Section 194R – Take A Dive Into The Ocean Of 194R

Gone are the days when one felt that Section 195 was a mind-numbing T(e)D(iou)S provision. Two years ago, when one thought that 194Q was the largest sea, now we plunged into the ocean of Section 194R and 194S.

Section 194R of the Income Tax Act, 1961 was first introduced in the Finance Act 2022 and the Central Board of Direct Taxes (CBDT) published certain guidelines dated 16.06.2022 to enable effective implementation of the provision. Section 194R regulates the taxability on benefits/perquisites arising to any resident from business or exercise of profession.

We have detailed the key principles and the objective of the Revenue department for inserting Section 194R.

1. Nature of income – Any benefit/perquisite provided to a resident

By itself it can be inferred that “any benefit/perquisite” enlarges the scope of this provision to a range of transactions. The primary checkpoint before applying section 194R is that the benefit/perquisite is provided to a resident and arises from business or exercise of profession by said resident.

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2. Nature of relationship – Other than “employer-employee relationship”

Another interpretation made from the provisions of the section as well as the guidelines issued by CBDT is that Section 194R targets to regulate the Benefits/perquisites provided in other than an “employer-employer relationship”. Benefits/perquisite provided in an employer-employee relationship are already governed by the provisions of Section 17 and corresponding TDS Section 192 of the Income Tax Act.

Note: In the above case scenarios, if the benefit/perquisite is provided to a government entity not carrying out business or profession (eg: Government hospital) then no TDS under section 194R.

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3. Benefit/Perquisite provider and receiver

As per the provisions laid down in the Income Tax Act, the provider may be a resident or a non-resident, but the receiver must be a resident. The implications of the same are tabulated hereunder:

Benefit/perquisite provider	Benefit/perquisite receiver	Implications
Resident/Non-Resident*	Resident having business or profession.	Tax deduction u/s 194R
Resident/Non-Resident	Resident being an end consumer.	No Tax deduction u/s 194R
Resident/Non-Resident	Non-Resident	No Tax deduction u/s 194R

Note: If the benefit/perquisite provider is an individual/HUF whose gross turnover from business < Rs.1 crore or receipts from profession < Rs. 50lakhs then, no tax deduction under section 194R.

*Practical difficulty: In case of a provider being a non-resident, giving benefit/perquisite to a resident will have to carry out excessive compliance procedures with the tax laws of India to provide certain benefits/perquisites.  

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4. Chargeability of the section 194R

Note: Two exceptional cases to derive value of benefit/perquisite where:

• Benefit/perquisite is specifically purchased to provide benefit/perquisite = Purchase price
• Benefit/perquisite is manufactured = Price charged to customers

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5. Key Takeaways

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6. Implications of Section 194R under Special Case Scenarios

Sales discount, cash discount and rebates allowed to customers

As the provision states tax on “any benefit/perquisite”, sales discount, cash discount and rebates also come under the purview of 194R. However, guidelines issued by CBDT specifically state that no tax is required to be deducted under 194R in case of sales discount, cash discount and rebates allowed to customers.

Reimbursement of expenditure

A. Making payment on behalf of a party and then being reimbursed for the same amount is a routine transaction carried out by a variety of industries, especially professional service providers. Principles of reimbursement of expenditure are stated hereunder:

• Backing by actual third-party documentation.
• Form & substance should clearly evidence that the expenditure is of the payer and is being reimbursed to the payee.
• Evaluate the nature of expenditure incurred and whether the same are to be reimbursed.

B. One can say that the implications of section 194R are manifold and inconceivable. This realisation is encountered when “reimbursement of expenditure” come under purview of “any benefit/perquisite”. Guidelines issued by CBDT give further clarifications on application of 194R in case of reimbursement of expenditure.

Case Study – in line with CBDT guidelines

Mr. T is the auditor of Company DEF having branches all over India. As per assurance engagement, Mr. T travels to different cities to audit the branches. Mr. T incurs certain lodging and boarding expenditure that are later reimbursed by Company DEF. What are the implications of section 194R?

Name on invoice	Expenditure paid by	Re-imbursed by company	Implications
Mr. T	Mr. T	Yes	194R applicable
Mr T	Company DEF	NA	194R applicable
Company DEF	Mr. T	Yes	194R not applicable*

*It is important to note that the expenditure that are re-imbursed are incurred wholly and exclusively to provide assurance services by Mr. T.

Business conferences held for dealers/agents

Prime objective of business conference	Implications
To educate agent about new product launch or address queries or new sales techniques etc.	194R not applicable
To select agent who have achieved pre-determined targets.	194R applicable

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7. Ramifications of Section 194R

• GST implications on free supply, reimbursement of expenditure needs to be considered.
• 194R opens a pandora’s box for the recipient, if such benefits/perquisites are not recorded in the books of account resulting in non-disclosure of income along with adverse tax implications.

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At Incorp, we have the expertise and skills to guide you through the entire TDS and TCS processes. We are here to ensure peace of mind, from setting up your company to staying compliant and managing your taxes on time with ease.