TDS under Section 194J : Detailed Analysis

Applicability : Section 194J of Income Tax Act, 1961 applies to payments made to residents as Fees for Professional Services, Fees for Technical Services, Royalty and Non compete Fees.

Definition:

Professional Services (Sec 194J and 44AA): Payment for Medical, Legal, Architectural, Engineering, Accountancy, Advertising, Interior Decorator and Technical Consultancy. CBDT can also notify professions for the purpose of 44AA and 194J. CBDT has notified following

• U/s 44AA CBDT has notified Film Artist, Company Secretary and Authorized Representative.
• U/s 194J CBDT has notified Sports Person, Commentator, Event Manager, Anchor, Umpires/Refrees, Physiotherapist, Coaches, Trainers, Team Physician and Sports Columnists.

Technical Services : Managerial, Technical and Consultancy Services. Where these terms mean :

• Technical Services: Services that involve technical expertise or expertise of technology.
• Managerial Service: Running and Managing the Business.
• Consultancy Services: Advisory Services where necessary advise and consultation are being provided for business.3

As per Supreme Court’s Judgment, technical services would include services provided by a human. It would not include services rendered by Machines and Robots.

Royalty: As Defined under Section 9 (1) (VI) Explanation 2 as follows :-

Explanation 2.—For the purposes of this clause, “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, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or

(vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

Explanation 3.—For the purposes of this clause, “computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customized electronic data.

Explanation 4.—For the removal of doubts, it is hereby clarified that the transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

Explanation 5.—For the removal of doubts, it is hereby clarified that the royalty includes and has always included consideration in respect of any right, property or information, whether or not—

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

Explanation 6.—For the removal of doubts, it is hereby clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;

Here attention is invited to above mentioned Explanation 4 to 6 which were inserted by the Finance Act 2012 to bring Standard Facilities within the ambit of definition of Royalty and to nullify the decision of Supreme court in the matter of CIT Vs. Eastle Communication Pvt. Ltd. (2009) 310 ITR 2 (SC).

Non Compete Fees : In simple words it means any amount received in return of an agreement that restricts the person from sharing any patent, license, franchise, trademark, know how or any commercial or business right , technique or information likely to be used elsewhere for manufacture, process or provisional services.

Thresh hold Limit :Rs. 30000 each for Fees for Professional Services, Technical Services, Royalty and Non Compete Fees. There no such limit set for payment made to director.

Example : ABC limited paid 26000 as royalty and 21000 as fees for technical services to Mr. AB. Here company ABC is not liable to deduct TDS from payment made to Mr. AB. It is because Rs. 30000 is a separate limit for each item i.e. for royalty and technical services.

Rate of Tax Deduction :

• Technical Services – 2%
• Call Centres – 2%
• Royalty of Cinematograph Films – 2%
• All other Payments – 10%

Example : Mr. A has availed professional services from B Ltd in FY 2021-22. First payment was for 25000 and second payment was of Rs. 25000. Here at the time of second payment TDS shall be deducted on full amount of Rs. 50000 @ 10% i.e. Rs. 5000.

Example : A Hockey club has engaged Mr. X as coach at a remuneration of Rs. 12 Lacs per annum. In this case also remuneration of Mr. X is liable for TDS @ 10 % since it is a specified profession and payment is above 30000

Example : M/s A an advertising agency pays Rs. 500000 to Mr. Y a model is it liable to TDS. Modelling may be a profession, but it is not defined as such for the purpose of Section 194J. Hence receipts of Mr. Y do not attract TDS under section 194J unless they are part of production of cinematograph film.

Some relevant issues :

When a Hospital engaged consulting doctors and provided them with consulting chambers. Fees collected from OPD patients to the consultants each day after deducting certain amount towards rent and secretarial assistance. Hel that Neither 192 nor 194J applies [ACIT Vs. Indraprasth Medical Corpn. Ltd. (2010) 35 DTR 353(Del)]

Consultant doctors were employed in hospital in addition to resident doctors and who were providing service under contract. Tax is deductible U/s 194 J and not 192. [CIT (TDS) Vs. Apollo Hospitals Internationals Ltd. (2013) 359 ITR 78 (Guj)].

Stockist receiving commission on sale of drug of drug manufacturer is not liable for TDS under section 194 J [Piramal Health care Ltd Vs. ACIT (TDS) (2012) 21 Taxman.com 225 (Mum.)]

Payments made by News Paper company to News Paper agency is liable for TDS under Section 194 J [ ACIT Vs. Ushoday Enterprises (p). Ltd. (2012) 23 Taxman.co, 258 HYD]

Airline companies making payment to International Airport Authority of India for Navigation Facilities – Held such payment attracts 194 J. Singapore Airlines Ltd. Vs. ITO (2006) 7 SOT 84 (Chennai).

Circular :No. 715, dated 8-8-1995 provide guidance on various TDS matters including 194J. :

Question 1: What would be the scope of an advertising contract for the purpose of section 194C of the Act?

Answer The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, art­ists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and techni­cal services under section 194J of the Act.

Question 2: Whether the advertising agency would deduct tax at source out of payments made to the media ?

Answer: No. The position has been clarified in the answer to question No. 1 above.

Question 3: At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?

Answer: The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If pay­ments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.

Question 4: Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?

Answer: The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be sub­jected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.

Question 5: Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?

Answer: The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.

Question 6: Whether payment under a contract for carriage of goods or passengers by any mode of transport would include pay­ment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?

Answer: The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstand­ing the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduc­tion at source under section 194C of the Act.

Question 7: Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?

Answer: The travel agent, issuing tickets on behalf of the air­lines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.

Question 8: Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?

Answer: The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couri­ers.

Question 9: In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill?

Answer: Normally, each GR can be said to be a separate contract, if the goods are transported at one time. But if the goods are transported continuously in pursuance of a contract for a specif­ic period or quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregat­ed for the purpose of the TDS.

Question 10: Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on “freight to pay” basis ?

Answer: Yes. The provisions of tax deduction at source are ap­plicable irrespective of the actual payment.

Question 11: Whether a contract for catering would include serv­ing food in a restaurant/sale of eatables?

Answer: TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.

Question 12: Whether payment to a recruitment agency can be covered by section 194C ?

Answer: Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.

Question 13: Whether section 194C would cover payments made by a company to a share registrar ?

Answer: In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.

Question 14: Whether FD commission and brokerage can be covered under section 194C ?

Answer : No

Question 15: Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?

Answer: Yes.

Question 16: Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?

Answer: Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.

Question 17: Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?

Answer: Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.

Question 18: Whether deduction of tax is required to be made under section 194C for sponsorship of debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organisers ?

Answer: The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.

Question 19: Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?

Answer: Yes.

Question 20: Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?

Answer: Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.

Question 21: Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?

Answer: Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provi­sions.

Question 22: Whether the rent paid should be enhanced for notion­al income in respect of deposit given to the landlord ?

Answer: The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.

Question 23: Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?

Answer: The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Expla­nation to section 194-I.

Question 24: Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?

Answer: If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.

Question 26: Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?

Answer: Yes.

Question 27: Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?

Answer: Yes.

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.

Question 30: Whether the deduction of tax at source under sec­tions 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?

Answer: Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.

Question 31: Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital apprecia­tion distributed at the time of repurchase/redemption of the units ?

Answer: The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.

Question 32: Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?

Answer: Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.

Question 33: Whether variable deposit schemes are liable to deduction of tax at source from interest ?

Answer: Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from inter­est on such deposits.

Question 34: Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?

Answer: Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.