Mr. Pradip R Shah (M/s Pradip R Shah & Co.) in his analytical article examines the proposals pertaining to withholding tax provisions on benefits or perquisites provided to resident assessees. He delves into a comparative of the proposed provisions with extant provisions of Sections 194A and 194C and opines that, at this stage it is not known what types of transactions would be covered under the term ‘benefits’ or ‘perquisites’. The author brings out pertinent issues emerging from the provision such as whether provision of benefit / perquisite under a contract can be considered as 'benefit' and or only when something more than agreed upon is provided is to be considered as 'benefit'. He also highlights that issues related to valuation of such benefits or perquisites are likely to arise as one deals with implementation of the proposed provisions.  He also points out the issues as regards the manner of tax deduction and the timing aspect. He concludes on the note that Section 194R tries to take in its sweep wide and varied nature of transactions which are difficult to envisage and to define, and cautions  that new transactions would find their way in the proposed Section’s ambit each year.

"TDS on Benefits or Perquisites of Business - Expanse & Complexity"

Introduction:

1. Section 2(24) defines the term “Income” in inclusive manner by including therein 28 different types of receipts being treated as “Income”. One of the transactions i.e. clause (vd), provides for value of any benefit or perquisites which is taxable under section 28(iv).

1.1. Section 28 provides for eighteen different types of income which are required to be treated as “Profits and Gains from Business or Profession”. Of these, one of the clauses i.e. (iv) provides for the value of any benefit or perquisites taxable as “Profits and Gains from Business or Profession”.

1.2. Provision of section 28(iv) is on the statute since 1^st April, 1964. Provisions of S. 192 to 195 provides for Deduction of Tax at Source (TDS) in respect of various types of payments. However, none of it covers the income which is covered u/s 28(iv). In view of this, it was not possible to trace such receipts of benefit / perquisites availed by the assessees and levy tax thereon. A glance at the proposed provisions of section 194R will reveal that an attempt has been made to capture the transactions referred to in section 28(iv).

1.3. As the wordings in both the cases i.e. section 28(iv) and 194R makes an attempt to bring within the tax net same type of transactions, case laws under section 28(iv) can give some idea about the nature of transactions falling therein. Some of them are as under:

a) CIT v. Bhavnagar Bone & Fertiliser Co. Ltd. [TS-9-HC-1986(GUJ)-O]

b) CIT v. Excel Industries Ltd.[TS-506-SC-2013-O]

c) Helios Food Improvers (P) Ltd. v. Dy. CIT [TS-47-ITAT-2007(Mum)-O]

d) Nirmala P Athavale v ITO [TS-5170-ITAT-2008(MUMBAI)-O]

e) Dy CIT v. Pidilite Industries Ltd.[TS-7076-ITAT-2019(MUMBAI)-O]

f) Priyanka Chopra v. Dy. CIT [TS-5181-ITAT-2018(MUMBAI)-O]

g) ACIT v. Shah Rukh Khan [TS-6420-ITAT-2017(MUMBAI)-O].

1.4. Majority of the cases were in relation to taxability of the amount received as gift in personal capacity, writing off of loan or creditors etc. At this stage, it is not known which types of the transactions will be covered under the term “benefits” or “perquisites” under 194R. Reading of Memorandum Explaining the Provisions of Finance Bill, the Government is aware of large number of transactions of income nature escaping tax net and rule to be laid down in this respect will be fairly long one.

1.5. The Government, so far, did not find it necessary to cover these transactions under TDS provisions. As can be seen from the nature of income, it is easy to conceal it and avoid payment of tax. After a long period of time, the Government has realised it and stated in Memorandum Explaining the provisions in Finance Bill “in many cases, such recipient does not report the receipt of benefits in their return of income, leading to furnishing of incorrect particulars of income”. It appears that tax avoidance by recourse to such transaction has gone up substantially high making it necessary to plug the loophole. Hence, proposed insertion of section 194R be read in that context.

1.6. Provisions of proposed section 194R differ from various provisions relating to deduction of tax at source. A table giving comparative position with reference to section 194A and 194C is given here below:

1.7. As can be seen from above it appears to be subjective for the reason that there is no clarity regarding (a) components of Benefits or Perquisites which are subject to tax, (b) quantification of it and (c) the value assigned to such benefits or perquisites on which TDS is to be made. This is the core of the proposed provision which can make it controversial.

