Section 194 J – An overview (Effective 1.10.2009)
Section 194J of the Income Tax Act, 1961 has the heading a “Fees for Professional and Technical Services”. However the Section covers the following categories
1. Fees for Professional Services
2. Fees for Technical Services
4. Non-Competence Fees
Tax has not to be deducted under this Section on services falling outside the purview of the above four categories.
Now we shall have a detailed outlook of all above categories
There are certain services specified in the explanation to this Section. Apart from this, the Government has also notified certain other services for this Section. In a nutshell, the Act has specified and Government has notified a selected set of professional services on which tax has to be deducted under Section 194J. In case any professional service is out of the scope of the so mentioned services, tax has not to be deducted under this section.
Services specified in the explanation to this Section
e. Profession of Accountancy (Including Chartered Accountants)
f. Technical Consultancy
g. Interior Decoration
h. Advertising (Here advertisement refers to consultancy relating to advertising and not payment for advertisement media. For example, amount paid towards advertisement expenses shall be covered by 194C, but amount paid to get an ad film prepared or an advertisement designed, then it shall be covered under 194J)
Professions notified by the Government
a. Authorised representative
b. Film Artist – Any person engaged in his professional capacity in the production of a cinematograph film, whether produced by him or by any other person. The term film artist includes the following:
(i) An actor
(ii) A cameraman
(iii) A director including an assistant director
(iv) A Music director including an assistant music director
(v) An art director including an assistant art director
(vi) A dance director including an assistant dance director
(vii) An editor
(viii) A singer
(ix) A lyricist
(x) A story writer
(xi) A dialogue writer
(xii) A dress designer
c. Company Secretary
d. Sports person
e. Umpires and referees
f. Coaches and trainers
g. Team physicians and Physiotherapists
h. Event managers
k. Sport Columnists
In other words, if the professional or technical consultancy is paid to the above mentioned persons, then only tax has to be deducted under this section.
Explanation 2 to Section 9(1)(vii) defines “Fees for Technical Services” as
“Fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head Salaries”
1. If payment is made to a software professional for development of software, then tax shall be deducted under Section 194J. But if payment is made by the software professional for development of software to his employees, then it shall not be covered under Section 194J as it is not a professional income for the recipient but it’s a salary income.
2. Similarly, website development charges paid to a website developer shall be under the scope of Section 194J. But if the website is developed by the IT department employees of the company, then it shall not come under the purview of this Section.
Explanation 2 to Section 9(1)(vi) defines “Royalty” as
Royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital Gains) for
(i) the transfer of all or any rights (including the granting of a license) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).
In other words if payment is made for aforementioned purposes for the transfer of the rights to use such intellectual property, then tax shall be deducted at source under Section 194J. But however, such intellectual property is transferred by the recipient of such amount, then it shall not be liable for deduction of tax at source under 194J as it shall be chargeable as capital gains in the hands of the recipient.
Non-competence fees is defined under Section 28(va) of the Act as under
“Any sum, whether received or receivable, in cash or kind, under an agreement for
a. not carrying out any activity in relation to any business;
b. or not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services”
It means if any amount is paid to any person for not carrying any business or any activity in relation to such business or even for not sharing the intellectual property right or any other right of similar nature, then it shall come under the purview of Section 194J.
Who has to deduct tax?
Every person other than an Individual and a HUF has to deduct tax at source on the payments specified under this section.
However an individual or a HUF is required to deduct tax at source under this Section if their sales turnover or gross receipts in the immediately preceding financial year exceeds Rs. 40 lakhs in case of business and Rs. 10 lakhs in case of profession. The individuals and HUF’s not coming such criteria need not deduct tax at source under this sections.
When tax is to be deducted?
The persons liable to deduct tax on payments under this Section, if the aggregate payments during the year exceed Rs.20,000/-. However, if smaller amounts are paid during the year and it is estimated that the aggregate of such payments shall exceed Rs.20,000/-, then tax shall be deducted on each such payment. On the other hand, if it is not expected that the payments during the year shall exceed Rs.20,000/- but eventually aggregate of such payments exceed Rs.20,000/-, then tax has to be deducted at the time of payment which results the aggregate payments to exceed Rs.20,000/-.
Tax has to be deducted at the time of payment or credit, whichever is earlier.
Whether to deduct tax on Service Tax component also?
Most of the services come under the scope of service tax. So, in such case, tax has to be deducted on the gross amount of the invoice i.e. the fees component as well as the service tax component. The Board has clarified on this issue with regards to payment to professional liable for service tax.
At what rate tax is to be deducted?
The tax has to be deducted at the rate of 10%.
Prior to 01.10.2009, surcharge was applicable @ 10% in the following manner
1. In case of Indivudual, HUF, Association of Persons and Body of Individuals, if the payments exceed Rs.10 lakh,
2. In case of a company of a firm, if the payments exceed Rs. 1 crore, and
3. In case of an Artificial Juridical Person.Prior to 1.10.2009.
Also, education cess @ 2% and Secondary and Higher Education cess @ 1% on total of tax and surcharge was also applicable.
However, w.e.f. 01.10.2009, Surcharge, Education cess and Secondary and Higher Secondary cess has not to be deducted.
The other provisions like due dates of payment, challan number for payment, form for deduction, quarterly return, etc. apply in common to all other Sections for TDS.
CA. Amol Gopal Kabra