For financial year 2020-21 (PY 2020-21 / AY 2021-22), the Finance Act, 2020 seems to have created few issues by unsettling some sections which were very well otherwise settled. In an attempt to cover revenue leakage, abolishing tax-evasion methods and to make law simpler – seeds of confusion and lack of clarity have been roped which may grow into plant of long-lasting disputes between tax payers and tax authority. Amendments in section 6 and under various TDS provisions are few examples which have unnerved tax professionals.

Taking spot to section 194J (applicable for resident payee), before the amendment, rate of TDS was 10 % for every transactions specified therein including fees for professional services (FPS) & fees for technical services (FTS) other than any credit given or payment made to person engaged only in Call Centre business. In view of this, instances have been seen where deductor would deduct tax on any credit or payment which falls under section 194J without categorising it between FPS, FTS, royalty and other specified nature.

However, after the amendment, such segregation in respect of nature of transaction is utmost relevant, specifically categorising the character between FPS and FTS, due to different rates of TDS for either case.

Understanding the basic:

The amendments made in section 194J by the Finance Act, 2020 are as follows:

1. TDS on fees for technical services will be deducted at 2%,

2. TDS on royalty for sale, distribution or exhibition of cinematographic films will be deducted at 2%, and

3. Individuals or HUFs having total sales or gross receipts or turnover exceeding Rs. 1 crore from business or Rs. 50 lakhs from profession in last financial year, will be liable to deduct tax at source from payment or credit, whichever is earlier, made in nature of professional fees (other than exclusively for personal purposes) or technical services.

With effect from 14th May, 2020, rates of TDS under various provisions are reduced by 25% till 31st March, 2021. Accordingly, rates of TDS and limits covered under amended section 194J as applicable for financial year 2020-21 are as under:

Amount paid or credited as – Limit above which TDS is applicable (Rs.) Rate of TDS applicable from –
1st April to 13th May 14th May to 31st March 
FPS 30,000 10 % 7.50 %
FTS 30,000 2 % 1.50 %
Royalty for sale, distribution or exhibition of cinematographic films 30,000 2 % 1.50 %
Other Royalty 10 % 7.50 %
In nature specified in section 28(va) 30,000 10 % 7.50 %
Payment to Director (not in nature of salary) No limit 10 % 7.50 %
In case payee is only carrying on business of Call Centre As mention above for respective nature 2 % 1.50 %

Analysis in brief:

  • Differentiate between FPS and FTS:

1. As per explanation (a) to section 194J, fees for professional service 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’

2. As per explanation (b) to the said section, “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 which is as under –

‘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”.’

In view of the above, by interpreting the strict language of the section, it can be derived that ‘technical consultancy’ would fall under FPS whereas ‘technical or managerial or consultancy services would fall under FTS. Accordingly going to the micro part of the topic, the nature of transaction, involving technical aspect, categorise either as consultancy or as service, will determine whether consideration paid is FPS or FTS and in view of that rate of TDS will be 10 % or 2 % respectively.

Differentiate between consultancy and service:

The terms ‘consultancy’ and ‘service’ are not specifically defined under the Income Tax Act, 1961. In many cases, the meaning is derived in various judgements by courts and tribunals. Few of the known judgements are mention under:

  • GVK Industries Ltd. [2015] 371 ITR 453 (SC)
  • Le Passage to India Tours & Travel (P) Ltd. [2014] 369 ITR 109
  • E-bay International AG vs ADIT (2012) 25 taxmann.com 500 (Mum)
  • Intertek Testing Services India (P) Ltd. [2008] 307 ITR 418 (AAR)

On summarising observations from above judgements, meaning of terms ‘consultancy’ and ‘service’ can be mount as follows :

Consultancy It involves giving an advice / opinion / recommendation or counselling having an element of expertise or special knowledge on part of the advisor.
Service It means any activity carried out by a person for another.

 Accordingly, it can be derive that in case consideration is paid or payable for transaction where there is involvement of only technical advice or opinion then the same can be construed as FPS liable to TDS at 10% and however, if there is element of any (physical) activity by the technical person then such transaction be construed as FTS.

For instance, say Mr. A, a technical person, gives advice over call or in person to Mr. B regarding whether the later shall obtain a feasibility or project report from any technical person, by explaining benefits of such report and also discussing parameters to be taken care in such process, in respect of Mr. B’s project. Accordingly, the consideration which will be paid by Mr. B to Mr. A would categorise for technical consultancy and FPS, liable to TDS at 10 %.

In similar case, if Mr. A prepares a feasibility or project report for Mr. B’s project then it will involve activity carried out by Mr. A. Thus, the consideration will be for technical service categorise as FTS, liable to 2 % TDS.

  • Conclusion:

On the basis of above analysis, a fine line of difference is required to be derived for each transaction which is liable to TDS under section 194J. Further, sometimes it will be difficult to explain such difference between ‘technical consultancy’ and ‘technical service’ to assessing officers specifically in era of e-assessments wherein skill of tax professionals in reply drafting will always be pertinent.

The explanation furnished in the memorandum by the Finance Ministry regarding modification of rate of TDS on FTS to 2 % from 10 % is mention to reduce litigation among assessees and tax authority arsing due to misclassification of nature of transaction falling under section 194C (rate of TDS being 2 % or 1%) and FTS liable to TDS at 10% under section 194J.

However, in process to reduce perplexity between classification of transactions liable to TDS under section 194C or section 194J being FTS, the amendment has resulted in ignition of spark of dispute with-in section 194J.

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