[Opinion] Will the guidelines issued u/s 194R(2) increase the litigation?

Answer: Tax under section 194R of the Act is required to be deducted whether the benefit or perquisite is in cash or in kind. In this regard it is important to draw attention to the first proviso to sub-section (1) of section 194R of the Act, which reads as under:

“Provided that in a case where the benefit or perquisite, as the case may be, is wholly in kind or 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 person responsible for providing such benefit or perquisite shall, before releasing the benefit or perquisite, ensure that tax required to be deducted has been paid in respect of the benefit or perquisite:”

This proviso clearly indicates the intent of legislature that there could also be situations where benefit or perquisite is in cash or the benefit or perquisite is in kind or partly in cash and partly in kind. Thus, section 194R of the Act clearly brings in its scope the situation where the benefit or perquisite is in cash or in kind or partly in cash or partly in kind.

Author’s View: As per guidelines given by the CBDT section 194R of the Act clearly brings in its scope the situation where the benefit or perquisite is in cash or in kind or party in can or party in kind.

As per Hon’ble Apex court judgement in the case of Commissioner Vs Mahindra & Mahindra Ltd (2018) 93 Taxmann.com 32 /255 Taxman 305/404 ITR 1 (SC) it was held that benefit or perquisite can be any form in which can be converted into money. It means it should not be money.

Hence this guideline in contrary to the decision of Hob’ble Apex Court so far benefit or perquisite in cash is concerned.

Answer: There is no requirement to check whether the perquisite or benefit is taxable in the hands of the recipient and the section under which it is taxable.
Further, courts have held many benefits or perquisites to be taxable even though one can argue that they are in the nature of capital asset. The following judgments illustrate this point:

• •  The amount representing principal loan waived by bank under one time settlement scheme would constitute income falling under section 28(iv) relating to value of any benefit or perquisite, arising from business or exercise of profession. CIT v. Rainaniyam Homes (P.) Ltd. [2016] 68 taxmann.com 289/239 Taxman 486/384 ITR 530 (Mad.)

Author’s View: The CBDT has given illustration and as per it, principal loan waived by bank under the time settlement scheme would constitute income falling under section 28(iv) relating to benefit or perquisite arising from business or exercise of profession. The CBDT relied upon the Hon’ble Madras High Court judgment in the case of CIT v. Ramaniyam Homes (P.) Ltd. [2016] 68 taxmann.com 289/239 Taxman 486/384 ITR 530 (Mad.)which has been reversed by Hon’ble Apex Court in the case Commissioner v. Mahindra & Mahindra Ltd. [2018] 93 taxmann.com 32/93 taxmann.com 32/404 ITR 1 (SC).

Answer: Sales discounts, cash discount or rebates allowed to customers from the listed retail price represent lesser realization of the sale price itself. To that extent purchase price of customer is also reduced.

To illustrate, the free medicine sample may be provided by a company to a doctor who is an employee of a hospital. The TDS under section 194R of the Act is required to be deducted by the company in the hands of hospital as the benefit/perquisite is provided to the doctor on account of him being the employee of the hospital. Thus, in substance, the benefit/perquisite is provided to the hospital. The hospital may subsequently treat this benefit/perquisite as the perquisite given to its employees (if the person who used it is his employee) under section 17 of the Act and deduct tax under section 192 of the Act. In such a case it would be first taxable in the hands of the hospital and then allowed as deduction as salary expenditure. Thus, ultimately the amount would get taxed in the hands of the employee and not in the hands of the hospital. Hospital can get credit of tax deducted under section 194R of the Act by furnishing its tax return. It is further clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (1) of section 194R of the Act is also required to be seen with respect to the recipient entity.

Author’s View: The CBDT has tried to give guidelines which are not as per the law. How can a pharma co. deduct TDS u/s 194R for free sample provided to a doctor and who is an employee of a hospital?

The very first condition under 194R is that the benefit or perquisite is provided to a resident person and it is arising from business or exercise of a profession by such resident (deductee/recipient). As per the illustration, the company will deduct tax of the hospital u/s 194R then hospital will deduct tax u/s 192 of the employee doctor.

The CBDT has enlarged the scope of section 194R by way of guidelines which is contrary to the settled legal position.