Section 194 J :TDS on Fees for Professional or Technical Services

Fees for professional or technical services.

^88a194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

(a)  fees for professional services, or

(b)  fees for technical services [or]

       (ba)  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 a company {Inserted by the Finance Act, 2012, w.e.f. 1-7-2012}, or

   (c)  royalty { Inserted by the Taxation Laws (Amendment) Act, 2006, w.e.f. 13-7-2006.}, or

(d)  any sum referred to in clause (va) of section 28,]

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 issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to ten per cent   of such sum as income-tax on income comprised therein :

Provided that no deduction shall be made under this section—

(A)  from any sums as aforesaid credited or paid before the 1st day of July, 1995; or

(B)  where the amount of such sum or, as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed—

 (i)  ⁹³[thirty thousand rupees], in the case of fees for professional services referred to in clause (a), or

(ii)  ⁹³[thirty thousand rupees], in the case of fees for technical services referred to in ⁹⁴[clause (b), or]

⁹⁵[(iii)  ⁹³[thirty thousand rupees], in the case of royalty referred to in clause (c), or

(iv)  ⁹³[thirty thousand rupees], in the case of sum referred to in clause (d) :]

⁹⁶[Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him 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 :]

⁹⁷[Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income-tax on the sum 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.]

(2) ⁹⁸[***]

(3) ⁹⁸[***]

Explanation.—For the purposes of this section,—

(a)  "professional services" means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising or such other profession as is notified⁹⁹ by the Board for the purposes of section 44AA or of this section;

(b)  "fees for technical services" shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

¹[(ba)  "royalty" shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;]

(c)  where any sum referred to in sub-section (1) is credited to any account, whether called "suspense account" or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.

Note 88:  see Rules : 28, 28AA, 28AB, 30, 31, 31A, 31AB and 37BA and Form Nos. 13, 16A, 24G, 26AS, 26B, 26Q and 27A.

Note 88a:  see  Circular No. 714, dated 3-8-1995, Circular No. 715, dated 8-8-1995, Circular No. 716, dated 9-8-1995, Circular No. 720, dated 30-8-1995, Circular No. 726, dated 18-10-1995, Circular No. 766, dated 24-4-1998, Letter F.No. 275/73/2007-IT(B), dated 30-6-2008 and Circular No. 8/2009, dated 24-11-2009

Note 93: Substituted for "twenty thousand rupees" by the Finance Act, 2010, w.e.f. 1-7-2010

Note 95: Inserted by the Taxation Laws (Amendment) Act, 2006, w.e.f. 13-7-2006.

Note 96 :  Inserted by the Finance Act, 2002, w.e.f. 1-6-2002.

Note 97:  Inserted by the Finance Act, 2003, w.e.f. 1-6-2003.

Note 98:  Omitted by the Finance Act, 2003, w.e.f. 1-6-2003. Prior to their omission, sub-sections (2) and (3) read as under :

"(2) Where the Assessing Officer is satisfied that the total income of any person in receipt of the sum referred to in sub-section (1) justifies the deduction of income-tax at any lower rate or no deduction of income-tax, as the case may be, the Assessing Officer shall, on an application made by that person in this behalf, give to him such certificate as may be appropriate.

(3) Where any such certificate is given, the person responsible for paying the sum referred to in sub-section (1) shall, until such certificate is cancelled by the Assessing Officer, deduct income-tax at the rates specified in such certificate or deduct no tax, as the case may be."

Note 1    Inserted by the Taxation Laws (Amendment) Act, 2006, w.e.f. 13-7-2006.

Q Whether expenses incurred on training and seminars fall under the category of professional services?

Answer In the case of Bharat Forge Ltd. v. Addl. CIT [2013] 36 taxmann.com 574 it was observed that the assessee had made payment to the various entities including CII for attending the training and seminar by its employees. Also, such payments included reimbursements of lunch, banquet and other expenses. Such training was being provided by the experts in the various fields having professional knowledge to the employees of the assessee-company for the intended benefit to be derived out of latest developments. It was claimed by the learned counsel for the assessee that no technical or professional services were rendered and, hence, the provisions of section 194J were not attracted. The Tribunal, after analyzing the facts of the case, opined that the payment made by the assessee-company to various entities and reputed institutes for attending the training and seminars by its employees could not be considered as payment made against rendering the professional services by those entities and institutes and, accordingly, could not be brought within the purview of section 194J by deliberately enhancing the territory of that section.

Conclusion - It is often said that where technical knowledge or skills are provided by one person to another, the provisions of section 194J are to be followed. In order to bring a service within the ambit of section 194J either as a professional or technical service, a service as such should be provided. Applying the explanation stating the meaning of "professional services" as reproduced above, in case the services rendered come within the boundary of such an explanation, the same shall be chargeable to tax under section194J as a professional service. As far as technical services are concerned, the meaning of "fee for technical services" is provided under the Explanation 2 to clause (vii) of sub-section (1) of section 9, which includes managerial, technical or consultancy services. As the expression "managerial, technical or consultancy services" is very wide, the scope of section 194J increases manifold which increases the possibility of litigation. So, it is always in the best interests of the assessee to clearly provide the nature of services being rendered in order to justify the non-applicability of section 194J.

Q What is the Definition of Fees for Technical Services  ?

