I. Introduction

In  the  Wealth of   Nations, Adam Smith famously noted  that  complexity makes taxes “much more burdensome to the people than they are beneficial to the sovereign ”.[1]The cost of  taxes isn’t just what we  pay. It’s  also the cost of complexity, or  what economists call  “compliance costs.”

The  Finance Act,  2022 (FA, 22) and the Finance Act,  2023 (FA, 23) have made sweeping changes in  the way, the benefits or  perquisite in a business or profession are being taxed and in their compliance. When one felt all  arrows are out from quiver of  chargeability provisions, TDS  provisions comes as a bolt from the blue. Introduction of  section 194R in  the Income-tax Act,  1961 (‘the Act’)  is  one of  such examples which has made it  compulsory to deduct the tax on   provision of  such benefits during the  course of business whether these are taxable or  not under the purview of the Act.

Where at one place, amendment had been made in  the section 28(iv) and section 37(1) of  the Income- tax Act,  1961 (‘the Act’)  to widen the scope of benefits or  perquisite in  business or  profession, section 194R also incorporated to ensure the deductibility on  such income. To remove difficulties in giving effect to the provision of  section 194R, the CBDT has further issued the guidelines vide circulars[2] [3]dated 16.06.2022 and 13.09.2022.

In this article, the Author has tried to understand the changes which have been brought in,  to charge and deduct tax on   benefits and perquisites in business or  profession, and whether the guidelines will  be helpful in their swift implementation. He  has also tried analyse the complexity involved in compliance of these provision and what can be the best interpretation while reading these changes cumulatively under different scenarios.

II. Interplay between charging section 28(iv) and TDS  provision u/s 194R

The  Section 194R of the Act  has been introduced to deduct tax at source on  the income which is covered under section 28(iv) of the Act.  It was stated in the Memorandum explaining to the Finance Bill[4]that in many cases,  the  recipients of  income related  to the  benefit or   perquisite  arising from business  or exercise of  profession does not report the receipt of  such benefits in  their return of  income, leading to furnishing of incorrect particulars of income. In order to widen and deepen the tax base, section 194R has been introduced to ensure that the person responsible for  providing such income deduct tax at source in respect of such benefits and perquisites.

First of  all,  we  will  try  to understand that nature of  the income which has been covered under section 28(iv) of the Act.  Section 28(iv) reads as under

 “28. The   following income shall be  chargeable  to income-tax under  the  head  "Profits and  gains  of business or  profession”,  -

(i) …

(iv)  the value of any benefit or  perquisite arising from business or  the exercise of a profession, whether—

(a)  convertible into money or  not; or

(b) in cash or  in kind or  partly in cash and partly in kind; ….” (After amendment by the Finance Act, 2023)

The  issues derived from the outcome of different case laws can be discussed to interpret the coverage of the section 28(iv), which are as follows:

(i) Transactions in which payments have been made only in money

It was vehemently debated whether or  not transactions in which payments were made in cash and not in kind should be covered by  Section 28(iv) prior to amendment by  the Finance Act,  2023, which added the clause (b)  to the Section.

Expression 'whether convertible into money or  not' would mean that benefit, which is  provided will  be liable for  TDS, irrespective of whether the benefit is capable of conversion into money form or  not. Once the benefit itself is provided in the form of money - then provision is not attracted. Hon'ble Apex Court in the case of  Mahindra & Mahindra Ltd   [5]has held in  unequivocal terms that in  order to invoke the provisions of section 28(iv) of the Income Tax  Act,  the benefit which is received has to be in some other form rather than in the shape of money.

In order to overturn the Apex Court's decision, Section 28(iv) has been amended to include all  benefits, whether paid in cash or  not. The  following is from the memorandum outlining the Finance Bill, 2023:

“Section 28 of  the Act  provides for  income that shall be chargeable to income-tax under the head “Profits and gains of  business or  profession”. Clause (iv)  of  this section brings to chargeability the value of  any benefit or  perquisite, whether convertible into money or  not, arising from business or  the exercise of  a profession. This provision was inserted through the Finance Act  1964 and the Circular no  20D dated 7th July 1964 issued to explain the provisions of  this Act  stated clearly that the benefit could be in cash or in kind. Therefore, the intention of the legislation while introducing this provision was also to include benefit or perquisite whether in cash or in kind. However, Courts have interpreted that if the benefit or perquisite are in cash, it is not covered within the scope of  this clause of  section 28 of  the Act.

