Section 194R | Comprehensive Guide to TDS on Specified Benefits or Perquisites

Table of Contents

1. Specified benefit/perquisite: Benefit or perquisite which if provided triggers provider’s (deductor’s) liability to deduct TDS under section 194R
2. ‘Any benefit or perquisite’
3. Meaning of ‘benefit’
4. Meaning of ‘perquisite’
5. Benefit/Perquisite vs. Consideration
6. Benefit/Perquisite vs. Compensation

Check out Taxmann's TDS on Benefits or Perquisites under Section 194R which provides a comprehensive analysis on the deduction of TDS under section 194-R on Benefits or Perquisites arising from business or profession and on the taxability of such benefits or perquisites under section 28(iv) of the Income-tax Act.

1. Specified benefit/perquisite: Benefit or perquisite which if provided triggers provider’s (deductor’s) liability to deduct TDS under section 194R

In order to trigger liability of deductor (benefit/perquisite provider) under section 194R to ensure that tax has been deducted, it is necessary that specified benefit/perquisite should have been provided by him to specified deductee. Benefit/perquisite shall be a specified benefit/perquisite only if it satisfies the following conditions:

(a) It is any benefit or perquisite;

(b) It may or may not be convertible into money;

(c) It (benefit or perquisite) may be in cash or kind or partly in cash and partly in kind. [Explanation 2 to Section 194R inserted by the Finance Act, 2023 with effect from 01-04-2023]

(d) It should arise from the carrying on of business or exercise of profession by the specified deductee (resident recipient satisfying certain conditions) ; and

(e) Value of such benefit or perquisite or the aggregate value of such benefits/perquisites provided during the financial year should not exceed ` 20,000.

Section 194R provides for deduction of tax from “any benefit or perquisite…”. Section 194R does not define the words “benefit” and “perquisite”. Nor are these words defined in section 28(iv). These words are also used in sub-clauses (iv) and (iva) of clause (24) of section 2 but are not defined by the said sub-clauses also.

2 .‘Any benefit or perquisite’

The word “any” in the phrase “any benefit or perquisite” casts the net far and wide and admits only those limitations that are imposed by the context. This is clear from the following decisions:

• • The words “any one” in common conversation or literature are not infrequently used to mean “every one” — not one, but all. “In affirmative sentences, it asserts, concerning a being or thing of the sort named, without limitation as to which, and thus collectively of every one of them” (Oxford Dictionary) The Chief Inspector of Mines and another v. Lala Karam Chand Thapar etc. (1962) 1 SCR 9.The word “any” in the said case was suffixed by the word “one”, still the Court held that the words “any one” would mean “all” and not “one”. It is to be noted that in the present case in section 26(2) of RBI Act,1934, the legislature has not employed the word “one” after the word “any”. Therefore, the ratio in Lala Karam Chand Thapar(Supra) would all the more apply to the word “any” in section 26(2) of RBI Act,1934 [Vivek Narayan Sharma v. Union of India [2023] 146 taxmann.com 36 (SC)[02-01-2023]]
  • “Anything said ….in Parliament” in Article 105 of the Constitution: The word “anything” is of the widest import and is equivalent to “everything”. The only limitation arises from the words “in Parliament” which means during the sitting of Parliament and in the course of the business of Parliament.- Banwarilal Agarawalla v. State of Bihar and others (1962) 1 SCR 33
  • An argument was sought to be advanced that since Section 35 of the Foreign Exchange Management Act, 1999 uses the words “any decision or order”, only appeals from final order could be filed. The Court rejected the argument holding that “In the instant case also when a right is conferred on a person aggrieved to file appeal from “any” order or decision of the Tribunal, there is no reason, in the absence of a contrary statutory intent, to give it a restricted meaning. Raj Kumar Shivhare  v. Assistant Director, Directorate of Enforcement (2010) 4 SCC 772
  • Word ‘any’ used 5 times in definition of ‘deposit’ in section 2(c) of MPID Act shows clear intent of the Legislature to cast far and wide the net of the regulatory provisions –State of Maharashtra v. 63 Moons Technologies Ltd. [2022] 137 taxmann.com 365 (SC)
  • In Vivek Narayan Sharma v. Union of India [2023] 146 taxmann.com 36 (SC) [02-01-2023] wherein the legal validity of demonetisation of Rs. 500 and Rs. 1000 notes in 2016 by notification issued u/s 26(2) of RBI Act was challenged. It was contended that Section 26(2) route can be adopted to demonetize “any series of bank notes of any denomination and not “all” series of bank notes of any denomination. The word in section 26(2) “Any” should be construed as “one” or “some” and not “all”. The Court rejected the above contention and held that the power available to the Central Government under sub-section (2) of Section 26 of the RBI Act cannot be restricted to mean that it can be exercised only for ‘one’ or ‘some’ series of bank notes and not for ‘all’ series of bank notes. The power can be exercised for all series of bank notes as “any” means “all” and not “one” or “some”. The Court further held that if the argument that the provisions of sub-section (2) have to be interpreted in a restricted manner, is to be accepted, it may, at times, lead to an anomalous situation. For example, if there are 20 series of a particular denomination, and if the argument of the petitioners is to be accepted, the Central Government would be empowered to demonetize 19 series of a particular denomination, leaving one series of the said denomination to continue to be a legal tender, which would lead to a chaotic situation.

