Section 194R of the Income-tax Act was introduced to bring within the tax net non-monetary or in-kind benefits or perquisites provided to business professionals or consultants. This provision is aimed at expanding the scope of tax deduction at source by targeting indirect forms of remuneration that have previously gone unreported or untaxed. It obligates any person responsible for providing to a resident any benefit or perquisite, whether convertible into money or not, arising from business or profession, to deduct tax at source.
Triggering of Obligation Under Section 194R(1)
The obligation under Section 194R is triggered when a benefit or perquisite is provided to a resident person under certain specific conditions. As per the opening portion of the section and clarified by the Circular 12/2022 and particularly Question No. 4 therein, the deductor must ensure the recipient meets the following three conditions. First, the recipient must not be an employee of the person providing the benefit or perquisite. Second, the recipient must be engaged in business or exercising a profession, or at least be involved in an adventure-like liked, and the recipient must have a business or professional relationship with the provider. When these three conditions are met, the deductor is under an obligation to deduct tax under Section 194R regardless of whether the benefit is used directly by the recipient or someone else connected to them by that business relationship.
Employees Are Not Covered Under Section 194R
Section 194R is not applicable if the recipient is an employee of the benefit provider. In such cases, any benefit or perquisite provided is taxed under Section 192 of the Act, which deals with salaries. For example, when a hospital provides a benefit to a doctor who is its employee, the tax must be deducted under Section 192. If the hospital provides a benefit to a consultant doctor (where the arrangement is a contract for services and not for servicess), tax is deductible under Section 194R.
CBDT Clarification Regarding Employer-Employee Situations
In Circular 12/2022, the CBDT has clearly illustrated how tax deduction should be handled in situations where the benefit or perquisite is extended due to a professional association. For instance, if a company provides free medical samples to a doctor employed by a hospital, the benefit is considered to have been provided to the hospital because the doctor received it in his capacity as an employee. Thus, TDS should be deducted in the name of the hospital. If the hospital later considers the sample to be a perquisite to the doctor, it can tax the doctor under Section 192 and claim the benefit as salary expenditure. Conversely, if a consultant doctor receives the sample, the benefit provider can either deduct TDS under Section 194R in the name of the hospital or directly in the name of the consultant doctor to ease compliance.
Test of Employer-Employee Relationship
Determining whether the recipient is an employee or a consultant is essential to applying the correct TDS provision. If the relationship is that of employer-employee, then Section 192 applies, and not Section 194R. The following principles help determine this relationship. The recipient should be an individual who is a current, former, or prospective employee. If the recipient is not an individual, such as a firm or company, Section 192 does not apply. If the individual is not under an employer-employee relationship but instead is an independent professional, then other provisions such as Section 194C, 194J, or 194R may apply.
Determining Contract of Services Versus Contract for Services
Halsbury’s Laws of England provides four tests to differentiate a contract of service from a service contract. These include the employer’s power of selection, payment of wages, the right to control the work method, and the right to suspend or dismiss. However, these are not definitive or universally applicable. In some professions, such as doctors or journalists, the employer may not have direct control over how the work is done. A person may even work exclusively under someone but still be classified as an independent contractor.
Judicial Interpretations on Employer-Employee Relationships
In Ram Parshad v. CIT, the Supreme Court ruled that the extent of control and supervision is key to distinguishing between a servant and an agent. A servant operates under direct supervision, whereas an agent follows broad instructions independently. Greater control implies an employer-employee relationship, while greater independence indicates an agency relationship. Similarly, in Lakshminarayan Ram Gopal & Son Ltd. v. Government of Hyderabad, the Supreme Court listed several factors to distinguish between a servant and an agent. These include who exercises control, who gives instructions, whether the recipient has authority to enter into contracts on behalf of the provider, and how the recipient is remunerated.
Consultant Doctors and TDS Classification
Consultant doctors often operate with significant independence, making it difficult to establish an employer-employee relationship. Just labeling someone as a consultant does not exempt the hospital from higher TDS under Section 192 if, in substance, the relationship is that of employment. Disputes often arise where the tax department argues that benefits or payments made to consultant doctors should attract TDS under Section 192, while hospitals claim the lower TDS under Section 194J or 194R. Such issues hinge on the facts of each case and the degree of control exercised by the hospital.
