TDS on Professional or Technical service : Complete Guide

By | October 21, 2016

TDS on Professional or Technical service

tds-on-technical-or-professional-services Section 194J

Conditions to be satisfied for application of section 194J regarding TDS on Professional or Technical service

 Following conditions need be satisfied for the application of section 194J -TDS on Professional or Technical service

♦             the payer is a person as specified in para 1.11;

♦             the payment must be in the nature of fees for professional services or fees for technical services or royalty or non-compete fees or 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

♦             the payee must be a resident person ; and

♦             the quantum of payment paid or likely to be paid during a financial year exceeds the monetary limits mentioned in para 1.7.

Content of Table- TDS on Professional or Technical service

Sr No Contents
1.1 Scope of section 194J
1.2 Payments covered by section 194J
1.3 Meaning of ‘professional services’
1.4 Meaning of Technical Services
1.5 Meaning of Royalty
1.6 Meaning of ‘Non-compete Fees’
1.7 Monetary limit upto which tax is not deductible u/s 194J
1.8 Rate of TDS under section 194J
1.9 Who is to deduct tax at source u/s 194J
1.10 When tax is to be deducted at source
1.11 Payers who are covered by section 194J
1.12 Payments exempt from TDS under section 197A(1F)
1.13 Effect of non-furnishing of PAN on rate of tax u/s  194J
1.14 When no tax need be deducted or deducted at lower rate
1.15 Special provisions for certain entities
1.16 Tax Deduction and Collection Account Number (TDCAN)
1.17 Deposit of tax to the credit of Central Government
1.18 Furnishing of statements by tax deductor to department
1.19 Certificate/statement for tax deducted at source
1.20 Annual statements to payees by department
1.21 Credit for tax deducted at source
1.22 Claim for refund
1.23 Consequences of non-deduction/short deduction of tax at source
1.24 Disallowance under section 40(a)
1.25 Information to be furnished by payer in case of payment to non-resident
1.26 Judgments on Section 194J
1.27 CBDT Circulars u/s 194J

1.1 Scope of section 194J

Section 194J, as amended by the Finance Act, 2012 provides for deduction of tax at source on any sum payable to a resident by way of

(i)           fees for professional services or

(ii)          fees for technical services or

(iii)         any sum payable as royalty or

(iv)          any sum referred to in section 28(va) of the Act, generally known as ‘non-compete fees’.

Payment to Director

With effect from 1-7-2012, tax is also deductible at source under section 194J in respect of any remuneration or fees or commission by whatever name called, other than those on which tax is deductible under section 192, paid to a director of a company.

Sub-section (1F) of section 197A provides that no deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Government in the Official Gazette, in this behalf. (see para 1.12 )

CBDT Circulars  

Payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194JCircular No. 715, dated 8-8-1995.

Commission received by the advertising agency from the media would attract deduction of tax at source under section 194J – Circular No. 715, dated 8-8-1995.

Payments made to an electrician or to a contractor who provides services of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work, and hence only the provisions of section 194C (and not 194J) will apply in such cases –Circular No. 715, dated 8-8-1995.

Routine and normal maintenance contracts which include supply of spares will be covered under section 194C. However, where technical services are rendered, the provisions of section 194J will apply in regard to tax deduction at source – Circular No. 715, dated 8-8-1995

Payments to recruitment agencies are in the nature of payments for services rendered, and hence will be subject to TDS under section 194J of the Act, and not under section 194C of the Act—Circular No. 715, dated 8-8-1995.

In respect of payment of commission to external parties for procuring orders for the company’s products, rendering of such services is not covered under section 194C, but may involve payment of fees for professional or technical services, in which case tax may be deduc-tible under section 194J—Circular No. 715, dated 8-8-1995.

In Dedicated Health Care Services TPA (India) (P.) Ltd. v. Asstt. CIT [2010] (Bom.), it was held that (a) services provided by hospital, which engages qualified medical professionals are services rendered in course of carrying on of medical profession within meaning of section 194J and (b) Third Party Administrators (TPAs), when they make payments to hospitals, are liable to deduct tax at source under section 194J.

Payments to consultants

Where, in addition to employees, an employer engages the services of consultants on part-time basis under contracts, the question whether the remuneration paid to such consultants was liable to deduction of tax at source under section 194J of the Act (as goes for professional services), or under section 192 of the Act (as salary) must be decided with reference to terms of the contract. Where the contract is a contract of service, the remuneration will be liable to deduction of tax at source under section 192 of the Act as ‘salary’. On the contrary, if the contract is a contract for service, the remuneration will be liable to deduction of tax at source under section 194J of the Act as ‘fees for professional or technical services’.

In CIT v. Apollo Hospitals International Ltd. [2013] 359 ITR 78 (Guj.) it was held that where contract with hospital and consultant doctors was one of contract ‘for service’ and not ‘of service’, tax on payment to such doctors were to be deducted at source under section 194J; section 192 had no application.

