attached – 2

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