Application in the Digital Platform Context
In today’s gig economy, the traditional employer-employee control test often fails. For instance, a ride-sharing app cannot control how a driver operates the vehicle. Similar issues arise for aggregators of skilled services such as plumbing or carpentry. The UK Supreme Court, in the Uber case, relied on the test laid down in Canada’s Supreme Court decision in McCormick v. Fasken Martineau DuMoulin LLP. The test focuses on the control exercised by the service recipient and the dependency of the worker. The more control and dependency there is, the more likely the relationship is that of employment.
Recipient Must Be Engaged in Business or Profession
Section 194R applies only when the recipient is engaged in business or profession or is at least involved in an adventure-like trade. If this condition is not met, the section is not applicable. This is also supported by the language used in the provision. Unlike Explanation 3 to Section 37(1), which applies to anyone regardless of whether they carry on a business or profession, Section 194R specifically requires that the benefit or perquisite arise in the course of business or profession. This has also been clarified in CBDT’s Circular 12/2022, where it states that Section 194R does not apply to benefits given to government hospitals or entities not engaged in business or profession.
Taxability Based on Nature of Relationship and Income Head
It does not matter under which head of income the benefit is taxed in the recipient’s hands as long as it arises from business or profession. If the benefit is taxable under salaries, then TDS applies under Section 192. If it is under profits and gains from business or profession or under income from other sources, then TDS under Section 194R applies. For instance, a benefit received by a director who is not a whole-time or managing director is taxable under income from other sources and would attract TDS under Section 194R.
Whether Panchayat Samiti and CSR Payments Attract Section 194R
Payments made by companies to Panchayat Samiti for development projects, temple construction, or compensation for the smooth execution of business projects are not covered under Section 194R. This is because the Panchayat Samiti is not engaged in any business or profession. Section 194R applies only when the benefit or perquisite arises from the recipient’s business or profession. The causal link between the benefit and business activity must be proximate and direct. Since the Panchayat Samiti performs governmental or community functions and is not in the business or profession, Section 194R does not apply even if there is a transfer of benefit.
TDS on CSR Expenditure
Section 194R does not apply to donations or CSR expenditures made to entities not engaged in business or a profession. Such payments do not arise from a professional or business relationship and, therefore, fall outside the scope of this provision.
Requirement of Business or Professional Relationship
The benefit or perquisite must be provided in the course of a business or professional relationship between the provider and recipient. Judicial precedents confirm that benefits received in exchange for brand endorsements, promotions, or as incentives in business collaborations are taxable under Section 28(iv) and therefore attract TDS under Section 194R. For example, in the case involving an actress receiving a car for promoting a brand, the value of the car was added to her income. Similarly, a luxury watch received for promotional work was treated as a taxable perquisite.
Instances Where Section 194R Is Not Applicable
Where the benefit or perquisite is not related to a professional or business activity, Section 194R does not apply. For instance, if a celebrity receives a villa without rendering any services or promotional activity, it cannot be said to have arisen from any business or professional relationship. Hence, it is not taxable under Section 28(iv), and no TDS under Section 194R is applicable.
Nature of Benefits or Perquisites Covered Under Section 194R
Section 194R applies to any benefit or perquisite provided in the course of business or profession, whether it is in cash or kind or partly in both. The provision is wide and does not limit the form of the benefit. It could include free samples, gifts, sponsored trips, reimbursement of expenses, assets provided for free or at a concessional rate, or any other non-cash incentive. The only requirement is that the benefit must arise from a business or professional relationship and must be provided to a resident recipient.
Form of Benefit or Perquisite and TDS Applicability
The benefit can be in tangible or intangible form. It need not be convertible into money. Even non-monetary benefits are covered under this section. If a car, mobile phone, accommodation, or free airline ticket is provided to a person as part of a business relationship, tax must be deducted at source. Where the benefit is wholly in kind or partly in cash and partly in kind, and the cash portion is insufficient to meet the TDS liability, the provider must ensure that the tax is paid before releasing the benefit.
