Criteria to decide whether any service rendered will fall U/s. 194C or 194J: An Analysis

Payment To Contractors – Section 194C

♦ As per Section 194C, Any person responsible for paying any sum to any resident for carrying out any work (including supply of labour for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor 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 –

• one per cent where the payment is being made or credit is being given to an individual or a Hindu undivided family;
• two per cent where the payment is being made or credit is being given to a person other than an individual or a Hindu undivided family,

♦ Here, “work” shall include—

• advertising;
• broadcasting and telecasting including production of programmes for such broadcasting or telecasting;
• carriage of goods or passengers by any mode of transport other than by railways;
• catering;
• manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer,

but does not include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person, other than such customer.

Fees for Professional or Technical Services – Section 194J

♣ As per Section 194J, Any person, not being an individual or a Hindu undivided family (Other than those liable for Audit) , who is responsible for paying to a resident any sum by way of –

(a) fees for professional services, or

(b)

(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 ten per cent of such sum as income-tax on income comprised therein.

♦ Relevant definitions for this section:

Professional Services:

“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;

Technical Services:

As per Explanation 2 to clause (vii) of sub-section (1) of Section 9, fee for technical services means 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 Legislature has not set out with precision as to what would constitute “technical” service to render it “technical service”. The Hon’ble Madras High Court in the case of Skyceli Communications Ltd. 251 ITR 53 (Mad) had an occasion to examine the definition of “fee for technical services” in the context of payment of fees by a cellular/Mobile phone subscriber to the operator of the cellular/mobile phone facility.” The High Court said:

“ The meaning of the word “technical” as given in the New Oxford Dictionary is adjective

1. of or relating to a particular subject, art or craft or its techniques : technical terms (especially of a book or article)

2. requiring special knowledge to be understood : a technical report.

3. of involving, or concerned with applied and industrial sciences : an important technical achievement.

4. resulting from mechanical failure : a technical fault.

5. according to a strict application or interpretation of the law or the rules : the arrest was a technical violation of the treaty.”

♦ Clause (va) of section 28:

Any sum, whether received or receivable, in cash or kind, under an agreement for—

(a) not carrying out any activity in relation to any business; or

(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:

Discussion on Some Clarification by Department

As per Circular No. 715, dated 8-8-1995:

• Question 28: Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable?
• Answer: The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.

• Question 29: Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act?
• Answer: Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.

COURT RULINGS

1. Whether testing and inspection charges come under the purview of section 194J?

• The Pune Bench of Income Tax Appellate Tribunal (ITAT) in the case of Bharat Forge Ltd. v. Addl. CIT [2013] 36 taxmann.com 574 considered this issue on an assessee’s appeal. In this case the CIT(A) had concluded the case against the assessee by treating testing and inspection of material as technical consultancy and the consequent applicability of section 194J. Although it was not denied by the counsel of the assessee that during the course of testing and inspection, technical expertise might have been used, at the same time it was claimed that the charges incurred for the same could not be construed to be fees for professional or technical service so as to bring the same within the purview of section 194J. In addition, it was argued that in order to cover a technical service under section 194J, it is necessary that there must either be acquisition or use of a technical know-how which is provided by a human element. Further, the counsel for the assessee tried to substantiate his claim by relying on the judgment in the case of Glaxosmithkline Pharmaceuticals Ltd. v. ITO [2011] 48 SOT 643/15 taxmann.com 163 by the Pune Bench of the Tribunal in which it was held that for covering any payment as technical services under section 194J, it should be a consideration for acquiring or using technical know-how simpliciter provided or made available by a human element and that if the conditions of section 194J, read with section 9(1), Explanation 2 to clause (vii) which provides for the meaning of “fee for technical services”, are not fulfilled, the liability under this section shall not arise.
• Hence, in the case of Bharat Forge Ltd. (supra), the appeal of the assessee with regard to the tax deduction under section 194C (instead under section 194J) on payment towards the testing and inspection charges was allowed.
• Moreover, the assessee could have referred to the following case laws:

1. Siemens Ltd. v. CIT(Appeals) [2013] 142 ITD 1/30 taxmann.com 200 (Mum.) in which it was concluded that if any person delivers any technical skills or services or makes available any such services through aid of any machine, equipment or any kind of technology, then such rendering of services can be inferred as “technical services”. Furthermore, involvement of human interface with constant human endeavour was insisted upon for the treatment of a service as a technical service. One step ahead, it was also made clear in the said judgment that just because of the fact that certificates were provided by human beings after a test was carried out by automatic machines, the same could not be treated at par with a case where constant human endeavour was there, meaning thereby that the constant involvement of human being was necessary to consider a service as a technical service.

