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As anticipated, the Apex body CBDT has come up with a Clarificatory Circular No. 12 of 2022 bearing folio no. 370142/27/2022-TPL, dated 16.6.2022, containing clarificatory guidelines in the form of ‘Ten Question-Answers’, on newly inserted provisions concerning applicability of TDS on Benefits or Perquisites, u/s 194R of the Income Tax Act. The copy of the said CBDT Circular is enclosed as per pdf file below, for ready reference of our Readers.

In this Taxalogue, all the significant clarifications/guidelines as contained in the captioned CBDT Circular No. 12 of 2022, concerning the practical implementation of the provisions of section 194R w.e.f. 1.7.2022, have been analysed and explained.

However, before proceeding towards the captioned CBDT Circular, it is desirable and worthwhile to first understand the newly inserted provisions on TDS on Benefits or Perquisites, in respect of carrying out of any Business or exercising of any Profession, w.e.f. 1.7.2022, as under: 

Section 194R: TDS @ 10% on Benefits or Perquisites arising out of Business or Profession

In the Finance Act 2022, a new TDS section 194R, has been inserted in the Income Tax Act, and which has been made applicable w.e.f. 1.7.2022.

This new section 194R requires deduction of tax at source @ 10%, by any person, providing any benefit or perquisite, whether convertible into money or not, exceeding Rs. 20,000 in value in a year, to a resident, arising from the carrying out of any business or exercise of any profession by such resident recipient.

The provisions of this section shall not apply to a person being an individual or a Hindu undivided family, whose total sales, gross receipts or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession, during the financial year immediately preceding the financial year in which such benefit or perquisite, as the case may be, is provided by such person.

The benefit or perquisite referred to in this new section 194R is not the perquisite u/s 17(2), under the head salary income, paid or payable by the employer to employees, as for that perquisite u/s 17(2), another TDS section 192 is already there.

The benefits or perquisites to be covered by this new section 194R are those perks, benefits, amenities, or facilities, in cash or kind, or in a combination of cash and kind, which a resident person enjoys, pursuant to, or in exercise of his business or profession, in lieu of the regular consideration payable to him, in monetary terms, in exercise of such business or profession.

In exercise of the power conferred by section 194R(2) of the Income Tax Act, the CBDT, has issued the following guidelines, in its Circular No. 12/2022 dated 16.6.2022:

1. Section 194R requires deduction of TDS on any Benefit or Perquisite, irrespective of whether such amount is taxable in the hands of recipient or not and also irrespective of the falling of such income, in any particular section of the Income Tax Act or not.  

It is imperative to note here that the Memorandum explaining the provisions of the Finance Bill 2022 specially and categorically required the deduction of tax at source u/s 194R of the Income Tax Act, only in respect of those Benefits or Perquisites which are in the nature of business income falling under section 28(iv) of the Income Tax Act.

For ready reference, the relevant extract of the said Memorandum in this regard, is reproduced below.

“TDS on benefit or perquisite of a business or profession

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.

2.         Accordingly, in order to widen and deepen the tax base, it is proposed to insert a new section 194R to the Act to provide that the person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from carrying out of a business or exercising 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. For the purpose of this section, the expression ‘person responsible for providing’ has been proposed to mean a person providing such benefit or perquisite or in case of a company, the company itself including the principal officer thereof.

[Clause 58]”

However, the captioned CBDT Circular No. 12/2022 dated 16.6.2022, containing the clarificatory guidelines on TDS provisions in section 194R, takes a complete U turn and departure from the above reproduced Legislative Intent of the Parliament in bringing about this new TDS section 194R and in the very First Question contained in it, clarifies that the requirement of deduction of TDS u/s 194R on any benefit or perquisite arising out of any business or profession of a resident Indian will arise, irrespective of whether such benefit or perquisite is in the nature of any business income under section 28(iv) of the Income Tax Act, or not.

In fact, in the said Question No. 1, the CBDT Circular goes to the extent of clarifying that Section 194R of the Act casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source @10% and as such 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.

