Circular No. 12 of 2022
Government of India Ministry of Finance Department of Revenue
(Central Board of Direct Taxes)
New Delhi, dated 16th June, 2022
Finance Act 2022 inserted a new section 194R in the Income-tax Act, 1961(hereinafter referred to as"the Act") with effect from I st July 2022.
The new section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @I0% of the value or aggregate of value of such benefit or perquisite, before providing such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident.
This deduction is not required to be made, if the value or aggregate of value of the benefit or perquisite provided or likely to be provided to the resident during the financial year does not exceed twenty thousand rupees.
The responsibility of tax deduction also does not apply to a person, being an Individual/Hindu undivided family (HUF) deductor, whose total sales/ gross receipts/ gross turnover from business does not exceed one crore rupees, or from profession does not exceed fifty lakh rupees, during the financial year immediately preceding the financial year in which such benefit or perquisite is provided by him.
Sub-section (2) of section I 94R of the Act authorises the Board to issue guidelines, for removal of difficulties, with the approval of the Central Government. These guidelines are required to be laid before each House of Parliament and are binding on the income-tax authorities and the person providing the benefit or perquisite.
Accordingly, in exercise of the power conferred by sub-section (2) of section I 94R of the Act, the Board, with the prior approval of the Central Government, hereby issues the following guidelines:-
Answer: No. The deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Act. The amount could be taxable under any other section like section 41(I) etc. Section I 94R of the Act casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source@l0%. There is no fu11her requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.
In this regard it may be highlighted that in the context of section 195 of the Act it is a requirement to know whether the payment made by the deductor is income in the hands of the non-resident recipient as section 195 of the Act requires deduction on any other sum chargeable under the pi·ovisions of this Act at the rates in force. Thus there is requirement that deductor needs to verify if the "sum is chargeable under the Income-tax Act". The term "rate in force" is defined in clause (37A) of section 2 of the Act and it allows benefit of agreement under section 90 or section 90A of the Act, if eligible, in determining the rate of tax at which the tax is to be deducted at source. Hence, there is fu11her requirement of checking if the amount is taxable under tax treaty and if yes, at what rate. Such a requirement is not there in section 194R of the Act, in the absence of these two terms in this section. Hence, there is no requirement for deductor to verify whether the amount is taxable in the hands of the recipient or section under which it is taxable.
It may also be highlighted that these two terms are also not there in section 194E of the Act and I-lon'ble Supreme Cowt in the case of PILCOM vs. CIT West Bengal (Civil Appeal No. 5749 of 2012), held that tax is to be deducted under section I 94E of the Act at a specific rate indicated there i and there is no need to see the taxability or the rate of taxability in the hands of the non-resident.
Answer: Tax under section I 94R of the Act is required to be deducted whether the benefit or perquisite is in cash or in kind. In this regard it is important to draw attention to the first proviso to sub-section (I) of section 194R of the Act, which reads as under:
"Provided that in a case where the bene_fit or perquisite, as the case may be, is wholly in kind or partly in cash and partly in kind but such part in cash is not sufficient lo meet the liability of deduction of tax in respect of whole of such benefit or perquisite. the person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite:"
This proviso clearly indicates the intent of legislature that there could also be situations where benefit or perquisite is in cash or the benefit or perquisite is in kind or partly in cash and partly in kind. Thus, section l 94R of the Act clearly brings in its scope the situation where the benefit or perquisite is in cash or in kind or pa1tly in cash or pa1tly in kind.
Answer: As has been stated in response to question no I, there is 110 requirement to check whether the perquisite or benefit is taxable in the hands of the recipient and the section under which it is taxable.
Further, courts have held many benefits or perquisites to be taxable even though one can argue that they are in the nature of capital asset. The following judgments illustrate this point:
Thus, 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 I 94R of the Act in all cases where benefit or perquisite (of whatever nature) is provided.
Answer: Sales discounts, cash discount or rebates allowed to customers from the listed retail price represent lesser realization of the sale pri e itself. To that extent purchase price of customer is also reduced.
Logically these are also benefits though related to sales/purchase. Since TDS under section l 94R of the Act is applicable on all forms of benefit/perquisite, tax is required to be deducted. However, it is seen that subjecting these to tax deduction would put seller to difficulty. To remove such difficulty it is clarified that no tax is required to be deducted under section l94R of the Act on sales discount, cash discount and rebates allowed to customers.
