Blog on Section 194R along with FAQs

By: Vidhi Vora - 27th October, 2023

SUMMARY OF SECTION 194R

By CA Vidhi Vora

• Who is liable under this section
  • Any person
  • If the person is Individual or HUF
    • Liability is there only if turnover exceeds 1 Crore of 50 Lakhs
    • Turnover for which period
      • Immediately preceding FY
    • When does the liability arise
      • When the said person become responsible for providing any
        • Benefit
        • Perquisite
        • Such benefit or perquisite may be
          • Wholly in cash
          • Wholly in kind
          • Partly in cash and partly in kind
          • It may be convertible into money
          • It may not be so convertible into money
        • To whom such benefit or perquisite is provided to attract this section
          • To any resident
          • When such benefit or perquisite arises from business or exercise of profession by such resident
        • What exactly is the liability on the person liable
          • To ensure that
            • Tax has been deducted in respect of such benefit or perquisite
            • At 10%
              • On value
              • Or aggregate value
              • Of such benefit or perquisite
            • If wholly in cash, deduct the required amount from payment
            • If wholly in kind
              • Ensure that tax required to be deducted has been paid
              • And release the benefit or perquisite only after that
            • If partly in cash and partly in kind 

• If cash portion is sufficient to cover the liability
  • Deduct the amount from such cash portion
• If cash portion is not sufficient
  • Ensure that the tax required to be deducted is paid
  • And release the benefit or perquisite only thereafter
• Monetary limit beyond which the section will come into play
  • Value or aggregate value should exceed 20000
  • During the financial year
  • Value for Benefit or Perquisite
    • Provided
    • Likely to be provided
    • Should exceed 20000
  • Who is person responsible in case of a Company
    • Company itself
    • Principle officer of the company

Circular No. 12 of 2022

1. No. 370142/27/2022-TPL

Government of India Ministry of Finance Department of Revenue

(Central Board of Direct Taxes)

***********

New  Delhi, dated 16^th June, 2022

Subject: Guidelines for removal of difficulties under sub-section (2) of section 194R of the Income­ tax Act, 1961

Finance Act 2022 inserted a new section 194R in the Income-tax Act, 1961(hereinafter referred to as"the Act") with effect from I ^st July 2022.

The new section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @I0% of the value or aggregate of value of such benefit or perquisite, before providing such benefit or perquisite. The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident.

This deduction is not required to be made, if the value or aggregate of value of the benefit or perquisite provided or likely to be provided to the resident during the financial year does not exceed twenty thousand rupees.

The responsibility of tax deduction also does not apply to a person, being an Individual/Hindu undivided family (HUF) deductor, whose total sales/ gross receipts/ gross turnover from business does not exceed one crore rupees, or from profession does not exceed fifty lakh rupees, during the financial year immediately preceding the financial year in which such benefit or perquisite is provided by him.

Sub-section (2) of section I 94R of the Act authorises the Board to issue guidelines, for removal of difficulties, with the approval of the Central Government. These guidelines are required to be laid before each House of Parliament and are binding on the income-tax authorities and the person providing the benefit or perquisite.

Accordingly, in exercise of the power conferred by sub-section (2) of section I 94R of the Act, the Board, with the prior approval of the Central Government, hereby issues the following guidelines:-

Guidelines

Question 1. Is it necessary that the person providing benefit or perquisite needs to check if the amount is taxable under clause (iv) of section 28 of the Act, before deducting tax under section 194R of the Act?

Answer: No. The deductor is not required to check whether the amount of benefit or perquisite that he is providing would be taxable in the hands of the recipient under clause (iv) of section 28 of the Act. The amount could be taxable under any other section like section 41(I) etc. Section I 94R of the Act casts an obligation on the person responsible for providing any benefit or perquisite to a resident, to deduct tax at source@l0%. There is no fu11her requirement to check whether the amount is taxable in the hands of the recipient or under which section it is taxable.

