Taxmann's TDS on Benefits or Perquisites under Section 194R

Chapter-heads I-5

Alphabetical Reckoner of TDS under section 194R on perquisites and benefits I-27

1

DEDUCTION OF TAX ON THE BENEFIT OR PERQUISITE IN RESPECT OF BUSINESS OR PROFESSION [SECTION 194R]

1.1 Salient features of section 194R providing for deduction of tax on the benefit or perquisite in respect of business or profession 1

1.2 Rationale for enacting section 194R 5

1.3 Ingredients of section 194R 5 2

‘PROVIDER OF BENEFIT OR PERQUISITE’/ ‘DEDUCTOR’/‘ENSURER’

2.1 Obligation is on any person responsible for providing benefit or perquisite (deductor) 7

2.2 Applicability to a non-resident provider 8

2.3 Exemption to specified individuals and specified HUFs from deducting tax under section 194R 9

2.3.1 Applicability of ICDSs for determining turnover of individual/HUF for determining whether he is liable to deduct TDS 9

2.3.2 Applicability of section 145A(ii) for determining turnover of individual/HUF for determining whether he is liable to deduct TDS 9

2.3.3 Applicability of section 194M to benefit or perquisite covered by section 28(iv)/section 194R 10

2.4 Whether Embassy/High Commissions are required to deduct tax under section 194R of the Act? 10

BENEFIT

OR

PERQUISITE SHOULD BE PROVIDED TO A SPECIFIED DEDUCTEE I.E. A RESIDENT RECIPIENT WHO SATISFIES SPECIFIED CONDITIONS

3.1 Who should be the recipient of the benefit/perquisite so as to trigger the obligation under section 194R(1)? 11

3.2 Recipient should not be employee of provider of benefit/ perquisite 13

3.2.1 Test of existence/non-existence of employer-employee relationship between deductor (provider) of benefit/ perquisite and recipient 14

3.3 Recipient must be carrying on business/profession 17

3.3.1 Payment made by company to Panchayat Samiti for village development/temple development/ compensation or any other reason for the smooth execution of projects-Whether TDS u/s 194R deductible on such payment? 18

3.3.2 Whether company is required to deduct TDS u/s 194R on payments made by it towards Donations/CSR Expenditure? 18

3.4 Resident recipient must be having a business or professional relationship with the provider of benefit/perquisite (deductor) 19

3.5 What if the recipient of the benefit or perquisite is a non-resident? In that case, will tax have to be deducted under section 195? 21

SPECIFIED BENEFIT/PERQUISITE

4.1 Specified benefit/perquisite: Benefit or perquisite which if provided triggers provider’s (deductor’s) liability to deduct TDS under section 194R 22

4.2 ‘Any benefit or perquisite’ 23

4.3 Meaning of ‘benefit’ 25

4.4 Meaning of ‘perquisite’

4.5.1 Whether company which is manufacturer of capital goods needs to deduct TDS under section 194R on 2-year free maintenance services provided to buyer of capital goods?

4.6

v. Compensation

4.7 Benefit or perquisite should be in the nature of income

4.8 Legal right to claim benefit or perquisite

4.9 Is it necessary that the benefit or perquisite must be in kind for section 194R of the Act to operate?

4.9.1 CBDT’s clarification in Circular No. 12/2022 clarifying that section 194K would apply to monetary benefits/ perquisites also

4.9.2 Amendment of section 194R by Finance Act, 2023 (Explanation 2) clarifying that monetary perquisite/ benefits are covered u/s 194R

4.10 Illustrative list of items that will be treated as benefit or perquisite for TDS purposes u/s 194R (as per CBDT’s Circular No.12/2022, dated 16.06.2022)

4.11

or perquisite, whether convertible into money or not

4.12 Link between section 28(iv) and section 194R

4.12.1 Comparison of section 28(iv) and section 194R(1)

4.12.2 Analysis of the amended section 28(iv)

4.12.3 Benefit or perquisite

4.12.4 ‘Value’ for section 28(iv) purposes

4.13 Benefit or perquisite must be ‘arising from business or the exercise of a profession, by such resident’

4.13.1 Payment made by company to Panchayat Samiti for village development/temple development/ compensation or any other reason for the smooth execution of projects - Whether TDS u/s 194R deductible on such payment?

4.13.2 Whether company is required to deduct TDS u/s 194R on payments made by it towards Donations/CSR Expenditure?

4.16 Discounts, rebates, gifts, incentives etc. to buyers - Whether liable to TDS under section 194R

4.17 Value of benefit or perquisite is ` 20,000 or less 63

OBLIGATION CAST UPON BY SECTION 194R ON THE “DEDUCTOR” (PROVIDER OF BENEFIT/PERQUISITE)

5.1 Obligation is to ‘ensure’ that tax has been deducted 65

5.2 How to comply with section 194R(1) and the first proviso thereto 66

5.3 CBDT’s clarification 66

5.4 Rate of TDS if deductee does not furnish PAN/or is a non-filer 68

5.5 Whether deductee can apply for a certificate of lower deduction or nil deduction 68

5.6 Whether non-deduction based on Form No. 15G/15H is applicable 69

5.7 It shall be ‘ensured that tax has been deducted’ before providing such benefit or perquisite (Time of deduction)

5.8 Meaning of ‘providing’ benefit or perquisite to a resident

5.8.1 Different stages of delivery of benefit/perquisite

5.8.2 Implications on the cancellation of the foreign tour by a dealer/distributor 73

5.9 Deduction of tax in case of continuous providing of benefits or perquisites 73

5.10 Obligation to ensure that tax required to be deducted has been paid if the benefit or perquisite is wholly in kind or partly in cash and partly in kind

5.10.1 Meaning of ‘in kind’

5.10.2 Meaning of ‘tax’

5.11 How to comply with the first proviso i.e. how to ensure that tax required to be deducted has been paid where perquisite/ benefit is wholly in kind or partly in cash and partly in kind?

