Tax Withholding under Section 194R: CBDT Issues Additional Guidelines

The CBDT has, vide Circular No. 18 of 2022, dated September 13, 2022, aimed to remove difficulties on the implementation of TDS on benefits or perquisites under Section 194R of the Income Tax Act of 1961 “Act”). This circular is a continuation of Circular No. 12, issued by CDBT earlier, on June 16, 2022, providing guidelines on the scope and coverage of Section 194R of the Act. The Income Tax Department explicitly makes it clear that this Circular is only for the removal of difficulties in the implementation of provisions of Section 194R of the Act 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.

Key Clarifications in Circular No. 18 of 2022

 

One-time loan settlement/waiver of loan

The provision of Section 194R of the Act shall not be applicable on one-time loan settlements entered with or waivers of loans granted to borrowers by specified banks or financial institutions.

 

Reimbursement of expenses incurred by a ‘Pure Agent’

Any expense incurred by a “pure agent,” as defined under the GST Valuation Rules, 2017 and which is in turn reimbursed by the service recipient, would not be treated as a benefit or perquisite for the purposes of Section 194R, and therefore the pure agent would not be liable to deduct TDS u/s 194R of the Act. It has been explained that in such cases, even the GST input credit ought to be availed of by the service provider and not the service recipient.

 

Interplay of 194R and other TDS provisions

The Circular clarifies that if reimbursement of out-of-pocket expenses (OPE) is already a part of the gross consideration and tax has been deducted on the gross consideration under sections 194J or 194C of the Act, then there would not be any further liability to deduct tax under section 194R of the Act.

 

Expenditure incurred on dealers’/business conferences

In case of a dealers’ conference to educate the dealers about the company’s products, it has been clarified that:

  • It is not necessary to invite all dealers to a conference for the expenses incurred for conducting the conference to not be reckoned as a benefit or perquisite for tax deduction.
  • Any overstay by a dealer beyond one day prior and one day after the date of the conference would be treated as a benefit or perquisite liable for deduction of tax under Section 194R.
  • Where it is not possible, owing to practical difficulties, to ascertain the actual number of dealers for whom certain expenses were incurred, which should be classified as a benefit/perquisite, then to avoid any further challenges, the taxpayer who has provided the benefit/perquisite may suo-moto disallow the said expenditure, and thereafter, there will not be any requirement to comply with the provisions of Section 194R.

 

Availability of depreciation on any capital asset (car) gifted as a benefit/perquisite

Where any capital asset is received as a gift and tax has been withheld under Section 194R, the recipient shall be eligible to claim depreciation under Section 32 of the Act on such asset. The Circular clarifies that the value of such a benefit/perquisite offered as ‘income’ in the income-tax return of the recipient shall be deemed to be ‘actual cost’ in the hands of the recipient for the purpose of calculating such depreciation.

 

Liability on Embassy or High Commissions

The Circular clarifies that certain embassies and high commissions are not required to deduct tax under Section 194R of the Act for the benefit/perquisite provided by such organisations.

 

Liability on issuance of bonus/right shares

Tax under Section 194R of the Act is not required to be deducted on the issuance of bonus or right shares issued by a company in which the public is substantially interested ( a listed company), as the overall value and ownership of their holding remain the same.

 

Practical Application

The above additional guidelines are welcome clarifications, as they certainly provide much needed clarity and certainty to some of the issues and concerns that were raised through representations by various industry and professional forums. As such, it is expected that the vexed provisions of Section 194R of the Act would now be less cumbersome in their practical application. Needless to say, there are still several issues in Section 194R and its application, which continue to bother the assessees regularly. It is hoped that CBDT, in the coming days, will continue with its avowed objective of making tax administration simple and provide further clarity on the other issues and challenges.

The Income Tax Department explicitly makes it clear that this Circular is only for the removal of difficulties in the implementation of provisions of Section 194R of the Act 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.

