Section 194 J – TDS on a fee for Technical or Professional Services

The two most common sections where TDS deduction is required are 194 J and 194C. Since this blog post is related to 194J so, we are going to analyze the provisions mentioned under the Income-tax Act of 1961.  Further, we will understand the practical implications of TDS under Section 194J.

 Nature of payments covered under Section – 194 J

A person other than an individual or Hindu undivided family, who is responsible for paying to a resident any sum by way of,

1. Fees for professional services
2. Fees for technical services
3. Any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under Section 192, to a director of the company, or
4. Royalty
5. Payment in relation to non-compete fees for instance, not carrying out any activity or not sharing any business and know-how, patent, copyright, trademark, license, franchise, or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten percent of such sum as income-tax on income comprised therein.

We have read the provision under Section 194J above. Now, we are going to analyze the above provision and its implications.

Who all are covered under Section 194 J?

A person other than an Individual or Hindu Undivided family is covered under this section, for instance, a company whether private or public is covered under this section.  Now the question comes, whether individual or Hindu Undivided Family (HUF) will ever be covered under the scope of this Section.

The answer to it is ‘Yes’ they will be covered, When the total sales, gross receipts, or turnover from the business or profession carried on by Individuals or HUFs will exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such sum by way of fees for professional services or technical services is credited or paid, shall be liable to deduct income-tax under this section.

Moving further, when the individual who falls under clause (a) or clause (b) of Section 44AB would be required to deduct TDS under Section 194J.

Section 44 AB Clause (a): A person whose gross receipts, turnover, and sales exceed one crore rupees in any previous year. Further, if aggregate payments and receipts in the previous year in cash do not exceed five percent of the amount, then the limit of one crore rupees would extend to five crore rupees.

Section 44 AB Clause (b): A person carrying on a profession like Doctor, or Lawyer whose gross receipts in profession exceeds fifty lakhs in any previous year.

Concluding from above, individuals or HUFs who will fall under Clause (a) and (b), will undergo an audit of accounts (Tax Audit) and would be required to deduct TDS under Section 194J.

What if payment made by Individual or HUFs is for personal purpose?

No individual or a Hindu undivided family will be required to deduct TDS on the payment made by way of fees for professional services in case such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family. It is to be noted, for personal purpose, professional services has been exempted.

Now, moving further and examining the nature of payments mentioned in Section 194J.

Meaning of various terms

Fees for professional services

It means the service provided by the person in carrying on legal, medical, engineering  or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising and other persons notified in Official Gazette by CBDT under Section 44AA of Income Tax Act of 1961.

Other professions notified by CBDT includes film artist, company secretary, authorized representative.

Professional services also include Anchors, Commentators, Event Managers, Physiotherapist, Referee and Umpires, Sports persons, Sports Columnist, Training and Coaches.

‘Fees for technical services’ or List of technical services covered under Section 194J

Fees for technical services means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision 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 which would be income of the recipient chargeable under the head” Salaries”

Going by the meaning provided, technical services means services by experts in the field of technology and managerial services would include management & operational services provided.  While consultancy can be in any form in managing day to day affairs of business.

Royalty

Royalty has been defined under Section 9 of Income tax act of 1961 as under. It includes the following payments made for.

1. Transfer of all or any rights (including granting license) for use of a patent, invention, model, design, secret formula or process or trade mark or similar property.
2. Providing  information for working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property.
3. Use of any patent, invention, model, design, secret formula or process or trade mark or similar property.
4. Providing information for technical, industrial, commercial or scientific knowledge, experience or skill.
5. Transfer of all or any rights (including the granting of a license) 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.

Remuneration other than those payable under Section 192

Any payment made to the resident other than payment covered under Section 192 (Salary) would fall under this criteria.

Non compete fees

Non compete fees basically means any payment made in cash or kind under an agreement for not carrying out any activity in relation to any business or not showing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services.  The definition of ‘agreement’ has been provided under Section 28 of Income tax act, 1961 which can read along with above.

What is TDS rate under Section 194J?

Finance Bill of 2020  amended section 194 J and modified the TDS deduction rates.

TDS will be deducted at the rate of 2% in case fees for technical services (not being professional services) and for professional services, TDS would be deducted at the rate of 10% and in all other payments, TDS would be deducted at the rate of ten percent. Further, TDS would be deducted at the rate of 2% for payment made for royalty for sale, distribution or exhibition of cinematographic films.

Finance bill of 2017 amended Section Section 194 J and modified TDS Deduction rates as follows.