In  order to align the provision with the intention of legislature, it is proposed to amend clause (iv) of section 28 of the Act to clarify that provisions of said clause also applies to cases where benefit or perquisite provided is in cash or in kind or partly in cash and partly in kind.” (Emphasis applied)]

Now,  it has been made unambiguous that any perks or  benefits given in the course of doing business or exercising a profession, whether in cash or  in kind, are taxable.

 (II)  Irretrievable benefits or  advantage

 The  term "perquisite" typically refers to

(a)  meeting of an obligation owed by  one person to another, whether directly or  indirectly, or

(b)  the provision of  a facility or  amenity to another person, where the person providing the facility or concession is  aware from the outset that what is  being done is  irretrievably lost to him because it  has been granted to the recipient as a privilege or  right. It  has been held[6]that the phrases "benefit" or "perquisite" are to be interpreted together and would provide colour to one another in  the context of section 28(iv). According to this perspective,  the word "benefit" must also be understood in the same way, i.e., that the one party must provide the other party with  some irretrievable benefit or  advantage at the moment the commercial transaction is executed.

(III)  Benefit or  perquisite received should be the consideration received for the services

Benefits or perks that are covered should come from operating a business or practicing a profession, thus there must be some connection between the receiving resident's business and the benefits that are given to him. Provisions of section 28(iv) can be applied only when there is circumvention of income by  taking or  receiving income in other forms[7].

This  aspect is also evident from illustration considered in Circular 20-D[8]issued long back at the time of insertion of section 28(iv)

"  83. The effect  of   the  above-mentioned amendment  is   that in   respect of   an   assessment for   the assessment  year 1964-65 and subsequent years, the value of  any benefit or  amenity, in  cash or  kind, arising to an  assessee  from his  business or  the exercise of  his  profession, e.g. the value of  rent-free residential accommodation secured by an  assessee from a company in consideration of  the professional services as a lawyer rendered by him to that company, will be assessable in the hands of  the assessee as his  income under the head 'Profits and gains of  business or profession'"

Section 28(iv) aims at  taxing fringe benefits that  are  availed in  addition to consideration earned  in carrying out a profession or  while doing business.[9]

The   case of  Helios  Food Improvers[10],  also explained circumvention with the  example of  trader selling the goods at a discounted price but receiving a gift  of car from the concerned buyer. In that case there being no  other consideration or  reason for  such party for  giving car in gift  to the seller, the value of that car can be taxed as income under section 28(iv) of the Act.

III. Disallowance of expenditure u/s 37(1) and its interplay with TDS  u/s 194R

The  newly amended  Explanation 3(ii)  to section 37(1) provides that no  expenditure should be allowed, where the recipient:

a) may or  may not be carrying on  a business or  exercising a profession; and

b)  acceptance of benefit or  perquisite is in violation of any law  or  rule or  regulation or  guideline which for the time being in force governs the conduct of the recipient

It  is  imperative to take into account that prior to the amendment whereby Explanation 3(ii)  to Section

37(1) was introduced, the Supreme Court in the case of Apex Laboratories (P) Ltd. v. DCIT  [11], held that even if the payer or  provider of  the benefit of  perquisite is  not bound or  regulated by  any code, regulation, etc., which prohibits acceptance of gifts, benefits, gratuity, etc., still  if the same is opposed to public policy, disallowance under Section 37(1) shall be attracted.

Thus, with the insertion of  Explanation 3(ii)  to section 37(1) of  the Act, pharmaceutical companies and allied health sector industry should take care that any expenditure incurred on  Doctors which is  not permitted by   MCI  Regulations 2002 (as  amended  by   Regulation 2009  and  2016),  Uniform Code of Pharmaceutical  Marketing Ethics ("UCPMP"), Drugs and Cosmetics Act,  1945 and UCMDMP and  PhRMA Code (applicable from 1st January 2022) will not be allowed under Section 37(1) read with Explanation 1 and 3 thereto.

The   approach can be applied to other industry sectors and professions. The   regulations also apply to legislation that are now in effect abroad, outside of India. Litigation may become quite heated depending on  each specific act and whether it contravenes a law, rule, or  other guideline. What will happen to the allowability  of   an  expenditure if  it   is   initially determined  to  be  illegal and  prohibited but  is   later considered as legal in court on  appeal by  a higher court.