5.12 Whether the first proviso can be construed as requiring deduction of tax at source u/s 194R where perquisite/benefit is wholly in cash/money?

5.13 Where perquisite/benefit is wholly in cash, or partly in cash and partly in kind, whether TDS under other applicable sections such as section 194J/section 194C/section 194H will also have to be deducted on cash perquisite/cash component of perquisite? In other words, will cash component attract TDS under section 194R as well as other applicable TDS sections? 79

‘REMOVAL OF DIFFICULTY CLAUSE’ - POWER OF CBDT TO ISSUE REMOVAL OF DIFFICULTIES GUIDELINES

6.1 Rationale for removal of difficulty clause in newly enacted law or newly enacted legal provision 82

6.2 Power of CBDT to issue guidelines for removing any difficulty that arises in giving effect to the provisions of section 194R 83

6.3 Removal of Difficulties Guidelines not binding on resident recipient for section 28(iv) purposes 84

6.4 Removal of difficulty Guidelines binding on ‘income tax authorities’ 84

6.5 Grounds on which the Removal of Difficulties clause as well as Guidelines/Orders issued thereunder can be challenged in a writ petition in High Court

85

6.6 Grounds on which Guidelines issued by CBDT under section 194R(2) can be challenged in writ petitions 85

7

VALUATION OF BENEFITS/PERQUISITES

7.1 How is the valuation of benefit/perquisite required to be carried out for the purposes of section 194R? 90

7.2 Valuation if item provided as perquisite is purchased by provider and provided to recipient 90

7.3 Valuation if item provided as perquisite is manufactured by the provider of benefit/perquisite 91

7.4 Valuation based on Fair Market Value 92

7.5 Grey areas in valuation-what about benefit/perquisite which is neither purchased nor manufactured by provider nor is a capital asset (e.g. services rendered free or at a huge discount, rental accommodation provided) 94

7.6 Above valuation norms not binding on the resident recipient for the purposes of section 28(iv)

7.7 Whether above valuation norms can be challenged in appellate fora? 96

APPLICABILITY

OF SECTION

8

194R TO PURELY MONETARY PERQUISITES/BENEFITS

8.1 Whether provisions of section 194R are applicable to wholly monetary perquisites?

8.2 Redemption/buy-back of FCCBs at a discount

8.3 Share application money subsequently written back in books of account

8.4 Subsidy given by company to dealer/distributor for purchase of van which was to be utilised for display and demonstration of logo of company

9

APPLICABILITY OF SECTION 194R TO PRINCIPAL AMOUNT OF LOAN WAIVED

9.1 Applicability of section 194R to loan waiver granted by bank to borrower under OTS

9.1.1 CBDT’s clarifications in Circular No.12/2022 and Circular No. 18/2022

9.1.2 Amendments made by Finance Act, 2023 to section 28(iv) and section 194R

9.2 Waiver by bank of loan taken by assessee for his personal purposes/Non-business purposes - Whether bank liable to deduct TDS

APPLICABILITY OF SECTION 194R/SECTION 28(iv) TO INTEREST-FREE

LOAN

10.1 Whether interest on interest-free loans to dealers, suppliers, etc. would be a ‘benefit or perquisite’?

11

APPLICABILITY OF SECTION 194R/SECTION 28(iv) TO DISCOUNTS, REBATES, GIFTS, INCENTIVES, CASHBACKS ETC.

11.1 Whether sales discount, cash discount, rebates, gifts, incentives to buyers/customers are benefit or perquisite for the purposes of section 194R/section 28(iv)?

11.2 Whether incentives to buyer in the form of free items other than items from his stock-in-trade or cash incentives will attract TDS under section 194R/section 28(iv)?

11.3 Cashbacks - Whether perquisite or benefit

12

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO AMOUNT RECEIVED UNDER CONSENT DECREE FROM SELLER OF PLOT FOR BREACH OF CONTRACT TO DELIVER POSSESSION OF PLOT

12.1 Amount received under consent decree from seller of plot for breach of contract to deliver possession after agreement to sell & receiving earnest money

12.2 CBDT’s views on applicability of section 194R

13

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO BENEFITS OR PERQUISITES PROVIDED IN THE FORM OF CAPITAL ASSETS

13.1 Benefits or perquisites provided in the form of capital assets

13.2 Benefits under advance license or DEPB

13.3 No benefit or perquisite arises where capital asset given conditionally under contract are returned as recipient failed to fulfil conditions

13.4 Valuation of benefit or perquisite in the form of a capital asset for section 194R purposes

13.5 Valuation of a benefit or perquisite in the form of a capital asset for section 28(iv) purposes

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO BENEFITS OR PERQUISITES PROVIDED IN THE FORM OF SHARES

14.1 No benefit or perquisite arises where shares given conditionally under contract are returned as recipient failed to fulfil conditions

14.2 Purchase of shares of a non-related company from parties other than the company, at a price less than fair market value

14.3 Issue of bonus shares/rights shares by a widely held company (i.e. a company in which public are substantially interested)Whether benefit/perquisite for section 194R purposes?

