Section 194J of The Income Tax Act 1961, pertains to deduction of tax at source in case of fees for professional or technical services. It applies to TDS on payment of any sum by way of –
a) fees for Professional services
b) fees for Technical services
c) Remuneration or fees or commission paid to directors (excluding salary)
d) Royalty
e) Non-compete fee
Threshold Limit for each of the above payments except for payment to directors is Rs. 30,000 i.e. no TDS shall be required to deduct at source if the amount paid or payable during the year do not exceed Rs. 30,000.
Non Applicability of Threshold Limit
However, in case of payment made to directors, TDS has to be deducted irrespective of quantum.
Rate of TDS
The rate of TDS is 10%, however this rate is taken to be 2% in following cases:
i. Fees for technical services
ii. royalty where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films
iii. in case of a payee engaged only in the business of operation of a call centre
This implies that the rate of TDS is 10% in case of fees paid for professional services while it is 2% in case of fees for technical services. As the rate of TDS is different for professional services and technical services, looking into the difference between the two is the need of the hour.
Let us go into the definitions of both as provided in the Act for the purpose of this very section –
Meaning of “Professional services”
“Professional services” means carrying on
a) Legal profession
b) Medical Profession
c) engineering Profession
d) architectural profession
e) profession of accountancy
f) technical consultancy
g) interior decoration
h) advertising
i) Profession of “authorised representatives”
j) Profession of “film artist”
k) Profession of “company secretary”
l) Profession of “information technology”
Meaning of “authorised representatives” and “film artist” has also been provided in the Act.
The CBDT has notified the services of following persons in relation to sports activities as “Professional Services”, namely –
a) Sports Persons,
b) Umpires and Referees,
c) Coaches and Trainers,
d) Team Physicians and Physiotherapists,
e) Event Managers,
f) Commentators,
g) Anchors and
h) Sports Columnists
However, the term “profession”, as such, is a very wide import but the term is defined exhaustively for the purpose of this section.
Meaning of “fees for technical services”
“fees for technical services” means any consideration (including any lump sum consideration) for rendering of any of the following services:
i. Managerial services
ii. Technical services
iii. Consultancy services
iv. Provision of services of technical or other personnel
Excluding
i. Consideration for any construction, assembly, mining or like project or
ii. Consideration which is chargeable under the head ‘Salaries’
So, a broad kind of definition is provided of “fees for technical services” with a very wider ambit.
Conclusion
If the services specified in the definition of “Professional services” are carried out by a professional (an individual) or by partnership firms including LLP, as they in their capacity can pursue a profession, then it shall be considered to be a professional service and TDS rate applicable would be 10%. However, if the same services are provided not in the course of profession i.e. by Corporate, Trust, Society, Artificial Juridical person and similar organizations then it will fall under the ambit of “fees for technical services” and beneficial TDS rate of just 2% shall be applicable.
Whereas the law is not that much clear on establishing the distinction between the two, thus the same may be interpreted differently depending upon the circumstances or situation in hand. For example, services of a Chartered Accountant, Doctors, Lawyer, Architectures, Engineer etc. are considered to be professional services and liable to higher TDS i.e. 10%. While, setting up an ERP system within an organization by an IT company shall be considered as technical services and thus liable for 2% of TDS.
The intention of lawmaker behind introducing differential TDS rates is quite justifiable. Since, in case of profession, the role of intellect and professional skills are more than that of infrastructure and other overheads. Therefore, the profit is on a higher side. Also, whole of the responsibility of the service provided lies on a person only. Hence, they earn a good margin of profit. Consequently, higher rate of TDS is imposed. On the other hand, in provision of technical services, profit is much less owing to huge expenditure of business overheads and infrastructure and accordingly, a lower rate of TDS is thus imposed.
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About the Author
Author is Ruchika Bhagat, FCA helping foreign companies in setting up and closure of business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants, is a well-established Chartered Accountancy firm founded in the year 1997 with its head office at New Delhi.
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