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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Additional Guidelines Issued on TDS/TCS Under Sections 194-O, 194Q & 206C(1H)

The Central Board of Direct Taxes (CBDT) has issued Circular No 20/2021 dated November 25, 2021, providing more clarification on deduction and collection of tax at source on certain transactions under sections 194-O, 194Q & 206C(1H) of the Income Tax Act.

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

In this regard, CBDT vide Circular no. 17/2020, dated 29.09.2020 and Circular no. 13/2021, dated 30.06.2021, issued guidelines to clarify the scope and applicability of the above sections and thereby removing the difficulties faced by the assessee.

In continuation to the above, to further remove the difficulties, CBDT with the approval of the Central Government (CG), has issued the following guidelines to clarify on the scope of the above TDS provisions:

 

Guidelines:

 

I. E-auction services carried out through electronic portal

It has been represented by various stakeholders involved in the business of e-auction services that provisions of section 194-O shall not be applicable to them based on the following arguments:

  • E-auctioneer conducts e-auction services for its clients in its electronic portal and is responsible for the price discovery only which is reported the client.
  • The price negotiations may happen directly between the parties and may not necessarily happen at the price discovered through e-auction process.
  • The transaction of purchase / sale takes place directly between the buyer and the seller party outside the electronic portal maintained by the auctioneer.
  • The e-auctioneer is not responsible for purchase / sale of goods except for limited purpose of price discovery.
  • Negotiation and payments terms happens only between the purchaser and seller offline and e-auctioneer does not have any further information or role to play to in this.
  • On the service charges payable to e-auctioneer, the client deducts TDS under the relevant provisions other than section 194-O of the Income tax Act (Act).

In this regard, it has been clarified by the CBDT that provisions of section 194-O shall not be applicable in cases where all the above features are cumulatively satisfied. Further, the buyer and seller would still be liable to deduct/ collect tax u/s. 194Q / 206C(1H) of the Act, as the case may be.

II. Adjustment of various State levies and taxes other than GST

It has been represented that while the clarification with respect to treatment of TDS on GST component is provided in the earlier Circular no. 13/2021, the same is silent on other non-GST levies such as VAT, Excise duty, Sales tax, etc.

In this regard, it has been clarified by CBDT that in case of purchase of goods exigible to other levies, if the component of VAT/Sales tax/Excise duty/CST, as the case may be, has been indicated separately in the invoice, then the tax is to deducted u/s. 194Q of the Act, without considering levies such as VAT/Sales tax/Excise duty/CST. However, in case of advance payment, the tax is to be deducted on the whole amount, as it will not be possible to identify the VAT/Sales tax/Excise duty/CST component to be invoiced in the future.

 

III. Applicability of Section 194Q of the Act in case where exemption has been provided under section 206C (1A) of the Act

Section 206C(1A) of the Act provides that, if the buyer furnishes to the seller a declaration in respect of  goods viz liquor, forest produce, scrap etc (specified in section 206C(1)) are to be utilized for the purpose of manufacturing, processing or producing article or thing or for the purposes of generation of power and not for trading purposes, than tax is not required to be collected. It has been requested to clarify whether the provisions of section 194Q of the Act will be applicable in such a case.  

Section 194Q of the Act does not apply in respect of those transaction where tax is collectible u/s. 206C [except sub-section (1H)]. Accordingly, it is noted that since section 206C(1A) exempts tax collection in respect of goods specified in section 206C(1),  it is hereby clarified that in such cases, the provisions of section 194Q of the Act will apply and the buyer shall be liable to deduct tax under the said section, if the conditions specified therein are fulfilled.

 

IV. Applicability of the provision of section 194Q in case of department of Government not being a public sector undertaking or corporation

It has been represented by both Central and State Government (department), to enquire if such department is required to deduct tax under the provision of section 194Q of the Act.

The provision of section 194Q requires tax to be deducted by a person, whose total sales, gross receipt or turnover from business carried on by that person, exceeds specified limit. Accordingly, it is clarified that in case department is not carrying any business or profession, the primary requirement of being considered as “buyer” will not be fulfilled. Hence, provision of section 194Q will not be applicable. However, if such department is carrying business or profession, then the provisions of section 194Q will be applicable.

In case where department is a seller, it is clarified that for the purpose of deduction of tax under section 194Q, department shall not be considered as “seller” and no tax should be deducted by the buyer.

In continuation to the above, it is further clarified that any other person, such as a public sector undertaking or corporation established under central or state Act, shall be liable to comply with provisions of section 194Q.

 

FM Comments:

The above are  welcome clarifications issued by the CBDT to bring more clarity and remove the hardship faced by the stake holders. However, there is still no clarity with respect to transactions where TDS / TCS is already deducted / collected and if by virtue of this clarification, the above provisions were not applicable, then whether in such cases refund can be claimed or not.

 

Image Credits: Photo by Nataliya Vaitkevich from Pexels

Finance Act, 2020 inserted section 194O and section 206(C)(1h), effective from 01 October 2020, requiring E-commerce operators and sellers, respectively, to deduct Tax at Source (TDS)/ collect tax (TCS) on sale of goods, under prescribed circumstances. Subsequently, Finance Act, 2021 inserted section 194Q, effective from 01 July 2021, requiring buyer of goods, to deduct TDS on payment made to seller under prescribed circumstances.

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