14.3A Issue of bonus shares/rights shares by a widely held company - Whether benefit/perquisite for section 28(iv) purposes?

14.4 Shares issued to director

14.4.1 Valuation

14.5 Valuation where benefit/perquisite is in the form of shares

14.5.1 Fair Market Value of quoted shares and securities as per Rule 11UA(1)(c)(a)

14.5.2

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO BENEFITS OR PERQUISITES PROVIDED IN THE FORM OF LAND

15.1 Where assessee-firm purchased a land with co-owner and received excess share in partition of land

15.2 Value of gift of land to preacher by disciple

15.3 Valuation of perquisite/benefit provided in the form of gift of land for section 194R purposes

15.4 Valuation of perquisite/benefit in the form of gift of land for section 28(iv) purposes

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO BENEFITS OR PERQUISITES PROVIDED IN THE FORM OF JEWELLERY

16.1 Applicability of section 28(iv)/section 194R to benefits or perquisites provided/received is in the form of jewellery 145

16.2 Valuation of jewellery for section 194R purposes 145

16.3 Valuation of perquisite/benefit in the form of gift of jewellery for section 28(iv) purposes 146

17

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO BENEFITS OR PERQUISITES PROVIDED IN THE FORM OF ARCHAEOLOGICAL COLLECTIONS, PAINTINGS, DRAWINGS, SCULPTURES OR ANY WORK OF ART

17.1 Applicability of section 28(iv)/section 194R to benefits or perquisites provided/received is in the form of archaeological collections, paintings, drawings, Sculptures or any work of art

17.2 Valuation for TDS purposes

17.3 Valuation of perquisite/benefit in the form of gift of archaeological collections, paintings, drawings, sculptures or any work of art for section 28(iv) purposes

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO BENEFITS OR PERQUISITES PROVIDED IN THE FORM OF CAR, FURNITURES/FIXTURES

18.1 Applicability of section 28(iv)/section 194R to benefits or perquisites provided/received is in the form of car, Furnitures/ fixtures provided to director 150

18.2 Valuation of car/furnitures/fixtures for section 194R purposes 152

18.2.1 Valuation of Brand new car 152

18.2.2 Valuation of second hand car owned by provider 153

18.3 Gift in kind (car of the co-sponsor of the campaign) to brand ambassador of environmental campaign 153

18.4 Valuation of perquisite/benefit for section 28(iv) purposes 154

COMPLIMENTARY COPIES PROVIDED BY PUBLISHERS TO AUTHORS/OTHERS

19.1 Backdrop

19.2 Applicability of section 28(iv)/section 194R to Complimentary Copies provided by publishers to authors

20

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO FREEBIES GIVEN BY PHARMA COMPANIES TO DOCTORS

20.1 Requirements of Medical Ethics, Explanation 1 to section 37(1) and Explanation 3 to section 37(1)

20.2 Whether freebies provided by pharma company to doctors tainted by unethicality and illegality and hit by disallowance under Explanation 1 and Explanation 3 to section 37(1) are perquisites for section 28(iv) and section 194R purposes?

20.3 Whether free samples to physicians/doctors are perquisites taxable in the hands of doctors u/s 28(iv) and attract TDS under section 194R?

21

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO GIFTS TO BRAND AMBASSADORS

21.1

21.3 How to comply with section 194R in respect of gift of expensive watch to brand ambassador by watch manufacturer

22

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO FOREIGN TOURS ORGANISED FOR DEALERS/ AGENTS WHO ACHIEVE TARGETS

22.1

22.2 What will be the TDS implications if an insurance company organises foreign travel for its agents?

23

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO PRODUCTS GIVEN FREE TO SOCIAL MEDIA INFLUENCERS

23.1 Applicability of section 28(iv)/section 194R to products given free to social media influencers 171

23.2 Valuation for TDS u/s 194R purposes 172

23.3 Valuation of perquisite/benefit to SMIs for section 28(iv) purposes 172

24

APPLICABILITY OF SECTION 28(iv)/ SECTION 194R TO REIMBURSEMENTS

24.1 Reimbursements 173

24.2 Making payment to someone who has not incurred the expense to be passed on to someone else, is not “reimbursement”

24.3 Whether reimbursement of out of pocket expense incurred by service provider in the course of rendering service is benefit/ perquisite? 175

25

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO DEALERS’ CONFERENCE

25.1 Applicability of section 28( iv )/section 194R to dealers’ conference 183

25.2 Valuation of dealers’ conference for section 194R purposes 186

25.3 Valuation of perquisite/benefit for section 28(iv) purposes 187

26

APPLICABILITY OF SECTION 28(iv)/ SECTION 194R TO AMALGAMATION

26.1 Where assessee-company amalgamated with 3 companies and Net book value of assets taken over exceeded consideration paid for acquiring 3 companies 188

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO SHAREHOLDER’S LOAN TO COMPANY CONVERTED INTO HIS EARNEST MONEY FOR PROPERTY SALE TO HIM AND FORFEITED BY COMPANY FOR FAILURE TO PAY BALANCE

27.1 Shareholder’s loan to company converted into his earnest money for property sale to him and forfeited by company for failure to pay balance

