Section 194J of Income Tax Act, 1961
Every person other than individual/HUF who are not required to do tax audit in preceding year, who is responsible for paying to a resident any sum by ways of :-
A. Fees for Professional fees or
B. Fees for technical services or
C. Remuneration paid to directors excluding salary (For e.g., sitting fees to attend board meetings, commission etc.)
D. Royalty or
E. Payments in the nature of non-compete fees referred to in clause (va) of section 28 (i.e. any sum paid to not carry on any business or profession or sum paid to not share any technical knowledge or know-how)
Shall be liable to deduct tax on such sum.
Threshold limit for deducting tax under Section 194J:-
Where aggregate amount of such sum is greater than of Rs. 30000 during the year. This is maximum limit which is separately counted for each item. However there is no such threshold limit for payment made to a director. The tax has been deducted no matter how small is the amount.
Time of deduction of TDS under Section 194J:-
The deduction of tax is to be made at the time of:-
At the time of passing such entry in the book of account
At the time of actual payment of the expense
Whichever is earlier.
Rate of deduction of tax under Section 194J:-
1. Payment covered under section 194J shall liable to deduct tax at the rate 10 percent.
2. However, fees for technical services, payment to call centres and royalties where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films shall be subject to deduct tax at the rate 2 percent.
Person not liable to deduct tax under Section 194J:-
1. An individual or a Hindu undivided family is not liable to deduct tax whose total sales, gross receipts or turnover from the business or profession carried out by him not exceed of Rs. one crore rupees in case of business or fifty lakh rupees in case of profession 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.
2. An individual or a Hindu undivided family is not liable to deduct tax on sum pay by way of royalty or non-compete fees even if whose turnover or gross receipts from the business or profession exceed of Rs. one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such sum is credited or paid.
3. No individual or a Hindu undivided family shall not be liable to deduct 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 even if he is subject to tax audit in preceding financial year. This exception is not for technical service or other services.
4. It has been clarified by CBDT that no tax deduct on any fee is paid through regular banking channel by non –residents to the Chartered Accountant, lawyer, advocate, solicitor who is resident of India.
Definitions for purpose of section 194J:-
Professional Service:- “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.
*CBDT notifies by Notification No. 88/2008 dated 21.08.2008 that the services rendered by following persons in relation to the sports activities as “Professional Services” for the purpose of the said section, namely :—
Fees for technical services:- “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”
Royalty:- “royalty” means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains”) for—
(i) the transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
(iva) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;
(v) the transfer of all or any rights (including the granting of a licence) 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 ; or
(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).
Consequences of failure to deduct or late deduction or deducted but not paid:-
If any person responsible for deduction of tax is fail to deduct the whole or any part of the tax or after deduction fail to deposit to the government then he shall be deemed to be an assessee in default under section 220 and 221 and has following consequence:-
Disallowance of a part of expenditure:- 30% of expenditure paid to resident on which tax has been deductible but not deducted or deducted but not paid on or before due date of section 139(1) of the Act shall be disallowed. However these disallowed expenditures shall be allowed in the year in which tax is deducted and paid to the government.
Liable to pay interest:- The deductor shall be liable to pay interest at the rate of 1% of every month or part of the month on the amount of tax he fail to deduct. However, where tax has been deducted but not paid to the government, the deductor shall be liable to pay interest at the rate of 1.5% every month or part of the month on the amount of tax he failed to deposit to the government.
Penalty: When a person is treated assessee is in default under section 221 is liable to pay an amount in addition to the amount of the tax and the amount of interest, by way of penalty, however, the amount of penalty does not exceed the amount of tax. However before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard. Where the assessee has sufficient reason for failure no penalty shall be levied.
However, section 201 of the Income-tax Act provides that a deductor, who fails to deduct tax at source, is not deemed to be in default if the payee has taken into account such sum for computing income in such return of income and has paid the tax due on such declared income. The deductor will have to obtain a certificate to this effect from a Chartered Accountant in Form No. 26A and submit it electronically.
Disclaimer: The views expressed in this article are strictly personal view of the author. Neither the view nor the analysis constitutes a legal opinion and are not intended to be an advice. In case of any doubt please discuss with your consultant.