Section 194J – TDS on Payment for Professional or Technical Services

TDS Section 194J is seeing renewed attention after the passage of Finance Bill 2020, which includes amendments to Section 194J that took effect on April 1, 2020. Section 194J TDS of the Income Tax Act of 1961 contains rules for deducting TDS on payments for scientific and skilled services.

This article was written to keep you informed about the updates and to give you a comprehensive rundown of Section 194J under TDS. You’ll also find detail on the applicability, TDS rate under Section 194J, and much more here.

Types of Payments in 194J

• TDS on professional fees
• Fee for technical services
• Remuneration paid to directors 
• Royalty
• Payments in the nature of non-compete fees

Amendments in TDS Section 194J 

TDS will be withdrawn at a rate of 2% in the case of payments for specialized services (not being skilled services) and up to 10% in all other cases under Section 194J.

Individuals or HUFs whose net revenue, gross earnings, or turnover from their company or career surpass Rs 1 crore in the case of a business or Rs 50 lacs in the case of a profession during the Financial year immediately preceding the FY in which such interest is charged or charged are required to deduct TDS. Where Section 44AB has been used, monetary caps would be used instead.

Who is Liable to Deduct TDS?

Everyone liable to make the following payments to any resident, except an employee or a HUF, is required to deduct TDS under Section 194J:

• Fees for specialized and engineering assistance, where applicable.
• Any remuneration, fees, commissions, or whatever name is given to a director of a corporation that is not a payment that is tax-exempt under Section 192 or a Royalty.
• Fees for non-competition under section 28 (VA).

Section 194J of the Income Tax Act TDS rate.

For services specified under section 194J of the Income Tax Act, the following rate applies:

Payments that are Protected by Section 194J

When making the following payments to a citizen in a fiscal year (over Rs.30,000), a person can subtract TDS at a rate of 10%:

• The sum is paid as a premium for professional services.
• Amount paid as a business fee for technical assistance
• Non-compete charge under Section 28(VA) of the Income Tax Act Royalty

Professional Services

It refers to the services provided by someone who works in the medical, architecture, civil, medical, or engineering fields. Accountancy, interior design, advertisement, professional consulting, and any other occupation recognized by the Board under Section 44AA are examples of other facilities.

Film writers, company clerks, and authorized delegates are among the other resources approved under Section 44AA.

It also includes athletes, program organizers, reporters, anchors, umpires and judges, coaches and assistants, physiotherapists, staff doctors, and sports columnists.

Technical Services

It refers to the consulting, technological, or managerial services provided by an employee.

Assemblies, mining, and manufacturing are not considered professional facilities since the money earned falls under the recipient’s head wage.

Non-Compete Fees 

For Section 194J, non-compete fees refer to the payment paid in cash or kind in exchange for an arrangement prohibiting the individual from exchanging any patent, license, contract, trademark, know-how, commercial or business rights, technique, or information that may be used anywhere for manufacturing, production, or any other provisional operation.

Royalty

For this section, royalty refers to payment in exchange for:

• Transfer in ownership of a patent, an invention, a magic formula, a blueprint, a concept, or a trademark.
• Making use of an invention, a blueprint, a patent, and so forth.
• Sharing all details about the use of an invention, copyright, algorithm, or another similar item.
• Equipment is used or has the right to be used for agricultural, research, or commercial purposes.
• Transfer of rights to published works, experimental discoveries, documentaries, or videotapes for radio broadcasting, with little allowance for their sale, presentation, or dissemination.

Specific Cases

TDS deduction is also available under Section 194J in the following cases, as determined by the department’s case laws and circulars:

• In hospitals, medical services are given.
• Film artists owe publicity companies professional fees.
• Amount paid to management firms and HR consulting firms.
• Companies pay registrars to exchange their data.

Consequences of Non-deduction or Late Deduction

Below are the repercussions of failing to deduct TDS or failing to pay TDS to the income tax authorities after it has been deducted:

Disallowance of Expenditure

• When measuring benefit or expense in the year in which the cost is claimed, 30% of the expenditure would be disallowed.
• In the year in which TDS is withheld and billed to the income tax authority, the disallowed spending will be recovered.

Interest on Deduction Failure

• Failure to Deduct TDS: 1% per month/part of a month from the day such tax was supposed to be deducted before the date of actual deduction.
• Failure to Pay or Deposit TDS- The taxpayer refused to pay or deposit the withheld TDS to the income tax department after it was deducted. From the day on which the tax was withheld before the date of payment to the state, the interest rate will be 1.5% a month/part of the month.