2. CIT v. Bharati Cellular Ltd. [2009] 319 ITR 139/[2008] 175 Taxman 573 (Delhi) – In this case the issue involved was diversion of calls from one cell to the other through towers. In this way it involved usage of towers without the involvement of human intervention. However, this judgment of the Hon’ble Delhi High Court was claimed by the DR to have been set aside by the Apex Court in the case of CIT v. Bharti Cellular Ltd. [2011] 330 ITR 239/[2010] 193 Taxman 97 whereas it was actually remanded by the Apex Court to the Assessing Officer for examination and to find out if any human intervention was involved or not during the process of call communication. Therefore, even the Apex Court had realized the importance of human intervention before the concerned issue could be concluded.

Therefore, it would be appropriate to include testing and inspection charges within the purview of section 194C instead of under section 194J, depending upon the involvement of the human endeavor. In other words, it should not be claimed unconditionally that testing and inspection charges fall under section 194C only, as there may be testing or inspection of a material, etc., which requires the constant involvement of human beings and comparatively lesser usage of machines for providing the service, in which case it will be more appropriate to apply the provisions of section 194J rather than those of section 194C.

2. Which section of Chapter XVIIB is applicable for tax deduction on expenses incurred for the windmill operation and maintenance?

• The Assessing Officer (A.O.) in the case of Bharat Forge Ltd., opined that as the operation and maintenance of windmill, repair and replacement of parts and other related work requires technical skills and knowledge it is covered by section 194J of the Act. On appeal by the assessee, CIT(A) referred to the landmark judgment of the Madras High Court in the case of Skycell Communications Ltd. v. Dy. CIT [2001] 251 ITR 53/119 Taxman 496 in which a clear distinction between a technical and a nontechnical service was made by way of giving a number of examples. Due to the modern era, the increased use of technology in our day-to-day life was highlighted. For example, the facility of transportation, phones, television and internet, etc., all are the result of scientific & technological development, however, by no stretch it can be said that the driver of a cab or bus who is providing transportation facility to a passenger is providing a technical service just because he is controlling the vehicle and monitoring its movement. Similarly, a subscriber to phone is not concerned with the fact that the service provider has installed sophisticated equipment and towers but is willing to get the service desired, i.e., to have airtime, thus, it is not treated as technical service. Similarly, in the case of television, the signals are transmitted to the service receiver by the cable operator but it cannot be said that the service receiver is receiving a technical service due to the fact that technology is applied for the transmission of signals and same is the case of internet.
• CIT(A) referred to the case of Gujarat State Electricity Corpn. Ltd. v. ITO [2004] 3 SOT 468 (Ahd.) wherein similar question of tax deduction under section 194J arose before the Ahmedabad Bench of the ITAT. In that case it was stated that Gujarat State Electricity Corporation Ltd. (GSECL) had entered into an Operation and Maintenance Agreement with Gujarat Electricity Board (GEB), according to which GEB was entrusted with the entire work relating to operation and maintenance of the power project set-up by the GSECL. Although the agreement required providing of skilled and technical services relating to operation and maintenance of plants, but it was GEB only which had to carry out all the necessary activities for the operation and maintenance of the power project and GEB was not going to provide any professional or technical services to the employees of GSECL, so that its employees could discharge the responsibility of the operation and maintenance of the plants. It was also concluded that the payment by GSECL was well covered by the exclusionary part, i.e., “consideration for like project” in the meaning of “fee for technical services” as given in the Explanation 2 to section 9(1)(vii) of the Act. Consequently, it was held that consideration involved for the execution of the agreement cannot be said to be covered by section 194J. Considering this judgment of the Ahmedabad Tribunal in that case, the CIT(A) in the present case held that consideration paid against a comprehensive contract covering annual maintenance, replacement, security and emergency services, etc., is covered by section 194C and not by section 194J. However, the view taken by the CIT(A) was not found to be justified by the revenue and was, therefore, appealed against before the Tribunal, which affirmed the order of the CIT(A) relying on the judgment in the case of Skycell Communications Ltd. (supra).
• Conclusion –The verdict given by the Madras High Court and the views expressed by the concerned Bench in the case of Skycell Communications Ltd. (supra) made it abundantly clear that during the course of providing a service, it is well possible that the service provider may have to use a sophisticated machinery, etc., but merely due to this fact it cannot be said that service provided is a technical one so as to attract the provisions of section 194J. In the same case the increased use of technology was pointed out in the form of TV, Internet and phones, etc. Moreover, none of these is to be treated as a technical service. Similarly, the consideration paid for the windmill operation and maintenance must not be treated as a technical service just because of the fact that the operation and maintenance of windmill, repair and replacement of parts and other related work requires technical skill and knowledge in the absence of the fact that no technical skill or knowledge is provided to the service receiver himself. It is the service provider only who is responsible for carrying out the windmill operation and maintenance. Furthermore, clause by clause reading of the agreement entered into will definitely provide absolute clarity about the nature of service rendered as rightly enumerated in the case of Assam General Sales Tax Act (supra).

Conculusion

Whether the TDS is deductible u/s 194C or 194J depend upon each and every case separately. Hence, each case has to be studied in the light of above discussion.