Section 194J: TDS on Professional & Technical Fees

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What is Section 194J under the Income Tax Act?

Section 194J of the Income Tax Act states the provisions for the mandatory tax deduction at source against the payments made for technical fees and professional fees. TDS is deducted under section 194J if the payment exceeds Rs.30,000 during a financial year. The TDS rate is 10% in general, but can be different based on the type of service, with the requirement to deduct 2% TDS for technical services.

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When is TDS Under Section 194J Not Required?

Professional and technical service fees are two of the most common and frequent payments made in daily routine. "Professional services" refer to services provided by professionals like lawyers, doctors, accountants, engineers, architects, etc. "Technical services" usually are related to developing, using, or transferring technical knowledge or information.

According to Section 194J of the Income Tax Act, any person (other than an individual or a Hindu Undivided Family) making payment to a resident for professional or technical services is required to deduct TDS at the rate of 10% or 2% as applicable of the amount paid or credited to the recipient. Also, if the payee does not provide PAN to the deductor, the 194J TDS rate would be 20%.

Individuals or a Hindu undivided family whose total sales or turnover from the business or profession exceed the threshold limits specified under section 44AB during the immediately preceding financial year in which fees for professional services or technical services are credited or paid shall be liable to deduct income-tax under this section.

Regarding fees for technical services provided by a person not resident in India, the TDS rate is generally higher at 20%, and Section 195 covers such payments.

The person making the payment is responsible for deducting the TDS and depositing it to the government within the specified time frame. The deducted TDS is then credited to the recipient's income tax account, and the recipient can claim credit for the TDS while filing their income tax return.

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Who is required to deduct TDS u/s 194J?

As per Section 194J, section, any person (other than an individual or HUF who is not covered u\s 44AB in the preceding FY) who pays fees to residents for professional or technical services will be required to deduct tax at source u/s 194J.

However, individuals or HUFs will be required to deduct TDS if they are liable to audit u/s 44AB (a) and (b).

The person here means :

1. Central or State Government
2. Local Authority
3. Corporation
4. Company
5. Cooperative Society
6. Trust
7. University
8. Registered Society
9. Firm
10. Individual/HUF/AOP/BOI must get accounts audited u/s 44AB (a) and (b)

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Types of Payments Covered Under Section

The following types of services are covered under section 194J:

1. Professional Services
   This refers to services provided by professionals in fields such as medicine, architecture, civil engineering, accountancy, interior design, advertising, and professional consulting. Additionally, it includes any other profession notified by the Board under Section 44AA of the Income Tax Act.
   Recognized professions under Section 44AA also encompass film writers, company secretaries, and authorized representatives.
   Furthermore, individuals involved in sports and media, such as athletes, event organizers, journalists, anchors, umpires, coaches, physiotherapists, team doctors, and sports columnists, are also included under this provision.
2. Technical services
   These services refer to consulting, managerial, technological services provided by an employee.
3. Non-Compete Fees
   Under Section 194J, non-compete fees refer to payments made in cash or kind as part of an agreement that restricts an individual from sharing or utilizing any patent, license, contract, trademark, know-how, commercial or business rights, techniques, or information. These restrictions apply to their use in manufacturing, production, or any other related operational activities.
4. Royalty
   1. Transfer of Ownership: Ownership rights of a patent, invention, formula, blueprint, concept, or trademark.
   2. Usage Rights: Utilizing an invention, blueprint, patent, or similar intellectual property.
   3. Sharing Information: Accessing detailed information about the use of an invention, copyright, algorithm, or similar assets.
   4. Equipment Usage: Using or granting the right to use equipment for agricultural, research, or commercial purposes.
   5. Broadcast and Media Rights: Transferring rights for published works, experimental discoveries, documentaries, or videotapes for radio broadcasting, with limited permissions for sale, presentation, or distribution.
5. Specific Cases
   TDS deduction under Section 194J is also applicable in the following cases, as clarified by departmental case laws and circulars:
   • Payments for medical services provided by hospitals.
   • Professional fees paid by film artists to publicity companies.
   • Fees paid to management firms and HR consulting firms.
   • Payments made to registrars for data exchange services.

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What is the meaning of professional service & technical services?

Professional services under section 194J means

• Legal Services
• Medical Services
• Engineering Services
• Architectural Services
• Accountancy or Technical Consultancy Services
• Interior Decoration Services
• Advertising Services
• Notified Professions (which are related to sports activities: sportspersons, umpires, referees, coaches, trainers, team physicians, physiotherapists, event managers, commentators, anchors, and sports columnists)

Technical services under section 194J means

Any consideration (including any lump sum consideration) for the rendering of any

i) Managerial
ii) Technical or
iii) Consultancy services (including the provision of services of technical or other personnel)

but does not include consideration for any

i) Construction
ii) Assembly
iii) Mining or
iv) like a project undertaken by the recipient or consideration which would be the income of the recipient chargeable under the head "Salaries."

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TDS Exemption Limit Under Section 194J

TDS must be deducted if the payment amount in a year exceeds Rs. 30,000/-.

Now, a question may arise in your mind: is this threshold limit the overall limit for all services covered u/s 194J, or it shall be calculated individually for payment of professional fees or technical fees etc.

This limit of Rs. 30,000/- is not a total limit for all services. Payment shall be calculated individually for professional fees, technical fees, royalty fees, or non-competence fees.

