Section 194J – Taxes on Professional and Technical Services

Section 194J covers the deduction of tax at source on professional or technical services fees. It covers payments made to doctors, engineers, accountants, architects, lawyers, etc.

Let’s take a deeper look at Section 194J and understand all the provisions related to it.

What is Section 194J?

Section 194J of the Indian Income Tax Act pertains to the Tax Deducted at Source (TDS) on professional or technical services fees. ‘Professional services’ typically refers to services provided by professionals like lawyers, doctors, accountants, engineers, architects, interior designers,  etc. ‘Technical services’ usually means services related to developing, using, or transferring technical knowledge or information.

The individual making the payment is responsible for deducting TDS and remitting it to the government within the designated timeframe. This TDS amount is credited to the recipient’s income tax account. Subsequently, the recipient can offset this TDS when they file their income tax return, claiming it as a credit.

Types of Payments covered by Section 194J

TDS should be deducted when the following payments (higher than Rs. 30,000) are made:

• Professional service fees
• Technical service fees
• Remuneration paid to directors except for their salary
• Non-compete fees (fees paid to abstain from conducting any business or profession within specified timeframes and geographical limits or to withhold technical knowledge or expertise).
• Royalty

Meaning of Various Terms

The meaning of the various terms mentioned in Section 194J is as follows:

Professional Services

• It refers to services provided by individuals in professions such as medicine, architecture, law, engineering, accountancy, interior decoration, advertising, technical consultancy, or any other profession recognised by the Board as per Section 44AA.
• Other services accepted under Section 44AA are film artists, company secretaries, and authorised representatives.
• Sportspersons, commentators, anchors, umpires and referees, coaches and trainers, physiotherapists, team physicians, event managers, and sports columnists are also under Section 194J.

The list of Professional Services under Section 194J is as follows:

• Medical Services
• Legal Services
• Architectural Services
• Technical Consultancy Services
• Advertising Services
• Interior Decoration Services
• Accountancy Services
• Engineering Services

Technical Services

• Technical service means providing services that involve technical expertise or expertise in technology.
• It implies an individual who provides services in consultancy, technical expertise, or managerial roles.
• Services like assembly, mining, and construction are not classified as technical services since the income generated from these falls under the recipient’s salary category.

The list of technical services under Section 194J is as follows:

• Consultancy services
• Technical or
• Managerial services

Royalty

Royalty means consideration for the following:

• Transfer of rights or usage of an invention, model, design, trademark, patent, etc.
• Use of patents, inventions, designs, etc.
• Giving any information about the usage of an invention, patent, formula, etc.
• Transfer of rights for scientific findings, literary work, films or videotapes for radio broadcasts but does not include compensation for the sale, exhibition, or distribution of cinematographic films.
• Providing information on technical, industrial, commercial or scientific knowledge, experience or skill.

Non-Compete Fees

Non-compete fees refer to payments, either in cash or kind, made in exchange for an agreement that prohibits individuals from disclosing or utilising licenses, patents, trademarks, franchises, know-how, commercial rights, or other business-related information for processing, manufacturing, or engaging in similar services elsewhere.

Specific Cases Where TDS is Applicable

The specific cases where TDS is applicable under Section 194J, according to the case laws, are as follows:

• Medical services rendered in hospitals.
• Professional fees charged by film artists from advertising agencies.
• The amount given to recruitment agencies and HR consultancy.
• Payments made by companies to share registrars.

Who can Deduct TDS?

All individuals who pay for professional/technical services must deduct TDS. However, the following individuals are not required to deduct TDS:

• HUF/individual involved in business where the preceding fiscal year’s turnover did not surpass Rs.1 crore.
• HUF/individual involved in business where the preceding fiscal year’s turnover did not surpass Rs.50 lakh.

Except for HUF/individuals who didn’t conduct a tax audit the preceding year, all business entities must deduct TDS when making payments for technical or professional services.

Services Under Section 194J

The following services are covered under Section 194J:

• Fees for professional services
• Fees for technical services
• Remuneration or fee or commission given to a director of a company
• Royalty
• Payment given under an agreement to:
• Not engage in any activities related to any business
• Not disclose any trade secrets, patents, copyrights, trademarks, licenses, franchises, or any other similar business or commercial rights, information, or techniques

Threshold Limit to Deduct TDS

The limit for deducting TDS is as follows:

• If technical/ professional services are paid above Rs.30,000 in a financial year.
• The Rs.30,000 threshold limit applies to each payment or item independently.
• There is no threshold limit on remuneration, fees or commission payments. Tax will be deducted even on amounts below Rs.30,000.