In Dy. CIT (TDS) v. Ivy Health Life Sciences (P.) Ltd. [2013]  (Chd. – Trib.) it was held that where assessee-hospital under an agreement was availing services of doctors who fixed their own OPD hours, etc., and there was no control of hospital by way of direction to doctors on treatment of patients, it could be said that there was no employer and employee relationship between hospital and professional doctors and, therefore, tax was to be deducted under section 194J and not under section 192.

TDS in case of hospitals

In ITO (TDS) v. Accounts Officer, Govt. Medical College [2012] (Asr. – Trib.) it was held that maintaining operation theatre and surgical equipments, RO system, CT scan machine, MRI machine, medical equipments and providing service of lift, sterilization and anti-termite treatment in a hospital, would amount to rendering technical and professional services.

In Chief Medical Officer v. ITO [2013]  (Indore – Trib.) where low income group patients were provided aid by State Government under a scheme but bill were raised in name of patients and payment were made by State Government on behalf of such patients, section 194J was not attracted.

In CIT v. P.V.S. Memorial Hospital Ltd. [2015]  (Ker.) the assessee-hospital had entered into an agreement with other hospital under which latter had undertaken to perform various professional services in the assessee’s hospital, it was held that payment made by the assessee to other hospital would be subject to deduction of tax at source under section 194J and not under section 194C.

Payment to stunt artists are not covered

In one case, the Tribunal observed that stunt artists/dupes had not been specifically mentioned in the list of film artists notified by the Board, and held that, since it would be farfetched to categorise them as ‘actor’. Thus, payments to stunt artists/dupes could not be subjected to deduction of tax at source by treating them as ‘fees for professional services’ – Dy. CIT v. Movies Stunt Artists  association [2006] 6 SOT 204 (Mum. – Trib.).

Payments to Models

 In Kodak India (P.) Ltd. v. Dy. CIT [2013]  58 SOT 251 (Mum. – Trib.) it was held that taxable receipts under section 194J are services-specific and not person specific. Further, payments made for services of modelling are unconnected with production of cinematographic film and, thus, said payments are not covered by provisions of section 194J.

Reimbursements cannot be deducted

Section 194J refers to ‘any sum paid’. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source – Circular No. 715, dated 8-8-1995.

TDS excluding Service tax

vide Circular No. 1/2014, dated 13-1-2014 (Annex in Para 1.27 ) it is clarified by CBDT that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.

General exemption

 The CBDT have granted exemption from tax deduction/collection at source on the receipts of corporations which are established by a Central, State or Provincial Act for the welfare and economic upliftment of ex-servicemen and whose income qualifies for exemption from income-tax under section 10(26BBB) of the Act, for a period of three years from 1-8-2008. The CBDT have also clarified that this exemption shall not absolve such organisations from their statutory obligations of deducting tax at source on all contractual payments made by them to other parties including sub-contractors etc. – Circular No. 7/2008, dated 1-8-2008.

Payments to new pension system trust

No tax is deductible at source on any payment made to any person for, or on behalf of, the New Pension System Trust established on 27-2-2008 under the provisions of the Indian Trusts Act, 1882, on or after 1-4-2009.

Payments relating to profession of advertising

It may be noted that ‘advertising’ figures both under section 194C and section 194J. The deduction of tax at source under section 194C will apply to payments made to the advertising agency in connection with services rendered by such agency in the area of advertising. On the other hand, section 194J will be attracted when payments are made by the advertising agency to professionals engaged by such agency in connection with the execution of advertising jobs entrusted to the agency. The Board have also clarified that when an advertising agency makes payment for professional services to a film artiste such as an actor, a cameraman, a director, etc., tax will be deducted at source under section 194J at the prescribed rate – Circular No. 714, dated 3-8-1995. In this context, the Board has also clarified that any payment is liable for tax deduction only under one section – Circular No. 720, dated 30-8-1995.

Payments by Non-residents to Residents

The Board have clarified that any fees paid through regular banking channels to any chartered accountant, lawyer, advocate or solicitor who is resident in India by the non-residents who do not have any agent or business connection or permanent establishment in India may not be subjected to the provisions of tax deduction at source under section 194J – Circular No. 726, dated 18-10-1995.

Data collection charges

Data collection charges paid by assessee are not covered by expression ‘professional services’ as mentioned in Explanation to section 194J – CIT v. Market Probe India (P.) Ltd. [2014] (Mag.)(Kar.).

Royalty to authors

Amount paid by the assessee to authors for copyright of literary work of authors for purpose of printing and publication for use of students, would fall within definition of royalty as per section 9. Therefore, the assessee was liable to deduct tax under section 194J – Calicut University Central Co-op. Stores Ltd. v. ITO [2014] 66 SOT 234 (Cochin).

Show room management fees

Managing day-to-day affairs of new branch of assessee-company would be professional or managerial service in nature, and payment made for same would be allowable expenditure subject to compliance of section 194J – Emkay Share & Stock Brokers (P.) Ltd. v. Dy. CIT [2014] 151 ITD 655 (Mum.).