Valuation of Benefit or Perquisite for TDS
The value of the benefit or perquisite for TDS deduction must be computed based on fair market value. In case the provider has purchased the item, the actual purchase price shall be the value. Where the benefit is manufactured or produced by the provider, the price that it normally charges to its customers should be taken as the value. In some situations, the benefit may not have a readily available market value. In such cases, the provider should adopt a reasonable method of valuation and retain documentation for audit purposes.
Reimbursement of Expenses and TDS
When an entity reimburses the expense incurred by the recipient on behalf of the provider, such reimbursement may not be considered as a benefit or perquisite. However, if the recipient incurs expenses for personal use and the provider reimburses them, such reimbursement is considered a benefit and will attract TDS under Section 194R. For example, if a company reimburses travel expenses of a consultant for attending a business meeting, and the travel was strictly for business, it may not be treated as a benefit. However, if the reimbursement includes additional leisure travel or accommodation not required for business purposes, it would be considered a benefit.
TDS Deduction Timeline and Compliance
Tax must be deducted at source before providing the benefit or perquisite to the recipient. This means that if the benefit is in the form of a gift or non-cash incentive, the provider must ensure that TDS is deducted or paid in advance. The deducted tax must be deposited with the government within the prescribed time frame. The deductor is also required to issue a TDS certificate and report the transaction in the TDS return. Non-compliance may lead to disallowance of the expenditure under Section 40(a)(i) and may also attract interest and penalties.
Threshold Limit for TDS Under Section 194R
TDS under Section 194R is required to be deducted only if the aggregate value of benefits or perquisites provided during the financial year exceeds twenty thousand rupees. This threshold is calculated with respect to each recipient. If the total benefits or perquisites provided to a recipient during the year exceed the threshold, TDS becomes applicable on the entire value, not just the excess. Providers need to maintain a register or record of all benefits or perquisites extended to each recipient to track the threshold.
Rate of TDS Under Section 194R
The tax must be deducted at the rate of ten percent of the value of the benefit or perquisite. There is no requirement for the recipient to furnish a PAN for the ten percent rate to apply. However, in the absence of a PAN, provisions of Section 206AA may apply, requiring deduction at a higher rate. Providers must also consider whether any exemptions or lower deduction certificates are applicable under other provisions of the Act before deducting TDS.
Non-Applicability to Individual or HUF With Turnover Below Specified Limit
The obligation to deduct tax under Section 194R does not apply to an individual or Hindu Undivided Family whose total sales, gross receipts, or turnover does not exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which the benefit or perquisite is provided. This exemption is intended to reduce the compliance burden on small taxpayers. It is crucial for such individuals or HUFs to verify their turnover status before determining TDS liability under this section.
Illustration of TDS Deduction on Free Samples
Consider a pharmaceutical company that provides free drug samples to doctors. If the doctor is employed by a hospital, then the benefit is treated as given to the hospital, and TDS is deducted in the name of the hospital. If the doctor is an independent consultant, the pharmaceutical company may directly deduct TDS in the doctor’s name. The value of the free samples will be taken as the market value of the drugs. If the doctor is also provided a sponsored foreign trip as part of the promotional campaign, the entire cost of travel, accommodation, and other benefits would be treated as a perquisite and subject to TDS under Section 194R.
Impact on the Recipient’s Tax Liability
The benefit or perquisite received becomes taxable in the hands of the recipient under the head of income depending on the nature of relationship and transaction. If there is an employer-employee relationship, the benefit is taxed as salary. If the benefit is received in the course of business or profession, it is taxed under profits and gains of business or profession or income from other sources. The recipient must report such benefits in their tax return and can claim the TDS deducted by the provider as credit against their overall tax liability.
Reporting Requirements for Deductors
The deductor must report the details of TDS deducted under Section 194R in the quarterly TDS return filed in Form 26Q. Additionally, the deductor is required to issue TDS certificates in Form 16A to the recipient. These compliance obligations are necessary to ensure transparency and proper credit of tax deducted to the recipient. Failure to file TDS returns on time may attract interest and penalties under the Income-tax Act.