In this regard it may be highlighted that in the context of section 195 of the Act it is a requirement to know whether the payment made by the deductor is income in the hands of the non-resident recipient as section 195 of the Act requires deduction on any other sum chargeable under the pi·ovisions of this Act at the rates in force. Thus there is requirement that deductor needs to verify if the "sum is chargeable under the Income-tax Act". The term "rate in force" is defined in clause (37A) of section 2 of the Act and it allows benefit of agreement under section 90 or section 90A of the Act, if eligible, in determining the rate of tax at which the tax is to be deducted at source. Hence, there is fu11her requirement of checking if the amount is taxable under tax treaty and if yes, at what rate. Such a requirement is not there in section 194R of the Act, in the absence of these two terms in this section. Hence, there is no requirement for deductor to verify whether the amount is taxable in the hands of the recipient or section under which it is taxable.

It may also be highlighted that these two terms are also not there in section 194E of the Act and I-lon'ble Supreme Cowt in the case of PILCOM vs. CIT West Bengal (Civil Appeal No. 5749 of 2012), held that tax is to be deducted under section I 94E of the Act at a specific rate indicated there i and there is no need to see the taxability or the rate of taxability in the hands of the non-resident.

Question 2. Is it necessary that the benefit or perquisite must be in kind for section 194R of the Act to operate?

Answer: Tax under section I 94R 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 (I) of section 194R of the Act, which reads as under:

"Provided that in a case where the bene_fit 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 lo 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 l 94R of the Act clearly brings in its scope the situation where the benefit or perquisite is in cash or in kind or pa1tly in cash or pa1tly in kind.

Question 3. Is there any requirement to deduct tax under section I 94R of the Act, when the benefit or perquisite is in the form of capital asset?

Answer: As has been stated in response to question no I, there is 110 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:

• Assessee entered into an agreement with 'J' for purchase of a plot of land and certain amount was paid as earnest However, possession of land was not given to assessee and seller entered into another agreement with a third party to develop the said plot. Assessee filed suit in which a consent decree was passed and in pursuance of same certain amount as paid to assessee. On appeal it was held that such sum received in pursuance of consent decree was liable to tax as business income under section 28(iv). Ramesh BabuIal Shah v CIT (2015) 53 taxmann.com 277 (Born)
• 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 CIT v Ramaniyam Homes (P) Ltd (2016) 68 taxmann.com 289 (Mad)
• Value of rent free accommodation, furniture and fixtures given to director was held as taxable under section 28(iv). CIT v Subrata Roy (2016) 385ITR 547 (All)
• Where a car was given to an assessee by his disciple, who had been benefited from his preaching, the value of car was held to be taxable in the hands of the assessee being a receipt from the exercise of the vocation carried on by CIT (Addi) v Ram Kripal Tripathi (1980) 125 ITR 408 (All)
• The assessee was a director of a company. In terms of an agreement with the promoters, shares were allotted to the director. On these facts, it was held that the shares received by the director were benefit or perquisite received from a company by the director and it was a benefit assessable to tax. M. Neterwala v CIT ( 1986) 122 ITR 880 (Born)
• Value of gift of land was held as a receipt by the assessee in carrying on of his vocation and was held as taxabl Amarendra Nath Chakraborty v CIT (1971) 79 !TR 342 (Cal)

Thus, it can be seen that 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 has accordingly been held to be taxable. In any case, as stated earlier, the deductor is not required to check if the benefit or perquisite is taxable in the hands of recipient. Thus, the deductor is required to deduct tax under section I 94R of the Act in all cases where benefit or perquisite (of whatever nature) is provided.

Question 4: Whether sales discount, cash discount and rebates are benefit or perquisite?

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

Logically these are also benefits though related to sales/purchase. Since TDS under section l 94R of the Act is applicable on all forms of benefit/perquisite, tax is required to be deducted. However, it is seen that subjecting these to tax deduction would put seller to difficulty. To remove such difficulty it is clarified that no tax is required to be deducted under section l94R of the Act on sales discount, cash discount and rebates allowed to customers.

There could be another situation, where a seller is selling its items from its stock in trade to a buyer. The seller offers two items free with purchase of IO items. In substance, the seller is actually selling l 2 items at a price of 10 items. Let us assume that the price of each item is Rs 12. In this case, the selling price for the seller would be Rs 120 for 12 items. For buyer, he has purchased 12 items at a price of I 0. Just like seller, the purchase price for the buyer is Rs 120 for 12 items and he is expected to record so in his books. In such a situation, again there could be difficulty in applying section 194R provision. Hence, to remove difficulty it is clarified that on the above facts no tax is required to be deducted under section l94R of the Act. It is clarified that situation is different when free samples are given and the above relaxation would not apply to a situation of free samples.