Brand Fee

 Where assessee sold beer manufactured by it under its own name by using brand name of main line companies, it was required to deduct tax at source under section 194J while making payment of brand fee – United Breweries Ltd. v. ITO [2015]  155 ITD 482 (Visakha.)

Advertising agency

Where assessee, engaged in business of advertising and marketing communication services, availed services of creative consultants, it was required to deduct tax at source under section 194J while making payments to them – Ogilvy & Mather (P.) Ltd. v. ITO [2015]  155 ITD 475 (Mum.)

Support services charges

Payments made by assessee to service providers for rendering support services such as field activations, vendor payment queries and tele-calling for bill payments would require deduction of tax at source under section 194J – Vodafone Cellular Ltd. v. Dy. CIT [2015] (Chennai – Trib.)

Data link charges

Transmission of data via technical gadgets without any human intervention will not amount to technical services – iGATE Computer Systems Ltd. v. Dy. CIT [2015]  67 SOT 296 (Pune).

Sale of Online computerized lottery

Where one ‘P’ was authorized by assessee to sell online computerized lottery directly or through retailers for a consideration in form of commission, ‘P’ was also entrusted with responsibility of maintaining of books, records, etc., and ‘P’ was to provide its infrastructure to sell online lotteries, assessee was liable to deduct tax under section 194J on operating fees paid to ‘P’, as all services provided by ‘P’ were in nature of technical services – Ultra Entertainment Solutions Ltd. v. ITO[2007] 17 SOT 249 (Mum. – Trib.).

Payment to Horse Owner

In Lotus Valley Education Society v. Asstt. CIT [2011] 46 SOT 77 (URO)  (Delhi – Trib.) horse-owner was required to provide assessee-school a few horses for Rs. 10,000 per horse per month throughout year along with qualified and experienced instructors to teach students horse riding. It was held that such payment to horse owner attracted section 194J.

Payment to News Agency

In Asstt. CIT v. Ushodaya Enterprises (P.) Ltd. [2012] 53 SOT 193 (Hyd. – Trib.) it was held that payments made by newspaper company to news agencies is liable for deduction of tax at source under section 194J.

Entry Load Fees

In Hero Moto Corp Ltd. v. Addl. CIT [2013] 60 SOT 25 (URO) (Delhi – Trib.) it was held that entry load fees paid at time of subscription of portfolio management scheme is not in nature of management fees, and therefore, no tax is required to be deducted at source under section 194J.

1.2 Payments covered by section 194J

Payments covered by section 194J -TDS on Professional or Technical service

 Tax is required to be deducted at source on—

(i)           any payment by way of fees for professional services, or

(ii)          any payment by way of fees for technical services, or

(iii)         any payment by way of royalty, or

(iv)          any payment by way of non-compete fees

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

1.3 Meaning of ‘professional services’

Under Explanation (a) to section 194J, the term ‘professional services’ means—

(a)          services rendered by a person in the course of carrying on any of the following professions :

♦             Legal profession

♦             Medical profession

♦             Engineering profession

♦             Architectural profession

♦             Profession of accountancy

♦             Profession of technical consultancy

♦             Profession of interior decoration

(b)          services rendered by a person in the course of carrying on any notified profession. The professions notified in this regard so far are as follows :

(i)           ‘Authorised representative’ i.e., a person who represents any other person, on payment of any fee or remuneration before any tribunal or authority constituted or appointed by or under any law for the time being in force, but does not include an employee of the person so represented or a person carrying on legal profession or a person carrying on the profession of accountancy.

(ii)          ‘Film artist’ i.e., any person engaged in his professional capacity in the production of a cinematograph film, whether produced by him or by any other person, as—

(a)          an actor;

(b)          a cameraman;

(c)           a director including an assistant director;

(d)          a music director including an assistant music director;

(e)           an art director including an assistant art director;

(f)           a dance director including an assistant dance director;

(g)          an editor;

(h)          a singer;

(i)           a lyricist;

(j)           a story writer;

(k)           a screenplay writer;

(l)           a dialogue writer; and

(m)         a dress designer.

(iii)         Profession of company secretary – For this purpose, a ‘company secretary’ means a person who is a member of the Institute of Company Secretaries of India in practice within the meaning of section 2(2) of the Company Secretaries Act, 1980.

(iv)         Profession of information technology

(v)          Sports Persons [Vide Notification No. 2085(E), dated 21-8-2008]

(vi)         Umpires and Referees [Vide Notification No. 2085(E), dated 21-8-2008]

(vii)        Coaches and Trainers[Vide Notification No. 2085(E), dated 21-8-2008]

(viii)       Team Physicians and Physiotherapists[Vide Notification No. 2085(E), dated 21-8-2008]

(ix)         Event Managers[Vide Notification No. 2085(E), dated 21-8-2008]

(x)          Commentators[Vide Notification No. 2085(E), dated 21-8-2008]

(xi)         Anchors[Vide Notification No. 2085(E), dated 21-8-2008]

(xii)        Sports Columnists[Vide Notification No. 2085(E), dated 21-8-2008]

1.4 Meaning of Technical Services

Explanation (b) to section 194J provides that ‘fees for technical services’ shall have the same meaning as in Explanation 2 to clause (vii) of section 9(1). Explanation 2 to section 9(1)(vii) reads as under :

‘Explanation 2.—For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.’