In arriving at this conclusion, the CBDT Circular relies upon the Hon’ble Supreme Court Judgement in the case of PILCOM vs. CIT West Bengal (Civil Appeal No. 5749 of 2012), requiring the deduction of TDS u/s 194E of the Act, in respect of Non Resident Sportsmen or Sports Association, irrespective of whether such sum is taxable in the hands of the recipient or not. The CBDT Circular also tries to bring out a distinction between the language used in section 195 and section 194R of the Act, to infer that as the expression ‘rates in force’ as used in section 195 has not been used in section 194R of the Act, therefore, there is no requirement to check the aspect of taxability of such income in the hands of the recipient.

However, it is pertinent to mention here that both sections 195 and section 194E of the Act are applicable in respect of Non-Resident Recipients, whereas section 194R of the Act is applicable on a Resident Recipient of any Benefit or Perquisite, and as such this analogy as brought about by the CBDT Circular seems to be vague and ambiguous, and as such requires reconsideration.

2. Section 194R requires Deduction of TDS on any Benefit or Perquisite, either in Kind, or Cash or a Combination of Both.

In its second question, the CBDT Circular clarifies that tax under section 194R of the Act is required to be deducted irrespective of whether the benefit or perquisite is in cash or in kind, by virtue of the language used in first proviso to section 194R.

It is imperative to mention here that as discussed supra, the Explanatory Memorandum to the Finance Bill 2022, envisaged the applicability of TDS deduction u/s 194R of the Act, only in respect of business income falling under section 28(iv) of the Income Tax Act, and the Hon’ble Supreme Court in the Mahindra & Mahindra Case 93 taxmann.com 32 (SC) has categorically held that only business income represented in Kind, are taxable u/s 28(iv) of the Act. Thus, as a natural corollary, it was inferred that requirement of deduction of TDS u/s 194R of the Act, will arise only in respect of those benefits or perquisites, which are in kind.

However, as the CBDT Circular in its question no 1 has clarified that applicability of section 194R of the Act, will arise even in those cases which are not covered by section 28(iv) of the Act, and as such, in a way has negated the reliance on the hon’ble Supreme Court judgement in the case of Mahindra & Mahindra, as discussed supra.

3. Section 194R requires Deduction of TDS on any Benefit or Perquisite, even a Capital Asset

In Question No. 3, the CBDT Circular has clarified that it can be seen that 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. In any case, as stated earlier, the deductor is not required to check if the benefit or perquisite is taxable in the hands of recipient. Thus, the deductor is required to deduct tax under section 194R of the Act in all cases where benefit or perquisite (of whatever nature) is provided

As discussed in point no 1 and 2 above, the CBDT Circular, on one hand, has categorically clarified that TDS u/s 194R will be required to be deducted on any benefit or perquisite, irrespective of whether such benefit is taxable as business receipts u/s 28(iv) of the Act or not.

However, interestingly, on the other hand, in its Question No. 3, CBDT has relied upon several judgements of the Hon’ble High Courts, wherein it has been held that business income falling u/s 28(iv) of the Act is taxable, even if the same is a Capital Asset like the judgements of Ramesh Babulal Shah v CIT (2015) 53 taxmann.com 277 (Born), CIT v Rainaniyam Homes (P) Ltd (2016) 68 taxmann.com 289 (Mad), CIT v Subrata Roy (2016) 385ITR 547 (All), in clarifying that TDS is required to be deducted on any benefit or perquisite, even if it is a Capital Asset.

Therefore, the CBDT Circular very conveniently adopts the Cherry-picking approach of relying upon some selective judgements rendered in the context of very same section 28(iv) of the Act, the applicability of which section has been tried to be made redundant in Question No. 1 of the very same CBDT Circular. 

4. TDS u/s 194R is not required to be deducted on Sales Discounts, Cash Discounts or Rebates, in view of Practical Difficulty

In Question No. 4, the CBDT Circular has clarified that the sales discounts, cash discounts or rebates, allowed to customers from the listed retail price, though logically represent benefits or perquisites requiring TDS deduction u/s 194R of the Act, but, in order to remove the practical difficulty of the sellers in deducting such TDS, such requirement to deduct TDS on such discounts and rebates, has been dispensed away with.

