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Prior to the amendment by Finance Act, 2020 in section 194J distinguishing a payment whether it is in the nature of professional or technical fees or a royalty did not have any significance since the rate of TDS was 10% in any case. However, after the amendment, the distinction has become important due to a lower rate of TDS of 2% for payments in the nature of technical fees and royalty.

The memorandum to Finance Bill, 2020 explains the rationale for reducing the rate of TDS for section 194J.

Reducing the rate of TDS on fees for technical services (other than professional services).

Section 194J of the Act provides that any person, not being an individual or a HUF, who is responsible for paying to a resident any sum by way of fees for professional services, or fees for technical services, or any remuneration or fees or commission by whatever name called (other than those on which tax is deductible under section 192 of the Act, to a director), or royalty or any sum referred to in clause (va) of section 28, shall, at the time of payment or credit of such sum to the account of the payee, deduct an amount equal to ten percent as income-tax.

Amendment to Sec 194J w.e.f 01.04.20 - The 2  and 10  Conundrum

Section 194C of the Act provides that any person responsible for paying any sum to a resident for carrying out any work (including the supply of labor for carrying out any work) in pursuance of a contract shall at the time of payment or credit of such sum deduct an amount equal to one percent in case payment is made to an individual or a HUF and two percent in other cases.

It is noticed that there are a large number of litigations on the issue of short deduction of tax treating assessee in default where the assessee deducts tax under section 194C, while the tax officers claim that tax should have been deducted under section 194J of the Act.

Therefore to reduce litigation, it is proposed to reduce the rate for TDS in section 194J in case of fees for technical services (other than professional services) to two percent from the existing ten percent. The TDS rate in other cases under section 194J would remain the same at ten percent.

Therefore, the intention of the legislature to reduce the rate of TDS in section 194J is to bring the parity with section 194C for technical fees. Since in many cases fees for technical services may be classified under section 194C or section 194J, however, the difference in rates of TDS was inviting litigation. In order to reduce litigation, reduced rate for TDS in case of fees for technical services (other than professional services) to two percent from existing ten percent provided to align the same with the rate of TDS on works contract under section 194C.


The Finance Bill, 2020 proposed to reduce the rate of TDS under section 194J to 2% from the existing 10% in respect of fees for technical services only. When the bill was enacted as Finance Act, 2020, it added one more payment under the umbrella of 2 percent and that payment is in respect of royalty income arising to a person by way of sale, distribution, or exhibition of cinematographic films. This will provide relief to the film distributors as currently tax is deducted at the rate of 10% on revenue they earn from sale, distribution, or exhibition right of the film. Now, this will attract 2 percent withholding tax.

Now, the question arises, what could be defined as 'Fee for Technical Services (FTS)' and 'Fee for Professional Services (FPS)'. We can try to understand the terms as under:


Explanation 2 to section 9(1)(vii) of the Act defines the term 'FTS' to 'mean 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 the income of the recipient chargeable under the head ‘Salaries’'.

The terms 'managerial', 'technical' and 'consultancy' appearing in the definition of the phrase 'FTS' has not been specifically defined in the Act. The Supreme Court in the case of GVK Industries Ltd. [2015] 371 ITR 453 (SC) has held that general and common usage of the said words has to be understood at common parlance while interpreting the ambit of the term 'FTS'.

In CIT v. Kotak Securities Ltd. [2016] 383 ITR 1, the Supreme Court has categorically held that the use of facility does not amount to technical services, as technical services denote services catering to the special needs of the person using them and not a facility provided to all. In this case, the issue before the Court was whether fully automated services are available to all members of the Stock Exchange in respect of every transaction that is entered into was ‘Technical services'. The Court observed that there is no exclusivity to the services rendered by the Stock Exchange and each and every member has to necessarily avail of such services in the normal course of trading in securities in the Stock Exchange. Such services, therefore, would undoubtedly be appropriate to be termed as facilities provided by the Stock Exchange on payment and does not amount to "technical services" provided by the Stock Exchange, not being services specifically sought for by the user or the consumer.

So, the takeaway from this judgment is that service should be provided to suit the special, customized, exclusive needs of the client (i.e. recipient of services) and not available generally to all, to be classified as 'FTS'.

The Delhi Tribunal in Le Passage to India Tours & Travel (P) Ltd [2014] 369 ITR 109, has held that not all kinds of advisory qualify as technical services. For any consultancy to be treated as technical services, it would be necessary that a technical element is involved in such advisory. Thus, the consultancy should be rendered by someone who has special skills and expertise in rendering such advisory.

Services relating to design and engineering inextricably linked with the manufacture and fabrication of the material and equipment to be supplied overseas and forming an integral part of the said supplies, would not be amenable to tax under Section 9(1)(vii) of the Act as FTS. In order to fall outside the scope of Section 9(1)(vii) of the Act, the link between the supply of equipment and services must be so strong and interlinked that the services in question are not capable of being considered as services on a standalone basis and are therefore subsumed as a part of the supplies - Linde AG, Linde Engineering Division v/s DDIT [2014] (365 ITR 1) (Delhi HC)



In many of the DTAAs India has entered into, the term 'FTS' /'FIS' has been defined to include any payment made in consideration for the provision of managerial, technical, or consultancy services, including the provision of services of technical or other personnel. This definition is similar to the definition of FTS under the Act.

Some DTAAs restrict the scope of 'FTS'/'FIS' based on the 'make available' criteria.

Some DTAAs (such as Canada, Finland, Netherlands, UK, and US) restrict the scope of the term 'FTS' to only technical and consultancy services (i.e., managerial services are not included within the fold of the definition).

Protocols to some of the DTAAs extend the restrictive definition (i.e., the 'make available' criteria) of 'FTS' / 'FIS'.