Human interface must be present

If service rendered by a bank’s MICR cheque processing centre involves human intervention requiring examination of technical data, same would fall within definition of ‘technical service’ – CITv. Chief Manager, State Bank of India [2012] (Punj. & Har.).

In Asstt. CIT v. Dakshin Haryana Bijli Vitran Nigam Ltd. [2013] 59 SOT 133 (URO)(Delhi – Trib.) it was held that payment made for wheeling/transmission charges by electricity company cannot be considered as fees for technical service.

In IDEA Cellular Ltd. v. Dy. CIT [2009] 121 TTJ (Delhi – Trib.) 352 it was held that interconnect/port and toll charges paid by one mobile telephone service provider to another service provider, cannot be treated as payment for technical services so as to require tax deduction at source under section 194J.

Where an assessee providing telephone service to its subscribers paid inter-connect charges to another telephone network for routing the telephone calls, the charges so paid cannot be brought under section 194J, since there was no ‘technical service’ involved – HFCL Infotel Ltd. v. ITO [2006] 99 TTJ (Chd. – Trib.) 440.

Where assessee-company made payment to BSNL on account of lease line rental charges, port charges (inter-connectivity charges), and access charges, payments made to BSNL with regard to port charges and access charges were subject to TDS under section 194J while lease rent charges could not be subjected to TDS under section 194J – Hutchison Telecom East Ltd. v. Asstt. CIT [2007] 16 SOT 404 (Kol. – Trib.).

Roaming charges paid by one telecom company to another telecom company are not fee for technical service as envisaged in section 194J – Bharti Hexacom Ltd. v. ITO [2015] 42 ITR (Trib.) 686 (Jp.).

Reimbursement of salary of deputed personnel

Where an assessee carrying on hotel business paid amounts to another company engaged in the same business as reimbursement towards salaries of certain personnel of that company who were deputed to the assessee for rendering certain services, and it was found that, (i) it was not the case of the revenue that the deputed personnel were carrying on any of the specified professions, (ii) it was the company which arranged to provide the services for which it was paid fees as per the agreement, and (iii) there was no contract between the assessee and the deputed personnel by which the former could demand the services of the latter, and the latter could claim the fees from the former, it was held that amounts so reimbursed could not be brought under section 194J and subjected to deduction of tax at source – United Hotels Ltd. v. ITO [2005] 2 SOT 267 (Delhi – Trib.).

Payments to clearing & forwarding agents

The activities carried out by a Clearing & Forwarding Agent (C&F Agent) form one composite ‘work’, and payments to such agents will attract deduction of tax at source only under section 194C of the Act. It was held that such payments could not be treated as fees for professional or technical services and subjected to tax deduction at source under section 194J, since the nature of the services were in pari materia with the nature of services as contemplated in section 194C – Glaxo Smithkline Consumer Healthcare Ltd. v. ITO [2007] 12 SOT 221 (Delhi – Trib.).

Payments for navigational facilities at airports

 Where the assessee-airlines paid charges to the International Airport Authority of India towards navigational facilities, the assessee was in fact getting technical services apart from using equipments for purposes of communication between the aircraft and air traffic controller. Therefore, such payments would attract deduction of tax at source under section 194J – Singapore Airlines Ltd.v. ITO [2006] 7 SOT 84 (Chennai – Trib.).

Landing and parking charges in airports

 Payments made by foreign airlines to airport authorities for landing and parking facility cannot be brought under section 194J, although composite services relating to landing and parking may involve some component of technical services, since it could not be said that all the services were provided by professional and technical personnel – Dy. CIT v. Japan Airlines [2005] 93 ITD 163 (Delhi – Trib.).

Transaction between holding and subsidiary companies

Where assessee paid certain amount to its holding company for rendering advice or service in respect of human resource development, maintenance of accounts and finance, service rendered would definitely amount to providing service in managerial/technical field as defined in Explanation 2 to section 9(1)(vii) and, therefore, assessee was liable to deduct tax at source under section 194J on payments made to holding company – Tecumseh Products (I) Ltd. v. Dy. CIT [2007] 13 SOT 489 (Hyd. – Trib.).

Stock exchanges services

In Asstt. CIT v. Rishti Stock & Shares (P.) Ltd. [2014] (Mum.) it was held that transaction charges paid by the assessee, stock broker, to stock exchange would be liable to TDS under section 194J.

IDBI Capital Market Services Ltd. v. Dy. CIT [2015] 42 ITR (Trib.) 379 (Mum.) it was held that assessee is not required to deduct tax at source under section 194J in respect of lease line charges and VSAT charges paid to stock exchange.