However, at the same time, it has been clarified in the CBDT Circular that this relaxation should not be extended to other benefits provided by the seller in connection with its sale.

To illustrate, the following are some of the examples of benefits/perquisites on which tax is required to be deducted under section 194R of the Act (the list is not exhaustive):

• When a person gives free samples.

• When a 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.

5. TDS u/s 194R is to be Deducted in some cases, even if the Recipient in his individual capacity, is not carrying on any business or profession

In Question No. 4 of the said CBDT Circular, it has been further clarified that these 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.

To illustrate, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under section 194R of the Act is required to be deducted by the company in the hands of hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital. Thus, in substance, the benefit/perquisite is provided to the hospital. The hospital may subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under section 17 of the Act and deduct tax under section 192 of the Act. In such a case it would be first taxable in the hands of the hospital and then allowed as deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the hospital. Hospital can get credit of tax deducted under section 194R of the Act by furnishing its tax return. It is further clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (1) of section 194R of the Act is also required to be seen with respect to the recipient entity.

Thus, a deeming fiction of obtainment of any benefit or perquisite not arising out of carrying out of any business or profession in the individual capacity of the recipient, but by virtue of his employment, has been provided by the CBDT Circular, for the applicability of the TDS provisions as contained in section 194R of the Act.

6. Guidelines for Valuation of Benefit or Perquisite

In Question No. 5, the CBDT Circular has provided the Guidelines concerning the Valuation of the Benefit or Perquisite as under:

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

• 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.

• 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.

7. GST not to be included in the Value of Benefit or Perquisite for the Purpose of TDS Deduction

In Question No. 5, the CBDT Circular has further clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section 194R of the Act.

8. Applicability of TDS u/s 194R on a Social Media Influencers/ Artists/Advertisers

In Question No. 6, the CBDT Circular has clarified that if the Social Media Influencer does not retain with himself the Benefit or Perquisite or Product like Car, Mobile, Outfit, Cosmetics etc, for which he is exercising his social media influence, and such benefit or perquisite or product is returned to the company for which such promotion is being done, then TDS is not required to be deducted u/s 194R.

However, if such benefit or perquisite or product is being retained by the social media influencer/ artists/ advertisers, then TDS u/s 194R is required to be deducted on such benefit or perquisite or product.

9. Applicability of TDS u/s 194R on Reimbursement of Out of Pocket Expenses

In Question No. 7, the CBDT Circular has clarified that TDS u/s 194R would be required to be deducted even on Out of Pocket Expenses, being incurred by the Service Provider, and being reimbursed to him by the Service Recipient, if the Bill/Invoice of such Out of Pocket Expenses, is not in the name of Service Recipient.

However, if the Invoice/Bill of such Out of Pocket Expenses is in the name of Service Recipient, then TDS provisions u/s 194R would not be applicable.

This treatment of applicability of deduction of TDS u/s 194R, even on Out of Pocket Expenses, being incurred by the Service Provider and being reimbursed by the Service Recipient, on Cost to Cost basis, if the Bill of such Out of Pocket Expenses is not in the name of Service Recipient, is clearly contradictory to the legislative intent of bringing in this TDS section 194R by the Legislature, as in such cost to cost basis reimbursement of out of pocket expenses, no benefit or perquisite is arising in the first place to attract TDS levy u/s 194R.

10. Applicability of Section 194R on Dealer Conference 

In Question No. 8, the CBDT Circular has clarified that the expenditure pertaining to deafer/business conference would not be considered as benefit/perquisite for the purposes of section 194R of the Act in a case where dealer/business conference is held with the prime object to educate dealers/customers about any of the following or similar aspects:

• 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.

However, such conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets. Further, in the following cases the expenditure would be considered as benefit or perquisite for the purposes of section 194R of the Act:

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

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

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

11. Guidelines for the Manner of Ensuring the Payment of TDS u/s 194R in case of Benefit or Perquisite is in Kind or partly in kind and in cash

In Question No. 9, the CBDT Circular 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. This year Form 26Q has included provisions for reporting such transactions.

