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Direct Tax Alert - CBDT issues guidelines on tax withholding from benefit or perquisite

23 June 2022


To bring benefits or perquisites arising from business or exercise of the profession within the ambit of tax withholding, the Finance Act, 2022 inserted section 194R in the Income-tax Act, 1961 (IT Act) which shall be effective from 1 July 2022. As per this section, a person who is providing any benefit or perquisite (hereinafter referred as deductor) to a resident carrying out any business or profession shall be required to withhold tax (TDS) at the rate of 10% of the value or aggregate value1 of such benefit or perquisite. This section also grants power to the Central Board of Direct Taxes (CBDT) to issue guidelines for the purpose of removing any difficulty.

Post introduction, representations were made to clarify various issues emanating from section 194R. To address such concerns, the CBDT recently issued a Circular2 laying down guidelines in a Q&A format. We, at BDO in India, have analysed and summarised the said circular and provided our comments on its impact hereunder:

1. Deductor not required to check taxability of the benefit/perquisite

  • Section 194R of the IT Act casts an obligation on the person responsible for providing any benefit/perquisite to a resident, to deduct tax at source. Hence, even if the amount is not taxable in the hands of the recipient under section 28(iv) of the IT Act (say section 41(1) of the Act - remission or cessation of trading liability), section 194R of the IT Act will get attracted. 
  • The Circular has taken support of PILCOM vs CIT3 wherein the Supreme Court has held that tax is to be deducted under section 194E of the IT Act at a specific rate indicated therein and there is no need to see the taxability or the rate of taxability in the hands of non-resident. Accordingly, the Circular has clarified that the deductor is not required to check whether income is taxable in the hands of the recipient or the section under which the income is a taxable

2. Tax withholding is required even when the benefit/perquisite is paid in cash or in-kind or partly in cash and partly in kind

The intent of the legislature can be seen from the language of section 194R(1) of the IT Act which covers situations where benefit / perquisites is in cash or kind or partly in cash and partly in kind.

3. Benefit/perquisite in the form of a capital asset

  • In several judicial precedents4 it has been held that benefits/perquisites are taxed even though they are capital assets since in the hands of the recipient they are benefit/perquisite.
  • Hence, the deductor is required to deduct tax even if the benefit/prequisite is a capital asset.

4. Sales discount, cash discount and rebates, though in the nature of benefit/prequisite, are not exigible to TDS under section 194R of the IT Act

  • While sales/cash discounts and rebates relate to sales/purchases, they are still benefits and thereby section 194R of the IT Act is applicable. However, considering that subjecting these to tax withholding would put the seller in difficulty, it has been clarified that no tax is required to be withheld under section 194R of the IT Act on sales/cash discount and rebates.
  • It is also clarified that where a seller offers some items free along with other items (say 2 items are offered as free when the customer purchases 10 items), section 194R of the IT Act shall not be applicable. However, in cases where free samples are given, tax withholding under section 194R of the IT Act is required.
  • Further, it is clarified that the relaxation shall not be extended to other benefits provided by the seller in connection with its sale. Following illustration (non-exhaustive list) are provided where section 194R of the IT Act will be applicable:
    • Incentives (other than discounts, and rebates) in the form of cash or kind such as cars, computers, gold coins, mobile phones etc.
    • Sponsors a trip for the recipient and his/her relatives upon achieving certain targets.
    • Provides free tickets for an event.
    • Gives medical samples free to medical practitioners.   

5. Benefits/perquisites used by employees’ of the recipient entity

  • There may be instances where the benefits/perquisites may be used by the owner/director/employee of the recipient entity or their relatives who in their individual capacity may not be carrying on business/profession. However, the deductor is required to deduct tax in the name of the recipient entity since the usage by the owner/director/employee/relative is by virtue of their relationship with the recipient entity and in substance the benefit/prequisite has been provided to the recipient entity.
  • Illustration: Free medical samples may be provided by a company (deductor) to a doctor who is an employee of a hospital. TDS under section 194R of the IT Act is required to be withheld by the Company in the hands of the hospital as the benefit/prequisite is provided to the doctor on account of him being an employee of the hospital. Thus, in substance, the benefit prequisite is provided to the hospital. The hospital may subsequently treat this benefit/perquisite given to its employees under section 17 of the IT Act and deduct tax under section 192 of the IT Act. In such a case, it would be the first taxable in the hands of the hospital and then allowed as a deduction as salary expenditure.
  • Continuing with the above illustration, in the case where benefit/prequisite is provided to a doctor who is working as a consultant in the hospital, tax may be deducted under section 194R of the IT Act with the hospital as recipient and then the hospital may again deduct tax under section 194R of the IT Act for providing same benefit/perquisite to the consultant. Alternatively, the original benefit/perquisite provider may directly deduct tax under section 194R of the IT Act in the name of the consultant.
  • Further, the provision of section 194R of the IT Act shall not apply if the benefit/perquisite is being provided to a government entity (e.g. Government hospital) not carrying on business or profession.  

6. Valuation of benefit/perquisite

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

Sr. No.


Value of benefit/perquisite


Deductor has purchased the benefit/perquisite before providing it to the recipient

Purchase price


Deductor has manufactured such items given as benefit/perquisite

Price is charged to its customers for such items

It is also clarified that GST will not be included for the purposes of valuation of benefit/perquisite for tax withholding under section 194R of the IT Act.