Applicability – Type of Payer

2. Section 194R begins with the words “Any person” giving an impression that it is applicable to all the types of assessees i.e. Individual, HUF, Partnership Firm, Private and Public Limited Companies, Charitable Trust etc. Not only that there is no reference to carrying on business or profession by the Payer. However, provisions of Third Proviso make it clear that in the case of Individual and HUF provisions in this respect are applicable only when total sales, gross receipts or turnover does not exceed Rs. 1 crore in case of business or Rs. 50 lacs in the case of profession during the financial year immediately preceding the financial year in which such benefit or perquisite is provided. It means that with reference to the Payer its applicability will be as under:

Status of Payer

3. Moreover, section 194R is applicable to a Resident and Non-resident (NR) as well although to what extent it can be extended to NR is a different question. However, provisions of S. 294(v) makes it clear that, in such cases, it can be enforced through agent of NR or any person who can be treated as an agent under section 163. It is a moot question whether categories of persons defined as “agent” of NR under section 163(1) will cover such cases or not.

Type of Recipient

4. This provision will be applicable when the recipient of benefit or perquisite is “resident” under the IT Act. Hence, Indian resident company providing such benefits to Non-residents cannot be covered under this clause. However, it is a different issue whether such benefits to NR are covered under section 195 or not.

Nature of transactions Covered

5. It is applicable to “any benefit or perquisite”. Interestingly, the term “benefit / perquisites” has not been defined herein. In fact it has not been defined neither under section 2 nor u/s 28(iv). A question that arises is whether provision of benefit / perquisite by the Payer as agreed upon with the Recipient as terms of the contract can be considered as “benefit” and subject to tax. Or is it that only when something more than agreed upon with the Recipient is being provided by the Payer is to be considered as “benefit”.

5.1. Another issue is whether income of hypothetical nature will also be covered. For example, tenant has provided deposit to the landlord free of interest. Whether computation of notional interest thereon to be derived by the landlord can be called as “benefit/perquisite”?

5.2. There is a custom of providing as gift high value / precious articles to employees of the Recipient. Looking to the wordings in this respect, it seems it will not be possible to catch such transactions.

5.3. These and various other types of transactions can be source of major controversy on this aspect.

What is “Benefit /Perquisite”

6. In the context of provisions of section 28(iv), the Courts have observed that the words "benefit" or "perquisite" have to be read together and would draw colour from each other. Normally, the term "perquisite" denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person and from the very beginning, the person providing such facilities or concessions knows that whatever is being done is irretrievable to him as it has been granted to a person as a privilege or right of that person. In this view of the matter, the word "benefit" has also to be interpreted in the same manner i.e. at the time of execution of the business transaction, the one party should give to the other party some irretrievable benefit or advantage. The provisions of s. 28(iv) can be applied in a number of situations but the bottom-line or crucial fact would always be circumvention of income by taking or receiving income in other forms.

6.1. Since reference is to “any” it will cover both i.e. tangible and intangible viz. goods and services as well. While it may be possible to identify transactions of “benefit/ perquisite” being provided by supply of tangible goods, identification of provision of service will pose a serious challenge.

6.2. As explained above in Para No. 2, the nature of Payer covered carrying on any activity, the provisions in this respect takes in its sweep all the benefits arising out of the business of the Payer or not.

6.3. Another condition laid down is that the provision of benefit / perquisite need not be in cash. In fact, the wordings viz. whether convertible into money or not makes it clear that benefits in the form of cash are not covered. This is for the reason that as per the judgements of various High Courts with respect to section 28(iv) that benefits in cash are not covered. Such transactions in cash get accounted for at the end of the Payer and Recipient as well. The problem of tax evasion arises because the expenses claimed / borne by the Payer for providing benefit/perquisite does not get accounted for at the end of Recipient.

6.4. Another issue connected herewith is whether the Payer has to look into the nature of income at the end of the Recipient. Theoretically, if the receipt of benefit/perquisite which is required to be treated as income is of capital nature and not subject to tax, there is no point in making TDS. However, that is not the case here. There is no provision for the Payer to examine such aspect of the Recipient. It means that once the supply of goods / services fall into the category of “benefit/perquisite”, TDS will have to be made.

Status of Recipient

7. It is provided that the benefits should be arising from business / profession carried on by the Recipient. If the benefit/perquisites are not emanating from any business or profession, the question of TDS should not arise. It means that the Payer can provide benefits/perquisites which are not arising from business / profession carried on by the Recipient. The point here is how to segregate? How to prove that benefits provided are not arising from business / profession carried on by the Recipient. This is going to be another area of controversy.

Valuation of Benefits / Perquisites

8. As the thrust herein is on benefit / perquisites provided in kind, the question of its valuation for the purpose of computing taxable value will arise. Section 194 R is silent on this aspect. We can expect detailed provisions in this respect under Income Tax Rules.