Example 194J applicability: XYZ Ltd made the Following payments to Mr. A

XYZ Ltd is not liable to deduct TDS from payments made to Mr.A Since INR 30,000 is a separate limit for professional services and fees for technical services, etc.

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What is the rate & time limit for deposit of TDS?

194J TDS rate:

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Time Limit for Deposit of TDS

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When is Section 194J under the Income Tax Act not applicable?

These are the exceptions to Section 194J applicability:

• Where the payment made by an individual or HUF is for personal purposes only.
• If payment is made to a non-resident contractor or sub-contractor.
• The payment amount (at one time or in total during the whole financial year) does not exceed Rs. 30000.
• No TDS by individual\HUF on royalty and non-compete fees( even if commercial).

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Some Special Considerations by CBDT(Government) Circular on 194J Applicability

CBDT has made some special announcements relating to the implications of section 194J, which are as follows:

Routine maintenance contracts

Any payment made for routine maintenance contracts (including the supply of spares) will be liable to TDS u/s 194C. But if such payment is made for giving any technical services, then Section 194J will become applicable.

Recruitment agencies

Any payment made to recruitment agencies (like Monster India or Naukri.com, etc.) will be subject to TDS u/s 194j of the Income Tax Act.

TDS Deduction on GST Amount

The TDS under this section will only apply to the amount (excluding GST) if the GST value is shown separately on the bill.

Media House

Any payment (in the form of commission) paid by a media house (like TimesNow) to any advertising agency (like FoxyMoron) will be liable to TDS u/s 194J.

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When is the TDS Statement issued and by whom u/s 194J?

TDS statement, known as Form 16A is issued by the specified person who is required to deduct TDS. Form 16A is issued to the deductee (i.e., whose TDS is deducted from the income). Given below are the due dates for issuing the TDS certificate:

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Consequences of non-deduction or late deduction of TDS

The employer or the person liable to deduct TDS fails to deduct the TDS or fails to deposit it with the government and may be subject to interest and penalty imposed by the Income Tax authorities.

Disallowance of expenditure:

Non-deductible payments: According to Section 40(a)(ia) of the Income Tax Act, any amount (except salary) paid outside India or to a non-resident, which is taxable in India in the hands of the receiver, shall not be deducted if it is paid without withholding tax or if tax is withheld but is not remitted to the Central Government till the deadline of filing of return.

However, if tax is withheld or remitted in the next year, as the case may be, the payment shall be deducted in that year.

Moreover, according to Section 40(a)(ia), any amount paid to a resident, which is subject to withholding tax, would attract 30% non-deductibility if it is paid without withholding tax or if tax is withheld but is not remitted to the Central Government till the deadline of filing of return.

Levy of Interest:

Any individual who is liable to deduct TDS but fails to deduct it wholly or partly or does not pay it to the government will be subject to pay interest. The interest rate is:

1. One percent per month or part of a month on the TDS amount from when TDS was to be deducted.
2. One and a half percent per month or part of a month on the TDS amount from when TDS was deducted to when it was actually paid.

The assessee has to pay this interest before furnishing the TDS statement.

Levy of Penalty:

If the assessee is liable to deduct or pay TDS and does not deduct (under sections 192 to 196D) or deposit as per Chapter Section 115-O(2), or the second proviso to Section 194B, the deductor may face a penalty U/S 271C of the Income Tax Act. The penalty amount can be equal to the TDS he failed to deduct or deposit.

If the assessee does not pay the tax demand raised by the assessing officer, the assessee may face another penalty under Section 221 of the Act. The penalty amount can vary depending on how long the payment is delayed; however, the penalty amount can not exceed the tax demand.

Prosecution:

If a person deducts the tax at source and is liable to deposit it to the government and fails to do so, he can be sentenced to imprisonment for a minimum of 3 months, and the sentence can be extended to a maximum of 7 years. Read more here.

Book an eCA for professional advice before submitting a TDS return.

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Examples of TDS on professional fees and technical services

• Consultancy fees: TDS is applicable when a company or individual pays a consultant for professional advice or services. For example, a marketing consultant, legal consultant, or financial consultant may receive payments that are subject to TDS.
• Legal fees: Any payment made to lawyers or law firms for legal services provided is subject to TDS. This includes fees for legal advice, drafting agreements, representing in court, etc.
• Technical services: Payments made to engineers, architects, IT professionals, or any other technical service providers for their expertise are subject to TDS. For instance, a software developer hired for a specific project would have TDS applicable to their payments.
• Royalty payments: Royalty payments made for the use of intellectual property, such as patents, copyrights, or trademarks, are subject to TDS. This includes payments to authors, musicians, artists, and other creators for the use of their work.
• Commission payments: TDS is applicable on commission payments made to agents or brokers for their services. For instance, a sales agent working on a commission basis would have TDS applied to their commission earnings.
• Professional fees: Payments made to professionals like doctors, accountants, engineers, or chartered accountants for their services are subject to TDS.
• Technical testing and analysis services: Payments made to laboratories or experts for conducting technical testing and analysis services may attract TDS.

You now know the basics of TDS on professional fees and technical services, including the deduction limits, rates, and timings. But tax computation can still be a challenge for a non-finance person. Why not hire an eCA to handle it for you? Book eCA now and experience a smooth and easy efiling of ITR.

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