Relevant Case Laws

1. Commissioner Of Income Tax vs Bharti Cellular Ltd on 31 October, 2008

Facts of the case

1. Parties Involved: The case involved the Commissioner of Income Tax (CIT) as the appellant and Bharti Cellular Ltd, a telecom service provider, as the respondent.
2. Nature of the Dispute: Bharti Cellular Ltd was making payments to various other telecom service providers for interconnection and access services. These payments were made to ensure seamless connectivity between different telecom networks, allowing customers to communicate across networks.
3. Position of the Income Tax Department: The CIT argued that the payments made by Bharti Cellular Ltd for interconnection and access charges should be classified as “fees for technical services” under Section 194J of the Income Tax Act, 1961. According to the department, if these payments fell under “fees for technical services,” Bharti Cellular Ltd was obligated to deduct tax at source (TDS) on such payments.
4. Bharti Cellular Ltd’s Argument: Bharti Cellular Ltd contended that the interconnection and access services did not involve any “technical services” as defined under the Act because there was no human intervention involved in the provision of these services. The company argued that the services were automated, involving technical equipment and systems without human involvement in the actual execution of the connectivity.

Conclusion

The Delhi High Court ruled in favor of Bharti Cellular Ltd, with the following key conclusions:

1. Definition of “Technical Services”: The Court held that for a service to qualify as a “technical service” under Section 194J, it must involve human intervention. The interconnection and access services provided between telecom operators were automated and did not involve human expertise or intervention in their execution.
2. Nature of the Services: Since the interconnection and access facilities operated automatically once established, they could not be classified as “technical services” under the Income Tax Act. As a result, the payments for these services were not subject to TDS under Section 194J.
3. Outcome: The Court ruled that the payments made by Bharti Cellular Ltd for interconnection and access charges did not constitute “fees for technical services” and therefore did not attract TDS obligations.

This judgment set a precedent for interpreting “technical services” in tax law, emphasizing the necessity of human involvement in determining whether a service qualifies as “technical.”

2. The Sonata Information Technology Ltd v. CIT (2012)

The case Sonata Information Technology Ltd. v. Commissioner of Income Tax (CIT) (2012) dealt with the applicability of tax deduction at source (TDS) on payments made for software purchases and whether such payments should be treated as “royalty” under the Income Tax Act, 1961.

Facts Of the Case:

1. Parties Involved: Sonata Information Technology Ltd., an Indian company engaged in the trading of software, was the appellant, while the Commissioner of Income Tax was the respondent.
2. Nature of the Transactions: Sonata purchased software from both foreign and domestic suppliers and then resold the software to end-users in India. The software included packaged or shrink-wrapped software products used by customers.
3. Issue Raised by the Tax Department: The Income Tax Department contended that payments made by Sonata for the purchase of software constituted “royalty” as defined under Section 9(1)(vi) of the Income Tax Act and Article 12 of the Double Taxation Avoidance Agreement (DTAA). Consequently, Sonata was required to deduct TDS on such payments made to the foreign software suppliers.
4. Sonata’s Argument: The company argued that it was merely purchasing software for resale purposes and not acquiring any copyright over the software. Therefore, the payments should not be considered “royalty” since the transactions did not involve the transfer of any rights to use the copyright in the software. Sonata claimed that it was acquiring a copyrighted article (the software) rather than any copyright itself.

Conclusion :

The Karnataka High Court ruled against Sonata Information Technology Ltd., with the following key conclusions:

1. Characterization of the Payments as “Royalty”: The Court held that payments for the purchase of software, whether from foreign or domestic suppliers, qualified as “royalty.” This was because the end-user was granted a license to use the software, which amounted to the use or right to use copyright associated with the software.
2. Obligation to Deduct TDS: As the payments were considered “royalty,” Sonata was required to deduct TDS on such payments made to the foreign suppliers under Section 195 of the Income Tax Act. The Court observed that the license to use the software implied a transfer of some rights, even if limited, in the copyright.
3. Distinction from Copyrighted Articles: The Court rejected the argument that the software should be treated as a mere copyrighted article. It held that even a limited right to use software for its intended purpose involved a payment for the use of the copyright, thereby constituting “royalty.”

Significance:

The ruling clarified the tax treatment of payments for software transactions, setting a precedent that payments for software licenses are considered “royalty” under Indian tax law. This judgment influenced subsequent cases on the taxation of software and the applicability of TDS on cross-border payments for software licenses.

The decision was also significant in determining the tax implications for companies dealing with software, particularly those involved in importing software from foreign vendors.