There could be another situation, where a seller is selling its items from its stock in trade to a buyer. The seller offers two items free with purchase of IO items. In substance, the seller is actually selling l 2 items at a price of 10 items. Let us assume that the price of each item is Rs 12. In this case, the selling price for the seller would be Rs 120 for 12 items. For buyer, he has purchased 12 items at a price of I 0. Just like seller, the purchase price for the buyer is Rs 120 for 12 items and he is expected to record so in his books. In such a situation, again there could be difficulty in applying section 194R provision. Hence, to remove difficulty it is clarified that on the above facts no tax is required to be deducted under section l94R of the Act. It is clarified that situation is different when free samples are given and the above relaxation would not apply to a situation of free samples.
Similarly, 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 l94R of the Act (the list is not exhaustive):
The above examples are only illustrative. The relaxation provided from non-deduction of tax for sales discount and rebate is only on those items and should not be extended to others.
It is 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 vi1tue 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 l94R 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 lo thtJ hospitul. The hospital mny 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 l 94R of the Act by furnishing its tax return. It is fuither clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (I) of section l94R of the Act is also required to be seen with respect to the recipient entity.
Similarly, 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 : 94R of the Act with hospital as recipient and then hospital may
again deduct tax under section I 94R 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.
The provision of section l94R of the Act shall not apply if the benefit or perquisite is being provided to a Government entity, like Government hospital, not carrying on business or profession.
Answer: The valuation would be based on fair market value of the benefit or perquisite except in following cases:-
It is further clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section l94R of the Act.
Answer: 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 l 94R 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.
Answer: Any expenditure which is the Iiability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of busine s/profession.
Let us assume that a consultant is rendering service to a person "X" for which he is receiving consultancy fee. In the course of rendering that service, he has to travel to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to "X". Ordinarily, the expenditure incurred by the consultant is part of his business expenditure which is deductible from the fee that he receives from company "X". In such a case, the fee received by the consultant is his income and the expenditure incurred on travel is his expenditure deductible from such income in computing his total income. Now if this travel expenditure is met by the company "X", it is benefit or perquisite provided by "X" to the consultant.
However, sometimes the invoice is obtained in the name of "X" and accordingly, if paid by the consultant, is reimbursed by "X". In this case, since the expense paid by the consultant (for which reimbursement is made) is incurred wholly and exclusively for the purposes of rendering services to "X" and the invoice is in the name of "X", then the reimbursement made by "X" being the service recipient will not be considered as benefit/perquisite for the purposes of section l94R of the Act.
If the invoice is not in the name of "X" and the payment is made by "X" directly or reimbursed, it is the benefit/perquisite provided by "X" to the consultant for which deduction is required to be made under section I 94R of the Act.
Answer: The expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for the purposes of section I 94R 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:
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 I94R of the Act:-
Answer: The requirement of law is that if a person is providing benefit in kind to a recipient and tax is required to be deducted under section l94R of the Act, the person is required to ensure that tax required to be deducted has been paid by the recipient. Such 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 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.
In the alternative, as an option to remove 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.
Answer: It is hereby clarified that,-
Under Secretary to the Govt. of India
I . PS to FM/ OSD to FM/ PS to MoS(F)/ OSD to MoS(F)
Circular No 18 of 2022
Government of India Ministry of Finance Department of Revenue
Central Board of Direct Taxes (TPL Division)
New Delhi, Dated 13th September, 2022
Finance Act 2022 inserted a new section I 94R in the Income-tax Act, 1961 (hereinafter referred to as "the Act") with effect from I st July 2022.
5. Sub-section (2) of section 194R of the Act authorises the Board to issue guidelines, for removal of difficulties, with the approval of the Central Government. These guidelines are required to be laid before each House of Parliament and are binding on the income-tax authorities and the person providing the benefit or perquisite.
Answer: It is true that waiver or settlement of loan by the bank may be an income to the person who had taken the loan. It is also true that subjecting such a transaction to tax deduction under section 194R of the Act would put extra cost on such bank, as this would require payment of tax by the deductor in addition to him taking a haircut already. Hence, to remove difficulty, it is clarified that one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with the borrowers by the following would not be subjected to tax deduction at source under section I 94R of the Act:
As stated earlier, this clarification is only for the purposes of section l 94R of the Act. The treatment of such settlement/waiver in the hands of the person who had got benefitted by such waiver would not be impacted by this clarification. Taxability of such settlement/waiver in the hands of the beneficiary will be governed by the relevant provisions of the Act.
Answer: In answer to question No 7 of the Circular No 12 of 2022, it has been clarified that any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.