Thus, any and every benefit or perquisite, whether in cash or in kind or partly in cash and partly in kind and whether convertible into money or not, will be covered by section 194R(1) The only limitations on the width of the expression “any benefit or perquisite” are the following limitations imposed by the section itself:

1. The benefit or perquisite should be provided by any person to a resident.
2. Not every advantage flowing to a resident recipient from person providing it can be treated as benefit or perquisite. What is received by recipient should be a “benefit or perquisite” within the ordinary connotation of the term. It is noteworthy that, unlike section 17(2), section 194R does not empower CBDT to deem anything as perquisite or benefit by rules notified.
3. The “benefit or perquisite” should be one arising to recipient from business or exercise of a profession.

3. Meaning of ‘benefit’

Black’s Law Dictionary gives the following definitions of ‘benefit’:

benefit, n. (14c) 1. Advantage; privilege <the benefit of owning a car>. 2. Profit or gain; esp., the consideration that moves to the promisee <a benefit received from the sale>. Also termed legal benefit; legal value. Cf.

The following judicial definitions of the word “benefit” are note-worthy:

(a) The dictionary meaning of the word “benefit” is advantage or profit or anything contributing to the improvement of the condition. If a person derives any advantage, it can be said that he was benefited. If he gains something either monetarily or otherwise, it can be said that he was benefited. If he is able to improve his condition, it can be said that he has benefited to that extent. Thus, the word “benefit” implies an element of advantage, profit or gain. Considering all these aspects, the word “benefit” occurring in sub clause (iv) of section 2(24) would mean “any advantage, gain or improvement in condition” [CIT v. Smt. Kamalini Gautam Sarabhai [1994] 208 ITR 139 (Guj.)];

(b) The word ‘benefit’ occurring in Section 2(24)(iv) would mean ‘any advantage, gain or improvement in condition’. The ‘benefit’ or ‘perquisite’ should be of material things of life. For the purpose of these provisions, it is immaterial whether the benefit or perquisite is convertible into money or not. The intention of the legislature is to tax any benefit if it is received by a director, etc., irrespective of the fact whether the benefit received was in the nature of capital, or whether there is any direct receipt in the transaction or whether there is any detriment to the company (provider of benefit) or not in the transaction [Diwan Rahul Nanda v. Dy CIT 8(3) [2008] 25 SOT 454 (Mum.)];

(c) Assessees being directors and having substantial interest in a transport company, purchased certain buses from that company at their written down value which was much lower than their market value. Even if the benefit received by the director of the company is of capital in nature, it can be brought under the term ‘value of any benefit’ as contemplated under section 2(24)(iv). The difference between written down value of buses and their fair market value determined by the department could be treated as a benefit to assessees under section 2(24)(iv) [CIT v. S. Varadarajan [1996] 89 Taxman 457 (Mad.)];

(d) Where assessees, i.e., directors of a company, got benefit in the form of repairs and renovations to their own apartments at the cost of the company, amount so spent was the value of benefit within the meaning of section 2(24)(iv) [Diwan Rahul Nanda v. Dy. CIT [2008] 25 SOT 454 (Mum.)].

4. Meaning of ‘perquisite’

The term ‘perquisite’ is defined inclusively in section 17(2). It enumerates certain items that would be treated as ‘perquisite’ in the hands of employees for taxability as “salaries” and also certain items that would be perquisites but tax-free in the hands of employees. However, this definition applies to taxability under the head “Salaries”. Perquisites provided to employees would attract TDS under section 192 and not under this section. So, ordinary meaning of the word ‘perquisite’ needs to be explored for the purposes of section 194R.

