CBDT Circular No. 12/2022 – Guidelines for removal of difficulties U/s 194R
Central Board of Direct Taxes vide Circular No. 12/2022 dated 16.06.2022 has issued guidelines to remove difficulties arising in giving effect to provision of section 194R. While the guidelines have been issues for removal of difficulties, however, it appears that the Circular in some cases is, apparently, expanding the scope of the provision itself. The clarifications issued by the Board are as under:
Grossing up principle to apply where tax deduction at source borne by deductor
In case perquisite/ benefit is in kind or partly in cash and partly in kind and cash component is not sufficient to cover the Tax deduction at source obligation, for removal of difficulty, it has been clarified that the deductor, in alternate to the above option (where he obtains declaration and advance tax challan from the recipient), may himself deposit tax U/s 194R of the Income tax act. If tax is so borne and deposited by the deductor, then the deductor shall not only deposit tax in respect of such perquisite or benefit but shall also be required to deposit tax in respect of the Tax deduction at source by considering the same as a benefit or perquisite i.e. the principle of grossing up enshrined U/s 195A shall be followed.
No requirement to check whether benefit chargeable to tax in the hands of the recipient
It has been clarified that the deductor is not required to check whether benefits/perquisites are taxable in the hands of resident recipient and/or under which provisions of the Income tax act the same is taxable. This is because unlike section 195, section 194R of the Income tax act does not require that Tax Deduction at Source shall only be deductible when benefits/perquisites are chargeable to tax under the Income tax act.
Cash Benefits also to be subject to Tax deduction at source U/s 194R
It has been clarified that benefit must not be in kind only in order for provision of section 194R to be applicable. Tax deduction at source U/s 194R shall be applicable even where the benefit is in cash or partly in cash and partly in kind.
Declaration and advance tax challan to be obtained to ensure that recipient has paid tax in respect of benefit
In case perquisite/ benefit is in kind or partly in cash & partly in kind and cash component is not sufficient to cover the tax deduction at source obligation, it has been clarified that the deductor must take appropriate steps to ensure that tax has been deducted and paid by the recipient before releasing the benefits/perquisites to resident recipient. In such cases, it has been clarified that the deductor may rely on a declaration along with advance tax payment challan provided by the recipient confirming that tax required to be deducted on such benefits/perquisites has been deposited. It has been clarified that the challan number shall also be required to be reported in Form 26Q (Tax deduction at source return).
No needed to check whether benefit is a revenue receipt or capital receipt
It has been further clarified that the deductor is also not required to verify whether benefits/ perquisites constitute capital receipt or revenue receipt in the hands of recipient. Thus, regardless of the nature of receipt in the hands of the recipient, Tax deduction at source shall be required to be deducted in respect of benefit or perquisite U/s 194R.
Free sample Vs Quantity discount
By way of an illustration, it has been clarified that quantity discount will also be outside the scope of section 194R. For ‘quantity discount’, let’s suppose that a seller is selling 100 items and giving 5 items free along with them to the customer. So, the buyer is actually purchasing 105 items at a price of 100. In this situation, it has been clarified that if the invoice mentions the 100 items as well as the 5 items as a part of scheme, then no Tax Deduction at Source is required to be deducted.
But, the Circular clarifies that situation will be different when ‘free samples’ are given and that Tax deduction at source shall be required to be deducted U/s 194R in case of
free samples. Thus, in case the 5 items are given as ‘free samples’ in the above example, then as per the above Circular, Tax deduction at source shall be required to be deducted. Accordingly, moving forward, it will be advisable that free samples are not given independently and are rather made a part of the invoicing itself.
Separately, it has been clarified that all other sorts of benefits/ perquisites like sponsorships, free ticket, free medical samples to medical practitioners, incentives in the form of cash/kind like TV, mobile phones, car, computers, gold coin, etc. will be subject to Tax deduction at source.
Sales discount / Cash discount/Rebates
For removal of difficulties, it has been clarified that where cash discount/sales discount, rebate, etc. is given by a seller to a purchaser, then there shall be no requirement to deduct tax deduction at source U/s 194R on such cash discount/sales discounts/rebate. Thus, in case the seller sells 100 pieces of toys of INR 50 each at discounted value of INR 45 per piece, INR 5 per piece shall not be considered as a benefit/perquisite and No Tax deduction at source shall be required to be deducted U/s 194R.
