Difference between Professional & technical services | Section 194J

Difference between Professional & technical services in the preview of section 194J of Income tax act, 1961

Section 194J of Income tax act, 1961 speaks about the applicability of TDS provisions on Professional and Technical services. Before understanding the difference between both these services, below is key highlights of this section 194J.

Applicability – This section is applicable on below trans:

1. Professional services fees

2. Technical services fees           

3. Remuneration paid to directors excluding salary

4. Royalty

5. Payment in the nature of non-compete fees e.g., fees paid to not share know how etc.  

Threshold limit – TDS has to be deducted in case the payment is greater than Rs.30K during the year. ( There is no such limit for payment made to a director).

Rate of deduction of TDS – Any payment covered under this section shall be subject to the TDS at the rate. 

1. 2% in case of technical services w.e.f. 1st April 2020

2. 10% in case of all other services covered under this section

So as mentioned above this section is providing two different rates for Technical and professional services. New rate of 2% has been introduced by the CBDT with effect from 1st April 2020. 

Here very interesting question arise that what is the difference between professional and technical services. So let us discuss:

Definition of both Professional and technical services is given in Income tax act as mentioned below: 

“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

“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”.

Let us discuss one case study:– Ram & Krishna enterprises is a grocery company. This is a fast growing company so seeing the market need and opportunity, management decided to expand the business. Management has decided below action plans for FY 20-21.

1. Construct infrastructure to manufacture & store the products

2. Implementation of customized software / ERP 

3. Feasibility study of owned vs hired logistics

Management has appointed M/s PMC & associates to design the construction layout to construct the building. They also appointed M/s F&S associates to design and implement an ERP solution for their all activities including procurement, manufacturing, sales, accounts payable and receivables etc.,

Purchase order has been raised for both the above services and the same is submitted to the finance team to release the advance payment as per the PO terms.

Since both the activities are falling under section 194 J hence Finance manager has to deduct the TDS as per the prevailing rates. Now here question comes that whether both the services are covered under the professional services. Whether TDS will be deducted @ 10% or 2%.

Prima facie, it is appearing that both the services are falling under the definition of professional services and TDS has to be deducted @10%. These confusions we face in our regular services during consultancy or Job.

In case of design service, vendor has to give the design layout, which can be finished with his professional knowledge hence finance manager has to deduct TDS @10%. Whereas customized software/ERP design & implementation is a technical service as the same involve following step : 1) gathering of the requirement from end users, 2) Solution design, 3) Development or customization of ERP software, 4) Implementation of the software throughout all the branches of PMC & associates. Hence the same will be covered under the technical service and as per our opinion TDS can be deducted @ 2% under section 194J.

More examples of Professional and technical services:

Professional services – Services of doctors, chartered accountants, tax consultancy services, project monitoring services etc.

Technical services –  Computer development software, Bio technical services, geological and scientific services etc.

Guidance note issues by ICAI on royalty and technical service is recommended from exams perspective.