TDS on Professional or Technical Services under section 194J

TDS on Professional or Technical Services

This article deals with the provisions of TDS on professional or technical services covered under the Income Tax Act, 1961. Section 194J of the Income Tax Act, 1961 provides the provisions of TDS on professional or technical services.  

What is Tax deduction at Source?

Tax Deduction at source is a mechanism of collecting tax on income wherein the person requiring to pay such amount shall deduct tax at the specified rates and make the payment of balance amount to the payee.

For example: -

X Limited is making payment of interest on loan Rs. 50,000 to Y Limited. TDS rate is 10%. In this case, X Limited will deduct Rs. 5,000 as TDS and make payment of balance amount Rs. 45,000 to Y Limited. Obviously, X Limited will deposit Rs. 5,000 to Government exchequer which will appear as credit for Y Limited. Y Limited will be able to adjust Rs. 5,000 while discharging its income tax obligation for that year.

Who are covered under Section 194J?

Section-194J shall be applicable where any payment is made towards professional or technical services to a resident by any of the following: -
(a) Any person other than individual or HUF
(b) Individual or HUF whose total sales, gross receipts or turnover from the business or profession exceed the monetary threshold limit under section 44AB in the immediately preceding financial year (i.e. Rs. 1 crore in case of business and Rs. 50 Lakhs in case of profession)

Which are the transactions or payments liable for deduction of tax under section 194J?

Following payments are liable for deduction of tax under section 194J of the Income Tax Act, 1961:-
(a) Fees for Professional Services
(b) Fees for Technical Services
(c) Royalty
(d) Fees paid for not carrying out any activity in relation to any business or profession under clause (va) of the section 28
(e) Fees paid for not sharing any technical know-how, copyright, trademark, patent or any other business or commercial rights of the same nature under clause (va) of section 28
(f) Remuneration or fees or commission paid by a company to its directors (except salary liable for TDS u/s 192)

What is Professional Services for Section 194J?

‘Professional Services’ means services rendered by a person in the course of any of the following professions: -

• Legal
• Medical
• Engineering or architectural profession
• Profession of accountancy
• Technical consultancy
• Interior Decoration
• Advertising
• Other notified professions for the purpose of section 44AA.

Thus, if you are required to deduct TDS and you are making payment towards any of the above professional services, you should deduct TDS on such above payments.

Which are the notified services for the purpose of Section 194J?

Following professions have been notified for the purposes of section 44AA as below: -
(a) Authorized representatives
(b) Film Artists
(c) Company Secretary

The CBDT has notified the services rendered by the following persons in relation to sports activities as professional services for the purpose of section 194J:

• Sport persons
• Umpires and Referees
• Coaches and Trainers
• Team Physicians and Physiotherapists
• Event Managers
• Commentators
• Anchors
• Sport Columnists

What is Technical Services for the purpose of Section 194J?

As per Explanation (b) to Section 194J, the term ‘fees for technical services’ shall have the same meaning as in Explanation 2 to clause (vi) of sub section (1) of section 9. According to this explanation, the term ‘fees for technical services’ means fees for rendering of any of the following services: -
(a) Managerial services
(b) Technical services
(c) Consultancy services
(d) Provision of services of technical or other personnel

Further, the term ‘fees for technical services’ will not include the following types of payments: -
(a) Payment towards any construction, assembly, mining or like project
(b) Payments which are chargeable to tax under the head ‘salaries’

What is the meaning of ‘Royalty’ for the purpose of Section 194J?

According to Section 194J, the term ‘Royalty’ shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9. According to this Explanation, ‘Royalty’ means consideration (including any lumpsum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital Gains) for:-

(i) Transfer of all or any rights (including the granting of a license) in respect of patent, invention, model, design, secret formula or process or trademark or similar property.
(ii) Imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trademark or similar property
(iii) Use of any patent, invention, model, design, secret formula or process or trademark or similar property
(iv) Imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill

It has also been clarified that 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 license) irrespective of the medium through which such right is transferred.

When TDS under section 194J shall be deducted?

The person who is required to deduct TDS under section 194J shall deduct TDS either at the time of credit of sum amount to the account of the payee or at the time of payment in cash/cheque/draft or any other mode, whichever is earlier.

What are the rates of TDS under section 194J?

An amendment has been brought by the Finance Act, 2020 in the section 194J. Consequent to this amendment, the following are effective rates of TDS u/s 194J: -

                                          Rates of TDS under section 194J

Note:

(a) If the payee is engaged only in the business of operation of a call centre, the TDS rate of 2% shall be effective in place of 10% in all cases in the above table.
(b) In any case where the payee fails to furnish PAN, TDS shall be deducted at the rate of 20%.
(c) TDS provisions shall be invoked as soon as the threshold limit as above is breached and TDS shall be deducted on entire amount payable/paid during the financial year. Thus, if you make payment of Rs. 32,000 to any person, TDS shall be deducted Rs. 3200. But if the payment is made for Rs. 29,500, no TDS to be deducted thereon.

