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An overview of TDS on Professional Fees/Fees for Technical Services/Royalty – Section 194J

Ruchi Gandhi

| Updated: Feb 02, 2020 | Category: Taxation

TDS on professional fees

Section 194J of the Income Tax Act, 1961 deals with TDS rules concerning the payments made towards fees for various professional or technical services. The tax must be deducted at the applicable rate by the payer who avails the consultancy services rendered by a professional. This TDS on professional fees must be deducted before the payment for any professional or technical service is completed. For example, if an individual entity avails an architect’s professional services, then it will have to deduct TDS under Section 194J before paying the applicable fees to the architect. This article attempts to accentuate the provisions of TDS which are applicable to services obtained from professionals.

Section 194J entails the deduction of tax in respect of below-mentioned payments made to a resident:

  • Fees for professional services such as legal, medical, or engineering
  • Fees for technical services such as accountancy, managerial, or consultancy
  • Directors’ fees other than salary
  • Royalty payments in lieu of literary work, inventions, etc.
  • Non-compete fees as specified under Section 28 Clause (va) for instance, an amount paid for not carrying out any business-related activity or any binding fee for not sharing any commercial right

Payment of a fee, royalty, etc. made to a non-resident does not attract ‘TDS on professional fees’ under Section 194J. Payments to non-resident persons are governed by Section 195.

For example, TYC Enterprises, a partnership firm obtains consultancy services of a Chartered Accountant firm situated at Mumbai and pays fees of Rs. 91,000. Since the professional fees are paid to a resident, the partnership firm has to deduct TDS under Section 194J from the fees of Rs. 91,000.

TDS on professional fees is to be deducted by whom?

Every payer other than an individual or HUF, who is responsible for making payments of fees, royalty, etc. as covered under Section 194J to a resident, needs to deduct TDS. However, an individual or HUF is also brought under the TDS ambit if such individual or HUF was liable to get a tax audit done under Section 44AB in the previous FY. Tax audit clause is attracted if gross sales/turnover of a business exceeds Rs. 1 crore or gross receipts of a profession exceeds Rs. 50 lakhs during the previous FY.

For example, Mr. Jaideep runs a factory which generated a turnover of Rs. 46,00,000 during the FY 2018-19. On 10-04-2019, he availed the consultancy services of a Company Secretary based at Kanpur. The fees for consultancy services amounted to Rs. 81,000. In this case, the turnover of Mr. Jaideep for the FY 2018-19 is below Rs. 1,00,00,000 and, therefore, he was not liable for tax audit during the FY 2018-19. Hence, no TDS will be deducted by him from the professional fees paid during the FY 2019-20.

When to deduct TDS on professional fees?

Pursuant to Section 194J, tax is to be deducted at the time of payment or credit to the account of the payee whichever is earlier.

Suppose ABC Publications, a partnership firm has to render a royalty of Rs. 1,45,000 to Mr. Rohan residing in Mumbai. Such royalty amount is credited to the account of Mr. Rohan in March 2020, but the same is actually paid in the month of May 2020. Here, the time of credit is March 2020 and the time of payment is May 2020. Hence, the firm is liable to deduct TDS under Section 194J in March 2020.

When no TDS on professional fees is to be deducted?

Some cases where there is no requirement to deduct TDS under Section 194J include the following:

  • If the amount of professional fees/technical fees or royalty or non-compete fee paid or payable during the FY does not exceed the threshold limit of Rs. 30,000. (However, no such restriction is applicable in case of director’s fees.)
  • If the payer, being an individual or HUF, pays fees for professional services, in respect of any personal service of the individual or any member of HUF.
  • When the payee has procured a certificate from the AO for no tax deduction or lower deduction of tax.
For example, LRT & Co., a partnership firm is involved in the business of trading of vehicles. It undertook the consultancy services of a Bangalore based software engineer for the FY 2019-20. The consultancy fee for the said year was equivalent to Rs. 33,000. In this case, since the aggregate fee for the year exceeds Rs. 30,000, TDS is to be charged by the partnership firm on the entire fees of Rs. 33,000 and not only on fees in excess of Rs. 30,000.

TDS rates on professional fees

From the payments covered under Section 194J, the payer is required to deduct TDS @ 10%. This 10% is replaced by 2% if the payee is solely engaged in operating a call centre business. Moreover, if the payee fails to furnish his PAN details, then TDS on professional fees shall be deducted at a higher rate of 20%.

To illustrate with an example, MIT Limited makes a payment of Rs. 50,000 towards professional fees of Mr. Kapoor during the FY 2018-19. The company shall deduct ‘TDS on professional fees’ for FY 2018-19 of Rs 5,000 and make a net payment of Rs. 45,000 to Mr. Kapoor.

Tax to be deposited to the credit of Central Government

The payer is accountable to deposit TDS on professional fees under Section 194J to the credit of the Central Government, as shown below:

TDS during April to February


(Example: TDS on professional fees deducted in April 2019)

On or before 7th of succeeding month

(Example: To be deposited on or before 07-05-2019)

TDS during March

On or before 30th April

Issuance of TDS certificate

The payer issues Form 16A certificate to the deductee as a proof of TDS to allow the deductee to claim its credit at the filing his ITR. Form 16A is furnished within 15 days of filing TDS quarterly returns. The due dates of issuance of TDS certificate are:

Quarter

Due date of filing of TDS return

Due date for issuing TDS Certificate

April to June

31st July

15th August

July to September

31st October

15th November

October to December

31st January

15th February

January to March

31st May

15th June

Delay in TDS payment

The person liable to deduct TDS is charged with interest if he fails to deduct TDS or fails to deposit tax (after deduction) to the credit of the Government. Interest is levied @ 1% for delay in deduction and @ 1.5% for delay in payment after the deduction of TDS.

Another consequence of non-deduction or late deduction of TDS is that 30% of the expenditure pertaining to the services received will be disallowed in the books of the payer. This disallowance will be applicable for the financial year in which the transaction was carried out. Therefore, full tax benefits of expenses can be claimed by the assessee only when TDS is properly deposited to the Government.

Takeaway

One of the most important payments often made by business entities is towards professional fees or fees for technical services paid to a lawyer, engineer, architect, consultant, etc. The payer is required to deduct TDS on professional fees @10% on such payments and give the balance amount to the payee. Moreover, by placing the liability to deduct tax on the shoulders of business entities, such TDS provisions allow the Government to control tax evasion in respect of certain expenses.

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Ruchi Gandhi

A CA together with MBA (Fin) and M Com, she relishes taking interest in insightful writing in the domain of taxation and finance. She has gained experience as a full-time author and has also served an accounting role in industry.

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