Furthermore, even though the aforementioned expense is prohibited under section 37(1), the payer is nevertheless obligated to deduct tax from the amount of the expense. Additionally, the same will be regarded as the recipient's income under Section 28(iv) of the Act.

IV.  Liability to deduct tax u/s 194R under different Scenarios

The  CBDT released guidelines attempted to provide a practical approach in many instances, however, its implementation has caused a lot  of  problems. The  author has made an effort to suggest a solution that works on  the applicability of the TDS provision under Section 194R in light of these guidelines and other practical scenarios.

(a)  Sale discount, Cash discount and rebates

Sales discounts, cash discount or  rebates allowed to customers from the listed retail price represent lesser realization of the sale price itself and there is no  requirement to deduct tax u/s 194R.

(b)  Incentives post the sale of goods/services which are not the part of initial offer

As per the understanding of  the author, such incentives are not the part of  the initial offer and can’t be considered as sale/cash discount of  the sale. In such circumstances, it  will be the additional benefits or perquisites which has  been  provided to the  recipient and should be considered for   the purpose  of deduction of tax u/s 194R of the Act.

   (c)  Free samples

    Free samples  are  benefits and  perquisites provided to  the  recipient, hence,  will  be  liable for   tax deduction. Some of such examples can be       illustrated as below:

 Incentives in the form of cash or  kind such as car, TV, computers, gold coin, etc. A trip for  the recipient and his/her relatives upon achieving certain targets

Free ticket for  an event

Medicine samples free to medical practitioners.

(d)  Benefits which are not capable of measurement such as loyalty/reward points

In  such cases, the FMV of  such reward/loyalty points need to be calculated and section 194R will  be applicable on  such amount accordingly.

(e)  Reimbursement of out-of-pocket expenses

Any  reimbursement of  out-of-pocket expenses should be considered for  the purpose of  tax deductibility u/s 194R of  the Act.   For  example, a consultant is  rendering service to a person "X"  for  which he is receiving consultancy fee. In the course of  rendering that service, he has to travel (travel is  exclusively for  services rendered to “X”)  to different cities and boarding and lodging expenses are incurred, the applicability of the section 194R can be defined as below:

In case, the invoice is in the name of consultant and paid by  him - applicable

In case, the invoice is in the name of “X” and paid by  the consultant – Not applicable

In case, the invoice is in the name of consultant and paid by  the “Y” - applicable

In case, the invoice is in the name of “X” and paid by  him – Not applicable

However, it can be litigated that reimbursement of any expenses does not lead to any income. It is very well  settled by  the judgment of Hon’ble Apex Court and various other High  Courts, that reimbursement of any expense is not income if there is no  mark up.[12]

(f) Dealer conference to educate the dealers about the products of the company

The  expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for  the purposes of  section 194R of  the Act  in  a case where dealer/business conference is  held with the prime object to educate dealers/customers about any of the following or  similar aspects:

For  obtaining orders from dealers/customers or  launch of new product Teaching sales techniques to dealers/customers or addressing their queries Any business-related activity, e.g., reconciliation of accounts

The  guidelines also clarify that,

All dealers are not required to be invited in a dealer/business conference. 

A day immediately prior to or  post the duration of the conference – no  requirement to deduct tax u/s 194R on  such expenditure.

If benefit/perquisite is provided in a group activity in a manner that it is difficult to match such benefit/perquisite to each participant using a reasonable allocation key, the benefit/perquisite provider may at his  option not claim the expense, representing such benefit/perquisite, as deductible expenditure for  calculating his  total income and then no  requirement of TDS.

However, such conference must not be in  the nature of  incentives/benefits to select dealers/customers who have achieved particular targets. Further, in the case of  expenditure attributable to leisure trip or leisure component of the dealer or  his  family member, it should be considered for  the applicability of tax deduction u/s 194R.

(g)  Benefit or  perquisite is in the form of capital asset

The  deductor is not required to check that whether the benefit is in the form of capital asset or  not. The asset given as benefit or  perquisite may be capital asset in  general sense of  the term like  car, land etc but in the hands of the recipient it is benefit or  perquisite and accordingly tax is required to be deducted irrespective of its nature. Some case laws and examples can be presented as below:

Value of gift  of land was held as a receipt by  the assessee in carrying on  of his  vocation and was held as taxable.[13]

Shares were allotted to the director of the company were held as benefit or  perquisite.[14]

A car to a preacher by  his  disciple, held to be taxable being a receipt from the exercise of the vocation carried on  by  him.[15]

The  amount representing principal loan waived by  bank under one time settlement scheme would constitute income falling under section 28(iv).[16] - However, to remove difficulties, the guidelines provided that one-time loan settlement with borrowers or  waiver of loan granted on reaching settlement with the borrowers by  the certain notified institutions would not be subjected to tax deduction at source under section 194R of the Act.