APPLICABILITY OF SECTION 28(iv)/SECTION 194R TO NON-MONETARY BENEFITS GIVEN TO PARTNER

28.1 Applicability of section 28(iv)/section 194R to perquisites given to the partner 191

28.2 Valuation of non-monetary perquisites given by professional firms/LLPs to their partners for section 194R purposes 192

28.3 Valuation of perquisite/benefit for section 28(iv) purposes 192

28.4 At what stage to ‘ensure’ TDS deduction as per section 194R 192

APPLICABILITY OF SECTION 194R TO ASSET TRANSFERRED TO RETIRING PARTNER

29.1 Applicability of section 194R to asset transferred to a retiring partner 193

PERQUISITES/BENEFITS PROVIDED TO A DIRECTOR OF A COMPANY

30.1 Whether company directors are employees and payments to them are liable for TDS u/s 192? 194

30.2 Buses owned by transport company sold to directors at written down value which is much below fair market value 195

30.2.1 Valuation

30.3 Repairs and renovations to own apartments of directors at cost to company

30.4 If no office in the residential accommodation provided to director, residence and other facilities cannot be treated as used for official purposes

31

PERQUISITES PROVIDED BY HOSPITAL TO DOCTORS

31.1 TDS on Perquisites/Benefits provided by Hospital to Doctors 196

31.2 Tests to Determine Whether Consultant Doctors are Employees of Hospital or Independent Professionals 196

31.3 Net Position which emerges 205

31.4 Perquisites/benefits provided by pharma companies to doctors of a hospital 206

32

TIPS COLLECTED BY HOTEL/FOOD DELIVERY APPS FROM CUSTOMERS AND PAID OVER TO EMPLOYEES/‘DELIVERY PARTNERS’

32.1 Tips collected by hotel from customers and paid to employees 207

32.2 Whether tips collected by food delivery apps and paid to delivery boys who are its employees are liable for TDS u/s 192 208

32.3 Whether TDS deductible on these tips u/s 194R, as TDS u/s 192 does not apply 208

33

BAD DEBTS WRITTEN OFF - WHETHER PERQUISITE/BENEFIT LIABLE FOR TDS U/S 194R

33.1 Bad debts written off - Whether perquisite/benefit liable for deduction of TDS under section 194R? 209

33.1.1 Whether writing off debt is a benefit for the debtor? 210

33.1.2 Whether such benefit could be said to be ‘provided’ by the creditor? 210

33.2 Waiver of interest on delayed payments - Whether liable to TDS u/s 194R 211

REWARDS TO ATHLETES/SPORTSPERSONS WHO WIN MEDALS IN OLYMPICS/WORLDS ETC.

34.1 Backdrop

34.2 Rewards received by Olympic/Asiad/CWG medal winners from the Central Govt. or any State Govt. are tax-free u/s 10(17A)(ii)

34.3 Awards & rewards not covered by CBDT’s exemption Order u/s 10(17A)(ii)

34.4 Amateur/Non-professional sportsperson v. Professional Sportsperson

34.5 Award received by non-professional/amateur sportspersonWhether taxable? Whether liable to TDS u/s 194R?

34.6 Award received by a professional sportsperson - Whether taxable? Whether liable TDS u/s 194R?

34.7 Rewards not covered by CBDT’s exemption order u/s 10(17A) (ii) - Whether taxable? Whether liable to TDS u/s 194R?

35

FREQUENTLY ASKED QUESTIONS (FAQs)

35.1 Sir, in guidelines, Board has mentioned of one time settlement is liable for TDS so whether bad debts written off is also liable for TDS?

35.2 What if the benefit has been provided by a person but not utilised it - Can it be said no advantage was received/availed/enjoyed/ gained anything from it and hence not a benefit. For instance leisure trip arranged for dealers but few of them could not go for the trip will it be subject to TDS u/s 194R considering the language used u/s 194R is ‘providing’?

35.3 Is section 194R applicable on perquisites provided under section 17(1) and 17(2) under head salary?

35.4 TDS cannot be deducted on consideration given in kind. Can it be said that after ascertaining the fair market value of the consideration, TDS can be deducted?

35.5 How it is practicable to deduct tax from others when its providing at free of cost?

35.6 Discount meant for ultimate consumer, reimbursed by distributor to retailer, by company to distributor. Would it covered under section 194R or company can claim this as discount?

35.7 If one is deducting TDS on reimbursement of expenses of CHA, u/s 194C, whether one is supposed to deduct TDS u/s 194R on reimbursement of expenses?

35.8 If car, laptop, foreign trip, etc. is given, on what amount the TDS will be deducted?

35.9 We are dealing with the Laboratory where we provide an instrument worth ` 4 lacs FOC and earning from its consumables within 3 years span of the business

35.10 A manufacturer provides reimbursement to its distributor for the free goods given by him to retailers. Are these benefits or perquisites?

35.11 An FMCG company provides reimbursement to the distributor for the goods delivered to the location of the retailers. Are these benefits or perquisites?

35.12 Whether complimentary copies of the books given by publisher to author a benefit or perquisites?

35.13 A company agrees to arrange foreign tours for dealers and distributors/agents who achieve specific targets. Who has to comply with section 194R? The company or the tour operators/ airlines/hotels who after accepting payments deliver the promised foreign tour to dealers/distributors/agents?

35.14 A client pays additional sum to architect for good work: TDS under section 194J or 194R or both sections?

35.15 A publisher provides complimentary copies to authors. How to value this perquisite or benefit. Publisher sells book at 40% discount to distributor and at 10% discount to end customers. Which price to adopt for valuation?

