Section 194R Of Income Tax Act: Purpose, Applicability, TDS Deduction

The Finance Act 2022 introduced Section 194R, which pertains to the deduction of tax on benefits or perquisites provided to a resident in respect of businesses or professions.

Businesses, companies, or entities often extend multiple types of benefits and perquisites to their distributors, channel partners, agents, or dealers to incentivise and motivate them to promote further growth of a business. A few examples would include travel packages, gift cards or vouchers, products under incentive schemes or the usage of business assets, among others.

Purpose Of Section 194R

The purpose of introducing the new Section 194R is to plug the possibility of tax revenue leakages (tax evasions) in businesses or professions. A few companies claimed expenses for business promotions while offering various gifts, perks, perquisites, or benefits to its distributors, dealers, or channel partners (on fulfilments of conditions of under agreement or as per prevalent norms/traditional practice followed over the years by the business entity) under Section 37 of Income-tax Act, 1961.

For instance, an electronics manufacturing company gave LCD televisions as incentives to those channel partners who achieved a particular revenue target. The company included these as expenses in its profit and loss account and claimed an Income Tax benefit.

The recipients do not report this in their income return because this particular incentive is in kind and not in cash. This leads to incorrect income furnishing. Ideally, such an incentive or benefit in kind should be disclosed as income under the Income-tax Act, 1961 (ITA).

As per Section 28 (iv) of the ITA, the value of any benefit or perquisite—whether convertible into money or not—arising from business or in a profession is to be charged as business income in the hands of the recipient of such benefit or perquisite.

Now, under Section 194R, if a business gives its distributors or channel partners any such perquisites or incentives, which is partly in cash or kind, then they are required to deduct a TDS. In case the benefit is wholly in kind, the person providing such a benefit or perquisite is required to pay TDS on the value of such benefit or perquisites out of his own pocket.

So, the purpose of Section 194R is to widen the tax base and plug any scope of tax evasion.

To cite another example, in case a medical professional receives free samples, it has to be shown as a benefit or perquisite and is income. This is irrespective of the fact that the pharmaceutical company is using it as a sales promotion technique. The pharma company can claim a deduction for such a sales promotion. However, in the hands of the receiver, the promotion would be a taxable income, and TDS is required to be deducted by the pharma company on the same.

Scope Of Section 194R

The TDS to be charged under Section 194R is 10%, which will come into effect from July 1, 2022. It applies only to resident recipients (receivers) of benefits or perquisites.

However, Section 194R is not applicable where the aggregate value of the benefit or perquisite to one beneficiary does not exceed Rs 20,000 during the financial year (FY).

Also, it is not applicable for an individual or Hindu Undivided Family (HUF) to deduct TDS where total sales do not exceed Rs 1 crore in the case of business or Rs 50 lakh in the case of the profession in the immediate preceding financial year.

Section 194R: Nexus With Business Or Profession

Any individual providing any benefit or perquisite to a resident, whether convertible into money or not, arising from business or the exercise 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 simple terms, under Section 194R, the TDS applies to any resident who is providing any benefit or perquisite to another resident. The benefit has to be in kind or cash and could be arising from business promotions. 

Applicability Of Section 194R

This section applies when any business, company or professional gives any perks, gifts, incentives or any other benefits (monetary or non-monetary) in cash, kind, or partially in cash and kind to a person exceeding Rs.20,000 during the financial year.

Who Should Deduct TDS Under Section 194R?

When a business, company or professional gives benefits or perquisites to an agent, dealer, channel partner, distributor or any other person during the financial year, the business, company or professional is liable to deduct TDS under Section 194R.

Non-applicability Of TDS Under Section 194R

• Section 194R does not apply to employees who receive benefits from their employers. Section 192 will apply to them. 
• When the recipient is a non-resident, the tax will be deducted under Section 195.
• When there is no business relationship, this section will not apply.
• TDS should not be deducted when the total value involved does not exceed Rs 20,000.
• This provision is not applicable to Individuals and HUFs with income from business not exceeding Rs 1 Cr. and profession not exceeding Rs 50 lakhs.
• Discounts and rebates will not be reduced from the sale value while calculating the value of benefits

How To Deduct TDS Under Section 194R?

TDS should be deducted and paid by the company, business or professional who provides benefits or perquisites before giving such benefits or perquisites.

Such deducted TDS needs to be paid by 7th of succeeding month.

However, the question is since the payment is ‘in kind’, how will the TDS be deducted on such a non-monetary transaction ?

• Payers can gross up the value of such benefits and pay the TDS from their own pocket
  • E.g. If a company has given Rs 100,000 worth of mobile phone as commission. It can gross up, and the value derived is Rs 111,111. Now the company can pay the TDS of RS 11,111 from its own pocket.
• The payer can ask the beneficiary to reimburse the cash component
  • In the above example, a company can ask the beneficiary to pay Rs 10,000 in cash in exchange for the mobile phone.
• If the Beneficiary has a credit balance in the books of the company (Payee), then such an amount can be adjusted.

How Is Value Of Benefit Calculated Under Section 194R?

CBDT has issued a clarification with its circular dated 16th June 2022 for any difficulty arising under the provision of section 194R with multiple examples.

As per this value of perquisites will be calculated based on the fair market value of the benefits except in the following cases

1. The value of the Perquisites will be the purchase price, If such benefit provider has purchased or paid consideration for the benefits
2. In the case of manufacturer, price charged to the customer will be the value of the benefits.

TDS Certificate

The deductor will issue a quarterly TDS certificate to the deductee in Form 16A. The deductor can download Form 16A from the TRACES account, and the deductee can view it in their 26AS. The deductor liable to deduct tax under Section 194R should file quarterly returns in Form 26Q.