Depository services

 In Asstt. CIT v. Karvy Computershare (P.) Ltd. [2013]  59 SOT 26 (URO) (Hyd.) it was held that charges paid to depositories, i.e., NSDL/CDSL by share transfer agent fall under professional managerial services and, therefore, tax is deductible at source on such payment.

Payment made by share transfer agent to Depositories, NSDL and CDSL, for availing access to database for downloading data electronically, was liable to TDS under section 194J – Karvy Computer – Share (P.) Ltd. v. Asstt. CIT [2013] [2014] 150 ITD 413 (Hyd.).

Payments for security services

 In Glaxo Smith Kline Pharmaceuticals Ltd. v. ITO [2011] 48 SOT 643  (Pune – Trib.), the appellant-company made payments to a contractor for providing security personnel, after deducting tax at source under section 194C at the then prevailing rate of 2%. The Assessing Officer treated the services as a technical service falling under section 194J, attracting TDS at 10%, and raised a demand. The Tribunal held that the contract in question was only a contract for ‘work’ (since it required no technical expertise but only skill and labour), and hence was liable to TDS only under section 194C and not under section 194J.

Website/Internet  services

In Brigade Global Services (P.) Ltd. v. ITO [2013]  143 ITD 59 (Hyd. – Trib.) it was held that where assessee availed internet services from VSNL, and efforts of technical personnel were involved in providing said services, payment made for same amounted to fee for technical services and, thus, assessee was liable to deduct tax at source while making payment in question.

In Asstt. CIT v. Anand & Anand [2013] 141 ITD 326 (Delhi – Trib.) it was held that where assessee-firm did not deduct tax on payment to a company towards web charges, such expenses were rightly disallowed in terms of section 40(a)(ia).

In Asstt. CIT v. Torry Harris Business Solutions (P.) Ltd. [2015]  155 ITD 122 (Bang. – Trib.) it was held that internet charges could not be regarded as fees for technical services and, hence, assessee was not bound to deduct tax at source under section 194J in respect of leased line expenses.

Payment for seismic survey

 In Oil & Natural Gas Corpn. Ltd. v. Asstt. CIT [2013] 59 SOT 160 (URO) (Ahd. – Trib.) it was held that where assessee had undertaken projects of exploration of oil and natural gas and made payment towards seismic survey and pre-mining activities, said payment would be liable to TDS under section 194J and not 194C.

Extraction of oil and natural gas

 In Oil India Ltd. v. Dy. CIT (TDS) [2013]  145 ITD 513 (Jodh. – Trib.) it was held that where assessee obtained different kinds of oilfield services for exploration or extraction of mineral oil and natural gas on contract basis, such services could not be termed as technical services and provision of section 194J were not applicable.

Warrant services

In Hero Moto Corp. Ltd. v. Addl. CIT [2013]  60 SOT 25 (URO) (Delhi – Trib.) the assessee issued free service coupons to customers along with vehicles sold for service of vehicles. Reimbursement was made by the assessee to dealers for carrying out service on presentation of coupons. It was held that since contract between dealer and customer was an independent and separate contract, reimbursement by the assessee was not for services rendered by dealer to customer, but was in discharge of warranty obligation included in sale price. Therefore, it could not be held that dealer rendered technical services as contemplated under section 194J and no tax was required to be deducted by assessee on reimbursement to dealers.

Transmission of electricity/Wheeling charges

 Where assessee-company paid wheeling charges for transportation of electricity, said charges paid could not be characterized as fee for technical service and no deduction under section 194J could be made – CIT v. Delhi Transco Ltd. [2015]  (Delhi).

Payment made for transmission of electricity alongwith maintenance of metering system, noting down meter reading, sealing and resealing of meters, etc. cannot be treated as fee for technical services as per provision of section 194J – Dy. CIT v. Central Power Distribution Co. of A.P. Ltd.[2014]  (Hyd. – Trib.).

Where assessee paid charges to State power utility for using its distribution network to sell energy generated and same did not involve any human intervention, assessee was not required to deduct TDS under section 194J – Auro Mira Biopower India (P.) Ltd. v. ITO [2015] 68 SOT 188 (URO) (Chennai)

Where in terms of agreement, assessee purchased electricity from UPPCL which was transmitted through UPPTCL, payment of transmission charges was not payment for fee for technical services and therefore provisions of section 194J were not attracted – Asstt. CIT v. Madhyanchal Vidyut Vitran Nigam Ltd. [2015] (Luck. – Trib.)

Transmission charges, wheeling charges and State load/dispatch charges paid by assessee, an electricity company, were not liable for deduction of tax at source under section 194J – Dy. CIT v.Jaipur Vidyut Vitran Nigam Ltd. [2015] 167 TTJ 24 (Jp.)

Film rights, acquisition of

Where assessee, a trader in films, purchased world negative rights from producers on perpetual and permanent basis, there was no liability to deduct tax at source under section 194J on payment made by assessee to producers and, accordingly, business disallowance was not justified –Dy. CIT v. V. Rama Krishna [2015] 155 ITD 394 (Hyd.).

