1. Background:
Finance Act 2020, has reduced withholding tax rates for fees for technical services under Section 194J of the Act to 2 percent from the existing rate of 10 percent. Memorandum to Finance Bill 2020, clarified that this amendment is introduced to reduce existing litigation on account of classification of services under section 194J (tax deductible at 10 percent) and 194C of the Act (tax deductible at 2 percent).
It is pertinent to note that the withholding tax rates are reduced only for technical services with an exception of fees for professional services.
Further, there is no change in the withholding tax rate on royalty (excluding royalty in relation to sale, distribution or exhibition of cinematographic films) which will continue to be deductible at 10 percent. Royalty payable towards sale, distribution or exhibition of cinematographic films shall be subject to withholding tax at 2 percent.
2. Amended provisions of Section 194J of the Income-tax Act, 1961 (‘Act’) and definitions of certain terms contained therein:
2.1 The amended provisions of Section 194J of the Act are as follows –
“(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, or
(c) royalty, 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 [two per cent of such sum in case of fees for technical services (not being a professional services or royalty where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films and ten per cent of such sum in other cases,] as income-tax on income comprised therein.”
2.2 In this regard, the term “professional services” is defined as follows under Explanation (a) to Section 194J of the Act –
“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 notified by the Board for the purposes of section 44AA or of this section;
Please note, the Central Board of Direct Taxes (‘CBDT’) through Notifications from time to time has notified the following professions for the purposes of Section 44AA of the Act.
- Authorised representative;
- Film artist;
- Company Secretary;
- Information technology; and
- Certain sports related professions.
2.3 Further, the term “fees for technical services” is defined to mean the following under Explanation (b) to Section 194J of the Act –
“fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;”
In terms of Explanation 2 to Section 9(1)(vii) of the Act, “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”;”
3. Analysis of definitions “professional services” and “fees for technical services”:
3.1. Professional services –
While considering the nature of activities mentioned in the definition of Professional services it may be said that the services are more intellectual and artistic in nature, and such services are driven at individual capacities, and generally covers the services which are offered by individuals or firm of individuals, the following conditions on careful reading of definition is pertinent to be noted.
As per the requirement of definition,
a. Services rendered by a person;
b. Services rendered in the course of carrying on profession; and
c. Services should fall in any of the specified services.
The above are further analysed in the ensuing paragraphs.
a. Services rendered by a person
In this regard, it needs to be noted that, under Section 2(31) of the Act, “Person” is defined to include inter-alia an individual, HUF, company and firm.
Given the above, aside from the individuals, where the services of the nature specified in Para 1.2. above is provided by a Company, HUF etc. the same would also be covered within the ambit of the definition “Professional services”.
The above analysis is also supported by Delhi High Court ruling in the case of Vipul Medcorp TPA (P.) Ltd v. Central Board of Direct Taxes [2011] 14 taxmann.com 13 (Delhi). Following are the excerpts of the said ruling –
“The term ‘person’ has been defined in section 2(31) to include an individual, HUF company, firm, AOP or BOI, whether incorporated or not, local authority and every artificial person not included in the other expressions. The term ‘person’ is indeed very broad and wide. For the purpose of Explanation (a ) to section 194J, the recipient can be any ‘person’ as defined in section 2(13). The recipient need not be restricted to an individual who carries on medical profession or other professions mentioned in the Explanation. It is not the intention of the parliament to restrict or curtail the scope of Explanation (a) to only payments received by or made to individuals, firms, association of persons, etc. and not to corporate bodies.
In the light of the aforesaid discussion, there can be no doubt that in case payment is made to a recipient for rendering services in course of carrying on medical profession or other professions as stipulated in section 194J deduction of tax at source has to be made and it is immaterial whether the recipient is an individual, firm or an artificial person.” [Emphasis supplied]
Furthermore, the Bombay High Court in the case of Dedicated Health Care Services TPA (India) (P.) Ltd v. Assistant Commissioner of Income-tax [2010] 191 TAXMAN 1 (BOM.) in the context of definition of “professional services” has held as follows –
“While defining the expression ‘professional services’, the Parliament has not defined the expression to mean services rendered by an individual who carries on the legal, medical, engineering or architectural profession or any of the other professions listed in the clause. If the Parliament intended to restrict the ambit of Explanation (a) only to fees received by an individual in discharge of his or her duties as a professional, it was open to the Parliament to use words that would be indicative of that position.” [Emphasis supplied]
Given the above, it can be concluded that, the service provider need not be an individual for the definition of “professional service” to become applicable, it can also be a Company, Firm, HUF etc.
b. Services rendered in the course of carrying on profession
While in a general connotation the “carrying on profession” is largely viewed to be done by an individual / firm, given the wide import of the definition which covers corporates as well within its ambit, it can be said that the corporates may carry on / undertake profession through the employment of qualified professionals within its fold.