7. Treatment of product given to social media influencer

  • Many times, a social media influencer is given a product of a manufacturing company so that he can use that product and make audio/video to speak about that product on social media.
  • In case of benefit/perquisite being a product like a car, mobile, outfit, cosmetics etc. and if the product is returned by the social media influencer to the manufacturing company after using for the purpose of rendering service, then it will not be treated as benefit/perquisite for the purposes of section 194R of the IT Act. However, if the product is retained by the social media influencer, then it will be in the nature of benefit/perquisite and tax is required to be deducted accordingly under section 194R of the IT Act.

8. Reimbursement of out-of-pocket expense incurred by service provider while rendering service 

  • 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. For e.g., where the consultant incurs travel expenditure which is paid by the client, it is benefit/perquisite provided by the client to the consultant.
  • Applicability of section194R of the IT Act would depend on the name in which the invoice for out-of-pocket expenses is made. If an invoice is in the name of the client, paid by the consultant and reimbursed by the client, then such reimbursement would not attract TDS.
  • However, if the invoice is not in the name of the client and the payment is made by the client directly or reimbursed to the consultant then it is a benefit/perquisite provided by the client to the consultant on which TDS under section 194R of the IT Act is to be withheld. 

9. Expenditure on dealer conferences to educate dealers about the products of the company

  • The expenditure incurred on Dealer’s Conference would not be subject to TDS under section 194R of the IT Act if the conference is held with the prime object to educate dealers/ customers about any of the following/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 a conference must not be in the nature of incentives/benefits to select dealers/customers who have achieved particular targets.

  • Following are illustrative cases of expenditure on dealer conference that would be treated as benefit/perquisite for the purpose of TDS under section 194R of the IT Act:-

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

10. TDS compliance if benefit/perquisite is in kind or partly in kind (and cash is not sufficient to meet TDS)

  • Section 194R of the IT Act requires that the deductor providing benefit/perquisite in kind to a recipient needs to ensure that the tax required to be deducted has been paid by the recipient. Such recipients would pay tax in the form of advance tax.
  • The deductor may rely on a declaration along with a copy of the advance tax payment challan provided by the recipient confirming that tax on the benefit/perquisite has been deposited.
  • This would be then required to be reported in the TDS return along with the challan number in Form 26Q.
  • Alternatively, the deductor may deduct the tax and deposit with the Government. The tax should be deducted after taking into account the fact that the tax paid by him as TDS is also a benefit under section 194R of the IT Act. This needs to be reflected in Form 26Q as tax deducted on the benefit provided.  

11. Manner of computing threshold of INR 20,000

  • Since section 194R (1) of the IT Act provides that the threshold of INR 20,000 is concerning the FY, calculation of value or aggregate of the value of the benefit/perquisite triggering the deduction under section 194R of the IT Act shall be counted from 1 April 2022.
  • If the value of the benefit/perquisite provided or likely to be provided to a resident exceeds INR 20,000 during FY 2022-23 (including the period up to 30 June 2022), TDS would apply on any benefit/perquisite provided on or after 1 July 2022.
  • The benefit/perquisite which has been provided on or before 30 June 2022, would not be subjected to TDS under section 194R of the IT Act.   

BDO comments

With section 194R of the IT Act coming into effect on 1 July 2022, the Circular is a timely clarification from the CBDT as it addresses several concerns raised by the stakeholders. However, a few more clarifications can help the n smooth operation of section 194R of the IT Act. E.g., Clarification that the deductor is not required to verify the section in which the income is taxable will lose the purpose for the introduction of section 194R of the IT Act as any kind of benefit/perquisite whether taxable under section 28(iv) of the IT Act (as per the memorandum to Finance Bill 2022 the intent is to capture benefits or perquisites covered by section 28(iv) of the IT Act). Further, in the hospitality industry, social media influencer visits the hotel, stays there for 2-3 nights and promotes the hotel. The circular is silent on this aspect as to whether TDS under section 194R is attracted or not as there are no goods which have been transferred but only the hotel service that has been used by the influencer. Further, there could be benefits which are not capable of measurement such as loyalty points or rewards points which can be encashed later within a given set timeframe. The clarification on reimbursement has created a situation where the income is not taxable (the consultant is travelling for the work of his client, the cost of which is subsequently reimbursed by the client) and is now brought within the TDS net.


1This deduction is not required to be made, if the value or aggregate value of benefit or perquisite to the resident during the fiscal year does not exceed INR 0.02 mn.

2Circular No. 12/2022, dated 16 June 2022

3PILCOM vs. CIT (Civil Appeal No. 5749 of 2012)(Supreme Court)

4Ramesh Babulal Shah v/s CIT [2015] 53 277 (Bombay High Court);

CIT v/s Ramaniyam Homes (P) Ltd [2016] 68 289 (Madras High Court);

CIT v/s Subrata Roy [2016] 385 ITR 547 (Allahabad High Court);

CIT (Addl) v/s Ram Kripal Tripathi [1980] 125 ITR 408 (Allahabad High Court);

D.M. Neterwala v/s CIT [1986] 122 ITR 880 (Bombay High Court);

Amarendra Nath Chakraborty v/s CIT [1971] 79 ITR 342 (Calcutta High Court)