Use of benefit by employee/director/owner of recipient entity
It has been clarified that in case benefit or perquisite is used by the director/ owner/employee of the recipient entity or their relatives, tax shall be required to be deducted U/s 194R even if such owner/director/employee/relative in their individual capacity may not be carrying on business or exercising a profession. In such cases, it has been clarified that the Tax deduction at source shall be deducted in the name of recipient entity since the usage by employee/relative/owner/director is by virtue of their relationship with the recipient entity.
By way of an example, it has been clarified that in case benefit is provided to an employee of the recipient entity, say a doctor who is an employee in the hospital, then Tax deduction at source shall first be deducted U/s 194R in the name of the recipient entity i.e. hospital & this benefit shall be treated as income of the hospital. The hospital may subsequently treat this benefit as perquisite given to an employee U/s 17 and deduct Tax deduction at source U/s 192 in the name of the employee. In such a case, the benefit will first be chargeable to tax in the hands of the hospital & subsequently be allowed as deduction as salary expenditure to the hospital. This way, the benefit would ultimately get taxed in the hands of the employee and not in the hands of the hospital.
It has been clarified that above said treatment may also be followed in case benefit is provided to a doctor who is working as a consultant in the hospital (as against an employee) wherein Tax deduction at source U/s 194R may first be deducted by the person giving gift in the name of the hospital & subsequently, hospital may again deduct Tax deduction at source U/s 194R in the name of the advisors for providing the same benefit to the consultant doctor. In order to remove difficulty in such cases (relationship as consultant), it has been clarified that original benefit or perquisite provider may directly deduct tax U/s 194R in the case of consultant as a recipient.
TDS u/s 194R not applicable where recipient is Govt.
As per explanation U/s 194R shall not apply to perquisites/benefits provided to Govt entity not carrying on business/profession (for ex: Govt Hospital).
Valuation of perquisite or benefit at FMV
It has been clarified that the benefits/perquisites will have to be valued at ‘fair market value’. But, two exceptions to the said Rule has been specified in the Circular as under:
- In case the provider purchases them before giving it to the recipient, the benefits/perquisites shall be valued at ‘purchase price’.
- In case the provider self manufactures them, the benefits/perquisites shall be valued at the price charged from other customers for such items.
Goods and services Tax not to be included in valuation of benefit ?
It has been clarified that goods & services Tax, if any, shall not be included for the purposes of valuation of perquisites/benefits
Products used by social media influencers
It has been clarified that products used by social media influencers to make their audios/videos will be subject to the provisions of section 194R, only if such products are retained by the person after its use for providing the service. But, in case
the product is returned to the provider manufacturing company after using the same for the purpose of rendering service, then it will not be treated as a benefit/perquisite and tax shall not be need to be deducted U/s 194R.
Reimbursements to be treated as perquisite
Reimbursement of out of pocket expenses incurred by the service provider in the course of rendering services is a common transaction. For instance, a lawyer based out of Delhi in order to provide services to its client may have to travel to Bangalore. The expenses incurred on travel and hotel stay are ordinarily reimbursed by the client as out of pocket expenses. In this circumstance, Central Board of Direct Taxes has clarified that reimbursement of expenses in such cases shall also be considered as a perquisite/ benefit for the purpose of section 194R. But, it has been clarified that reimbursement in such cases shall not be considered as a benefit/ perquisite if the invoice for such expenses to be reimbursed is in the name of the person reimbursing such expense (i.e. the client in the given case).
Thus, in case the invoice is not in the name of the person reimbursing such expenses (i.e. client) but in the name of the service provider (lawyer in the present case), then such reimbursements shall be treated as perquisite/benefit and Tax deduction at source shall be required to be deducted U/s 194R of the income tax Act. In such cases, the benefit shall be considered as income of the service provider (lawyer) and the service provider shall be entitled to deduction of expenses paid for which reimbursement was sought (travel and hotel stay in the given example).
The above explanation apparently seeks to expand the scope of section 194R. When a service recipient is reimbursing the service provider for expenses incurred in the course of providing the services, it is not clear as to how such reimbursement can be considered as a ‘benefit’ or ‘perquisite’ for the service provider. Be that as it may, it may be relevant to point out that way back in 1995, Central Board of Direct Taxes had issued Circular No. 715 dated 08.08.1995 to provide clarification on Tax deduction at source provisions. Vide frequently asked Questions No. 30, Central Board of Direct Taxes considered the issue as to whether the deduction of tax at source under Section .