Definition of 'FIS' as per Article 12 of the India-US DTAA 4.24

Payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:

(a)  are ancillary and subsidiary to the application or enjoyment of the right, property, or information for which a payment described in paragraph 378 is received; or

(b)  make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design.

Concept of 'make available' - clause (b) of the above definition (i.e., make available technical knowledge, experience, skill, know-how, or processes or consist of the development and transfer of a technical plan or technical design)

The MOU to the India-US DTAA lists down various illustrations in order to aid interpretation as to whether a particular service 'makes available' technical knowledge, experience, skill, know-how, or processes or not.

The AAR and ITAT have held that the explanation as provided in the MOU to the India-US DTAA should be equally applicable to all other DTAAs India have entered into wherein the 'make available' criteria is provided.

Simplistically understood, a mere rendition of services does not fall within the gamut of the term 'make available' unless the recipient of services is enabled and empowered to make use of the technical knowledge by itself in its business or for its own benefit without recourse to the original service provider in the future.

The condition of 'make available' is satisfied when the recipient acquires a means to an end, i.e. he acquires the technical knowledge, experience, skills, know-how, or processes from the provider which acts as a means and enables him to use the same for achieving a further end. The condition of make available is not satisfied merely where the services itself serves as an end for the recipient and he does not acquire any technical knowledge, experience, skill, know-how, or processes from the service provider.

Services are said to be 'made available' if the recipient of services is at liberty to use the technical knowledge, skill, know-how, and processes in his own right.

For instance, if a US tax resident simply provides some consultancy services to an Indian tax resident, payment towards the same would not satisfy the 'make available' criteria and hence, would not qualify as FIS as per Article 12 of the India-US DTAA.  
However, if in the above example, the US tax resident tutors the Indian tax resident in such a manner that the Indian tax resident is thereafter enabled to render the said consultancy services independently, the same would satisfy the 'make available' criteria.

Illustrative examples of income qualifying as 'FTS' / 'FIS' (under the 'make available' criteria in specified circumstances)

  • Engineering services (including the sub-categories of bio-engineering and aeronautical, agricultural, ceramics, chemical, civil, electrical, mechanical, metallurgical, and industrial engineering);
  • Architectural services;
  • Computer software development;
  • Bio-technical services;
  • Food processing;
  • Environmental and ecological services;
  • Communication through satellite or otherwise;
  • Energy conservation;
  • Exploration or exploitation of mineral oil or natural gas;
  • Geological surveys;
  • Scientific services;
  • Technical training;
  • Consulting services in relation to review of hydrocarbons, analysis, and review of data maps;
  • Training in the use of simulators;
  • Technical assistance and training to enable the recipient to manufacture aluminum foils;
  • Technical plans, designs, and information to enable the recipient to execute and install water features.

Illustrative examples of income not qualifying as 'FTS' / 'FIS' (under the 'make available' criteria in specified circumstances)

  • Services provided by overseas lead managers for managing a GDR issue;
  • Standard telecom service;
  • Quality assurance assessment and certification activities;
  • Reviewing project documentation and providing expert opinion;
  • Providing commercial and industrial information;
  • Updation of a market study;
  • Project monitoring services;
  • Grading and certification reports;
  • Referral services;
  • Clinical or bio-analytical studies;
  • Airborne survey and providing high-resolution geophysical data;
  • Services of reinsurance broking;
  • Project-specific architectural drawings and designs with measurements.

Note: All these illustrations are obtained from various settled case laws.


The term 'profession' or 'professional services' has not been defined in the Income Tax Act. However, section 44AA (1) prescribes persons carrying on the following professions, who are mandatorily required to maintain books of accounts:

  • Legal
  • Medical
  • Engineering
  • Architecture
  • Accountancy
  • Technical consultancy
  • Interior Decoration
  • Any other profession that may be notified by CBDT-
  • Authorized representatives
  • Film artists
  • Certain sports-related persons
  • Company secretaries, and
  • Information technology.

Further, the services of professionals are more into intellectual, attitudinal, and artistic nature which can be provided by a natural person and not by any artificial person.

Profession is a type of business which requires intellectual skills only and most professionals are recognized by their respective professional institutions as members, which permit them to practice as individuals/firms. 


Even after amendment in Section 194J few services like Information Technology, Engineering Service, or Technical Consultancy Service seem to be overlapping because FPS includes technical consultancy provided in the course of the profession and FTS includes Technical and Consultancy services.

However, post amendment to Section 194J it can be inferred that if technical consultancy is given in the course of the profession then the same is covered under 'FPS' and liable to TDS @ 10%, whereas, if the same is given otherwise than in the course of the profession, then the same gets covered under 'FTS' and subject to TDS @ 2%.

Under Section 44AA(1), a list of professions is given, however, the section also covers the profession of 'technical consultancy'. Further, the definition of 'FTS' also covers technical services.

When technical service is obtained, confusion may arise whether it is covered under 'FTS' or 'FPS' for the purpose of deduction of TDS under section 194J. In such a scenario for the purpose of 'FPS', interpretation of words 'Technical Consultancy' should be drawn as per the principle of interpretation of 'noscitur a sociis' which means the meaning of a word should be derived from the company of the words in which it is placed. This is important for interpretation after an amendment to Section 194J.

THEREFORE, for the purpose of 'FPS', the meaning of the word 'Technical Consultancy' should be similar to the meaning of the words mentioned earlier.

Accordingly, if 'Technical Consultancy' is given by a person holding some professional qualification AND such service is provided in the course of carrying out any profession then it will get covered under 'FPS' liable to TDS @ 10%, otherwise, it will get covered under 'FTS' and will be subject to TDS @ 2%. 


Published by

CA. Ankit Chandrakar
Category Income Tax   Report

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