Similarly, this relaxation should not be extended to other benefits provided by the seller in connection with its sale. To illustrate, the following are some of the examples of benefits/perquisites on which tax is required to be deducted under section l94R of the Act (the list is not exhaustive):

• When a person gives incentives (other than discount, rebate) in the form of cash or kind such as car, TV, computers, gold coin, mobile phone
• When a person sponsors a trip for the recipient and his/her relatives upon achieving certain targets
• When a person provides free ticket for an event
• When a person gives medicine samples free to medical

The above examples are only illustrative. The relaxation provided from non-deduction of tax for sales discount and rebate is only on those items and should not be extended to others.

It is further clarified that these 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. However, the tax is required to be deducted by the person in the name of recipient entity since the usage by owner/director/employee/relative is by vi1tue of their relation with the recipient entity and in substance the benefit/perquisite has been provided by the person to the recipient entity.

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 l94R 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 lo thtJ hospitul. The hospital mny 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 l 94R of the Act by furnishing its tax return. It is fuither clarified that the threshold of twenty thousand rupees in the second proviso to sub-section (I) of section l94R of the Act is also required to be seen with respect to the recipient entity.

Similarly, the tax is required to be deducted under section 194R of the Act if the benefit or perquisite is provided to a doctor who is working as a consultant in the hospital. In this case the benefit or perquisite provider may deduct tax under section : 94R of the Act with hospital as recipient and then hospital may

again deduct tax under section I 94R of the Act for providing the same benefit or perquisite to the consultant. To remove difficulty, 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.

The provision of section l94R of the Act shall not apply if the benefit or perquisite is being provided to a Government entity, like Government hospital, not carrying on business or profession.

Question 5. How is the valuation of benefit/perquisite required to be carried out? 

Answer: The valuation would be based on fair market value of the benefit or perquisite except in following cases:-

• The benefit/perquisite provider has purchased the benefit/perquisite before providing it to the recipient. In that case the purchase price shall be the value for such benefit/perquisite.
• The benefit/perquisite provider manufactures such items given as benefit/perquisite, then the price that it charges to its customers for such items shall be the value for such benefit/perquisite.

It is further clarified that GST will not be included for the purposes of valuation of benefit/perquisite for TDS under section l94R of the Act.

Question 6: Many a times, a social media influencer is given a product of a manufacturing company so that be can use that product and make audio/video to speak about that product in social media. Is this product given to such influencer a benefit or perquisite?

Answer: Whether this is benefit or perquisite will depend upon the facts of the case. 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 l 94R 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.

Question 7: Whether reimbursement of out of pocket expense incurred by service provider in the course of rendering service is benefit/perquisite?

Answer: Any expenditure which is the Iiability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of busine s/profession.

Let us assume that 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 to different city from the place where is regularly carrying on business or profession. For this purpose, he pays for boarding and lodging expense incurred exclusively for the purposes of rendering the service to "X". Ordinarily, the expenditure incurred by the consultant is part of his business expenditure which is deductible from the fee that he receives from company "X". In such a case, the fee received by the consultant is his income and the expenditure incurred on travel is his expenditure deductible from such income in computing his total income. Now if this travel expenditure is met by the company "X", it is benefit or perquisite provided by "X" to the consultant.

However, sometimes the invoice is obtained in the name of "X" and accordingly, if paid by the consultant, is reimbursed by "X". In this case, since the expense paid by the consultant (for which reimbursement is made) is incurred wholly and exclusively for the purposes of rendering services to "X" and the invoice is in the name of "X", then the reimbursement made by "X" being the service recipient will not be considered as benefit/perquisite for the purposes of section l94R of the Act.

If the invoice is not in the name of "X" and the payment is made by "X" directly or reimbursed, it is the benefit/perquisite provided by "X" to the consultant for which deduction is required to be made under section I 94R of the Act.

Question 8: If there is a dealer conference to educate the dealers about the products of the company - Is it benefit/perquisite?