Owing to Covid-19 difficulties, the relaxation of 25% has been given by the Government in TDS rates till 31^st March 2021. Therefore, after 14^th May 2020, TDS shall be deducted @ 7.5% in place of 10% and 1.5% in place of 2%.

Can I claim TDS deducted under section 194J?

If TDS has been deducted by the payer on any payment made to you under section 194J, you may claim such TDS while filing your income tax return. If your income tax liability is nil, you can claim refund of the entire amount of TDS otherwise you will be able to claim refund of net TDS after adjusting your tax liability for the year.

I am an individual having annual aggregate turnover of Rs. 1.5 crores in last financial year. I made payment of Rs. 50,000 to my Chartered Accountant for audit and other legal services related to my business. Further, I also made payment of Rs. 5,000 to C.A. for filing of my personal Income Tax Return. Please guide about TDS applicability.

As per the proviso to Section 194J, TDS shall not be deducted on any payment of fees for professional services in case such sum is paid towards personal purposes of such individual. Hence, in this case, TDS shall be deducted only towards Rs. 50,000. No TDS provisions are attracted for expenditure towards personal ITR filing being expenditure of personal nature.

X Limited makes payment of Rs. 25,000 to Y Limited towards professional services and also Rs. 23,000 towards technical services separately. Is it liable for TDS u/s 194J?

TDS provisions u/s 194J would not get attracted, since the limit of Rs. 30,000 is applicable for professional services and technical services separately under clause (a) and (b) of section 194J. In this case, both payments made to Y Limited are below threshold limit of Rs. 30,000.

I have purchased a software for use in my business from abroad. Is this transaction liable for deduction of tax under section 194J?

According to Section-9 of Income Tax Act, payment received for transfer of all or any right to use (including granting of a license) in respect of a computer software shall be treated as ‘Royalty’. Thus, if you are purchasing a software from a resident in India, then the payment made to such resident in India is ‘Royalty’ and therefore you should deduct TDS at the rate of 10% under section 194J.

But if similar payment is made on import of a software from a foreign national, such payment shall require deduction of tax under section 195 @ 10% as given in section 115A or rate given in DTAA whichever is lower.

For example: -
X Limited has acquired a software from Y India Limited for Rs. 5 Lakhs. X Limited shall deduct TDS @ 10% u/s 194J i.e. Rs. 50,000.
Suppose, X Limited acquired software from Y Limited based in USA for Rs. 5 Lakhs. In this case, X Limited shall deduct TDS u/s 195 @ 10% or DTAA rate, whichever is lower.

I have acquired a software from H.P. India Limited for Rs. 50 Lakhs. HP Limited has acquired such software from H.P.(USA) and sold to me without any modification. Should I deduct TDS on such purchase of software?

In this respect, the CBDT has notified as below: -
“No deduction of tax shall be made on the following specified payment under section 194J of the Act, namely: -
Payment by the transferee for acquisition of software from the resident transferor where-

(i) The software is acquired in a subsequent transfer and the transferor has transferred the software without any modification,
(ii) Tax has been deducted u/s 194J or 195 for any previous transfer of such software and
(iii) The transferee obtains a declaration from the transferor that the tax has been deducted u/s 194J or 195 along with the PAN of the transferor.”

On the basis of above reading, it is clear that you are not required to deduct TDS on purchase of software from H.P. India Limited as it has been acquired by you from H.P. India Limited without any modification.

But this is applicable only if H.P. India Limited has already deducted TDS while purchase of software from H.P. (USA) and you should obtain declaration from H.P. India Limited in this regard along with its PAN.

X Limited has made payment to its Managing Director towards salary Rs. 10 Lakhs and also made payment of Rs. 10,000 as sitting fees. What is TDS applicability on such payment?

If the company is making payment to a director who is under an agreement for employment with the company, TDS is deducted u/s 192 and not under section 194J. Therefore, in this case, X Limited shall deduct TDS on Rs. 10 Lakhs as per the provisions of section 192.

X Limited shall deduct TDS on sitting fees Rs. 10,000 @ 10% u/s 194J as such payment is covered under the ambit of section 194J. It is to be kept in mind that the threshold limit of Rs. 30,000 is not applicable on payments made to the directors under section 194J.

Is TDS to be deducted on obtaining legal services?

Yes, legal profession is covered under section 194J. Therefore, if a payment is made to a resident person towards legal services, TDS shall be deducted @ 10% under section 194J where the aggregate amount exceeds Rs. 30,000 during the financial year.

What are the TDS rates for consultancy services?

TDS shall be deducted at the rate of 10% u/s 194J in respect of any payment towards consultancy services. However, in case of technical consultancy services, the rates of TDS shall be 2%.