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Faceless Appeal Scheme 2021: A Forward-Looking Initiative

The Central Board of Direct taxes (“CBDT”), with an objective of bringing in more transparency in the appeal proceedings and “honoring the honest”, had introduced the “Faceless Appeal Scheme 2020”[1] (“Old Scheme”), on September 25, 2020. The Old Scheme was introduced with an aim to eliminate human interference between the taxpayer and the First appellate authority (Commissioner Appeals), thereby ensuring that the appeals are disposed in a fair manner and are not influenced by any relation and human biasness.

The Old Scheme was introduced with the noble intention of curbing malpractices, easing compliance and make appeal process seamless and faceless. However, there were some post implementation hiccups experienced and accordingly taxpayers requested certain modifications in the Old Scheme.

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

In this alert, we have made an effort to apprise the readers with the changes introduced in the New faceless appeal Scheme vis-à-vis the Old Scheme.

Key Changes in the New Faceless Appeal Scheme, 2021

The key changes brought in by the New Appeal Scheme are as follows:

  1. Mandatory personal hearing, if requested

In the Old Scheme, the appellant or his authorized representative had to make a request for personal hearing and the Chief Commissioner or Director General in charge of the Regional Faceless Appeal Centre (RFAC) had the discretion to approve such request, if he was of the opinion that the request is covered by the circumstances laid down by the CBDT.

In the New Scheme, there is no requirement for prescribed circumstances and the discretion for grant of personal hearing has been completely removed. CIT(A) shall allow personal hearing if requested by the appellant anytime during the course of the proceedings.

  1. Restructuring of the appeal center

In the Old Scheme, CBDT had set up a three-layer structure with National Faceless Appeal Centre (NFAC) at the top to conduct appeals in a centralized manner (nodal agency), followed by RFAC to support NFAC and Appeal Unit (AU) at the bottom, to facilitate the conduct of e-appeal proceedings and dispose them. In the composition structure, each AU unit had one or more Commissioner Appeals [CIT(A)].

In comparison, the New Scheme has done away with the RFAC and has set up a two-layered structure headed by NFAC and AU will directly coordinate with NFAC and conduct the appeal and dispose them. Further, in the New Scheme, each AU will have only one CIT(A).

  1. Elimination of review by multiple AUs

In the Old Scheme, the NFAC on receipt of draft order from AU, would  review the order and if the payable amount in respect of disputed issue was more than a specified amount, then send the draft order to another AU, other than the AU which had prepared it. In any other case, the NFAC would  examine the order based on the specified risk management strategy and then finalise the appeal or send the draft order to another AU.

The other AU who was assigned such case, would  either concur with the order or suggest variations as it would  deem fit. In case of variation, the NFAC would  assign the said appeal to another AU other than the one who had prepared or reviewed the draft order. The NFAC would then pass the final order, based on the order received from the last AU.

In the New Scheme, the CIT(A), after examining the submissions, shall now pass the order by digitally signing the same and send it to NFAC, along with details of penalty proceedings, if any, to be initiated therein.

Such order shall be final and will not be reviewed at multiple AUs as provided in the erstwhile scheme. NFAC shall communicate such order to the appellant and such other officers as may be prescribed.

  1. Penalty Proceedings

In the Old Scheme, AU in the event of any non-compliance during the appeal proceedings, had to send a recommendation to NFAC to initiate penalty proceedings. However, in the New Scheme, there is no need to send such recommendation and the CIT(A) can directly send the penalty notice through NFAC.

FM Comments:

The modifications provided in the New Scheme are certainly a move in the right direction by easing the process and building a robust appeal scheme. The CDBT, by removing the discretionary power of the authorities for grant of personal hearing, has also made an effort to meet the constitutional validity criteria, which has also been one of the matters, challenged before the Courts.

References: 

[1] Notification No 76/2020 dated 25 September 2020

[2] Notification No 139/2021 dated 28 December 2021

Image Credits: Photo by Arina Krasnikova from Pexels

In order to fix the hiccups and incorporate the changes requested by taxpayers, the CDBT, in supersession of the Old Scheme, has introduced a new appeal scheme called as “Faceless Appeal Scheme 2021”[2] (“New Scheme”) on December 28, 2021.

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