Payment made to producers towards acquisition of satellite rights over films for a period of 99 years are not royalty and, hence, section 194J would not apply – Asstt. CIT v. S. Panduranga Rao [2015] 42 ITR (Trib.) 427 (Hyd.)

Acquisition of right to telecast a movie via satellite for 99 years held as sale; not liable to TDS – Dy. CIT v. Ganapathy Media (P.) Ltd. [2015]  154 ITD 803 (Chennai)

1.5 Meaning of Royalty

Meaning of Royalty under section 194J –TDS on Professional or Technical service

The term ‘royalty’ shall have the same meaning as in Explanation 2 to section 9(1)(vi) of the Act. This Explanation reads 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 trademark 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 consi-deration 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).’

Transfer of satellite television rights of films

In Mrs. K. Bhagyalakshmi v. Dy. CIT, Media Circle-I, Chennai [2013]  (Mad.)

Transfer of satellite television rights of films in favour of assessee amounted to sale and, therefore, assessee was not required to deduct tax at source while making payments to acquire television rights in question.

1.6 Meaning of ‘Non-compete Fees’

Clause (va) of section 28 of the Act defines ‘non-compete fees’ as any sum, whether received or receivable, in cash or kind, under an agreement for—

(a)          not carrying out any activity in relation to any business; or

(b)          not sharing any know-how, patent, copyright, trade mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services,

but excluding—

(i)           any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head ‘Capital gains’;

(ii)          any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India.

               For the purposes of clause (va) of section 28,

(i)           ‘agreement’ includes any arrangement or understanding or action in concert,—

(A)          whether or not such arrangement, understanding or action is formal or in writing; or

(B)          whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

(ii)          ‘service’ means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.

1.7 Monetary limit upto which tax is not deductible u/s 194J

No tax is required to be deducted at source where any 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 to the account of, or to, the payee, does not exceed the following monetary limits:

Category of payment Monetary limits
Paid/credited on or before 30-6-2010 Paid/credited on or after 1-7-2010
Fees for professional services Rs. 20,000 Rs. 30,000
Fees for technical services Rs. 20,000 Rs. 30,000
Royalty Rs. 20,000 Rs. 30,000
Non-compete fees Rs. 20,000 Rs. 30,000

It may be noted that the monetary limits apply separately to each category of payment, and not to all the categories put together.

Note

No threshold limit has been prescribed for payments to directors. The entire amount paid, with the exception of amounts on which tax is deductible under section 192, shall be subjected to deduction of tax at source at the prescribed rate.

1.8 Rate of TDS under section 194J

Deduct TDS @ 10% w.e.f 01.06.2007

[Before 01.06.2007 TDS  rate was 5%]

1.9 Who is to deduct tax at source u/s 194J

The payer (vide para 1.11 ) is to deduct tax at source

1.10 When tax is to be deducted at source

Tax must be deducted at that point of time at which any of the following events occur first :

♦             At the time of credit of the sum to the account of the payee.

♦             At the time of payment in cash or by issue of a cheque or draft or by any other mode.

♦             When the sum is credited to any account, whether called ‘Suspense Account’ or by any other name, in books of account of the payer.

In Marubeni Corpn. v. Addl. DIT (International Taxation) [2013] (Mum. – Trib.) it was held that where income pertains to current year, income is to be booked and tax is to be deducted in current year only, even though assessee-recipient has raised bill and received payment in subsequent year.

1.11 Payers who are covered by section 194J

The following persons are responsible for deduction of tax at source, if they pay or credit any income by way of fees for technical services or professional services or royalty or non-compete fees in excess of the monetary limit specified in para 1.7

  • Any person (resident or non-resident) other than an individual or HUF.
  • From 1-6-2002, any individual or HUF who satisfies any of the following conditions is also liable to deduct tax at source:

(i) If his/its total sales, turnover or gross receipts from business exceed or exceeds specified monetary limits during the financial year immediately preceding the financial year in which income is credited or paid. The specified monetary limits are as follows

Financial year(s) Monetary limit (Rs.)
Up to 2009-10  40 lakhs
2010-11 and 2011-12  60 lakhs
2012-13 and subsequent financial years  1 crore

ii) If his/its gross receipts from profession exceeds specified monetary limits during the financial year immediately preceding the financial year in which income is credited or paid. The specified monetary limits are as follows:

Financial year(s) Monetary limit (Rs.)
Up to 2009-10 10 lakhs
2010-11 and 2011-12 15 lakhs
2012-13 to 2015-16 25 lakhs
2016-17 and subsequent financial years 50 lakhs

Illustration

Since the figures for the ‘preceding financial year’ are the determinative factor, an individual or HUF shall be liable to deduct tax at source during the financial year 2016-17, only if such individual or HUF has carried on some business or profession during the financial year 2015-16 and the sales/turnover/gross receipts for that year exceed Rs. 1 core (in case an Individual or HUF was carring on Business) or Rs. 25 lakhs (in case an Individual or HUF was carring on Profession).