Answer: The expenditure pertaining to dealer/business conference would not be considered as benefit/perquisite for the purposes of section I 94R 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:

• new product being launched
• discussion as to how the product is better than others
• obtaining orders from dealers/customers
• teaching sales techniques to dealers/customers
• addressing queries of the dealers/customers
• reconciliation of accounts with dealers/customers

However, such conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets.

Further, in the following cases the expenditure would be considered as benefit or perquisite for the purposes of section I94R of the Act:-

• Expense attributable to leisure trip or leisure component, even if it is incidental to the dealer/business
• Expenditure incurred for family members accompanying the person attending dealer/business conference
• Expenditure on participants of dealer/business conference for days which are on account of prior stay or overstay beyond the dates of such

Question 9: Section 194R provides that if the benefit/perquisite is in kind or partly in kind (and cash is not sufficient to meet TDS) then the person responsible for providing such benefit or perquisite is required to ensure that tax required to be deducted has been paid in respect of the benefit or perquisite, before releasing the benefit or perquisite. How can such person be satisfied that tax has been deposited?

Answer: 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 l94R of the Act, the person is required to ensure that tax required to be deducted has been paid by the recipient. Such recipient would pay tax in the form of advance tax. 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. This would be then required to be reported in TDS return along with challan number. This year Form 26Q has included provisions for reporting such transactions.

In the alternative, as an option to remove difficulty if any, the benefit provider may deduct the tax under section 194R of the Act and pay to the Government. The tax should be deducted after taking into account the fact the tax paid by him as TDS is also a benefit under section 194R of the Act. In the Form 26Q he will need to show it as tax deducted on benefit provided.

Question 10. Section 194R would come into effect from the 1'' July 2022. Second proviso to sub­ section (1) of section 194R of the Act provides that the provision of this section does not apply where the value or aggregate of value of the benefit or perquisite provided or likely to be provided to a resident during the financial year does not exceed twenty thousand rupees. It is not clear how this limit of twenty thousand is to be computed for the Financial Year 2022-23?

Answer: It is hereby clarified that,-

• Since the threshold of twenty thousand rupees is with respect to the financial year, calculation of value or aggregate of value of the benefit or perquisite triggering deduction under section 194R of the Act shall be counted from 1si April, Hence, if the value or aggregate value of the benefit or perquisite provided or likely to be provided to a resident exceeds twenty thousand rupees during the financial year 2022-23 (including the period up to 30th June 2022), the provision of section 194R shaJI apply on any benefit or perquisite provided on or after I 51 July 2022.
• The benefit or perquisite which has been provided on or before 30¹h June 2022, would not be subjected to tax deduction under section 194R of the Act.

(Ankit Jain)

Under Secretary to the Govt. of India

Copy to:

I .    PS to FM/ OSD to FM/ PS to MoS(F)/ OSD to MoS(F)

2. PPS to Secretary (Revenue)
3. Chairman, CBDT & All Members, CBDT
4. All DGsIT/ Pr. CCsIT
5. All Joint-Secretaries/ CslT/ Directors/ Deputy Secretaries/ Under Secretaries of CBDT
6. The C&AG of India
7. The JS & Legal Adviser, Ministry of Law & Justice, New Delhi
8. CIT (M&TP), Official Spokesperson of CBDT
9. O/o DGIT (Systems) for uploading on official website.
10. JCIT (Database Cell) for uploading on irsorticcrso11linc.gov.i11.

Circular No 18 of 2022

F.No. 370142/27/2022-TPL

Government of India Ministry of Finance Department of Revenue

Central Board of Direct Taxes (TPL Division)

New Delhi, Dated 13^th September, 2022

Sub: Additional Guidelines for removal of difficulties under sub-section (2) of section 194R of the Income-tax Act, 1961

Finance Act 2022 inserted a new section I 94R in the Income-tax Act, 1961 (hereinafter referred to as "the Act") with effect from I st July 2022.

