Inserted vide Finance Act 2022, Section 194R of the Income-tax Act, 1961 (the Act) mandates deduction of tax at source (TDS) on benefit or perquisite in respect of business and profession. The provision has been made effective from July 01, 2022. The Central Board of Direct Taxes (CBDT) had earlier issued a Circular dated June 16, 20221 containing guidelines for removal of difficulties in application of Section 194R of the Act.
Considering the peculiarity of the provision and uncertainty surrounding transactions that might fall within the ambit of Section 194R of the Act, further clarifications were sought by the stakeholders on ambiguous matters. Accordingly, the CBDT has now issued another Circular dated September 13, 20222 containing additional guidelines for removal of difficulties in implementation of Section 194R of the Act.
It is inter alia clarified that the Circular is meant only for the removal of difficulties in implementation of provisions of Section 194R of the Act on part of the deductor and does not impact the taxability of income in the hands of the recipient which shall be governed by the relevant provisions of the Act.
- TDS has been done away in the case of Banks/specified financial institutions on one-time loan settlement/waiver as TDS would have cost them out of their pockets. This has been done to reduce the burden of bearing the tax deduction by banks as they are already taking a haircut by settling/ waiving off the underlying loans;
- Under CBDT Circular dated June 16, 2022 it was stated that where a Service Provider (SP) incurs some expenses in the course of rendering services to a Service Recipient (SR) and the invoice was obtained is in the name of SP, then this expense is the liability of the SP and not of SR. It was clarified that when the SR meets such liability of SP, it is in effect is a benefit/perquisite provided to the SP. Hence, in such a situation, reimbursement of an expense was a benefit/perquisite on which tax is required to be deducted under Section 194R of the Act by the SR.
This aspect has been re-emphasized in the new Circular dated September 13, 2022 wherein CBDT has mentioned that where the invoice is in the name of the SP, it is the SP who would be entitled to the benefit of input tax credit and thus reimbursement of such expenditure by SR would create benefit/perquisite in hands of the SP making it liable for tax deduction.
The new Circular has borrowed the concept of ‘pure agent’ from the GST law to clarify that if the SP acts as a pure agent for SR, no TDS would be required under Section 194R of the Act. The definition of pure agent has been taken from GST Valuation Rules, 2017. In addition to the said definition, following conditions have been laid out in the Circular which need to be fulfilled by SP to qualify as a pure agent.