194J & 194C has to be made out of Total Bill including reimbursement or excluding reimbursement for actual expenses. In this regard, Central Board of Direct Taxes clarified that Tax deduction at source has to be deducted on Total bill including the reimbursement. Relevant extract is as under:
Q: 30 : Whether the deduction of tax at source U/s 194J & 194C has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?
Ans : Under Sections 194J & 194C refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
Going forward, in case the main invoice issued by the hotel, airlines, etc is not in the name of the client but in the name of the service provider, while reimbursing such expenses, an issue may arise as to whether one should follow the earlier Circular No. 715/1995 and accordingly deduct Tax deduction at source with reference to the provision under which main service is subjected to tax (say 194J, 194C, other provision where term used is ‘any sum’) or to follow current Circular No. 12/2022 and deduct Tax deduction at source U/s 194R. Because rate of Tax deduction at source prescribed U/s 194R is higher (10%), it may be suggestion to deduct Tax deduction at source U/s 194R to safeguard oneself from litigation.
Tax Deduction At Source obligation in respect of dealer conferences
Dealer/business conferences is a common trend in the industry. For instance, a car manufacturer may host conferences for its dealers from time to time. In such a case, an issue may arise as to whether such conferences shall be considered as perquisite/ benefit for the purpose of section 194R.
Central Board of Direct Taxes has been clarified that expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite 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 customers/ dealers
- teaching sales techniques to customers/ dealers
- addressing queries of the customers/ dealers
- reconciliation of accounts with customers/ dealers
It may be noted that the above list is not an exhaustive list and ordinary dealer conferences to educate dealers regarding topics similar to the ones stated above shall not be considered as perquisite/ benefit.
Incentives for specific dealers – to be treated as perquisite
It has been clarified that in case dealer conference is the nature of incentives/benefits to select dealers/customers who have achieved particular targets, then the same shall be treated as a perquisite/ benefit. Thus, in case the objective of dealer conference is not to educate dealers in general but to only give benefit to only few specified dealers who have achieved particular targets, then the same shall be considered as a benefit and Tax deduction at source shall be required to be deducted U/s 194R of the income Tax Act 1961.
Instances relating to Dealer conferences which shall be considered as ‘benefit’ Additionally, it has been clarified in the Circular that the following specific cases will be considered as perquisite/ benefit for the purpose of section 194R of the Act:
- Leisure component – Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business
- Accompanying Family member: Expenditure incurred for family members accompanying the person attending dealer/business
- Stay prior or after dealer 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
The stand of the Income tax Dept. that stay of family members and the say period prior to/after the dealer conference should be considered as benefit may be understandable. But circular envisages that the expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business conference, shall still be considered as benefit or perquisite. This clarification may lead to litigation.
Say a Corporate organizes a dealer conference in Goa for 3 days wherein the hotel stay and all meals are paid for. The dealer conference normally takes place during the day time from 10 AM to 5 PM. In such a case, Revenue may argue that expense attributable to the hotel stay and night meals shall be considered as leisure component and should be considered as a benefit. Income Taxpayer on the contrary may argue that the same should not be seen as a benefit as it is a normal practice that hotel stay and meals are covered during Three day period during which dealer conference takes place. This clarification thus may lead to litigation between the taxpayer and the Income tax Dept.
Income Tax Taxpayers will now be needed to be identify as to whether there is any ‘leisure component’ in the dealer conference and expenses attributable to the same shall be needed to be considered as benefit.
20,000 thresholds to be computed with reference to benefit provided during entire FY 2022-23
It has been clarified that section 194R is applicable from 01.07.2022 and tax shall be required to be deducted only in respect of benefits provided on or after 01 July 2022. No Tax shall be required to be deducted for benefits provided prior to 01 July 2022. However, it has been clarified that for the purpose of checking limit of INR 20,000/- in Financial Year 2022-23, it has been clarified that the entire FY beginning from 01.04.2022 shall be considered.
Thus, in case benefit of say INR 50,000 has already been provided to a particular person during April-June 2022, subsequently, in case a benefit of INR 10,000 is provided to such person in August/July, 2022, Tax deduction at source shall be required to be deducted U/s 194R in respect of INR 10,000 notwithstanding that the quantum is less than INR 20,000/-
- New TDS deduction No cash transactions exceeding 1 Crore -Section 194N
- Deduction u/s 80CCD of Income Tax Act, 1961
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