2. The new section mandates a person, who is responsible for providing any benefit or perquisite to a resident, to deduct tax at source @10% of the value or aggregate of value of such benefit or perquisite, before providing such benefit or The benefit or perquisite may or may not be convertible into money but should arise either from carrying out of business, or from exercising a profession, by such resident.
3. This deduction is not required to be made, if the value or aggregate of value of the benefit or perquisite provided or likely to be provided to the resident during the financial year does not exceed twenty thousand rupees.
4. The responsibility of tax deduction also does not apply to a person, being an Individual/Hindu Undivided Family (HUF) deductor, whose total sales / gross receipts / gross turnover from  business does  not exceed  one crore  rupees, or from profession does not exceed fifty lakh rupees, during the financial year immediately  preceding  the  financial  year  in  which  such  benefit  or  perquisite is provided by him.

 5. 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. These guidelines are  required  to  be  laid  before  each  House  of Parliament and are binding on  the  income-tax  authorities  and  the  person providing the benefit or perquisite. 

7. Accordingly, in exercise of the power conferred  by sub-section  (2) of section 194R of the Act, CBDT had  issued  guidelines  in the form of the Circular  no 12 of  2022  dated  16th  June    Subsequently,  some  more  clarifications  are requested  by  stakeholders  on  various  issues.  Accordingly,  this  Circular  is  also issued  under  sub-section  (2)  of  section  194R  to  provide  clarification  on  issues which will help to remove difficulties in implerri.entation of this provision. 

8. It is clarified that this Circular is only for removing difficulties in implementation of  provisions  of  section  194R  of  the  Act  and it does not  impact  the  taxability  of  income  in  the  hands  of  the  recipient which shall be governed by the relevant provisions of the Act.

Guidelines

Question 1: Refer question No 3 of the Circular No 12 of 2022: If loan settlement/waiver by a bank is to be treated as btmefit/perquisite, it would lead to hardship as the bank would need to incur the additional cost of tax deduction in addition to the haircut that he has taken. Will section 194R of the Act apply in such a situation?

Answer: It is true that waiver or settlement of loan by the bank may be an income to the person who had taken the loan. It is also true that subjecting such a transaction to tax deduction under section 194R of the Act would put extra cost on such bank, as this would require payment of tax by the deductor in addition to him taking a haircut already. Hence, to remove difficulty, it is clarified that one-time loan settlement with borrowers or waiver of loan granted on reaching settlement with the borrowers by the following would not be subjected to tax deduction at source under section I 94R of the Act:

• Public Financial Institution as defined in clause (72) of section 2 of the Companies Act 2013;
• Scheduled Bank as defined in clause (ii) of the Explanation to clause (viia) of sub­ section (1) of section 36 of the Act;
• Cooperative bank (other than a primary agricultural credit society) as defined m the Explanation to sub-section (4) of section SOP of the Act;
• Primary co-operative Agricultural and Rural Development Bank as defined m the Explanation to sub-section (4) of section SOP of the Act;
• State Financial Corporation being a financial corporation established under section 3 or section 3A or an institution notified under section 46 of the State Financial Corporation Act, 1951;
• State Industrial Investment Corporation being a Government company within the meaning of sub-section (45) of section 2 of the Companies Act 2013, engaged in the business of providing long-term finance for industrial projects;
• Deposit taking  Non-Banking  Financial  Company  as  defined  m clause  (e) of the Explanation 4 to section 438 of the Act;
• Systemically Important Non-deposit Taking Non-Banking Financial Company as defined in clause (g) of the Explanation 4 to section 438 of the Act;
• Public company engaged in providing long term finance for construction or purchase of houses in India for residential purpose and which is registered in accordance with the guidelines/direction issued by the National Housing Bank formed under National Housing Bank Act 1987;
• Asset Reconstruction Companies registered under section 3 of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act

As stated earlier, this clarification is only for the purposes of section l 94R of the Act. The treatment of such settlement/waiver in the hands of the person who had got benefitted by such waiver would not be impacted by this clarification. Taxability of such settlement/waiver in the hands of the beneficiary will be governed by the relevant provisions of the Act.

Question 2: Refer question No 7 of the Circular No 12 of 2022- If under the terms of the agreement, the expense incurred by the service provider is the cost of service recipient and such cost is reimbursed by the service recipient to service provider, how is it benefit/perquisite if the bill is not in the name of service recipient?

Answer: In answer to question No 7 of the Circular No 12 of 2022, it has been clarified that any expenditure which is the liability of a person carrying out business or profession, if met by the other person is in effect benefit/perquisite provided by the second person to the first person in the course of business/profession.