Example of Section 194J Applicability

XYZ Ltd. has made the following payments to Mr A:

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

Time Limit for Depositing TDS

The tax deduction should occur when recording the entry in the accounts or disbursing the expense payment, whichever comes first. The time limit to deposit TDS is as follows:

Tax Deduction Rate

The tax deduction rates under Section 194J are as follows:

Applying for TDS at a Lower Rate

Under Section 197, individuals receiving payments can seek a TDS reduction by completing Form 13 and submitting it to the assessing officer. Upon approval, the officer issues a certificate to the individual indicating the reduced TDS amount.

Time Limit to File TDS

After depositing TDS to the government, a quarterly TDS return in form 26Q must also be filed. Its due dates are as follows:

Issuing the TDS Statement

The TDS statement, referred to as Form 16A, is provided by the individual who deducts TDS. Form 16A is given to the deductee. The following are the due dates for issuing the TDS certificate:

Example of TDS on Professional and Technical Services

The examples of TDS on professional and technical services are as follows:

• Consultancy fees: TDS applies to a consultant’s payments for professional advice or services. For example, marketing, legal, or financial consultants may receive payments subject to TDS.
• Legal fees: TDS applies to any payment to lawyers or law firms for legal services. This includes fees for legal advice, drafting agreements, court representation, etc.
• Technical services: TDS applies to payments to engineers, architects, IT professionals, or other technical service providers. For instance, a software developer brought on for a specific project would be subject to TDS on their payments.
• Royalty payments: TDS applies to any royalty payments to use intellectual property, such as patents, copyrights, or trademarks. This includes payments to authors, musicians, artists, and other creators for the use of their work.
• Commission payments: TDS is applicable on commission payments to agents or brokers for their services. For instance, a sales agent working on a commission basis would be subject to TDS on commission earnings.
• Professional fees: Payments made to professionals like doctors, accountants, engineers, or chartered accountants are also subject to TDS.
• Technical testing and analysis services: Payments to laboratories or experts to conduct technical testing and analysis services also attract TDS.

For Example:

A Badminton Club has hired Mr Pawan, an Indian resident, as a coach at a remuneration of Rs. 12 lakhs p.a. Is the club liable to deduct TDS from such payment?

Services provided by coaches for sports activities are notified as professional services under section 194J. Also, the amount of remuneration is more than Rs. 30,000. Therefore, the Badminton Club must deduct TDS from the payment to the Coach, Mr Pawan.

When is Section 194J Not Applicable?

Section 194J is not applicable when:

• If an individual or HUF makes the payment for personal purposes.
• If there is a payment made to a non-resident contractor or sub-contractor.
• If the payment amount (at one time or in total during the financial year) does not exceed Rs. 30,000.
• If there is no deduction for TDS by individual\HUF on royalty and non-compete fees (even if commercial).

Special Considerations by CBDT Circular on Section 194J Applicability

CBDT has made the following special announcements relating to the implications of section 194J:

Routine maintenance contracts

Payments for routine maintenance contracts, including spare parts supply, are subject to TDS as per Section 194C. However, if the payment pertains to technical services, Section 194J becomes relevant for TDS.

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 commission payment from a media outlet, such as TimesNow, to an advertising agency, like FoxyMoron, is subject to TDS as per Section 194J.

Consequences of Late/Non-Deduction of TDS

Failure to deduct TDS or late deduction of TDS has the following consequences:

1. Disallowance of expenses: In the year the expenditure is claimed and reflected in the profit and loss account, 30% of that amount will be disallowed. Nevertheless, this 30% disallowance will be reinstated in the year when the TDS is remitted to the government.
2. Levy of interest until the date of payment: If there is a delay in the tax payment, interest must be paid to the government along with the TDS. The rate of interest depends on:
   1. When no deduction of tax has been made: Interest is payable at 1% per month from the date TDS was to be deducted up to the date of actual deduction.
   2. When tax has been deducted but not paid to the government: Interest is payable at 1.5% per month from the date TDS was deducted up to the date of payment to the government.

Frequently Asked Questions about Section 194J