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Section 194J Fees paid for professional services & technical services

Tax Deduction at Source (TDS) aids tax collection by targeting income sources and eases taxpayers' load during income tax return filing, allowing them to claim credit for source-deducted taxes.

Professional and technical service fees, such as those paid to lawyers, engineers, accountants, and others, are common payments for businesses. These payments to residents fall under section 194J.

Payment Types

This section covers: 

  • Professional fees
  • Technical service fees
  • Non-salary director remuneration (e.g., board meeting attendance fees)
  • Royalties
  • Non-compete or technical knowledge sharing fees.

Term Definitions

Professional Services

These are services provided by professionals such as doctors, lawyers, engineers, accountants, advertisers, interior decorators, and technical consultants. Certain professions are also notified by the CBDT Board under Section 44AA. 

The CBDT has notified professions like film artists, company secretaries, and authorised representatives under Section 44AA. 

Additionally, the CBDT has notified sports-related professions, including athletes, commentators, event managers, anchors, umpires, referees, physiotherapists, coaches, trainers, team doctors, and sports columnists under Section 194J.

Technical Services

Technical services, as per tax law, include managerial, technical, and consultancy services, excluding payments considered as salary. 

  • Technical services involve technical expertise.
  • Managerial services involve business management for clients.
  • Consultancy services involve providing business advice and consultation.

The Supreme Court rules that only services provided by humans qualify as technical services, not those provided by machines or robots.

Royalty

Royalty is a payment for: 

  • Transfer or use of patents, inventions, designs, etc.
  • Information provision about using patents, inventions, etc.
  • Rights transfer of scientific discoveries, creative works, or broadcasting content excluding film sales and distribution.
  • Sharing technical, industrial, commercial, or scientific knowledge or skills.

Non-compete fees

Non-Compete Fees are payments made for an agreement preventing the sharing of business rights or information that could be used elsewhere. 

Tax Deduction Threshold

  • Tax is deducted if professional and technical service payments exceed Rs 30,000 in a year.
  • The Rs 30,000 limit applies to each separate payment.
  • Example: ABC company paid Rs 25,000 as royalty and Rs 20,000 as technical service fees to Mr.PK. No TDS is deducted as each payment is under the limit.
  • No deduction limit exists for director payments. Tax is deducted regardless of amount.

Persons Liable for Tax Deduction

Everyone who pays for professional or technical services must deduct tax at source. However, there are exceptions: 

  • Business run by an individual or HUF: If the annual turnover is below Rs 1 crore.
  • Profession managed by an individual or HUF: If the yearly turnover is less than Rs 50 lakh.

In simpler terms, all entities, except individuals/HUF not required to perform a tax audit in the previous year, should deduct tax while making payments for professional or technical services.

Tax Deduction Under Section 194J

Payment Type

Tax Deduction Rate

Technical service fees

2%

Call centre operator payments

2%

Cinematographic film royalty

2%

Other payments (e.g. Professional Services)

10%

No PAN provided by Payee

20%

When to Deduct Tax Under Section 194J

Taxes are deducted when- 

  • An entry is made in the accounts, or
  • An expense is paid,

whichever happens first.

TDS on Professional and Technical Services Examples

Example 1: Mr. Jay paid Mr. Veer for professional services in F.Y. 2021-22. A payment of Rs 55,000 was made in April and Rs 22,000 in December. The TDS liability for these payments will vary based on the following scenarios: 

  1. Mr. Jay is not liable for audit u/s 44AB.
  2. Mr. Jay is liable for audit u/s 44AB but the service was for personal use.
  3. Mr. Jay is subject to tax audit u/s 44AB and the service was for business use.

Scenario 1 Analysis: Mr. Jay is not liable for Tax Audit u/s 44AB, so there is no requirement to deduct tax when paying Mr. Veer. 

Scenario 2 Analysis: Mr. Jay used the service for personal reasons, so there's no need to deduct TDS for these payments. 

Scenario 3 Analysis: If Mr. Jay is subject to a tax audit and used the service for business, then a 10% TDS must be deducted from the Rs. 55,000 payment. This is because the transaction exceeds the threshold limit of Rs. 30,000. Also, TDS should be deducted from the second payment of Rs. 22,000 as it exceeds the annual threshold limit. 

Example 2: A Badminton Club pays Mr Pravin, an Indian resident, Rs 10 lakh per annum as a coach. Does the club need to deduct TDS from this payment? 

Coaching services are professional services under section 194J. As the remuneration exceeds Rs 30,000 per annum, the Badminton Club must deduct TDS under section 194J from the payment to Mr Pravin.

Consequences of TDS Non-deduction or Late Deduction

Failure to deduct tax or late deduction results in two main consequences: 

  • Disallowance of Expenditure: If TDS is not deducted or late deducted, 30% of the expenditure will be disallowed for that year. However, it can be re-allowed when TDS is paid to the government.
  • Interest Penalty: Interest must be paid with the TDS to the Government in case of delay in payment. The interest rates are: 
  • For no deduction of tax: Interest is payable at 1% per month/part of month from the required deduction date to the actual deduction date.
  • For tax deducted but not paid: Interest is payable at 1.5% per month/part of month from the date of deduction to the date of government payment.

 

TDS Deposit Deadline

 

Non-Government Deductors

Government Office Deductors

Payment before 1st March

7th day of following month

7th day of following month

Payment in March

April 30th

Tax payment date is the date of professional or technical fee payment to the payee, but the related challan is deposited by the 7th day of April

 

The Tax Heaven

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