Payments for Personal Purposes by Individual/HUF

With effect from 1-6-2003, no tax need be deducted on payments made towards fees for professional services only, made by such individuals and HUF, if the payments are exclusively for personal purposes of such individual or any member of HUF.

1.12 Payments exempt from TDS under section 197A(1F)

Payments exempt from TDS under section 197A(1F)

Sub-section (1F) of section 197A provides that no deduction of tax shall be made from such specified payment to such institution, association or body or class of institutions, associations or bodies as may be notified by the Central Government in the Official Gazette, in this behalf.

Following payments have been notified under sub-section (1F) of section 197A :

“With effect from 1-7-2012 no deduction of tax shall be made in respect of a payment by a person (hereafter referred to as the transferee) for acquisition of software from another person, being a resident (hereafter referred to as the transferor), where—

(i)           the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification.

(ii)          tax has been deducted—

(a)           under section 194J on payment for any previous transfer of such software; or

(b)           under section 195 on payment for any previous transfer of such software from a non-resident, and

(iii)         the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor. – Notification No. S.O. 1323(E), dated 13-6-2012.

With effect from 1-1-2013 no deduction of tax shall be made on the payments of the nature specified below, in case such payment is made by a person to a bank listed in the Second Schedule to the Reserve Bank of India Act, 1934, excluding a foreign bank, namely:—

(i)           bank guarantee commission;

(ii)          cash management service charges;

(iii)         depository charges on maintenance of DEMAT accounts;

(iv)          charges for warehousing services for commodities;

(v)           underwriting service charges;

(vi)          clearing charges (MICR charges);

(vii)         credit card or debit card commission for transaction between the merchant establishment and acquirer bank. – Notification No. S.O. 3069(E), dated 31-12-2012.

1.13 Effect of non-furnishing of PAN on rate of tax u/s  194J

Section 206AA, as inserted with effect from 1-4-2010, provides as under :

♦  Every person whose receipts are subject to deduction of tax at source (i.e., the deductee) shall furnish his PAN to the deductor. It will be compulsory from 1-4-2010.

♦   If such person does not furnish PAN to the deductor, the deductor will deduct tax at source at higher of the following rates—

(a)          the rate prescribed in the Act;

(b)          at the rate in force, i.e., the rate mentioned in the Finance Act; or

(c)          at the rate of 20 per cent.

♦     No certificate under section 197 will be granted by the Assessing Officer unless the application contains the PAN of the applicant.

♦   It is mandatory for quoting of PAN of the deductee by both the deductor and the deductee in all correspondence, bills and vouchers exchanged between them.

♦   Where the PAN provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his PAN to the deductor and above provisions shall apply accordingly.

1.14 When no tax need be deducted or deducted at lower rate

The payee has to make an application to the Assessing Officer in the prescribed form well in advance. If the Assessing Officer is satisfied that existing and estimated tax liability of the payee justifies deduction at a lower rate or no deduction of tax, he shall issue an appropriate certificate to that effect.

The payee must apply for certificate before the amount is paid or credited to its account. The CBDT have directed that applications requesting for certificate under section 197(1) should not be acted upon by the Assessing Officers if submitted after credit/payment of the amount subject to tax deduction at source. The Board have further clarified that assessees having genuine hardship in submitting such applications in time may refer to the Board for condonation of delay in terms of section 119(2)(b) – Circular No. 774, dated 17-3-1999.

  • The application by the payee must be in Form No. 13.
  • No certificate will be issued if the application does not contain the Permanent Account Number (PAN) of the payee.
  • In cases where the ‘deductor’ is more than one person according to the application made by the payee, the Assessing Officer is required to issue separate certificate in respect of each ‘deductor’ and send it to the concerned deductor under advice to the applicant-payee.
  • The certificate for no deduction of tax shall be issued direct to the person responsible for deducting the tax under advice to the person who made an application for issue of such certificate.
  • The certificate for deduction of tax at lower rate shall be issued to the person who made an application for issue of such certificate, authorizing him to receive income or sum after deduction of tax at lower rate.
  • The certificate shall be valid for such period of the previous year as may be specified in the certificate, unless it is cancelled by the Assessing Officer at any time before the expiry of the specified period. The certificate shall be valid only with regard to the person responsible for deducting the tax and named therein

1.15 Special provisions for certain entities

The persons mentioned below may make an application in Form No. 13 to the Assessing Officer for the grant of a certificate under section 197(1) authorising them to receive incomes of any type without deduction of tax at source.[Rule 28AB of Income Tax Rules]

The following persons are covered in this regard

(a)          Persons in receipt of income or deemed income derived from property held under trust wholly for charitable or religious purposes and who claim exemption under section 11 or section 12.