Value of rent-free accommodation, furniture and fixtures given to director was held as taxable under section 28(iv).[17]

(h)  Benefits or  perquisite to the owner/director/partner/employee of the business entity

Benefits/perquisites may be used by  owner/director/employee of  the recipient entity or  their relatives who in their individual capacity may not be carrying on  business or exercising a profession. In such cases, tax is  required to be deducted by  the person in  the name of  recipient entity, e.g., the free medicine sample may be provided by  a company to a doctor who is an employee of a hospital, the TDS u/s 194R is required to be deducted by  the company in  the hands of  hospital. The  hospital may subsequently treat this benefit/perquisite as  the  perquisite given to its employees and deduct tax u/s 192 of  the  Act. However, as an alternative, the original benefit or  perquisite provider may directly deduct tax under section 194R of the Act in the case of the consultant as a recipient.

(i) Benefit or  perquisite not in the course of business or  profession, e.g., Govt. Entities

Section 194R would not apply to benefit or  perquisite to a Government entity, like  Government hospital, not carrying on  business or  profession as per the clarification given in the Guidelines as these recipients do  not receive the benefit or  perquisite in the course of business or  profession. On  the same logic, it can be  considered that  not only Government entities  like   hospitals but benefits or   perquisites to other institutions, e.g., charitable trusts, NGOs  which are not carrying any business or  profession, cannot be subject to TDS u/s 194R of the Act.

(j) Product given to celebrities while influencing to the prospective customers

In case of benefit or  perquisite being a product like  car, mobile, outfit, cosmetics etc and if the product is returned to the manufacturing company after using for  the purpose of rendering service, then it will not be treated as a benefit/perquisite for  the purposes of section 194R of the Act.  However, if the product is retained then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the Act.

(k)  Any  perquisite or  benefit received out of  natural  love and  affection not arising from business  or profession – provisions of section 194R is not applicable.

(l) Bonus share/right share issued by  a company

The  tax under section 194R of the Act is not required to be deducted on  issuance of bonus or right shares by  a company in which the public are substantially interested as defined in clause (18) of section 2 of the Act,  where bonus shares are issued to all  shareholders by  such a company or  right shares are offered to all shareholders by  such a company, as the case may be.

The   justification provided  behind  this  interpretation  is   that  this does  not  result in   any benefit to shareholders as  the  overall value and ownership of  their  holding does  not  change.  Further cost  of acquisition of bonus share is taken as nil for  capital gains computation when this share is sold. As per the understanding of the author, in case, the same logic is applied to the closely held or  Pvt  Ltd  companies, there should be no  required to withhold any tax u/s 194R.

V.  Controversial matters, their interpretation and the author’s take

(i) Binding nature of Guidelines issued by Circulars[18] [19] on the Taxpayers

It  should be identified that the Legislature has started a new trend with the passage of  the last two Finance Acts to grant the CBDT the authority to resolve issues. Further, using such powers, clarifications and guidelines has been made binding not only on  the Department but also on  the assesses at large. Sub- section (2)  of section 194R of the Act  authorises the Board to issue guidelines, for  removal of difficulties, with the approval of the Central Government.

Traditionally, clarifications/ instructions/ guidelines were issued by  the Board u/s 119 of the Act.  Further, it is very well  settled that such clarifications/ instructions/ guidelines, though binding on  the Department, are not binding on   either the Courts or  the taxpayers. However, under the new mechanism, though clarifications are issued by  the Board the same are sought to be made binding on  the taxpayers also. This, appears to be incongruous with the prevailing position in law. It is very well  settled that by  using the ‘removal of difficulty clause’ the Central Government cannot change, disfigure or do  violence to the basic structure and primary features of  the Act.  In  no  case, can it,  under the guise of  removing a difficulty, change the scheme and essential provisions of the Act.[20][21]

(ii) Deduction of TDS  irrespective of the taxability nature of benefits or  perquisite

In response to Q. 1 of guidelines issued on  16.06.2022, it has been clarified that there is no  necessity for a deductor to check whether the benefit or perquisite is taxable or  not in the hands of the recipient. The clarification runs  contrary  to  the  object/  purpose  behind insertion  of   section 194R, wherein, the Explanatory Memorandum to Finance Bill,  2022 clearly mentioned that  the object behind insertion of section 194R is to collect tax on benefits or  perquisites which are taxable u/s 28(iv) of the Act.