Now, if service provider incurs some expense in the course of rendering service to service recipient and the bill is in the name of service provider, then in substance (irrespective of the terms of the agreement) this expense is the liability of the service provider and not of service recipient. It is service provider who gets input credit of GST included in the expenses incurred by him. If it was the liability of the service recipient, then GST input credit would have been allowed to him (service recipient) and not to service provider. Hence, the answer to question No 7 in the Circular No 12 of 2022 correctly clarifies that in such a situation reimbursement of such an expense is benefit/perquisite on which tax is required to be deducted under section l 94R of the Act.

Subsequently, it has been brought to the notice that in GST, if service provider incurs an expense as "pure agent", then GST input credit is allowed to service recipient and not to service provider. Broadly speaking a pure agent is one who while making a supply to the recipient, also receives and incurs expenditure on some other supply on behalf of the recipient and claims reimbursement (as actual, without adding it to the value of his own supply) for such supplies from the recipient of the main supply. While the relationship between them (provider of service and recipient of service) in respect of the main service is on a principal to principal basis, the relationship between them in respect of other ancillary services is that of a pure agent. Under the GST Valuation Rules 2017 "pure agent" is given the following meaning.

"pure agent" means a person who

1. enters into a contractual agreement with the recipient of supply to act as his pure agent to incur expenditure or costs in the course of supply of goods or services or both;
2. neither intends to hold nor holds any title to the goods or services or both, so procured or provided as pure agent of the recipient of supply;
3. does not use for his own interest such goods or services so procured; and
4. receives only the actual amount incurred to procure such goods or services in addition to the amount received for supply he provides on his own account.

The GST valuation rules provide that expenditure incurred as a pure agent, will be excluded from the value of supply, and thus also from aggregate turnover. However, such exclusion of expenditure incurred as a pure agent is possible only and only if all the conditions required to be considered as a pure agent and further conditions stipulated in the rules are satisfied by the supplier in each case. The supplier would have to satisfy the following conditions (in addition to the condition required to be satisfied to be considered as a pure agent and discussed above) for exclusion from the value as under:-

1. the supplier acts as a pure agent of the recipient of the supply, when he makes payment to the third party on authorization by such recipient;
2. the payment made by the pure agent on behalf of the recipient of supply has been separately indicated in the invoice issued by the pure agent to the recipient of service; and
3. the supplies procured by the pure agent from the third party as a pure agent of the recipient of supply are in addition to the services he supplies on his own account.

In case these conditions are not satisfied, such expenditure incurred is included in the value of supply under GST. However, in the abovementioned case of "pure agent", if all the conditions are satisfied, the GST input credit is allowed to the recipient and it is not considered as supply of the pure agent, it is clarified that amount incurred by such "pure agent" for which he is reimbursed by the recipient would not be treated as benefit/perquisite for the purpose of section l 94R of the Act.

Question 3: Refer question No 7 of the Circular No 12 of 2022- Question No 30 of CBDT Circular No 715 dated 8th August 1995 clarifies that tax deduction under section 194C and 194J is required to be made from the gross amount of bill including the reimbursement. A person has provided service to a Company and out of pocket expenses are charged by him to the Company along with service fee in the same bill. Company deducts tax under section 194J of the Act on both service fee component as well as on out of pocket expense in accordance with this circular. Is there a non­ compliance with the provision of section 194R of the Act?

Answer: Relevant portion of CBDT Circular No 715 dated 8th August 1995 is as under

Question 30: Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses?

Answer: Sections J 94C and J 94J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.

If out of pocket expenses (reimbursement) are already part of the consideration in the bill on which tax is deducted under the relevant provisions of the Act, other than section l 94R, in accordance with the Circular No 715 dated 8th August 1995, it is clarified that there will not be further liability for tax deduction under section 194R of the Act.

In the above example, out of pocket expense is part of the consideration in the bill for professional fee that is charged to the Company and the tax is deducted under section 1941 of the Act on the entire consideration including on out of pocket expense. In such a case, the out of pocket expense is already included as part of professional fee. Hence, there 1s no further benefit/perquisite which requires tax deduction under section l 94R of the Act.

