"Perquisite or Benefits" - The Controversy Continues!!!

 

Shankar Rochlani, Principal Associate & Gaurav Sharma, Associate

Lakshmikumaran & Sridharan Attorneys

 

Backdrop

Amongst the many burning issues widespread across the Country, one that has grabbed the eyeballs of tax professionals as well as the taxpayers, is the newly introduced Section 194R in the Income Tax Act, 1961 ("ITA") effective from 01.07.2022. The said provision requires deduction of tax at source by the person providing 'benefit or perquisite' to a resident, who receives such 'benefit or perquisite' in the course of his business or profession. The 'benefit or perquisite' so received, is taxable in the hands of the recipient. However, it was observed that the recipients were not reporting such benefit or perquisite in their books of account and were consequently evading tax. Resultantly there was a loss of revenue to the Exchequer. Section 194R has been brought in to track such benefits and perquisites.

 

Section 194R (2) empowers the Central Board of Direct Taxes ("Board") to issue guidelines for removing difficulties that may be faced in application of the provisions of Section 194R. It is in this backdrop, that the Board has recently issued Circular No. 12 of 2022 dated 16.06.2022 ("Circular/ Recent Circular") under Section 194R (2). It is pertinent to note that neither the Section nor the Circular defines the meaning of the term 'benefit' or 'perquisite'. Although the Circular was intended to provide clarity with respect to the implementation of provisions of the said section, certain instances covered in the Circular are resulting in expansion of the scope of the said section. One such issue covered in the Circular is treating 'reimbursement' of expenses as benefit or perquisite for the purpose of deduction of tax at source ("TDS") under Section 194R.

Whether reimbursement of expenses be termed as "benefit" or "perquisite"?

In the absence of lucidity on the scope of the term 'benefit' or 'perquisite', the primary question is whether the reimbursement of necessary expenses incurred for fulfilling the service by a service provider will fall under the said expressions. In this regard, the Hon'ble Supreme Court in the case of GE India Technological Centre [(2010) 10 SCC 29] has held that there is no element of income in case of reimbursement of expenses. The Hon'ble Bombay High Court in the case of Bipin R Shah [ITA No. 8544 (Mum) of 1990] has held that reimbursement of the expenses that are incurred on behalf of the employer is not income in the hands of the employee. However, it is pertinent to note that the Circular has categorically clarified that the deductor is not required to ascertain the taxability or nature of benefit or perquisite in the hands of deductee before deducting TDS u/s 194R. This runs contrary to understanding of the taxpayers and may result in deduction of TDS on an amount which was not supposed to be taxed under the ITA.

Whether reimbursement of expenses will be subject to TDS under Section 194R?

The Circular states that any expenditure of a person carrying on business or profession, if met by other person ('provider') is in effect benefit or perquisite provided to the first person ('receiver') and should be subject to TDS under Section 194R.

 

However, the said view of the Board does not seem to be in consonance with its earlier Circular No. 715 of 1995 dated 08.08.1995 ("Old Circular"), wherein it was stated that the amount of reimbursement included in the invoice for work done or professional services provided should also be subject to TDS under Section 194C and 194J respectively alongwith the consideration for work done or fees for professional services.

 

As is evident from the above, there is a clear dichotomy in the views given in the two Circulars. While the Old Circular, states that the TDS on reimbursement should be deducted under Section 194C or 194J, the Recent Circular provides the TDS to be deducted under Section 194R

 

It is worth pointing out that this situation has resulted in ambiguity with respect to appropriate rate of TDS to be made applicable in case there is difference in rate of TDS. For example: TDS u/s 194C is deductible at the rate of 1%/2% whereas the rate of TDS is 10% u/s Section 194R. In addition to the above, the distinction carved out in the Circular under Question No. 7 in the Recent Circular based on the invoicing methodology also needs to be tested in the Court of law.

The GST Effect

As per Section 15 of Central Goods and Services Tax Act, 2017 ("CGST Act"), GST is leviable on the value of supply of goods and services. In terms of Section 15(2)(c) of the CGST Act, incidental expenses charged by the supplier to the recipient of supply and any amount charged for anything done by supplier in respect of supply of goods or services shall be included in the value of supply. The only exception to the said scenario is in the case of 'Pure Agent', as provided under Rule 33(ii) of the Central Goods and Services Tax Rules 2017. In the case of Premier Vigilance & Security Pvt. Ltd. - 2018-VIL-248-AAR the West Bengal Advance Ruling Authority has held that expenses that are cost of service provider would be included in the value of supply unless such supplier qualifies as "Pure Agent". Thus, reimbursement of expenses which are separately charged by the supplier would be included in the value of supply except when the conditions laid down for qualifying as "pure agent" are fulfilled.

 

Having said so, the larger question to be dealt here is with respect to the taxability of 'Benefits and Perquisites' under the CGST Act other than those which are reimbursable expenses.

 

Under the GST regime, the taxable event is 'supply' as provided under Section 7 of the CGST Act. The scope of the term 'supply' includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, provision of service, etc. made for a consideration in course or furtherance of business. Existence of consideration i.e., quid-pro-quo is paramount for an activity to qualify as 'supply' unless the same is covered by Schedule I.

 

Typically, any benefit or perquisite in the form of any article or provision of service, is received on happening of any event, whether pre-agreed or otherwise. Such benefit or perquisite is a condition of contract, and it can be argued that it lacks quid-pro-quo.

 

It is also imperative to note that input tax credit in respect of goods given as 'gifts' is specifically denied u/s 17(5)(h) of CGST Act. The Maharashtra Advance Ruling Authority in the case of Biostadt India Limited - 2019-VIL-60-AAR, ruled that gold coins distributed to the customers at the end of scheme period for achieving the stipulated lifting or payment criteria are gift requiring ITC reversal in the hands of the applicant. In light of the above, it can be argued that if a particular activity is treated as 'gift' for the supplier/ donor, then the same shall not be treated as 'consideration' for the receiver. Thus, the benefit or perquisite is not received for "supply" of goods or services or both.

 

However, since the definition of 'service' as provided under the CGST Act is wide, the Department may contend that the monetary value of benefit or perquisite is liable to GST.

 

Conclusion

It is high time that the Board should appreciate that the circulars shall supplant the law and not supplement the law. The power entrusted u/s 194R (2) is only to issue guidelines to remove difficulties faced by the taxpayers and not to expand the scope of the section enacted by the Parliament. Further, the taxpayers and the tax officials shall follow the Circular in the letter and spirit of the law laid down u/s 194R (2) and shall not go beyond the scope of the provision embodied therein. At the same time, suitable clarification is crucial from Central Board of Indirect Taxes to avoid any potential litigation in GST.

[Date: 13/07/2022]

 

(The views expressed in this article are strictly personal.)