Answer : As per Explanation 2 to section 9(1)(vii) 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"

The Act is silent on the meaning of these three terms “rendering of any managerial, technical or consultancy services”.

Mumbai Income Tax Appellate Tribunal ('Tribunal') had an opportunity to discuss the meaning of these terms in TUV Bayren (India) Ltd. v. Dy. CIT [2012] 23 taxmann.com 127/53 SOT 56 (Mum.)(URO). The question before the tribunal was about the taxability of consideration paid for ISO Certification. Tribunal observed that, "Technical services require expertise in technology and providing the client such technical expertise…Managerial services is used in the context of running and management of the business of the client…Consultancy is to be understood as advisory services wherein necessary advice and consultation is given to its clients for the purpose of client's business." 

In construing the three terms Courts have curtailed the generic nature of 'managerial, technical and consultancy services'. One such restriction is the involvement of 'human intervention' as a criterion for determining an income/payment as FTS. Supreme Court upheld the judgment of the Delhi High Court in CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139/[2008] 175 Taxman 573, where the High Court relying on the rule of Noscitur a Socii ( Latin term means that the meaning of a word may be known from accompanying words) concluded that 'technical services' are to be understood in the narrower sense as circumscribed by the expressions 'managerial service' and 'consultancy service'. High Court observed that, "Since both managerial and consultancy services, by their very nature, involve a human element, the technical services which are relevant for the purpose of section 194J would be those technical services which involve human interface/element

In the case of  Siemens Ltd. v. CIT [2013] 142 ITD 1/30 taxmann.com 200 (Mum.) while determining the nature of payments made to a German resident for rendering of testing services in relation to circuit breakers, Mumbai Tribunal followed Supreme Court's decision in Bharti Cellular Ltd. (supra) and held that human involvement in such testing services was 'not much'⁷(the processes were automated and carried out by machines). Accordingly, the testing services could not be regarded as technical services. In Tribunal's view the extent/degree of human involvement in rendering a service was material in determining the character of a payment as FTS.

Q: When the Annual Maintenance Contract (AMC) of Machines is given whether the TDS is to be deducted u/s 194C (Payments to contractor) or a94J (Fees for Professional/Technical Services)

Answer In Kandla Port Trust v. Dy. CIT [2011] 16 taxmann.com 273 (Rajkot) the assessee deployed heavy cranes, weigh bridge and, elevator for carrying out its operations. It awarded contracts for repair and maintenance of these machineries. The assessee deducted tax at source under section 194C while making payment to contractors as per maintenance contract. The revenue claimed that the sum so paid was for technical service and, hence, tax deduction must be at the rate prescribed in section 194-J.

The Tribunal interpreted Explanation 2 to section 9(1)(vii) and held that fee for technical services include payment made for services such as (i) managerial; (ii) technical and consultancy services; and (iii) provision of services of technical or other personnel. Fee for technical services does not include (i) construction; (ii) assembly; and (iii) mining or like project.

It was held that the AMC between the assessee and the contractor was that the contractor must carry out all repairs as per detailed description in the agreement. It held that contracts were not in the nature of managerial or technical or consultancy services. The agreements were related to annual maintenance of machinery and not for technical service. The technical service may have been availed by the contractor in the course of discharging its contract to the assessee but the assessee had not made the payment for such contract. Accordingly, it held that payment for annual maintenance of machineries will not fall within section 194J  of the Act.

Q : When the Hopsital engaged the doctors as consultants , whether the  TDS is to be deducted u/s 192 (Salary) or u/s 194 J ?

Answer: Where assessee-hospital made payments to doctors engaged as consultants, in view of fact that doctors were not precluded from pursuing professional pursuits elsewhere and, moreover, once doctors achieved some seniority and standing, their remuneration was fixed as a percentage of fees collected from patients consulting them, there existed a contract for service between parties and, therefore, assessee was justified in deducting tax at source under section 194J while making payments to consultant doctors [2014] 48 taxmann.com 88 (Hyderabad - Trib.) IN THE ITAT HYDERABAD BENCH 'A' Deputy Commissioner of Income-tax 15(2), Hyderabad v Quality Care India Ltd.

Q Whether the  Channel placement fee paid by assessee to cable TV operator/DTH Provider could be regarded as royalty and hence TDS to be deducted u/s 194J ?

Answer Channel placement fee paid by assessee to cable TV operator/DTH provider could not be regarded as royalty in terms of Explanation 2 to section 9(1)(vi)  [2014] 48 taxmann.com 149 (Mumbai - Trib.)

IN THE ITAT MUMBAI BENCH 'K' Assistant Commissioner of Income-tax, 11(1), Mumbai v. NGC Networks (I) (P.) Ltd.

Q Whether the Payments made to the Film Actor for acting as model for promotion of a particular product is covered under section 194J  and TDS is liable to be deducted on such payment?

Answer : Section 194J of the Income-tax Act, 1961 - Deduction of tax at source - Fees for technical or professional services [Models] - Assessment year 2007-08 - Whether taxable receipts under section 194J are services-specific and not person specific - Held, yes - Whether payments made for services of modelling are unconnected with production of cinematographic film, and, thus, said payments are not covered by provisions of section 194J - Held, yes [In favour of assessee]

 [2013] 32 taxmann.com 88 (Mumbai - Trib.) IN THE ITAT MUMBAI BENCH 'A'

Kodak India (P.) Ltd. v. Deputy Commissioner of Income-tax*