The above ratio is supported by Delhi High Court ruling in the case of Vipul Medcorp TPA (P.) Ltd v. Central Board of Direct Taxes [2011] 14 taxmann.com 13 (Delhi). Following are the excerpts of the said ruling –
“The words ‘in the course of carrying on’ do not mean that the person who renders service and is paid, must be a professional. These words signify that services rendered and paid for in the course of carrying on medical profession or other professions as stipulated, are covered and require deduction of TDS under section 194J. The words ‘in the course of carrying on’ are used with the intention to include incidental, ancillary, adjunct or allied services connected with or relatable to medical services. Thus, the sweep and scope of the Explanation is not restricted only to payments made to medical or other professionals, but services rendered in the course of carrying on the stipulated profession. A corporate hospital, therefore, does not carry on profession of medicine. It is not a professional and does not earn professional income but it can be paid fee for services in the course of carrying on professional services. It is not necessary that the person who renders service and is receiving the payment/fee should himself or herself carry on the medical profession or other professions. Explanation ( a) does not stipulate that the services must be rendered by the person concerned himself and not with the help, assistance, employment and engagements of others. What is covered and falls within the ambit of professional services are all services rendered in the course of medical profession or other professions. A corporate hospital offers services in the course of carrying on medical profession by the doctors who are associated with the hospital as consultants or as employees. The said doctors are professionals and income earned by them is professional income but section 194J is attracted not only when professional fee is paid for services rendered by the recipient, but also when income/fee received by the recipient is towards services rendered in the course of carrying on medical profession. Thus, payments/fee for the services specified should be to a person who is a resident and section 194J is not confined to payments to the person who is a professional.” [Emphasis supplied]
c. Services should fall in any of the specified services.
Where the nature of services provided falls within the ambit of list of services captured in Para 2.1 above, this conditionality can be said to have fulfilled. Accordingly, for such services, the withholding tax rate applicable is 10%.
We have also discussed certain specific set of services covered within the ambit of definition of “professional services” such as engineering, technical consultancy and information technology services separately in Para 3.3. below, given the interplay of the same with the definition of “fees for technical services”.
3.2. Fees for technical services (‘FTS’) –
As per the definition of FTS captured in Para 1.3. above, any consideration towards managerial, technical or consultancy services (subject to the exclusion provided therein), is treated as FTS. The terms “managerial”, “technical” and “consultancy” appearing in the definition of “FTS” have not been specifically defined in the Act.
a. Meaning of the term “Managerial services”:
In this regard, it may be noted that the ordinary meaning of the term “management” involves the application of knowledge, skill or expertise in the control or administration of the conduct of a commercial enterprise or organization. Thus, if the management of all or a significant part of an enterprise is contracted out to persons other than the directors, officers or employees of the enterprise, payments made by the enterprise for those management services.
The expression “managerial service” needs to be considered in a commercial parlance. In various judicial precedents[1], the same has been interpreted as follows:
- It signifies service for management of affairs or services rendered in performing management functions.
- It involves controlling, directing or administering the business.
- It means managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in light of the procedures so laid down.
In this regard, it may be noted that, as defined in various judicial precedents managerial services means services in the nature of controlling, directing or administering the business, management of affairs and directed towards the adoption and carrying out the policies of the organization.
Given the above, where any services in the nature as mentioned above is received, the reduced withholding tax rate of 2% shall be applicable in relation to amounts payable towards such services.
b. Meaning of the term “Technical services”:
Given interplay involved for the term “technical services” in FTS definition with certain set of services captured in the definition of “professional services”, we have captured the discussion regarding the same separately in Para 3.3. below.
c. Meaning of the term “Consultancy services”:
Consultancy services of non-technical nature such as consultancy in the area of human resource, business advisory, deals etc., would be covered within this. Any consideration payable towards such services shall be subject to withholding tax at the rate of 2%.
3.3. Conflict between technical consultancy, engineering and information technology services covered under “professional services” definition and “technical services” covered under FTS definition –
Based on the reading of both the definitions and various judicial precedents on the subject of “technical services”, it appears that there is a reasonable amount of muddle in classification of the above-mentioned services between professional services and technical services.
Given this, we have attempted to analyse the meaning of each of the terms mentioned above in conjunction with the overall reading of the respective definitions.
a. “Technical services” in the definition of FTS:
Technical service can include services which may require an application of technical learning. It is relating to a particular subject and may involve application of existing scientific knowledge to practical application such as technology or inventions.
