In order to widen the tax base, the Legislature has, very recently, introduced Section 194R in IT Act^[1], pursuant to which, every ‘person responsible for providing any benefit or perquisite’, is required to ensure that tax at the rate of 10% has been deducted in respect of such benefit or perquisite on a gross basis. This provision is only applicable where the benefit or perquisite in question is received by an Indian resident during the course of his business or profession. It is immaterial whether the benefit or perquisite is convertible into money or not. However, this provision is not applicable where:

i.     The value or aggregate value of the benefit or perquisite provided or likely to be provided during a financial year^[2] does not exceed INR 20,000; or

ii.    Person responsible for providing benefit or perquisite, is an individual or a Hindu undivided family, whose total turnover does not exceed INR 1,00,00,000 in case of business or INR 50,00,000 in case of profession, during the financial year immediately preceding the year in which such benefit or perquisite is provided.

First proviso to Section 194R requires that the person responsible for providing benefit or perquisite will, before releasing the benefit or perquisite, ensure that the tax has been paid in respect of the benefit or perquisite, where the benefit or perquisite is:

i.     Wholly in kind; or

ii.    Partly in cash and partly in kind, but such part in cash is not sufficient to meet the liability of deduction of tax in respect of whole of such benefit or perquisite,

The Central Board of Direct Taxes (‘CBDT’) has recently issued Guidelines^[3], wherein it has been stated that Section 194R will apply even where the benefit or perquisite is wholly in cash. However, Section 194R does not expressly state so and therefore, one may argue that the CBDT Guidelines are beyond the scope of Section 194R. This position draws support from the decision of the Apex Court^[4], wherein while interpreting Section 28(iv) of the IT Act, which is identically worded, it has been held that a benefit or perquisite in the form of cash cannot be brought to tax in the hands of the recipient under Section 28(iv) of the IT Act.

Similarly, CBDT Guidelines have also laid out various examples on the applicability of Section 194R, which, in our view, could give rise to substantial litigation and may require further clarification or intervention from the judiciary. Few of such examples are:

i.     Applicability of Section 194R where benefit or perquisite is a capital asset;

ii.    Applicability of Section 194R on reimbursement of out-of-pocket expenses, unless the invoice for expenses is in the name of the person reimbursing such expenses; and

iii.   Applicability of Section 194R where free samples are given by seller.

The CBDT has also been clarified that Section 194R will apply on the fair market value of such benefit or perquisite, unless:

i.     The benefit or perquisite is provided by a person after purchasing it, in which case, the cost of the benefit or perquisite in the hands of the provider will be considered as the value of the benefit or perquisite in the hands of recipient; or

ii.    The benefit or perquisite is provided by a person who manufactures it, in which case, the price charged by the provider to its customer, will be considered as the value of the benefit or perquisite in the hands of recipient.

Therefore, apart from litigation threat, Section 194R and the CBDT Guidelines thereto, pose an enormous compliance burden on all B2B businesses, who may need to tread carefully in order to avoid any default of tax deduction obligation under Section 194R.

[1]  Finance Act, 2022 with effect from July 01, 2022.

[2]  The calculation of this threshold is to be carried out from April 01, 2022.

[3]  Circular No. 12/ 2022 dated June 16, 2022 issued by the CBDT.

[4]  CIT v. Mahindra And Mahindra Ltd., (2018) 255 Taxman 305 (Supreme Court).