In the said guidelines, comparison with section 195 and referring to the judgment in  case of PILCOM vs. CIT[22], have  no  relevance and that there are ample examples of  TDS  provisions and judgments to the contrary. The  whole idea behind collecting tax in advance by  way of TDS is that an income should not go untaxed. The   same becomes evident on  reading of  section 199 of  the Act  read  with Rule 37BA which states that credit of TDS would be available in the year in which corresponding income is offered to tax. It is  therefore, clear that TDS u/s 194R has to be deducted only if the benefit or  perquisite is  taxable u/s 28(iv) of the Act.

(iii) Interplay in applicability of different provisions of TDS

There would be interplay of section 194R with other sections like  pharma companies deduct tax at 0.1% under section 194O on  purchase from supplier; deduct tax under section 194C at 1%  on  payment to courier company; disallowance of these expenses under section 37(1) post amendment, etc.

Such  interplay   will   cause  a  lot    of    complexity  in    compliance  of    such   provisions. As    per  my understanding, which provision is  more specific to  the  transaction should be  applicable, however, the litigation can’t be avoided in such cases.

(iv) Valuation of the benefits or  perquisites provided in kind or  partly in kind

The   guidelines provides that  the  valuation would be  based  on   fair   market  value of  the  benefit or perquisite except in following cases, i.e.,

In case the provider has purchased the benefit/perquisite – the purchase price

In case the provided is the manufacture of such item – The  price that is charges to its customers.

It is  further clarified that GST  will not be included for  the purposes of  valuation of  benefit/perquisite  for

TDS under section 194R of the Act.

However, in  numerous cases, the purchaser is  not the buyer and the manufacturer, in  such cases, no rules have been provided to calculate the FMV of  the good, which can cause the practical issues in  the implementation of the provisions.

(v) Ultimate beneficiary is not identified due to complexity of incentives schemes.

Sometimes, incentives schemes are drafted in  such a manner that it is practically impossible to find  out that who is  the ultimate beneficiary. There are many intermediaries through which the incentives are passed on. The  question arises, that how to deduct tax in  such cases and how the deductor ensure that tax has been deposited by  the recipient in  such transactions. As  per the  author  understanding,  TDS should be deducted on  the 1st receipt of such services.

(vi) Liability on the Deductor to ensure that tax has been paid or  deposited.

The  requirement of law  is that if a person is providing benefit in kind to a recipient and tax is required to be deducted under section 194R of  the Act, the person is  required to ensure that tax, required to be deducted, has been paid by  the recipient. In such cases,the tax deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that the tax required to be deducted on the benefit/perquisite has been deposited.

As per the author, the deductor’s liability should end with tax deduction only and should not be extended such that he also ensures that tax has been paid on  perquisite or  benefit before releasing such benefit or perquisite. There is no  mechanism for  ensuring that such liability has been settled has been brought out in the provisions. Taking a declaration from the recipient, as provided in the guidelines, is a cumbersome job  which is practically not possible.

VI.  Conclusion

The  famous tax proverb by  Alfred E. Neuman that reads, "Today, it takes more brains and effort to make out the income-tax form than it  does to make the income," perfectly sums up the design of  the  TDS provisions of the Income-tax Act.

In  a number of  circumstances, the Revenue Department has released guidelines with FAQs  to address the practical problems. Even though, these guidelines have tried to provide answers to most of  the queries of  taxpayers, but still, it  has nonetheless generated greater debate. For  law  to be successfully implemented,  it   must  be  clear  and  simple to  understand.  The   complexity  of   these  newly added regulations and their severance nature  in  the event of  non-compliance will  only lead  to  additional litigation and controversy.

There are still  many issues that remain unresolved, and only time will tell  how much litigation is going to arise from conflicting interpretations and comprehensions of  the TDS  regulations. The  gap between the two pillars of  the tax conflicts, i.e., the taxpayers and the revenue authority will continue to widen, making it seem difficult to build a bridge between them.