TDS on fees for professional or technical services

Dear Friends as you are aware that we are a republic state and the government is a representative of the people of India. We Indians choose our government every five years and the government will work for the welfare of all Indians. The main sources of income of government are the collection and levying of various types of taxes. The Government after collecting taxes expend amount on welfare, security, scientific development, infrastructure development, etc. It is necessary for the Government to collect taxes from citizens to maintain various types of works.

The Government had brought the concept of TDS (Tax Deduction at Source), through which persons are required to deduct TDS and deposit the same with the Government. This process reduces the burden of payment of huge tax at the end of the financial year and provides liquidity to the Government. We also know that as per Income Tax Act,1961 a tax on all incomes earned in any year by an assessee, shall be taxable in the next year i.e. your previous year income will be taxed in the next Financial Year (Assessment Year) and not in the same. But in certain cases, the tax on income earned in the previous year will be payable in the same year.

Although Regular Assessment in respect of any income is to be made in a later assessment year, tax on such income is payable in the previous year itself in the following manner;

1. TAX DEDUCTED AT SOURCE: In this case, tax of certain payments/ incomes, tax is deducted at source by the payer at the rate as may be specified at the time of accrual or payment of such income;
2. TAX COLLECTED AT SOURCE: In certain cases, tax is collected at source by the seller of any goods or provider of any services from the buyer or from any person such as licensee/lessee, etc., at the time of debiting amount to the account of buyer/lessor/licensor or at the time of payment receipt of payment, whichever is earlier;
3. ADVANCE TAX: An assessee under certain circumstances is under an obligation to pay his taxes in advance in installments;
4. In some cases, an employer is also required to pay taxes on Non-Monetary Perquisites given to its employees [Section 192A];
5. In the case of Self-Assessment, if any tax is due or payable, we have to pay the same to the Government [Section 140A].

NOTE:

1. There are 31 items of income /payment from which Tax if Deductible at Source, on the other hand, there are 11 items on which it is the obligation of the seller to Collect tax at source.
2. Sections 190 to 206CA, i.e. Chapter XVIIA, XVIIB & XVIIBB of Income Tax Act, 1961 deal with Tax Deducted at Source and Collection at Source.

LET'S CONSIDER MODE OF PAYMENT AND TDS/TCS

DIRECT PAYMENT [Section 191];

In the case of Income;

1. In respect of which provision is not made under Chapter XVII for deduction of Income Tax at the time of payment; and
2. In any case where Income Tax has to be deducted in accordance with the provisions of Chapter XVII (TDS Provisions).

In the above two cases if an assessee is liable to pay Income Tax directly to the Government as Advance Tax or otherwise as may be prescribed.

EXPLANATION TO SECTION 191; WHEN A TAXPAYER IS DEEMED TO BE IN DEFAULT;

If any person, including a principal officer of a company-

1. Who is required to deduct any sum in accordance with the provisions of this act;
2. Referred to Section 192(1A) being an employer,

Does not deduct, or after deducting fails to pay, or does not pay, the whole or any part of the tax, as required by or under this Act, and where the assessee has also failed to pay such tax directly., then such person shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default within the meaning of Section 201(1) in respect of such amount of tax.

If an assessee himself has deposited the required tax directly with the Government, then in this case the deductor shall not be deemed to be an assessee in default.

Provided that any person including Principal Officer of a Company, who fails to deduct the whole or any part of tax in accordance with the provisions of Chapter XVII on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident(deductee)-

1. Has furnished his return of income u/s 139 of the Act;
2. Has taken such sum while calculating his income in return of income;
3. Has paid the tax due on the income declared by him in return and
4. Furnishes a certificate to this effect from an accountant in Form 26A.

No penalty shall be charged u/s 221 from such person unless the Assessing Officer is satisfied that such person has without good and sufficient reasons failed to deduct and pay the tax and hence shall be liable to penalty u/s 221 of the Act.