Question 4: Refer question No 8 of the Circular No 12 of 2022- If there is a dealer conference to educate the dealers about the products of the company - (i) is there a requirement that all dealers must be invited in the conference, (ii) what if dealers arrive one day before and leave one day after and (iii) how to identify benefit against individual dealers in a group activity?

Answer: Representations have been received from various stakeholders seeking clarity on these questions arising out of answer to question No 8. It is clarified that

• it is not necessary that all dealers are required to be invited in a dealer/business conference for the expenses to be not considered as benefit/perquisite for the purposes of tax deduction under section l 94R of the Act.
• Expenditure on participants of dealer/business conference for days which are on account of over stay prior to the dates of conference or beyond the dates of such conference would be considered as benefit/perquisite for the purposes of section l 94R of the Act. However, a day immediately prior to actual start date of conference and a day immediately following the actual end date of conference would not be considered as over stay.
• It is brought to the notice that there may be expenses during such dealer/business conference which need to be classified as benefit/perquisite and tax is required to be deducted under section l 94R of the Act. However, there may be practical difficulties in identifying such benefit/perquisite to actual recipient due to the fact that it is a group activity and reasonable allocation is not possible. Noncompliance of the provision of section l 94R of the Act, in such a case, would not only result in disallowance under clause (ia) of section 40 of the Act but may also result in treating the benefit/perquisite provider as assessee in default under section 201 of the Act with all other consequences.

In order to remove these practical difficulties, it is clarified that 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. If he decides to opt so, he will not be required to deduct tax under section l 94R on such benefit/perquisite and therefore he will not be treated as assessee in default under section 20 I of the Act. Thus, in such a case he must add back the expenditure, representing such benefit/perquisite, to calculate his total income if such expenditure is debited in the account.

Answer to question No 8 in the Circular No 12 of2022 is modified to this extent. 

Question 5: Refer question No 9 of the Circular No 12 of 2022- Company "A" gifts a car to its dealer "B" and deducted tax on this benefit under section 194R of the Act. Dealer "B" uses this car in his business. Will he get deduction for depreciation in calculating his income under the head "profits and gains of business or profession"?

Answer: Once Company "A" has deducted tax on gifting of car in accordance with section 194 R of the Act (or released the car after dealer "B" showed him payment of tax on such benefit) and dealer "B" has included this benefit as income in his income tax return, it would be deemed that the "actual cost" of the car for the purposes of section 32 of the Act shall be the amount of benefit included by dealer "B" as income in his income-tax return. Hence, dealer "B" can get depreciation on fulfillment of other conditions for claiming depreciation.

Question 6: Whether Embassy/High Commissions are required to deduct tax under section 194R of the Act?

Answer: For the removal of difficulty it is clarified that the provision of section 194R is not applicable on benefit/perquisite provided by, an organization in scope of The United Nations (Privileges and Immunity Act) 1947, an international organization whose income is exempt under specific Act of Parliament (such as the Asian Development Bank Act 1966), an embassy, a High Commission, legation, commission, consulate and the trade representation of a foreign state.

Question 7: Whether issuance of bonus share/right share is a benefit or perquisite if issued by a company in which the public are substantially interested as defined in clause (18) of section 2 of the Act and whether tax is required to be deducted under section 194R of the Act?

Answer: In case of bonus shares which are issued to all shareholders by a company in which the public are substantially interested as defined in clause (18) of section 2 of the Act, it has been represented 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. Similar representations have been received seeking clarity on issuance of right shares.

It is clarified that the tax under section l 94R 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.

(Om Prakash Meena) DCIT(OSD)(TPL-111)

Copy to:

1. PS to FM/ OSD to FM/ PS to MoS(F)/ OSD to MoS(F)
2. PPS to Secretary (Revenue)
3. Chairman, CBDT & All Members, CBDT
4. All DGsIT/ Pr. CCslT
5. All Joint Secretaries/ CsIT/ Directors/ Deputy Secretaries/ Under Secretaries of CBDT
6. The C&AG of India
7. The JS & Legal Adviser, Ministry of Law & Justice, New Delhi
8. CIT (M&TP), Official Spokesperson of CBDT
9. O/o DGIT (Systems) for uploading on official website.
10. JCIT (Database Cell) for uploading on irsofficersonline.gov.in.

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