Challenges in Implementation and Practical Considerations
Implementation of Section 194R has raised several practical challenges for taxpayers. The wide scope of the term benefit or perquisite has resulted in varied interpretations. In some cases, there is difficulty in determining the fair market value of the benefit. In other cases, it is not clear whether a reimbursement qualifies as a benefit. Taxpayers are also facing compliance burden due to the requirement to track benefits provided to each recipient and determine whether the threshold has been crossed. Businesses are also concerned about double taxation in cases where both the provider and the recipient may be required to deduct tax on the same benefit.
Role of CBDT Circulars in Clarifying the Law
To address various ambiguities, the CBDT has issued clarificatory circulars, the most notable being Circular 12/2022 dated 16 June 2022. This circular provides detailed responses to questions raised by taxpayers and clarifies the applicability of Section 194R in various scenarios. While CBDT circulars do not have the force of law, they are binding on the tax authorities and are generally followed in practice. These clarifications help in ensuring consistent implementation of the provision and reducing litigation.
Legal Interpretations and Judicial View
Although Section 194R is relatively new, its applicability is expected to be the subject of judicial scrutiny in the coming years. Courts and tribunals will have to interpret whether a particular benefit arises from a business or professional relationship. Past decisions under Section 28(iv) will be relevant, as both provisions rely on similar language regarding the taxation of benefits or perquisites. The courts are also likely to weigh in on issues such as the valuation of benefits, employer-employee relationships, and the scope of obligations under the section.
Comparison With Other TDS Provisions
Section 194R must be distinguished from other TDS provisions such as Section 192 (salary), Section 194C (contract payments), Section 194J (professional services), and Section 195 (payments to non-residents). Each of these provisions applies based on the nature of the transaction and the relationship between the parties. While other sections deal with monetary payments, Section 194R specifically targets non-monetary benefits. This distinction is important for ensuring that the appropriate section is applied and to avoid duplication of TDS.
Key Documentation and Audit Preparedness
To comply with Section 194R, businesses must maintain detailed documentation regarding the nature and value of the benefit or perquisite provided, the recipient’s business relationship, valuation methodology, and the basis for determining the recipient’s eligibility. In case of an audit, such records will be essential for defending the deductor’s position. Businesses are advised to create internal policies and tracking systems to monitor the provision of benefits to ensure timely deduction and payment of TDS.
Role of Chartered Accountants and Tax Consultants
Given the complexities involved in applying Section 194R, professional assistance from chartered accountants or tax consultants can be valuable. Professionals can assist in identifying transactions that may qualify as benefits, determining valuation, advising on deduction obligations, and ensuring compliance with reporting requirements. Their expertise can help mitigate the risk of non-compliance and litigation.
TDS Applicability on Business Promotions and Gifts
Under Section 194R, TDS applies to various promotional activities where benefits or perquisites are provided to a resident. This includes giving gifts, free samples, or other incentives. For example, if a pharmaceutical company provides doctors with free samples, those are treated as perquisites. Similarly, if companies offer rewards in the form of foreign trips or gadgets to their dealers for meeting sales targets, such items are subject to TDS. Even if the benefit is given in kind or partly in kind and partly in cash, the section mandates deduction of tax before the benefit is provided.
CBDT has clarified through guidelines that if a company provides a car to a dealer, it will be treated as a benefit and be covered under this provision. Where such benefits are provided as part of a business promotion or marketing strategy, the benefit provider must ensure TDS compliance under this section.
Reimbursement and Expense Payments
Another significant aspect covered under Section 194R is the reimbursement of expenses. Suppose a company reimburses travel, lodging, or other expenses incurred by an individual who is not its employee. In that case, such reimbursement may be considered a benefit unless incurred entirely on behalf of the company. The deductor must analyze whether the reimbursement qualifies as a benefit to the recipient or purely a business expenditure.
If a consultant or agent is reimbursed for travel and other related costs incurred for their benefit or convenience, the amount may be subject to TDS under this section. However, if the company directly pays for the services and the services are used for company business only, such payments may not be subject to TDS under Section 194R.
Valuation of Benefits or Perquisites
The valuation of the benefit or perquisite plays a crucial role in the TDS mechanism under Section 194R. The value of the benefit is determined based on the fair market value. Where the benefit is provided in kind, the fair market value should be computed as per standard accounting or commercial practices. For example, if a company provides a mobile phone to a dealer, the cost to the company or market value of the phone is considered the perquisite value.