NOW LET’S CONSIDER OUR TOPIC

DEFINITION OF PROFESSIONAL SERVICES; [ SECTION 194J]

Explanation (a)

Professional Services, means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or profession of accountancy or technical consultancy or interior decoration or advertisement or Authorised Representatives or Film Artists or Company Secretaries or Profession of Information technologies any other professional as may be notified under Section 44AA of the Act.

CBDT vide its Notification No. 88/2008 dated 21/08/2008 has notified that the services rendered by the following persons in relation to the sports activities as “Professional Services” for the purpose of Section 194 J of the Act, namely-

1. Sports Persons;
2. Umpire and Referees;
3. Coaches and Trainers;
4. Team Physicians and Physiotherapists;
5. Event Managers;
6. Commentators;
7. Anchors and
8. Sports Columnists.

NOTE:

1. From the above it is very clear that payments made to various professionals such as lawyers, doctors, engineers, architects, chartered accountants, interior decorators, advertising, actors, cameraman, director, music director, art director, dance directors, editors, singers, lyricist, story writers, screenplay writer, dress designers, authorized representatives, company secretary, information technology, sportsperson, umpires and referees, coaches and trainers, team physicians and physiotherapists, event manager, commentators, anchors, and sports columnists are all clearly covered in the “Fees For Professional Services” and tax deduction at the rate of 10 percent is clearly application.

2. TPA (Third Party Administrators): who is making payment on behalf of insurance companies to hospitals for settlement of medical/insurance claims, etc. under various schemes including Cashless Schemes are liable to deduct tax at source under Section 194J on all payments to Hospitals.

DEFINITION OF TECHNICAL SERVICES;

Explanation (2) to Section 9(1)(vii) “ Fees for Technical Services “, means any consideration ( including any lump sum consideration) for the rendering of any managerial, technical, or consultancy services ( including the provisions 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 for which would be the income of the recipient chargeable under the head “ Income from Salaries”.

NOTE:

1. Finance Act 2020, has reduced withholding tax rates ('TDS') for fees for technical services ('FTS') under Section 194J of the Income-tax Act, 1961 ('the Act') to 2 percent from the existing rate of 10 percent.

2. Memorandum to Finance Bill 2020, clarified that this amendment is introduced to reduce existing litigation on account of the classification of services under section 194J (tax-deductible at 10 percent) and 194C of the Act (tax-deductible at 2 percent).

LET'S CONSIDER SOME JUDICIAL DECISIONS

1. As per Delhi ITAT in Le Passage to India Tours & Travel (P) Ltd. [2014] 369 ITR 109, it is 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.

2. E-bay International AG vs ADIT (2012) 25 taxmann.com 500 (Mum) Services are of technical nature when special skills or knowledge or education related to a technical field are required for the provision of such services. Mere use of a standard facility does not result in availing of technical services although such a facility has been developed with the usage of technology.

3. Intertek Testing Services India (P) Ltd. [2008] 307 ITR 418 (AAR) The expression “consultancy involves giving ofadvice/opinion/recommendation or counseling or advisory services by a professional. Expertise in a technology is not essential while providing consultancy services. However, an element of expertise or special knowledge on part of the advisor is essential. Advisory services which merely involve discussion and advice of a routine nature cannot be classified as consultancy services.

Note: The terms “management,” “technical” and “consultancy” do not have precise meanings and may overlap. Thus, for example, services of a technical nature may also be services of a consultancy nature and management services may also be considered to be services of a consultancy nature.

4. J.K (Bombay) Ltd. v/s CBDT [1979] 118 ITR 312 ; Management – Management in an organization includes at least the following: (a) discovering, developing, defining and evaluating the goals of the organization and the alternative policies that will lead towards the goals; (b) getting the organization to adopt the policies; (c) scrutinizing the effectiveness of the policies that are adopted; and (d) initiating steps to change policies when they are judged to be less effective than they ought to be management thus pervades all organizations.