35.16 Whether the Company needs to deduct tax under section 194R on goods issued to vendors as a free sample?

AVENUES FOR LITIGATION

36.1 Backdrop

36.2 CBDT’s Clarification that section 194R has no nexus with section 28(iv)

36.3 CBDT’s Clarification on applicability to wholly monetary perquisites

36.4 Clarification on reimbursement in Question 7 of the Circular runs contrary to judicial definitions of reimbursement and section 190

36.5 CBDT’s clarification on valuation not clear and comprehensive 230

36.6 Benefit/perquisite arising from business or profession of recipient 231

36.7 CBDT’s clarification implying bad debts written off unilaterally will attract TDS 231

36.8 Reliance in Circular on Judicial decision reversed by Supreme Court 231

36.9 CBDT’s clarification that free samples will attract TDS under section 194R 231

AMENDMENTS MADE TO INCOME TAX RULES CONSEQUENT TO SECTION 194R

37.1 Separate reporting of tax payments made in accordance with Provisos to sections 194B, 194R and 194S

APPLICABILITY OF PENALTY AND PROSECUTION FOR DEFAULT IN DEDUCTING TDS U/S 194R

38.1 Consequential amendments by FA, 2023 to penalty provisions in section 271C to provide for penalty for violation of section 194R

38.1.1 Pre-amended provisions of section 271C

38.1.2 Consequential amendments to section 271C necessitated by insertion of new TDS sections 194R and 194S by the Finance Act, 2022 and new section 194BA inserted by Finance Act, 2023

38.2 Consequential amendments by FA, 2023 to section 276B to provide for prosecution for violation of section 194R

38.2.1 Pre-amended section 276B

38.2.2 Consequential amendments to section 271C necessitated by insertion of new TDS sections 194R and 194S by the Finance Act, 2022 and new section 194BA inserted by Finance Act, 2023

38.2.3 Amendment by Finance (No. 2) Act, 2024 w.e.f. 01.10.2024 240

Specified benefit/perquisite

4.1 Specified benefit/perquisite: Benefit or perquisite which if provided triggers provider’s (deductor’s) liability to deduct TDS under section 194R

In order to trigger liability of deductor (benefit/perquisite provider) under section 194R to ensure that tax has been deducted, it is necessary that specified benefit/perquisite should have been provided by him to specified deductee. Benefit/perquisite shall be a specified benefit/perquisite only if it satisfies the following conditions:

(

a) It is any benefit or perquisite;

(b) It may or may not be convertible into money;

(

c) It (benefit or perquisite) may be in cash or kind or partly in cash and partly in kind. [Explanation 2 to Section 194R inserted by the Finance Act, 2023 with effect from 01-04-2023]

(d) It should arise from the carrying on of business or exercise of profession by the specified deductee (resident recipient satisfying certain conditions) ; and

(

e) Value of such benefit or perquisite or the aggregate value of such benefits/perquisites provided during the financial year should not exceed ` 20,000.

Section 194R provides for deduction of tax from “any benefit or perquisite…”. Section 194R does not define the words “benefit” and “perquisite”. Nor are these words defined in section 28(iv). These words are also used in sub-clauses (iv) and (iva) of clause (24) of section 2 but are not defined by the said sub-clauses also.

4.2 ‘Any benefit or perquisite’

The word “any” in the phrase “any benefit or perquisite” casts the net far and wide and admits only those limitations that are imposed by the context. This is clear from the following decisions:

The words “any one” in common conversation or literature are not infrequently used to mean “every one” — not one, but all. “In affirmative sentences, it asserts, concerning a being or thing of the sort named, without limitation as to which, and thus collectively of every one of them” (Oxford Dictionary) The Chief Inspector of Mines and another v. Lala Karam Chand Thapar etc. (1962) 1 SCR 9.The word “any” in the said case was suffixed by the word “one”, still the Court held that the words “any one” would mean “all” and not “one”. It is to be noted that in the present case in section 26(2) of RBI Act,1934, the legislature has not employed the word “one” after the word “any”. Therefore, the ratio in Lala Karam Chand Thapar(Supra) would all the more apply to the word “any” in section 26(2) of RBI Act,1934 [Vivek Narayan Sharma v. Union of India [2023] 146 taxmann.com 36 (SC)[02-01-2023]]

“Anything said ....in Parliament” in Article 105 of the Constitution: The word “anything” is of the widest import and is equivalent to “everything”. The only limitation arises from the words “in Parliament” which means during the sitting of Parliament and in the course of the business of Parliament.- Banwarilal Agarawalla v. State of Bihar and others (1962) 1 SCR 33

An argument was sought to be advanced that since Section 35 of the Foreign Exchange Management Act, 1999 uses the words “any decision or order”, only appeals from final order could be filed. The Court rejected the argument holding that “In the instant case also when a right is conferred on a person aggrieved to file appeal from “any” order or decision of the Tribunal, there is no reason, in the absence of a contrary statutory intent, to give it a restricted meaning. Raj Kumar Shivhare v. Assistant Director, Directorate of Enforcement (2010) 4 SCC 772

Word ‘any’ used 5 times in definition of ‘deposit’ in section 2(c) of MPID Act shows clear intent of the Legislature to cast far and wide the net of the regulatory provisions -State of Maha-

rashtra v. 63 Moons Technologies Ltd. [2022] 137 taxmann.com 365 (SC)