In cases where benefits are purchased at a discount, the actual cost to the company may be considered for valuation. CBDT guidelines suggest using the price charged to customers or the purchase invoice value to determine fair value. However, any GST component is excluded from the valuation for TDS calculation purposes. This helps standardize the approach and avoids disputes over the benefit’s taxable value.
Deducting TDS in Case of Purely Kind Benefits
If the benefit is provided entirely in kind and there is no cash component to recover the TDS, the deductor is responsible for ensuring tax compliance. The deductor must either collect the TDS amount from the recipient in cash or bear the TDS liability on behalf of the recipient. In the latter case, the TDS paid by the deductor is treated as an additional perquisite, and tax must be deducted on the grossed-up value.
For example, if a company gifts a laptop worth ₹50,000 to a consultant, the TDS on ₹50,000 at 10 percent would be ₹5,000. If the company decides to bear the TDS, it must gross up the benefit to calculate the correct TDS and deduct tax on ₹55,555 (₹50,000 is 90 percent of ₹55,555), leading to a TDS of ₹5,555. The deductor should report and deposit this amount to comply with Section 194R provisions.
Non-Cash Benefits and Reimbursement Structures
It is important to distinguish between non-cash benefits and reimbursement structures. Where a company reimburses an expense such as hotel accommodation for a consultant or dealer as a part of a non-monetary incentive, this will typically be treated as a perquisite. However, if the consultant incurs the expense solely on behalf of the company, with the bill raised in the name of the company, and no personal benefit accrues to the individual, it may be argued that no perquisite exists, and hence, Section 194R would not apply.
Understanding the factual context of the benefit is essential. TDS under this section aims to tax indirect advantages received by professionals and businesses in the course of their dealings, even if these are not in cash form. This principle must guide the deductor’s assessment of whether TDS is applicable in specific scenarios.
Role of Tax Audit and Books of Accounts
The applicability of Section 194R is linked to the turnover or gross receipts of the business or profession of the deductor. If the total sales, turnover, or gross receipts exceed ₹1 crore for business or ₹50 lakh for profession in the financial year immediately preceding the year in which the benefit is provided, the section becomes applicable. Therefore, tax audit status becomes relevant to determine the deductor’s liability.
Maintaining proper documentation and books of accounts is essential for deductors. Details of the benefits provided, valuation, nature of the transaction, recipient details, TDS deductions, and challan payments must be accurately recorded. This will ensure smooth audits and inspections, particularly since non-compliance can lead to disallowances and penalties.
Reporting Requirements and TDS Return Filing
TDS deducted under Section 194R must be deposited with the government using the appropriate challan (Challan No. ITNS 281). The payment must be made within the stipulated due dates, generally by the 7th of the following month. The deductor must also file quarterly TDS returns in Form 26Q, furnishing the details of the deductee, PAN, amount of benefit, and tax deducted.
Failure to file returns or delayed filing attracts penalties under Section 234E and late fees. The government may also impose penalties under Section 271H for incorrect or non-filing of TDS returns. Hence, timely and accurate reporting of perquisites provided is crucial to remain compliant with TDS provisions under Section 194R.
Impact on Recipients of Benefits or Perquisites
Recipients of benefits or perquisites must consider the tax implications of receiving such advantages. These are generally taxable under the head “Income from Business or Profession” and must be reported accordingly in the income tax return. Since the benefit is not received in cash, recipients must ensure sufficient tax planning to account for the tax already deducted and any additional tax liability that may arise.
The recipient must also reconcile the TDS entries with Form 26AS and AIS (Annual Information Statement) provided by the Income Tax Department. If any TDS under Section 194R appears in these statements, it must be appropriately matched with the income reported in the tax return to avoid notices or inquiries.
Examples Illustrating Practical Application
Consider a situation where a company invites top-performing dealers on an international tour. The cost of the tour per dealer is ₹2,00,000. This constitutes a benefit provided in kind. Under Section 194R, the company must deduct 10 percent TDS, i.e., ₹20,000 per dealer. Since the benefit is entirely in kind, the company can either collect ₹20,000 from each dealer or bear the cost itself and deduct TDS on the grossed-up value.