In this regard, the Mumbai Tribunal in the case of E-bay International AG vs ADIT (2012) 25 taxmann.com 500 (Mum) has observed as follows –
“Services are of technical nature when special skills or knowledge or education related to a technical field are required for the provision of such services. A mere use of a standard facility does not result into availing of technical services although such facility has been developed with the usage of technology.” [Emphasis supplied]
Further, the Mumbai Tribunal in the case of Endemol South Africa (Proprietary) Ltd. vs DCIT [2018] 98 taxmann.com 227 (Mum ITAT) while dealing with the term “technical service” has observed the following –
“The term “technical services” takes within its sweep services which would require the expertise in technology or special skill or knowledge relating to the field of technology. As per the concise oxford dictionary, the term technical services means belonging or relating to art, science, profession or occupation involving mechanical arts and applied sciences.” [Emphasis supplied]
b. “Technical consultancy”, “engineering” and “information technology” in the definition of Professional services:
The definition of the term “technical consultancy” is not provided under the provisions of the Act. Given this, we have interpreted the term below considering the dictionary meaning, judicial precedents of the same.
“Technical” would mean any special skills or knowledge or education related to a technical field. It can be relating to applied and industrial science as well.
“Consultancy” would mean consulting or advising on a particular subject. This involves application of human intellect and knowledge for a given case. Delhi High Court in the case of CIT v. Bharti Cellular Limited (ITA 1120/2007) while observing the meaning ascribed to the term “consultancy” in Oxford English Dictionary (Fifth edition), noted as follows –
“the word “consultancy” has been defined in the said Dictionary as “the work or position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action”. It is obvious that the service of consultancy also necessarily entails human intervention.”
Further, Supreme Court in the case of GVK Industries Ltd. v. ITO Civil Appeal No. 7796 of 1997 [2015] 54 taxmann.com 347 (SC) has observed as follows –
“…. we may fruitfully refer to the dictionary meaning of ‘consultation’ in Black’s Law Dictionary, Eighth Edition. The word ‘consultation’ has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interaction that leads to rendering of advice.” [Emphasis supplied]
On a conjunctive reading of the above, it can be said that any advisory in the technical field would be categorised as “technical consultancy” under the definition of “professional services”.
Furthermore, the terms “engineering” and “information technology” are not defined under the provisions of the Act. Going by the commercial / dictionary meaning of the terms, it can be said that
- “engineering” means a branch of science and technology concerned with the design, building, and use of engines, machines, and structures.
- “information technology” is a study or use of systems (especially computers and telecommunications) for storing, retrieving, and sending information.
Given the above, any services involving any application in the above areas would be categorised as “professional services”.
c. Conclusion:
Keeping in mind the analysis covered in Para 3.3. and the analysis of the definition of “professional services” covered in Para 3.1 above, we would like to note the following-
- there is a reasonable amount of overlapping and ambiguity between the meanings of the term “technical services” and “professional services”.
- while it may be said that, largely any technical services involving advisory element can be categorised as “professional services” and any implementation / execution / routine set of services can be categorised as “technical services”, given the ambiguity and lack of guidance on application of the terms “engineering” and “information technology”, it may be difficult to suggest that no implementation / execution / routine nature of services will get covered within the ambit of the definition of “professional services”.
- it is also pertinent to note that, based on the judicial precedents mentioned in Para 3.1. above, the meaning of the term “professional services” is of wide import and can cover various services provided by corporates, partnership firms etc. in the information technology / technical field.
- the Central Government while amending the provisions of Section 194J has not adequately clarified on the intent / issues noted in our analysis above.
- practically, it is very likely that TDS officers during withholding tax proceedings under Section 201 of the Act, may take a view that various payments for technical services are in the nature of professional services and accordingly may seek to charge the higher withholding tax rate of 10 percent.
- there would also be an exposure of disallowance under Section 40(a)(ia) of the Act where the Assessing Officers hold that there is a short deduction of tax on this account.
Considering all of the above, it would be very helpful if further clarity is provided by the Government about the kind of payments which liable for deduction at 2 percent or 10 percent, which will prevent potential litigations in future and undue hardship to the assessees.
[1] J.K (Bombay) Ltd. v/s CBDT [1979] 118 ITR 312 (Delhi HC); Endemol South Africa (Proprietary) Ltd. vs DCIT [2018] 98 taxmann.com 227 (Mum ITAT)
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Very elaborately explained article. You have explained every aspect in detail and accurately.