In Owen v. Pook (Inspector of Taxes) [1969] 74 ITR 147, the House of Lords held that perquisite has a known normal meaning namely a personal advantage. The word could not apply to a mere reimbursement of a necessary disbursement. Lord Pearce observed as under:

• • “The normal meaning of the word denotes something that benefits a man by going “into his own pocket.” It would be a wholly misleading description of an office to say that it had very large perquisites, merely because the holder had to disburse very large sums out of his own pocket and subsequently received a reimbursement or partial reimbursement of these sums. If a school teacher takes children out for a school treat, paying for them out of his (or her) own pocket, and is later wholly or partially reimbursed by the school, nobody would describe him (or her) as enjoying a perquisite. In my view, perquisite has a known normal meaning, namely, a personal advantage, which would not apply to a mere reimbursement of necessary disbursements. There is nothing in the section to give it a different meaning. Indeed, the other words of the section confirm the view that some element of personal profit is intended”

It is only when reimbursement is of expenses of the provider how/incurred by payee/recipient/deductee that it is not a perquisite.

The following definition of ‘perquisite’ as per Black’s Law Dictionary is noteworthy:

• • perquisite (p;u-kwi-zit). (16c) A privilege or benefit given in addition to one’s salary or regular wages. – Often shortened to perk. [Cases: Officers and Public EmployeesC=>99.]

The above definition gives us the ordinary meaning of the word “perquisite”. The above definition was judicially noticed in Nirmala P. Athavale v. ITO [2008] 22 SOT 197 (Mum.). The Tribunal held as under:

(a) Where the assessee never charged any fee or remuneration for his imparting of knowledge and practising of values based on Shrimad Bhagawad Gita and also the assessee did not have any vested right to receive any kind of payment for these activities from his disciples/followers, the gift made by the followers, without being under any contractual or legal or customary obligations, cannot be treated as a consideration arising out of carrying of vocation;

(b) The other condition is that such benefit or perquisite should arise out of the exercise of business or profession. In the facts of the case, the Revenue has not established conclusively that the amount of gift arose to the assessee due to the exercise of vocation because such gifts have got no element of consideration being paid for services obtained by the followers/disciples;

(c) It is also noted that both the words ‘benefit’ and ‘perquisite’ refer to specific situations wherein receipt of revenue nature having attributes of income would be covered, and such attribute should exist from the very beginning. To illustrate this aspect, where a gift is made in lieu of paying consideration for services obtained and this fact is established, then such gift can fall within the provisions of section 28(iv) of the Act;

(d) It is clear that in the present case, there is no intention of circumvention of income on the part of the assessee or receiving income in other forms. Hence, provisions of section 28(iv) of the Act cannot be applied;

(e) The term ‘perquisite’ as per Blacks Law Dictionary means “privilege or benefit given in addition to one salary or regular wages” which means that it is an additional benefit and not a complete substitution of one’s income;

(f) As stated earlier, the assessee has never charged any consideration from his followers; hence, based on the above meaning, it cannot be termed as ‘benefit’ or ‘perquisite’ within the meaning of section 28(iv) of the Act.

5. Benefit/Perquisite vs. Consideration

The Tribunal’s decision in Nirmala P Athavala (Supra) appears to draw a distinction between “perquisite”/ “benefit” and “consideration”. Consideration cannot be regarded as perquisite/benefit. The alleged perquisite/benefit should be something distinct and over and above consideration.

FAQ. No. 3 of CBDT’s Circular No. 18/2022, dated 13.09.2022, clarifies that 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 194R, in accordance with the Circular No. 715 dated 8th August 1995, there will not be further liability for tax deduction under section 194R of the Act.

Thus, FAQ No. 3 of CBDT’s Circular No. 18/2022, dated 13.09.2022, distinguishes “consideration” from “perquisite”. If amount provided is “consideration”, then TDS would be deductible under other sections such as section 194C/section 194J/section 194H. If it is “perquisite”/“benefit” in addition to “consideration”, then, TDS will be deductible under section 194R.

FAQ No. 3 of CBDT’s Circular No. 18/2022, dated 13.09.2022, is reproduced below for ready reference:

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 sections 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?

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?

Sections 194C and 194J 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 194R, 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 194J 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 is no further benefit/perquisite which requires tax deduction under section 194R of the Act.

5.1 Whether company which is manufacturer of capital goods needs to deduct TDS under section 194R on 2-year free maintenance services provided to buyer of capital goods?