In another case, a software company offers free laptops worth ₹60,000 to consultants who refer new clients. These are non-cash benefits and are liable for TDS under Section 194R. If the company chooses to bear the TDS cost, the amount is grossed up, and tax is deducted on the higher value accordingly. These examples highlight the operational steps involved in implementing Section 194R.
GST Implications and Interplay with Section 194R
Although Section 194R is an income tax provision, businesses must also consider the implications under GST law. If the benefit or perquisite is subject to GST, the valuation of the benefit for TDS purposes must exclude the GST portion. This ensures there is no dual levy on the same value under both GST and income tax laws.
For instance, if a gift item has a total invoice value of ₹11,800, including ₹1,800 as GST, the TDS under Section 194R is computed on ₹10,000 only. Businesses must properly segregate the GST portion in their records to avoid over-deduction of tax or reporting mismatches.
TDS in Case of Capital Assets Given as Benefit
The value of a capital asset (such as a car, jewelry, or property) provided as a benefit or perquisite is still liable for TDS under Section 194R. The nature of the asset—whether a capital asset or not—is irrelevant. What matters is that it was provided as a benefit arising from a business or profession. If such an asset is provided without any payment from the recipient, the entire fair market value becomes the taxable amount. If the recipient bears part of the cost, only the differential amount is taxed. This creates complexities in valuation, but the liability remains with the provider.
Impact on Employee Benefits
It is important to distinguish between perquisites provided to employees and those to other business associates. Employee benefits are already taxed under Section 17(2) of the Income-tax Act and are subject to TDS under Section 192. However, if the same benefit is given to a consultant or agent who is not on payroll but provides services to the business, Section 194R applies. For instance, giving a car to a distributor or a gift card to a channel partner will attract TDS under this section.
Free Samples and Promotional Gifts
In many industries, especially in pharma and FMCG, providing free samples and promotional gifts is a common business practice. These are covered under Section 194R if given to persons who are not employees. If a pharmaceutical company provides free samples to doctors, even if indirectly through medical representatives, TDS is applicable, since the benefit arises due to a business relationship. One must ensure that TDS is deducted on the market value of the sample unless it is exempt due to the ₹20,000 threshold or other exceptions.
Discounts and Trade Schemes
Trade discounts and volume rebates given to dealers or distributors may not always fall under the purview of Section 194R if they are passed through as pricing policies. However, if such schemes result in extra benefits—like foreign trips, gold coins, or household appliances—then they would be treated as perquisites. The difference lies in whether the incentive is monetary or non-monetary and whether it results in a direct benefit or transfer of ownership. If yes, TDS is applicable.
Recording and Reporting Requirements
Every person responsible for providing such benefits must maintain detailed records, including the nature of benefit, valuation method, and details of the recipient. At the time of filing TDS returns, these must be disclosed appropriately in the Form 26Q. Non-compliance may lead to penalties, interest on delayed payment, and disallowance of expenses under Section 40(a)(ia). Therefore, accounting systems must be updated to identify and flag transactions that fall under Section 194R.
Role of Tax Consultants and Advisors
Given the ambiguity and operational complexity of Section 194R, professional advice becomes essential. Tax consultants help businesses evaluate whether a transaction qualifies as a perquisite, estimate the fair market value, and determine the correct TDS implication. Businesses are encouraged to formulate internal policies around gifts, sponsorships, and promotional schemes to ensure compliance and avoid last-minute surprises during audits.
Judicial Interpretations and Industry Feedback
Since this provision is relatively new, judicial interpretations are still evolving. Some industries have raised concerns regarding its scope and the administrative burden it imposes. There have been representations to the CBDT to further clarify the definition of “benefit or perquisite” and to provide safe harbor thresholds. Until such clarifications or judicial precedents emerge, businesses must proceed with caution and conservative interpretation to avoid litigation risk.
Conclusion
Section 194R represents a significant shift in TDS compliance, aimed at curbing tax evasion through unaccounted benefits and perks. It places the responsibility on the provider of such benefits to deduct tax and report the transaction. While this promotes transparency, it also adds compliance complexity. A clear understanding of the nature of perquisites, appropriate valuation, and diligent recordkeeping is essential to managing obligations under this provision. Businesses must realign their policies, accounting practices, and vendor relationships to ensure smooth implementation and avoid penalties.