A Debate Over Guidelines
Recent guidelines issued by the CBDT seem to have overreached the ambit of the provisions of Section 194R
AA RECENT CIRCULAR issued by the Central Board of Direct Taxes (CBDT) containing guidelines under the provisions of Section 194R (2) of the Income-tax Act, 1961, has given rise to a huge debate. Section 194R was introduced by the Finance Act, 2022, to provide that tax should be deducted at 10 per cent on provision of any benefit or perquisite arising from business or the exercise of profession carried on by a recipient (other than an individual/HUF who are not subjected to tax audit). The Section came into effect from July 1, 2022. This Section was introduced as such benefits and perquisites are taxable under Section 28 (iv) of the Act and it was felt that the recipients do not report their receipt in their tax returns and that the tax authorities may not be able to detect evasion. The need to withhold taxes would cast responsibility on the provider of such benefit or perquisite to withhold taxes and report such provision, which could then be appropriately dealt with during assessment proceedings. While the provision to withhold taxes is understandable, the way the circular has overreached the ambit of the provisions is what has led to the debate.
Clearly, Section 194R becomes applicable only when a benefit or perquisite has arisen under Section 28 (iv) of the Act and not otherwise. Section 194R (2) provides that the CBDT is empowered to issue a circular to “remove difficulties” in giving effect to the provisions of Section 194R. It further provides that such a circular would be issued with the prior approval of the central government, would be laid before Parliament and would be binding on the tax authorities as well as the persons providing such benefit or perquisite. This is in sharp contrast to Section 119 of the Act under which the CBDT can issue a circular which is binding on the tax authorities but not on taxpayers and the judiciary. It merits to be noted that the ability to issue the circular is to “remove difficulties” that may arise in giving effect to the provisions of the Section; however, this circular (as we will analyse) deals with the interpretation of the Section, enlarges the scope of it beyond the provisions of Section 28 (iv) of the Act, has requirements that are inconsistent with principles laid down by the courts (including the Supreme Court) and, to an extent, undermines the basic tenets of taxation of income.
For Section 28 (iv) of the Act to apply, the benefit or perquisite should be: (a) arising from the business or exercise of the profession; (b) a benefit or perquisite from the perspective of the recipient; and (c) received in kind (whether convertible into money or not). It is only when a receipt meets all these three conditions that it would be taxable under Section 28 (iv) and would consequently be liable to withholding tax under Section 194R of the Act.
The circular issued by the CBDT contains several questions and answers seeking to clarify what payments would fall within the ambit of Section 194R of the Act. Let us examine whether the examples set out therein fulfil the above conditions.
Question 1 of the guidelines provides that the deductor is not required to ascertain whether the amount received by the recipient is taxable in his hands or not. The answer to Question 7 specifically provides that reimbursement on outof-pocket expenses should be treated as a benefit or a perquisite. There are several precedents where it has been held that the provisions requiring deduction of tax at source apply only if the payment contains an element of “income” chargeable to tax in the hands of the recipient and not otherwise. Specifically, a reimbursement of expenses does not confer any benefit to the service provider if the service recipient was under an obligation to incur the same and the reimbursement was agreed upon earlier.
Question 4 obliged a company to deduct tax at source if the benefit is enjoyed by the employees of the distributor. As discussed earlier, for a receipt to be taxable under Section 28 (iv) of the Act, it should arise from business or exercise of the profession. An employee of a distributor cannot be said to carry on a business or profession and a receipt by such an employee ought not to be covered by Section 28 (iv)/194R of the Act.
Finally, the Supreme Court in the case of CIT vs. Mahindra & Mahindra [2018] 404 ITR 1 (SC) and several other cases has held that Section 28 (iv) speaks about a benefit or a perquisite “whether convertible into money or not”. A cash receipt would not be a perquisite or a benefit so covered. But Question 2 of the guidelines enjoins a requirement to deduct tax at source even if a benefit is provided in cash.
Thus, the guidelines go far beyond the purview of Section 28 (iv) and cannot be said to have been issued to “remove difficulties” arising in giving effect to the provisions of the Section.
Apart from these, there are several other practical issues which arise. These include the point of time when tax is required to be withheld, situations where a recipient does not utilise the benefit, and absence of a valuation methodology from the perspective of a recipient. For example, the CBDT guidelines require that if an expenditure is incurred on a conference, tax is required to be deducted on the leisure component! One can well see the practical difficulties that would arise in implementation.
It is necessary when such guidelines are issued, its draft be put up for comments and they be finalised after obtaining inputs from the stakeholders. Issuing guidelines of this type deviates from the principles of ease of doing business and are likely to create more litigation going forward.
It is necessary that when such guidelines are issued, its draft be put up for comments and they be finalised only after obtaining relevant inputs from the stakeholders