In case, payee is engaged in the business of operating a call center, TDS would be deducted at the rate of two percent.

What is Section 194JA & Section 194JB?

After Finance Act, 2020 bifurcated TDS into technical services and professional services. Two different rates of 2% and 10% existed under Section 194J. So, TDS utility divided the Section 194J into two parts i.e. Section 194 JA and Section 194 JB.

Section 194 JA: TDS deducted at the rate of two percent for fees for technical services, call centers and royalty paid for sale, distribution or exhibition of cinematographic films,

Section 194 JB: TDS deducted at the rate of ten percent for fees for professional services and Royalty except covered above.

Threshold Limit for deduction of TDS under 194J

No deduction of TDS shall be made, in case the aggregate of amount of such credited or paid or likely to be credited or paid during the financial year does not exceed the following limits.

Nature of Service	Limit prescribed
Fees for professional services	INR 30,000
Fees for technical services	INR 30,000
Royalty	INR 30,000
Non compete fees	INR 30,000

The limit is to be constituted individually for each of categories. It should not be taken in aggregate. For instance, if ABC Limited paid INR 15,000 for professional services and INR 19,000 for technical services. TDS is not required to be deducted, because individual limit threshold of INR 30,000 has not been exceeded.

However, no limit has been prescribed under the Act for remuneration, fees or commission. Hence, TDS would be deducted even if payment made is less than INR 30,000.

Time of deduction of TDS under Section 194J

Tax deducted at source (TDS) under Section 194J shall be deducted at the earliest of the following.

• Credit of such amount to payee account.
• Payment of such amount via cash, cheque, draft or any other medium.

It is to be noted that credit of such amount means passing the entry in books of accounts. Also, note,  where any sum payable is credited (recorded) in any account ‘whether suspense account’, provision of this section shall apply and TDS deduction should have been made at time.

How to calculate TDS on professional services under 194J?

Moving forward with an example, Suppose ABC Limited received services of INR 1,00,000 from PQR Limited. Now, we will go step by step and understand how will TDS liability will be determined.

Step 1:  ABC Limited is not an Individual or HUF, So Section 194J is applicable.

Step 2: Whether the payment exceeds INR 30,000. Yes the payment exceeds the threshold limits provided under Section 194J. Hence, TDS would be deducted.

Step 3: Invoice recorded in books on 02-September and payment made to PQR Limited on 05-October. So, TDS liability would arise on the earliest of the above dates that is 02-Sep.

Step 4: Since, its professional services. TDS would be deducted at the rate of 10%.

Step 5: TDS deducted at 10% of INR 1,00,000 i.e. INR 10,000 and net amount INR 90,000 would be paid to PQR limited and INR 10,000 would be paid to government.

Moving further, how TDS would be paid to government. TDS is paid to government via Challans and due date of depositing Challans is seventh of next month. Say, on 02-September we deducted TDS of INR 10,000 in above example which shall be paid to government by 07th of October. Further, TDS return would be filed incorporating all such challans paid.

Practical illustrations for Section 194J

Example 1: Mr. A has received professional services amounting to INR 1,20,000 from ABC Limited fir business purpose. Mr. A is running a business and his total turnover exceeds INR 5 crores. Whether TDS would be required to be deducted?

TDS would be required to be deducted since, Mr. A although being an individual is having turnover exceeding the threshold prescribed under Section 44AB. Hence, the TDS would be required to be deducted at the rate of ten percent.

What if the services received are for personal purpose?

In case, services received by Mr. A from ABC limited are for personal purpose. TDS would not be required to be deducted.

Example 2:  ABC Limited received technical services from a company based in United Kingdom for GBP 5,000. Whether TDS would be required to be deducted under Section 194J?

No, TDS would not be required to be deducted under Section 194J. Since, Section 194J is applicable for residents not for entities based outside India i.e. Non residents. TDS provisions for non residents shall apply here.

Example 3:  DEF Limited received services of INR 15,000 from a legal firm based in Mumbai in Sep-22 and on Nov-22, further services amounting to INR 50,000 were received from that legal firm. When will Section 194J apply?

DEF Limited will not TDS under Section 194J in the month of Sep-22, as INR 15,000 is less than the threshold limit prescribed under Section 194J. When services are received in the month of Nov-22, TDS would be deducted at the rate of ten percent on INR 65,000 (INR 15,000 and INR 50,000).  It is to be noted aggregate of services received during the financial year is taken to calculate the limit under Section 194J.