TDS on Professional or Technical Services (Section 194J)
1. Nature of payments covered:
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Fees for professional services
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Fees for Technical Services
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Royalty
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Receipts in the nature of non-compete fees and exclusivity rights as specified u/s 28(va).
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Who is liable to deduct: Any person other than individual and Hindu Undivided Family. However, individual and HUF are also covered if they are liable to get their accounts audited u/s 44AB. In other words, individual and HUF, if their gross receipts/turnover exceed the limits specified in section 44AB, are also liable to deduct tax at source from payments they make.
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Income Tax should be deducted at the time of payment of such sum or at the time of credit to the account of the payee whichever is earlier.
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Rate of Deduction: The present rate of TDS is 10% of the amount paid/credited.
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No deduction in certain cases:
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If the aggregate amount of payment made/credited or likely to be paid/credited does not exceed Rs.20,000/- in a financial year.
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Individual and HUF need not deduct tax at source if they utilize the professional services only for their personal purposes.
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Professional Services: Areas covered
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Legal Profession
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Medical Profession
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Engineering
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Architect
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Chartered Accountants
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Technical Consultancy
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Interior Decoration
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Advertising
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Authorised Representatives other than employee of the person represented. Authorised Representative does not mean a chartered accountant or an Advocate. However, payments to them are also subject to tax deduction.
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Film artistes including actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, dress designer.
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Company Secretary
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Profession of Information Technology.
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Technical Services: Areas Covered
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Rendering of managerial services.
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Rendering of technical services.
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Rendering of consultancy services.
The above areas exclude consideration for construction, assembly, mining or similar project undertaken by the recipient. It also excludes payments which are taxable under the head “Salaries”
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Important Case Laws: Telephone services are not covered - When a person decides to subscribe to a cellular telephone service in order to have the facility of being able to communicate with others, he does not contract to receive a technical service. What he does agree is to pay for the use of the airtime for which he pays a charge. The fact that the telephone service provider has installed sophisticated technical equipment in the exchange to ensure connectivity to its subscriber does not on that score make it provision of a technical service to the subscriber. The subscriber is not concerned with the complexity of the equipment installed in the exchange, or the location of the base station. All that he wants is the facility of using the telephone when he wishes so, and being able to get connected to the person at the number to which he desires to be connected. What applies to cellular mobile telephone is also applicable to fixed telephone service. Neither service can be regarded as ‘technical service’ for the purpose of section 194J of the Act - Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53 (Mad.).
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The Delhi bench of the Income Tax Appellate Tribunal in ITO Vs. Dr. Willmar Schwabe India (P) Ltd. [2005] 3 SOT 71 examined the scope of Circular No.715 dt.8-8-1995 on the subject of deduction of tax at source on expenses reimbursement and upon perusal of the same, held that reimbursement of expenses for which bill is separately raised did not attract the provisions of Section 194J.
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Clearing & Forwarding (C&F) services – TDS: Assessee applied Sec.194C in respect of payments made to C&F agents. Assessing Officer (AO) opined that such services are managerial in nature and Sec.194J is to be applied. Assessee was considered to be in default for short deduction. CIT (A) confirmed AO’s action. On appeal before the Hon’ble Delhi Bench of the Tribunal, it was held that C&F services were not professional or technical services as mentioned in Sec.194J and the same are pari materia to the services mentioned in Sec.194C. CBDT in its Circular No.720 dt.30.08.1995 provided that various provisions of Chapter XVII relating to TDS are mutually exclusive and any particular payment could be covered by a particular section to the exclusion of others. It was held that C&F services were covered only 194C and not 194J. Glaxo Smithklime Consumer Healthcare Ltd. vs. ITO (2007) 12 SOT 221(Del)
11. Tax deduction at source--APPLICABILITY OF SECTION 194J--Fees for professional or technical services--Payment of navigational charges--Where assessee airline was in fact getting technical services apart from using the equipments for the purpose of communication between the aircraft and the air traffic controller, therefore, the provisions of section 194J would be applicable. Accordingly the assessee ought to have deducted tax as provided under section 194J in respect of payment made for navigational facility.--Vide Singapore Airlines Ltd. v. ITO (2006) 7 SOT 84 (Chen-Trib)
12. Tax deduction at source--UNDER SECTION 194J--Payment made to the stunt artists--Where the stunt artists were rendering services to film producers directly but payments received from directors/film makers were routed through their association (being the assessee), which protected their interest by making payment to its members artists, such an assessee was not required to make any deduction of tax under section 194J.--Vide Dy. CIT v. Movies Stunt Artists Association (2006) 6 SOT 204 (Mum-Trib)
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Important Circulars: Fees received from abroad - In respect of fees for professional services received from foreign companies or foreign law and accountancy firms, any fees paid through regular banking channels to any chartered accountant, lawyer, advocate or solicitor who is resident in India by non-residents who do not have any agent or business connection or permanent establishment in India may not be subjected to deduction of tax at source under section 194J.—Circular : No. 726, dated 18-10-1995.
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Payments to recruitment agencies are in the nature of payments for services rendered, and hence will be subject to TDS under section 194J of the Act, and not under section 194C of the Act. Circular : No. 715, dated 8-8-1995.
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Payments made by a company to a share registrar will also similarly be liable to tax deduction at source under section 194J and not under section 194C.
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Payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J.
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Commission received by the advertising agency from the media would require deduction of tax at source under section 194J.
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Payments to a director: A director is also a manager under the provisions of the Companies Act, 1956. He is, therefore, technical personnel. Any payment made to such director (be it sitting fee or any other sum) shall be required to be taken into consideration for the purposes of deduction of tax at source under section 194J.
regards,
ratan
CAclubindia