In Vivek Narayan Sharma v. Union of India [2023] 146 taxmann. com 36 (SC) [02-01-2023] wherein the legal validity of demonetisation of Rs. 500 and Rs. 1000 notes in 2016 by notification issued u/s 26(2) of RBI Act was challenged. It was contended that Section 26(2) route can be adopted to demonetize “any series of bank notes of any denomination and not “all” series of bank notes of any denomination. The word in section 26(2) “Any” should be construed as “one” or “some” and not “all”. The Court rejected the above contention and held that the power available to the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes as “any” means “all” and not “one” or “some”. The Court further held that if the argument that the provisions of sub-section (2) have to be interpreted in a restricted manner, is to be accepted, it may, at times, lead to an anomalous situation. For example, if there are 20 series of a particular denomination, and if the argument of the petitioners is to be accepted, the Central Government would be empowered to demonetize 19 series of a particular denomination, leaving one series of the said denomination to continue to be a legal tender, which would lead to a chaotic situation.

Thus, any and every benefit or perquisite, whether in cash or in kind or partly in cash and partly in kind and whether convertible into money or not, will be covered by section 194R(1) The only limitations on the width of the expression “any benefit or perquisite” are the following limitations imposed by the section itself:

(1) The benefit or perquisite should be provided by any person to a resident.

(2) Not every advantage flowing to a resident recipient from person providing it can be treated as benefit or perquisite. What is received by recipient should be a “benefit or perquisite” within the ordinary connotation of the term. It is noteworthy that, unlike section 17(2), section 194R does not empower CBDT to deem anything as perquisite or benefit by rules notified.

(3) The “benefit or perquisite” should be one arising to recipient from business or exercise of a profession.

4.3 Meaning of ‘benefit’

Black’s Law Dictionary gives the following definitions of ‘benefit’: benefit, n. (14c) 1. Advantage; privilege <the benefit of owning a car>. 2. Profit or gain; esp., the consideration that moves to the promisee <a benefit received from the sale>. Also termed legal benefit; legal value. Cf.

The following judicial definitions of the word “benefit” are noteworthy:

(

a) The dictionary meaning of the word “benefit” is advantage or profit or anything contributing to the improvement of the condition. If a person derives any advantage, it can be said that he was benefited. If he gains something either monetarily or otherwise, it can be said that he was benefited. If he is able to improve his condition, it can be said that he has benefited to that extent. Thus, the word “benefit” implies an element of advantage, profit or gain. Considering all these aspects, the word “benefit” occurring in sub clause (iv) of section 2(24) would mean “any advantage, gain or improvement in condition” [CIT v. Smt. Kamalini Gautam Sarabhai [1994] 208 ITR 139 (Guj.)];

(

b) The word ‘benefit’ occurring in Section 2(24)(iv) would mean ‘any advantage, gain or improvement in condition’. The ‘benefit’ or ‘perquisite’ should be of material things of life. For the purpose of these provisions, it is immaterial whether the benefit or perquisite is convertible into money or not. The intention of the legislature is to tax any benefit if it is received by a director, etc., irrespective of the fact whether the benefit received was in the nature of capital, or whether there is any direct receipt in the transaction or whether there is any detriment to the company (provider of benefit) or not in the transaction [Diwan Rahul Nanda v. Dy CIT 8(3) [2008] 25 SOT 454 (Mum.)];

(c) Assessees being directors and having substantial interest in a transport company, purchased certain buses from that company at their written down value which was much lower than their market value. Even if the benefit received by the director of the company is of capital in nature, it can be brought under

the term ‘value of any benefit’ as contemplated under section 2(24)(iv). The difference between written down value of buses and their fair market value determined by the department could be treated as a benefit to assessees under section 2(24) (iv) [CIT v. S. Varadarajan [1996] 89 Taxman 457 (Mad.)]; (d) Where assessees, i.e., directors of a company, got benefit in the form of repairs and renovations to their own apartments at the cost of the company, amount so spent was the value of benefit within the meaning of section 2(24)(iv) [Diwan Rahul Nanda v. Dy. CIT [2008] 25 SOT 454 (Mum.)].

4.4 Meaning of ‘perquisite’

The term ‘perquisite’ is defined inclusively in section 17(2). It enumerates certain items that would be treated as ‘perquisite’ in the hands of employees for taxability as “salaries” and also certain items that would be perquisites but tax-free in the hands of employees. However, this definition applies to taxability under the head “Salaries”. Perquisites provided to employees would attract TDS under section 192 and not under this section. So, ordinary meaning of the word ‘perquisite’ needs to be explored for the purposes of section 194R.

In Owen v. Pook (Inspector of Taxes) [1969] 74 ITR 147, the House of Lords held that perquisite has a known normal meaning namely a personal advantage. The word could not apply to a mere reimbursement of a necessary disbursement. Lord Pearce observed as under:

“The normal meaning of the word denotes something that benefits a man by going “into his own pocket.” It would be a wholly misleading description of an office to say that it had very large perquisites, merely because the holder had to disburse very large sums out of his own pocket and subsequently received a reimbursement or partial reimbursement of these sums. If a school teacher takes children out for a school treat, paying for them out of his (or her) own pocket, and is later wholly or partially reimbursed by the school, nobody would describe him (or her) as enjoying a perquisite. In my view, perquisite has a known normal meaning, namely, a personal advantage, which would not apply to a mere reimbursement of necessary disbursements. There is nothing in the section to give it a different meaning. Indeed, the other words of the section confirm the view that some element of personal profit is intended”

It is only when reimbursement is of expenses of the provider how/ incurred by payee/recipient/deductee that it is not a perquisite.