Now, if service provider incurs some expense in the course of rendering service to service recipient and the bill is in the name of service provider, then in substance (irrespective of the terms of the agreement) this expense is the liability of the service provider and not of service recipient. It is service provider who gets input credit of GST included in the expenses incurred by him. If it was the liability of the service recipient, then GST input credit would have been allowed to him (service recipient) and not to service provider. Hence, the answer to question No 7 in the Circular No 12 of 2022 correctly clarifies that in such a situation reimbursement of such an expense is benefit/perquisite on which tax is required to be deducted under section l 94R of the Act.
Subsequently, it has been brought to the notice that in GST, if service provider incurs an expense as "pure agent", then GST input credit is allowed to service recipient and not to service provider. Broadly speaking a pure agent is one who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply. While the relationship between them (provider of service and recipient of service) in respect of the main service is on a principal to principal basis, the relationship between them in respect of other ancillary services is that of a pure agent. Under the GST Valuation Rules 2017 "pure agent" is given the following meaning.
"pure agent" means a person who
The GST valuation rules provide that expenditure incurred as a pure agent, will be excluded from the value of supply, and thus also from aggregate turnover. However, such exclusion of expenditure incurred as a pure agent is possible only and only if all the conditions required to be considered as a pure agent and further conditions stipulated in the rules are satisfied by the supplier in each case. The supplier would have to satisfy the following conditions (in addition to the condition required to be satisfied to be considered as a pure agent and discussed above) for exclusion from the value as under:-
In case these conditions are not satisfied, such expenditure incurred is included in the value of supply under GST. However, in the abovementioned case of "pure agent", if all the conditions are satisfied, the GST input credit is allowed to the recipient and it is not considered as supply of the pure agent, it is clarified that amount incurred by such "pure agent" for which he is reimbursed by the recipient would not be treated as benefit/perquisite for the purpose of section l 94R of the Act.
Answer: Relevant portion of CBDT Circular No 715 dated 8th August 1995 is as under
Question 30: Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses?
Answer: Sections J 94C and J 94J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.
If out of pocket expenses (reimbursement) are already part of the consideration in the bill on which tax is deducted under the relevant provisions of the Act, other than section l 94R, in accordance with the Circular No 715 dated 8th August 1995, it is clarified that there will not be further liability for tax deduction under section 194R of the Act.
In the above example, out of pocket expense is part of the consideration in the bill for professional fee that is charged to the Company and the tax is deducted under section 1941 of the Act on the entire consideration including on out of pocket expense. In such a case, the out of pocket expense is already included as part of professional fee. Hence, there 1s no further benefit/perquisite which requires tax deduction under section l 94R of the Act.
Answer: Representations have been received from various stakeholders seeking clarity on these questions arising out of answer to question No 8. It is clarified that
In order to remove these practical difficulties, it is clarified that if benefit/perquisite is provided in a group activity in a manner that it is difficult to match such benefit/perquisite to each participant using a reasonable allocation key, the benefit/perquisite provider may at his option not claim the expense, representing such benefit/perquisite, as deductible expenditure for calculating his total income. If he decides to opt so, he will not be required to deduct tax under section l 94R on such benefit/perquisite and therefore he will not be treated as assessee in default under section 20 I of the Act. Thus, in such a case he must add back the expenditure, representing such benefit/perquisite, to calculate his total income if such expenditure is debited in the account.
Answer to question No 8 in the Circular No 12 of2022 is modified to this extent.
Answer: Once Company "A" has deducted tax on gifting of car in accordance with section 194 R of the Act (or released the car after dealer "B" showed him payment of tax on such benefit) and dealer "B" has included this benefit as income in his income tax return, it would be deemed that the "actual cost" of the car for the purposes of section 32 of the Act shall be the amount of benefit included by dealer "B" as income in his income-tax return. Hence, dealer "B" can get depreciation on fulfillment of other conditions for claiming depreciation.
Answer: For the removal of difficulty it is clarified that the provision of section 194R is not applicable on benefit/perquisite provided by, an organization in scope of The United Nations (Privileges and Immunity Act) 1947, an international organization whose income is exempt under specific Act of Parliament (such as the Asian Development Bank Act 1966), an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign state.
Answer: In case of bonus shares which are issued to all shareholders by a company in which the public are substantially interested as defined in clause (18) of section 2 of the Act, it has been represented that this does not result in any benefit to shareholders as the overall value and ownership of their holding does not change. Further cost of acquisition of bonus share is taken as nil for capital gains computation when this share is sold. Similar representations have been received seeking clarity on issuance of right shares.
It is clarified that the tax under section l 94R of the Act is not required to be deducted on issuance of bonus or right shares by a company in which the public are substantially interested as defined in clause (18) of section 2 of the Act, where bonus shares are issued to all shareholders by such a company or right shares are offered to all shareholders by such a company, as the case may be.
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