Section 194J- TDS on Fees for professional or technical services

Understanding Section 194J of the Income Tax Act (1961)

Section 194J of the Income Tax Act, 1961, is a provision that deals with the deduction of tax at source (TDS) on fees for professional or technical services. It mandates the payer to deduct a certain percentage of the payment made to a resident professional or technical service provider as tax and remit it to the government. This provision aims to ensure that taxes are collected in advance on such payments, preventing tax evasion and ensuring compliance.

Let’s first Read the Law

Section 194J

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—

 (a) fees for professional services, or

 (b) fees for technical services, or

(ba) any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, to a director of a company, or

 (c) royalty, or

 (d) any sum referred to in clause (va) of section 28,

shall, at the time of credit of such sum to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to 2% of such sum in case of fees for technical services (not being a professional services), or royalty where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films and 10% of such sum in other cases, as income-tax on income comprised therein :

Provided that no deduction shall be made under this section—

 (A) from any sums as aforesaid credited or paid before the 1st day of July, 1995; or

 (B) where the amount of such sum or, as the case may be, the aggregate of the amounts of such sums credited or paid or likely to be credited or paid during the financial year by the aforesaid person to the account of, or to, the payee, does not exceed—

   (i) Rs.30000, in the case of fees for professional services referred to in clause (a), or

  (ii) Rs.30000, in the case of fees for technical services referred to in clause (b), or

 (iii) Rs.30000, in the case of royalty referred to in clause (c), or

 (iv) Rs.30000, in the case of sum referred to in clause (d) :

Provided further that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed one crore rupees in case of business or fifty lakh rupees in case of profession during the financial year immediately preceding the financial year in which such sum by way of fees for professional services or technical services is credited or paid, shall be liable to deduct income-tax under this section :

Provided also that no individual or a Hindu undivided family referred to in the second proviso shall be liable to deduct income-tax on the sum by way of fees for professional services in case such sum is credited or paid exclusively for personal purposes of such individual or any member of Hindu undivided family:

Provided also that the provisions of this section shall have effect, as if for the words “ten per cent”, the words “two per cent” had been substituted in the case of a payee, engaged only in the business of operation of call centre.

(2) [***]

(3) [***]

Explanation.—For the purposes of this section,—

 (a) “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;

 (b) “fees for technical services” shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9;

(ba) “royalty” shall have the same meaning as in Explanation 2 to clause (vi) of sub-section (1) of section 9;

 (c) where any sum referred to in sub-section (1) is credited to any account, whether called “suspense account” or by any other name, in the books of account of the person liable to pay such sum, such crediting shall be deemed to be credit of such sum to the account of the payee and the provisions of this section shall apply accordingly.

Now Let’s understand in brief:

Applicability: 

Section 194J applies to payments made to a resident individual, Hindu Undivided Family (HUF), firm, association of persons (AOP), body of individuals (BOI), company, or any other person for services in the nature of professional fees or fees for technical services.

Scope of Services: 

The term “professional services” generally includes services rendered by professionals like doctors, lawyers, engineers, accountants, etc. “Technical services” refer to services involving the application of specialized knowledge and skills, including those related to technical, managerial, consultancy, or other disciplines.

TDS Rate u/s 194J:

The following rate applies to the services listed under section 194J of the Income Tax Act:

Threshold Limit

A person liable to deduct TDS must deduct TDS only if the amount of payment for the professional or technical services exceeds the limit. If the aggregate amount credited/paid during the financial year does not exceed the prescribed limit then TDS must not be deducted

The following is the list of services along with the limit:

Time To Deduct TDS:

The person liable to deduct TDS under section 194J must deduct TDS:

• at the time of credit of such sum to the account of the payee, or
• at the time of payment thereof in cash or draft or by any other mode

Meaning of Important Terms For the Purpose of Section 194J

Professional Services

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 

Fees for technical services

Any consideration for the rendering of any of the following:

• Managerial services
• Technical or consultancy services

However, the following services do not form part of fees for technical services

• consideration for any construction, assembly, mining or like project undertaken by the recipient
• consideration which is chargeable under the head “Salaries in the hands of the receipient

The consideration for technical service could be a lumpsum payment or in installments. The frequency of payment does not affect the applicability of section 194J

Royalty

Royalty includes the following:

• Transfer of all or any rights or granting of a licence. This could be for a patent, invention, model, design, secret formula or process or trade mark or similar property.
• 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 ;
• Use of any patent, invention, model, design, secret formula or process or trade mark or similar property ;
• Imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ;
• use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB
• 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
• Rendering of any services in connection with the activities referred to in section 9 sub-clauses (i) to (iv), (iva) and (v).

Applicability to Individuals and HUFs: 

Section 194J doesn’t apply to individuals or HUFs if the professional or technical services are rendered by them, and their gross receipts or sales during the financial year do not exceed the monetary limits specified under section 44AB (tax audit limits).

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Frequently Asked Questions (FAQs) on Section 194J:

1. What is Section 194J of the Income Tax Act? Section 194J deals with the deduction of tax at source (TDS) on fees for professional or technical services. It applies to a wide range of payments made to professionals, consultants, and service providers.
2. What kind of payments fall under Section 194J? Payments made for professional services like legal, medical, technical, architectural, engineering, accounting, etc., as well as for technical services like designing, testing, analysis, etc., are covered under this section.
3. Who is liable to deduct TDS under Section 194J? Any person making payments for professional or technical services is liable to deduct TDS under this section. This includes individuals, businesses, and entities.
4. What is the TDS rate under Section 194J? The TDS rate under Section 194J is 2% and 10%. If the payee doesn’t provide their PAN, the TDS rate becomes 20%.
5. Is the TDS deductible on the gross amount or net of taxes? TDS is deductible on the gross amount of the payment, excluding Goods and Services Tax (GST).
6. Are there any exemptions or thresholds under Section 194J? Yes, there’s a threshold of Rs. 30,000. If the payment to a single payee during the financial year doesn’t exceed Rs. 30,000, TDS isn’t required.
7. What if the total payment to a payee exceeds Rs. 30,000 during the financial year? If the total payment exceeds Rs. 30,000, TDS should be deducted on the entire amount, not just the excess over Rs. 30,000.
8. Is GST included in the TDS calculation under Section 194J? No, TDS should be calculated on the payment amount excluding GST.
9. What if the payee doesn’t provide their PAN? If the payee doesn’t provide their PAN, TDS should be deducted at a higher rate of 20%.
10. Is there a provision for non-deduction or lower deduction of TDS under Section 194J? Yes, the payee can apply to the Assessing Officer for a certificate for non-deduction or lower deduction of TDS if their estimated income justifies it.

Example of TDS Calculation under Section 194J:

Let’s say a company “ABC Consultants” engages a legal firm “Legal Experts LLP” for legal advisory services and makes a payment of Rs. 40,000. Here’s how TDS will be calculated:

• Gross Payment: Rs. 40,000
• TDS Rate: 10%

TDS Calculation: TDS = Gross Payment × TDS Rate TDS = Rs. 40,000 × 10% = Rs. 4,000

However, since the payment exceeds Rs. 30,000, TDS will be applicable on the entire amount of Rs. 40,000.

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