The following definition of ‘perquisite’ as per Black’s Law Dictionary is noteworthy:

perquisite (p;u-kwi-zit). (16c) A privilege or benefit given in addition to one’s salary or regular wages. - Often shortened to perk. [Cases: Officers and Public EmployeesC=>99.]

The above definition gives us the ordinary meaning of the word “perquisite”. The above definition was judicially noticed in Nirmala P. Athavale v. ITO [2008] 22 SOT 197 (Mum.) The Tribunal held as under:

(

a) Where the assessee never charged any fee or remuneration for his imparting of knowledge and practising of values based on Shrimad Bhagawad Gita and also the assessee did not have any vested right to receive any kind of payment for these activities from his disciples/followers, the gift made by the followers, without being under any contractual or legal or customary obligations, cannot be treated as a consideration arising out of carrying of vocation;

(

b) The other condition is that such benefit or perquisite should arise out of the exercise of business or profession. In the facts of the case, the Revenue has not established conclusively that the amount of gift arose to the assessee due to the exercise of vocation because such gifts have got no element of consideration being paid for services obtained by the followers/disciples;

(c) It is also noted that both the words ‘benefit’ and ‘perquisite’ refer to specific situations wherein receipt of revenue nature having attributes of income would be covered, and such attribute should exist from the very beginning. To illustrate this aspect, where a gift is made in lieu of paying consideration for services obtained and this fact is established, then such gift can fall within the provisions of section 28(iv) of the Act;

(d) It is clear that in the present case, there is no intention of circumvention of income on the part of the assessee or receiving income in other forms. Hence, provisions of section 28(iv) of the Act cannot be applied;

(e) The term ‘perquisite’ as per Blacks Law Dictionary means “privilege or benefit given in addition to one salary or regular

wages” which means that it is an additional benefit and not a complete substitution of one’s income;

(f) As stated earlier, the assessee has never charged any consideration from his followers; hence, based on the above meaning, it cannot be termed as ‘benefit’ or ‘perquisite’ within the meaning of section 28(iv) of the Act.

4.5 Benefit/Perquisite vs. Consideration

The Tribunal’s decision in Nirmala P Athavala (Supra) appears to draw a distinction between “perquisite”/ “benefit” and “consideration”. Consideration cannot be regarded as perquisite/benefit. The alleged perquisite/benefit should be something distinct and over and above consideration.

FAQ. No. 3 of CBDT’s Circular No. 18/2022,dated 13.09.2022, clarifies that 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 194R, in accordance with the Circular No. 715 dated 8th August 1995, there will not be further liability for tax deduction under section 194R of the Act.

Thus, FAQ No. 3 of CBDT’s Circular No.18/2022, dated 13.09.2022, distinguishes “consideration” from “perquisite”. If amount provided is “consideration”, then TDS would be deductible under other sections such as section 194C/section 194J/section 194H. If it is “perquisite” /“benefit” in addition to “consideration”, then, TDS will be deductible under section 194R.

FAQ No. 3 of CBDT’s Circular No. 18/2022,dated 13.09.2022, is reproduced below for ready reference:

Question 3: Refer question No. 7 of the Circular No. 12 of 2022Question No. 30 of CBDT Circular No. 715 dated 8th August 1995 clarifies that tax deduction under sections 194C and 194J is required to be made from the gross amount of bill including the reimbursement. A person has provided service to a Company and out of pocket expenses are charged by him to the Company along with service fee in the same bill. Company deducts tax under section 194J of the Act on both service fee component as well as on out of pocket expense in accordance with this circular. Is there a non-compliance with the provision of section 194R 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 194C and 194J 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 194R, 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 194J 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 is no further benefit/perquisite which requires tax deduction under section 194R of the Act.

4.5.1 Whether company which is manufacturer of capital goods needs to deduct TDS under section 194R on 2-year free maintenance services provided to buyer of capital goods?

Section 194R will not come into play merely because something is given, paid or provided unless it is a benefit or perquisite. Section 194R will not get triggered merely because some advantage flows from company to the recipient. Section 194R is triggered only when the advantage flowing from the Company to the recipient is a ‘benefit’ or ‘perquisite’ as distinguished from ‘consideration’ for what the recipient has done or promised to do.

If any and every advantage flowing to resident recipient, even if it be consideration, is to be treated as “benefit or perquisite”, then, probably, all other TDS sections except section 192 would be rendered otiose. Clearly, the intention behind section 194R is not to replace all non-salary TDS sections with one omnibus non-salary TDS section of section 194R.

4.5-1a Where consideration for providing free maintenance services is factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods, is TDS deductible u/s 194R? - It is assumed that the consideration for providing free

maintenance services is factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods. In such a situation, the operation and maintenance services cannot be considered in silos as a free supply of services. It can at best be treated as a supply of two goods or services for the price of one, and it cannot be treated as a benefit/perquisite but as a mixed supply of goods or services. Thus, it is a normal sale transaction and what is given by the company is rendering of services by way of consideration for price received. It is not the intention that normal sales, purchases and services transactions should be within the scope of section 194R since there are provisions for TCS on sale of goods u/s 206C(1H), TDS provisions for purchase of goods u/s 194Q and TDS provisions for payment for services u/s 194J/194C/194H.