8.1. Another aspect associated with it is whether “grossing-up” will have to be made or not. This is for the reason as the provision of benefit / perquisite will be in the nature of goods / services, no deduction of tax can be made from the benefits provided. Payer will have to pay the tax as applicable thereon based on the valuation of benefits carried out. It means that the Payer is providing to the recipient some value of benefit and applicable tax to be deducted therefrom as well. Therefore, the question is whether TDS will have to be computed on the amount of tax not deducted from the benefits. For example, a company has provided a laptop costing Rs. 1,00,000 as benefit. In terms of provisions of S. 194R, TDS will be of Rs. 10,000 i.e. 10% of Rs. 1,00,000. Since the company cannot make TDS from the value of Rs. 1,00,000, it is bearing the additional burden of Rs. 10,000 as well. Can it be said that the Payer Company has provided benefit of Rs. 10,000 as well? This will amount to additional benefit to the recipient requiring TDS of Rs. 1,000 (i.e. 10% of Rs. 10,000) as well. If it is so, whether TDS will have to be made on Rs. 10,000 as well?

How to Make Tax Deduction

9. It is provided that “tax will be deducted in respect of such benefits..…”. Since the section addresses to the problem of providing benefits which is in the form of other than sum of money, it is not known how and from which amount deduction of tax be made.

Timing Aspect

10. An interesting aspect here is the timing of deduction of tax at source. At what point of time TDS be made? Provisions of S. 192 to S. 195 provide for “at the time of credit” or “at the time of payment” whichever is earlier. However, here the scenario is totally different. In the instant case, since there is no payment of any sum of money, the question of crediting the amount or payment thereof does not arise. In view of this, provision has been made as “before providing such benefits”.

10.1. S. 194R covers the case of where benefit is in kind only. However, First Proviso covers the case wherein benefit is visualised is of mix nature i.e. in cash and in kind. In the case of benefits in kind, TDS is required to be made “before providing” such benefits. However, as per the First Proviso wherein cash plus benefit in kind is involved, TDS is required to be made “before releasing the benefit”.

10.2. In both the cases, obligation to make TDS is “before” releasing / providing the benefit. This is in sharp contrast to all the sections relating to TDS wherein TDS is required to be made “at the time of credit” or “at the time of payment”. Documentary evidences for compliance in this respect will pose serious challenge to the Payer of benefits.

Core Issues involved:

11. As against the provisions of TDS with reference to different types of transactions at present, proposed provision seems to be posing serious challenges to the Deductor. Existing provisions are specific about nature of payment i.e. payment of interest, payment to contractor for work carried out, payment of some income to the Deductee etc. In contrast, proposed section does not refer to payment of sum of money or any income. It simply refers to providing of any benefits or perquisites. Here, it is presumed that the said benefits or perquisites are income of the Deductee and, therefore, subject to tax. Tax Deductee has no choice herein. Ultimately, for the Deductor, the issue boils down to determine:

a) Whether benefits to be provided are arising out of business or profession of Deductee (It should be noted that the terminology used herein does not refer to any transaction arising out of business carried on by the Deductee.)

b) Whether the benefits to be provided are arising out of pre-existing contract with the Deductee and, if so, whether TDS to be made or not?

c) If benefits to be provided are not out of any pre-existing contract, will it attract the provisions of section 194R?

d) If the benefits to be provided do not take the character of income of the Deductee whether to make TDS or not.

e) Whether to make deduction of tax at source in respect of hypothetical income which the Deductee might have derived.

Plight of Tax Deductor

12. As explained above, the proposed provision being subjective in certain respect, the Payer will face various challenges. The process to be followed by the Deductor will be as under:

a) Identify the nature of business or profession of the Deductee

b) Determine whether the benefit or perquisite to be provided is arising out of any business transaction

c) Determine quantum of benefits or perquisites to be provided

d) Assign value to the benefit or perquisite to be provided

e) If the value of benefit or perquisites to the Deductee in the said financial year is less than Rs. 20,000 no need to pay TDS.

f) Compute amount of tax to be deducted (or paid?)

g) Make payment of tax deducted at source

h) Deliver / provide benefits/perquisites to the Deductee

i) Recover amount of TDS made from the Deductee

j) File quarterly TDS return

Conclusion

13. As can be seen, section 194R tries to take in its sweep wide and varied nature of transactions which are difficult to envisage and to define. It will be interesting to see how the Government lays down various rules in this respect. One thing is certain that every year we shall find new types of transactions being covered under “benefit / perquisites”.