Section 194R will not come into play merely because something is given, paid or provided unless it is a benefit or perquisite. Section 194R will not get triggered merely because some advantage flows from company to the recipient. Section 194R is triggered only when the advantage flowing from the Company to the recipient is a ‘benefit’ or ‘perquisite’ as distinguished from ‘consideration’ for what the recipient has done or promised to do.

If any and every advantage flowing to resident recipient, even if it be consideration, is to be treated as “benefit or perquisite”, then, probably, all other TDS sections except section 192 would be rendered otiose.

Clearly, the intention behind section 194R is not to replace all non-salary TDS sections with one omnibus non-salary TDS section of section 194R.

5.1.1 Where consideration for providing free maintenance services is factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods, is TDS deductible u/s 194R? – It is assumed that the consideration for providing free maintenance services is factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods. In such a situation, the operation and maintenance services cannot be considered in silos as a free supply of services. It can at best be treated as a supply of two goods or services for the price of one, and it cannot be treated as a benefit/perquisite but as a mixed supply of goods or services. Thus, it is a normal sale transaction  and what is given by the company is rendering of services by way of consideration for price received. It is not the intention that normal sales, purchases and services transactions should be within the scope of section 194R since there are provisions for TCS on sale of goods u/s 206C(1H), TDS provisions for purchase of goods u/s 194Q and TDS provisions for payment for services u/s 194J/194C/194H.

In Owen v. Pook (Inspector of Taxes) [1969] 74 ITR 147, the House of Lords held that perquisite has a known normal meaning namely a personal advantage. The word could not apply to a mere reimbursement of a necessary disbursement. Lord Pearce observed,

“The normal meaning of the word denotes something that benefits a man by going “into his own pocket”. It would be a wholly misleading description of an office to say that it had very large perquisites, merely because the holder had to disburse very large sums out of his own pocket and subsequently received reimbursement or partial reimbursement of these sums. If a school teacher takes children out for a school treat, paying for them out of his (or her) own pocket, and is later wholly or partially reimbursed by the school, nobody would describe him (or her) as enjoying a perquisite. In my view, perquisite has a known normal meaning, namely, a personal advantage, which would not apply to a mere reimbursement of necessary disbursements. There is nothing in the section to give it a different meaning. Indeed, the other words of the section confirm the view that some element of personal profit is intended.”

The normal meaning of perquisite is something that goes into the recipient’s pocket. It follows as a corollary that if any amount is recovered from the recipient towards the cost of what is ‘provided’, there is no perquisite to the extent of recovery from the recipient.

The CBDT in Question 4 of Circular No. 12/2022, dated 16-06-2022, has clarified that where free items are being offered with the purchase of some items, the seller and buyer record the transaction at the same value. In such a situation, there could be difficulty in applying the Section 194R provision. Thus, to remove such difficulty, the CBDT has clarified that no tax shall be required to be deducted in case of said transaction. This clarification may apply to a transaction where goods and services are supplied for one price.

Therefore, in view of the above, Section 194R has no application in this case.

5.1.2 Where consideration for providing free maintenance services is not factored in and recovered from the customer through the price for capital goods at the time of the sale of capital goods, is TDS deductible u/s 194R? – The position in Para 5.1 will not change even if no consideration for free maintenance services is recovered through the price build up of capital goods sold. These services are consideration given to buyer for his purchase of capital goods and are a sweetener for the deal. It is quite possible that buyer may not purchase the capital goods without such commitment of free maintenance services. Besides, this may fall within the ambit of Question 4 of Circular No. 12/2022, dated 16-06-2022. Therefore, in view of the above, Section 194R has no application in this case.

6. Benefit/Perquisite vs. Compensation

Question arises whether on payment made against the performance guarantee to buyer, the Company needs to deduct tax under Section 194R? Whether answer will be different if the Company is offering free OMS for one/two years instead of payment?

Section 194R will not come into play merely because something is given, paid or provided unless it is a benefit or perquisite. Section 194R will not get triggered merely because some advantage flows from company to the recipient. Section 194R is triggered only when the advantage flowing from the Company to the recipient is a ‘benefit’ or ‘perquisite’. It is to be examined whether compensation/damages is in the nature of perquisite/benefit?

First of all, the payment against performance guarantee to buyer is consideration paid under contract with buyer whereunder seller had agreed to compensate the buyer if product does not perform to agreed/prescribed standards. Perquisite/benefit is distinct from consideration paid under a contract. Secondly, the nature of compensation and its distinction vis a vis a perquisite/benefit needs to be examined.