15 September 2022
Government issues additional guidelines, removing the ambiguity for withholding of tax over benefits and perks provided to business houses

The Central Board of Direct Taxes (CBDT) has issued an additional set of guidelines vide Circular no 18 of 2022, exercising the power conferred as per sub-section 2 to Section 194R of the Income-tax Act, 1961 (the Act). The additional guidelines aim to provide clarity on earlier guidelines issued by CBDT vide Circular no. 12 of 2022 dated 16 June 2022 and remove the ambiguities and difficulties faced by the taxpayers on the implementation of the Section. Furthermore, the said Circular also clarifies that the additional guidelines don't impact the taxability of the income in the hands of the recipient of such benefit/perquisite.
The Circular provides additional clarification as follows:
  • It is clarified that the provision of Section 194R shall not be applicable on one-time loan settlement or waiver of loan granted to borrowers by the specified banking institutions.
  • It is again clarified that out-of-pocket expenses incurred by the service provider at the first instance and subsequently reimbursed by the service recipient is a perquisite/ benefit and hence, liable to TDS under Section 194R. It has been explained that in such cases, even the GST input credit is availed of by the service provider and not the service recipient.
  • However, where the service provider qualifies as a ‘pure agent’ as per the GST valuation Rules 2017, TDS under Section 194R shall not be applicable. In the case of a pure agent, input credit on GST is availed of by the service recipient, and the service provider incurs the expense only on behalf of the service recipient.
  • Where tax has been withheld on the out-of-pocket expenses as part of the entire consideration under Section 194J or 194C of the Act in accordance with Circular No 715 dated 8 August 1995, then there is no further liability to deduct tax under Section 194R.
  • In respect of conferences/seminars held for dealers/distributors to educate them regarding the products of the Company etc., it is clarified as follows:
    • It is not necessary that all dealers are required to be invited to a dealer/business conference for the expenses to not be considered as benefit/perquisite for the purposes of tax deduction under Section 194R of the Act.
    • Stay for a day immediately prior to the actual start date of the conference and a day immediately following the actual end date of the conference would not be considered an overstay and provisions of Section 194R shall not apply.
    • It is clarified that if benefit/perquisite is provided in a group and it is difficult to quantify such benefit against each participating individual, the benefit/perquisite provider may, at his option, not claim the corresponding expense as a deductible expenditure while calculating his total income. If the benefit/perquisite provider opts so, he will not be required to deduct tax under Section 194R on such benefit/perquisite and will not be treated as an assessee in default under Section 201 of the Act.
  • It is clarified that where a capital asset (e.g., a car) is gifted and tax has been withheld under Section 194R, the receiver of the gift shall be eligible for depreciation on such capital asset provided he has also included the benefit as income in his return of income.
  • It is clarified that TDS is not applicable in the case of the issue of bonus shares/right shares by a company in which the public is substantially interested, as defined under Section 2(18) of the Act.
Our Comments
The clarification provides much-needed relief, especially to the banks. The clarification on tax deduction on out-of-pocket expenses also resolves the conflicting views, thereby reducing consequent litigation.

Also, it also implies that the introduction of said Section targets not only for bringing such benefits and perquisites under tax purview but also aims to provide benefit to the taxpayers complying with the provisions of such Section, which is evident from the clarification brought in terms of eligibility of depreciation of capital assets received as gifts, which is a welcome step.

However, there are still some open points where difficulties may continue to persist, such as whether cost saving or reduced costs result in benefits eligible for a tax deduction, payment of advance tax on non-monetary benefits/perquisites by the service recipient, where the compliance is still cumbersome and further clarification is expected.
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