5. Endemol South Africa (Proprietary) Ltd. vs DCIT [2018] 98 taxmann.com 227 (Mum ITAT); The term managerial services, ordinarily means handling management and its affairs. As per the concise oxford dictionary, the term managerial services mean rendering of services which involves controlling, directing, managing or administering a business or part of a business or any other thing.

6. DDIT (International Taxation) vs Avavya Global Connect Ltd. [2011] 43 SOT 439

The expression technical service would have reference to only technical service rendered by a human being. It would not include any service provided by machines or robots.

7. CIT vs Group Ism (P) Ltd. [2015] 278 CTR 194 (Delhi); Consultancy Services would mean something akin to advisory services pursuant to deliberation between parties.

8. Endemol South Africa (Proprietary) Ltd. vs DCIT [2018] 98 taxmann.com 227 (Mum ITAT); The term consultancy services, in common parlance, means providing advice or advisory services by a professional. Usually consultancy services are professional services requiring specialized qualification, knowledge, expertise of a professional person, and are more dependent on skill, intellect and individual characteristics of the person rendering it.

DEFINITION OF ROYALTY [ SECTION 9(1)(vi)];

EXPLANATION 2- For the purposes of this clause, "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).

CLARIFICATION REGARDING ROYALTY INCOME U/S. 9(1)(vi)

The CBDT considering the conflicting decision of various courts on Royalty Income and to restate legislative intent;

1. The consideration for use or right to use computer software is royalty; The transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.[ Explanation 4]
2. Royalty includes and has always included consideration in respect of any right, property or information, whether or not—

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

iii) For the removal of doubts, it is hereby clarified that the expression "process" includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;

WHEN TAX IS TO BE DEDUCTED; At the time of payment of such fees or at the time to credit to the account of payee, whichever is earlier.

RATES OF TDS;

1. @10% on such income;
2. @2% [In case of payee engaged only in operation of call centres w.e.f. 01/06/2017];
3. @2% [ In case of payee engaged in providing Technical Services, Finance Act, 2020].

Note:

1. No Surcharge, Education Cess or SHEC shall be added to above amount;
2. TDS rate will be @20% in all above cases if PAN has not been mentioned by payee.

WHEN NO TAX IT TO BE DEDUCTED AT SOURCE;

No tax is to be deducted where amount of such sum, or as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the payer to the account of the payee or to payee does not exceeds;

1. Rs. 30,000/- in case of fees for Professional Services rendered;
2. Rs. 30,000/- in case of fees for Technical Services rendered to above;
3. Rs. 30,000/- in case of Royalty payment referred to above;
4. Rs. 30,000/- in case of non-compete fees referred to above.

Note:

1. There is no threshold limit for deduction of tax at source if payment is made to a director of company under Section 194J;
2. Any fees paid through regular banking channels to any Chartered Accountant, lawyer, advocate or solicitor, who is resident in India by the non-residents who do not have any agency or business connection or permanent establishment in India may not be subject to the provisions of TDS under Section 194J;
3. However, foreign companies or foreign law and accountancy firms are required to send a quarterly statement, indicating the name and address of the person to whom the payments are made, to the Deputy Secretary, Foreign Tax Division, CBDT, Department of Revenue, Ministry of Finance, New Delhi;
4. Wheeling or transmission charges paid to power transmitting companies by the assessee- electricity distribution company did not amount to rent or fees for technical services;
5. Fees paid to BSE as Transaction Charges is not fees for Technical Services;
6. E-magazine could not be considered as being nature of any consultative/ professional services;
7. Payments share with the Franchisees is not payments for Technical Services rendered;
8. Supply of ready study data is not a technical service.
9. Payment of fees for use of a Standard facility provided is not a technical fee.

Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Some judgements of counts have been taken as it is available. Although care has been taken to ensure the accuracy, completeness, and reliability of the information provided, author assume no responsibility, therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws and take appropriate advice of consultants. The user of the information agrees that the information is not professional advice and is subject to change without notice. Author assume no responsibility for the consequences of the use of such information.