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Tax Deduction at Source | Professional Fees (194J)

 

 

 

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TDS on Professional or Technical Services (Section 194J)

 

1.      Nature of payments covered:

 

    1. Fees for professional services
    2. Fees for Technical Services
    3. Royalty
    4. Receipts in the nature of non-compete fees and exclusivity rights as specified u/s 28(va).
    5. Remuneration or fees or commission by whatever name called, other than which tax is deductible under section 192, to a director of a Company.

  

          

  1. 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.

   

 
  1. 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.

 
Important Note: As per section 206AA, with effect from 1.4.2010, every person who receives income subject to TDS under chapter XVIIB (covers all TDS cases) shall furnish to the deductor, his PAN. If PAN is not so furnished, the rate of TDS will be at the rates specified in the Act or at the rates currently in force or  at 20% whichever is higher. Please note that this applies to non residents also.

  1. Rate of Deduction: The present rate of TDS is 10% of the amount paid/credited.

 

  1. No deduction in certain cases:

 

    1. If the aggregate amount of payment made/credited or likely to be paid/credited does not exceed Rs.30,000/- in a financial year (from 1.7.2010). It was Rs.20000 previously.
    2. Individual and HUF need not deduct tax at source if they utilize the professional services only for their personal purposes.
    3. There is no threshold limit for payment of remuneration or fees to directors. Hence, a company would be liable to deduct tax on each and every payment to director even if total payment during the year does not exceed Rs.30000

 

  1. Professional Services: Areas covered

 

    1. Legal Profession
    2. Medical Profession
    3. Engineering
    4. Architect
    5. Chartered Accountants
    6. Technical Consultancy
    7. Interior Decoration
    8. Advertising
    9. 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.
    10. Film artistes including actor, cameraman, director, music director, art director, dance director, editor, singer, lyricist, story writer, screenplay writer, dialogue writer, dress designer.
    11. Company Secretary
    12. Profession of Information Technology.

 

  1. Technical Services: Areas Covered

 

    1. Rendering of managerial services.
    2. Rendering of technical services.
    3. 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”

 

  1. 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.).

 

  1. 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.

 

  1. 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)


 

 

  1. 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.

 

  1.   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.

 

  1.  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.

 

  1.  Payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J.

 

  1. Commission received by the advertising agency from the media would require deduction of tax at source under section 194J.

 

  1. 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.
  2. TDS on the Service Tax Component or not: The payments made under section 194-I differ significantly from payment made under section 194J in the way that in the case of 194-I TDS has to be deducted on any income paid as rent. However, in the case of section 194J TDS has to be deducted on any sum paid as professional and technical fees. The Board had decided to exclude TDS on service tax component on rental payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since section 194J covers any sum paid, therefore the board has decided not to extend the scope of Circular No. 4/2008, dated 28-4-2008 to such payment under section 194J.--Vide Circular F.No. 275/73/ 2007-IT(B), dt. 30-6-2008.

However, the Board's attention was drawn to the Hon'ble Rajasthan High Court's judgmentin CIT (TDS) Jaipur Vs.Rajasthan Urban Infrastructure, holding that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service tax component under section 194J of the Act.

This matter has been examined afresh by CBDT and if in terms of the agreement between payer and payee, service tax component is indicated separately, tax shall be deducted at source on the amount paid/payable without including such service tax component.Vide Circular No.1/2014[F.No.275/59/2012-IT(B)] dt. 13.1.2014
  1. Third Party Administrator (TPA) making payment to hospitals is liable to deduct tax under Section 194J:

    In Dedicated Health Care Services TPA (India) (P) Ltd & Ors. V. Asstt. CIT & Ors. (2010) 324 ITR 0345 (Bom-HC), Petitioners 1 to 5 were registered with IRDA under the Third Party Administrator Health Services Regulations 2001 framed under the provisions of sections 14 and 26 of the Insurance Regulatory and Development Act read with section 114A of the Insurance Act. The Sixth Petitioner was a trust registered under the Indian Trusts Act 1882 and had been constituted by Third Party Administrators (TPAs). All claims payable by the insurance company to the policy holder are paid through TPA. The issue is whether while making payments to hospitals, TPAs are required to deduct tax at source under section 194J or not. It was held that where the provision of medical services takes place within the institutional framework of a hospital, services are rendered as part of an umbrella of services provided by the hospital which engages qualified medical professionals. These are the services rendered in the course of carrying on of medical profession. Hence, TPAs have to deduct tax at source under section 194J when they make payments to hospitals.


     

 

Other Issues on Indian Income Tax Deducted At Source:  Introduction     Contractor Payments(Sec 194C)  Interest Other than Interest on securities   Interest on Securities(Sec 193)  TDS on Commission   TDS on Rent   TDS on Other Sums         TDS on Salaries(Sec 192)

 

Disclaimer: All the information provided above is for informative purposes only. You are advised to consult your tax consultant before you act upon any of the above information. In spite of this, if any person acts upon this information and suffers any loss, we are not to be held liable.

 

     Though all efforts have been made to provide latest information, you are advised to check latest circulars, latest changes in law etc from the Indian Income Tax Department.

 

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