In Owen v. Pook (Inspector of Taxes) [1969] 74 ITR 147, the House of Lords held that perquisite has a known normal meaning namely a personal advantage. The word could not apply to a mere reimbursement of a necessary disbursement. Lord Pearce observed, “The normal meaning of the word denotes something that benefits a man by going “into his own pocket”. It would be a wholly misleading description of an office to say that it had very large perquisites, merely because the holder had to disburse very large sums out of his own pocket and subsequently received reimbursement or partial reimbursement of these sums. If a school teacher takes children out for a school treat, paying for them out of his (or her) own pocket, and is later wholly or partially reimbursed by the school, nobody would describe him (or her) as enjoying a perquisite. In my view, perquisite has a known normal meaning, namely, a personal advantage, which would not apply to a mere reimbursement of necessary disbursements. There is nothing in the section to give it a different meaning. Indeed, the other words of the section confirm the view that some element of personal profit is intended.”

The normal meaning of perquisite is something that goes into the recipient’s pocket. It follows as a corollary that if any amount is recovered from the recipient towards the cost of what is ‘provided’, there is no perquisite to the extent of recovery from the recipient.

The CBDT in Question 4 of Circular No. 12/2022, dated 16-06-2022, has clarified that where free items are being offered with the purchase of some items, the seller and buyer record the transaction at the same value. In such a situation, there could be difficulty in applying the

Section 194R provision. Thus, to remove such difficulty, the CBDT has clarified that no tax shall be required to be deducted in case of said transaction. This clarification may apply to a transaction where goods and services are supplied for one price. Therefore, in view of the above, Section 194R has no application in this case.

4.5-1b Where consideration for providing free maintenance services is not factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods, is TDS deductible u/s 194R? - The position in Para 4.5-1a will not change even if no consideration for free maintenance services is recovered through the price build up of capital goods sold. These services are consideration given to buyer for his purchase of capital goods and are a sweetener for the deal. It is quite possible that buyer may not purchase the capital goods without such commitment of free maintenance services. Besides, this may fall within the ambit of Question 4 of Circular No. 12/2022, dated 16-06-2022. Therefore, in view of the above, Section 194R has no application in this case.

4.6 Benefit/Perquisite vs. Compensation

Question arises whether on payment made against the performance guarantee to buyer, the Company needs to deduct tax under Section 194R? Whether answer will be different if the Company is offering free OMS for one/two years instead of payment?

Section 194R will not come into play merely because something is given, paid or provided unless it is a benefit or perquisite. Section 194R will not get triggered merely because some advantage flows from company to the recipient. Section 194R is triggered only when the advantage flowing from the Company to the recipient is a ‘benefit’ or ‘perquisite’. It is to be examined whether compensation/damages is in the nature of perquisite/benefit?

First of all, the payment against performance guarantee to buyer is consideration paid under contract with buyer whereunder seller had agreed to compensate the buyer if product does not perform to agreed/prescribed standards. Perquisite/benefit is distinct from consideration paid under a contract. Secondly, the nature of compensation and its distinction vis a vis a perquisite/benefit needs to be examined.

TDS on Benefits or Perquisites under Section 194R

AUTHOR : SRINIVASAN ANAND G.

PUBLISHER

: TAXMANN

DATE OF PUBLICATION : SEPTEMBER 2024

EDITION : 3RD EDITION

NO. OF PAGES : 272

ISBN NO : 9789364557986

BINDING TYPE : PAPERBACK

DESCRIPTION

This book is an authoritative resource that simplifies the complexities of tax deduction at source (TDS) on benefits or perquisites as mandated under Section 194R of the Income-tax Act. This book provides a clear understanding of the intricate provisions of Section 194R, along with the taxability of such benefits or perquisites under Section 28(iv). Moving beyond a mere statutory overview, it provides practical insights through illustrative case studies, detailed FAQs, and ready reckoners, providing a comprehensive perspective on the compliance landscape.

This book is helpful for tax professionals, accountants, corporate finance teams, legal advisors, and businesses engaged in TDS administration. It serves as both a reference guide and a practical manual, providing a detailed roadmap to effectively manage the complexities of taxability under Section 28(iv) and TDS under Section 194R.

The Present Publication is the 3rd Edition and has been amended by the Finance (No. 2) Act, 2024. This book is authored by CA Srinivasan Anand G., with the following noteworthy features:

• [Comprehensive Analysis] Detailed examination of Sections 28(iv) and 194R, including the conditions for TDS deductions and the rationale behind these provisions

• [CBDT Circulars Dissection] Analysis of relevant Circulars, including clarifications, potential legal challenges, and application guidelines

• [Controversial Issues] Coverage of complex topics like compensation for non-performance, CSR expenditures, donations, waivers, and write-offs, with practical examples and case laws

• [Simplified Legal Concepts] Use of flowcharts and diagrams to simplify complex legal positions and procedural requirements

• [Practical Tools] Case studies, FAQs, and an alphabetical ready reckoner for quick reference on benefits and perquisites covered under Section 194R

• [Valuation Guidelines] Detailed guidance on valuing different types of benefits, enhancing compliance across various business scenarios

• [Penalties and Prosecutions] In-depth discussion on penalties and legal consequences of non-compliance under Sections 271C and 276B