As an alternative, to remove practical difficulty, if any, the benefit provider may deduct the tax under section 194R of the Act and pay to the Government. The tax should be deducted after taking into account the fact the tax paid by him as TDS is also a benefit under section 194R of the Act. In the Form 26Q he will need to show it as tax deducted on benefit provided.

12. Guidelines for Determination of Threshold Limit of Rs. 20,000 of the aggregate value of any Benefit or Perquisite for the FY 2022-23, under section 194R to be made applicable w.e.f. 1.7.2022

In its final Question No. 10, the CBDT Circular has clarified that:

• Since the threshold of twenty thousand rupees is with respect to the financial year, calculation of value or aggregate of value of the benefit or perquisite triggering deduction under section 194R of the Act shall be counted from 1st April, 2022. Hence, if the value or aggregate value of the benefit or perquisite provided or likely to be provided to a resident exceeds twenty thousand rupees during the financial year 2022-23 (including the period up to 30th June 2022), the provision of section 194R shall apply on any benefit or perquisite provided on or after July 2022.

• 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.

Concluding Remarks

The CBDT has done a good job in bringing about this timely Circular containing the Guidelines for practical implementation of the new TDS provision u/s 194R of the Act, w.e.f. 1.7.2022. However, off late, the CBDT Instructions and Circulars, some-how, try to encompass each and everything within the realms of tax net, and cover even those transactions or items, and in this case, the Benefits or Perquisites which are in fact not even intended by the Legislature, at the time of introducing the Legislative Provisions in the Income Tax Act.

The predecessor CBDT Instruction No. 1/2022 dated 11.5.2022 on the Implementation Guidelines for SC Judgement on Validity of Old Reassessment Notices, also brought about a notional and fictional concept of Time Travel in the Income Tax Act, and recommended the application of TOLA Extensions, even after accepting it as Revenue’s Bonafide Mistake and the newly amended legislative provisions concerning re-assessment in the Finance Act 2021, from some imaginary backdates, when in fact, the Finance Act 2021 was not even enacted, just in order to cover the time barred AYs 2013-14 and 2014-15 within the reassessment scope and also to do away with the more stringent criteria of establishment of escapement of income represented by an asset, for reopening beyond 3 years and upto 10 years for the AYs 2015-16, 2016-17 and 2017-18. The result in the form of rampantly issued Notices u/s 148A(b), and consequential Notices u/s 148, covering almost each and everything, under the guise of ‘information in possession’, are there to see, for everyone.

In the present case of New TDS Section 194R, the Explanatory Memorandum very clearly and categorically mandated that only those Benefits or Perquisites which are in the nature of Business Income u/s 28(iv) of the Income Tax Act, would be covered by this new TDS section 194R. However, the captioned CBDT Circular, takes a complete departure from the said Legislative Intent and is trying to bring all benefits or perquisites within the scope and coverage of section 194R, irrespective of whether or not those are business income u/s 28(iv) of the Act.

In fact, leave aside section 28(iv) of the Income Tax Act, the captioned CBDT Circular is trying to suggest that even those benefits or perquisites would also be covered in section 194R which are not even taxable in the hands of the recipient or which can’t be even classified or put under any head or section of income under the Income Tax Act. The CBDT Circular further goes to the extent of clarifying that TDS u/s 194R would be applicable even on Out of Pocket Expenses being reimbursed on Cost to Cost basis by the Service Recipient to the Service Provider, if the Bill of such Out of Pocket Expenses is not in the name of Service Recipient.     

In bringing such Circulars, it should be remembered that our Hon’ble Prime Minister Sh. Narendra Modi ji has referred the Taxpayers as “Wealth Creators in Nation Building”, and as such the ever growing tendency of killing the golden goose for short term gain of revenue maximisation, should be avoided, in order to bring in “Ease of Doing Business” at the ground level.  

Note: This Article has been authored by our Founder Director Shri Mayank Mohanka, FCA and has also been published in Taxmann with the Citation [2022] 139 taxmann.com 353 (Article).