(b)          Persons mentioned below who are required to file a return of income under section 139(4C) :

(i)           Scientific research association referred to in section 10(21);

(ii)          News agency referred to in section 10(22B);

(iii)         Association or institution referred to in section 10(23A);

(iv)         Institution referred to in section 10(23B);

(v)          Fund or trust referred to in section 10(23C)(iv);

(vi)         Trust or institution referred to in section 10(23C)(v);

(vii)        University or other educational institution referred to in section 10(23C)(iiiad)/(vi);

(viii)       Hospital or other medical institution referred to in section 10(23C)(iiiae)/(via);

(ix)         Trade Union or association referred to in section 10(24)(a)/(b).

1.16 Tax Deduction and Collection Account Number (TDCAN)

Every person deducting/collecting tax in accordance with the provisions of Chapter XVII who has not been allotted a Tax Deduction Account Number (TDAN) shall apply for Tax Deduction and Collection Account Number (TDCAN) in Form No. 49B within one month from the end of the month in which tax was deducted.

In case of an applicant, being a company which has not been registered under the Companies Act, 2013, the application for allotment of a tax deduction and collection account number may be made in Form No. INC-7 of Companies (Incorporation) Rules, 2014, specified under sub-section (1) of section 7 of the said Act for, incorporation of the company.

The TDAN so allotted must be quoted by the tax deductor in the following documents :

♦             All challans for the payment of any tax deducted at source.

♦             All certificates for deduction of tax at source.

♦             All returns required to be furnished

♦             All quarterly statements

♦             All other documents pertaining to such transactions as may be prescribed in the interests of revenue.

Penalty for failure to obtain TDAN under section 272BB

 Where a person who is responsible to deduct tax at source had failed to comply with the requirement of obtaining TDAN or TDCAN within time prescribed, or after allotment fails to quote such number in prescribed documents, he or it shall be liable for penalty of Rs. 10,000. No order imposing penalty shall be passed unless the person on whom penalty is proposed to be imposed is given an opportunity of being heard in the matter. No penalty shall be imposable on the person if he proves that there was reasonable cause for the failure.

Penalty for quoting false TDAN or TDCAN

Under sub-section (1A) of section 272BB, if a person, who is required to quote his TDAN  as the case may be  in the challans or certificates or statements or other notified documents, quotes a number which is false, and which he either knows or believes to be false or does not believe to be true, the Assessing Officer may direct such person to pay, by way of penalty, a sum of Rs. 10,000. Under section 273B, penalty shall not be imposed if the person proves that there was reasonable cause for the default. Again no order imposing penalty shall be passed unless the person on whom penalty is imposed is given a reasonable opportunity of being heard in the matter. Persons deducting tax should ensure that the number quoted on the aforesaid documents is not incorrect or is not false, in view of the fact that, on each occasion on which the default occurs, penalty of Rs. 10,000 is likely to be attracted.

1.17 Deposit of tax to the credit of Central Government

Due date for Deposit of TDS on Rent to the credit of the Central Government

 TDS on Rent  by office of Government

 In the case of an office of the Government, tax shall be paid to the credit of the Central Government :-

(a)          on the same day where the tax is paid without production of an income-tax challan; and

(b)          on or before seven days from the end of the month in which the deduction is made, where tax is paid accompanied by an income-tax challan.

Read  Mode of payment in case of TDS made by an office of Government without production of challan

 TDS on Rent by any person other than office of Government

In the case of deductors other than an office of the Government, tax shall be paid to the credit of the Central Government—

(a)          on or before 30th day of April where the income or amount is credited or paid in the month of March; and

(b)          in any other case, on or before seven days from the end of the month in which the deduction is made.

How to deposit TDS on Rent

Where tax has been deposited accompanied by an income-tax challan, the amount of tax so deducted or collected shall be deposited to the credit of the Central Government by remitting it within the time specified into any branch of the Reserve Bank of India or of the State Bank of India or of any authorised bank;

However in case of (a) a company; and (b) a person (other than a company) to whom the provisions of section 44AB are applicable, the amount deducted shall be electronically remitted into the Reserve Bank of India or the State Bank of India or any authorised bank accompanied by an electronic income-tax challan.

The amount shall be construed as electronically remitted to the Reserve Bank of India or to the State Bank of India or to any authorised bank, if the amount is remitted by way of—

(a)          internet banking facility of the Reserve Bank of India or of the State Bank of India or of any authorised bank; or

(b)          debit card.

Following points should also be kept in view :

♦   Date of encashment of cheque will be the date of payment of tax—Circular No. 141, dated 23-7-1974.

♦    While payment by a local cheque or draft can be made at any of the branches of banks authorised for the purpose, the assessees are advised that if they have an account in any branch of an authorised bank they should tender cheques at the said branch of the authorised bank—Circular No. 306, dated 19-6-1981.

♦   The payment of tax deducted at source should be made at the place of the income-tax office where the person responsible for deduction and payment of tax is required to file the periodical statements of tax deducted at source as prescribed under the Income-tax Rules.-Circular No. 306, dated 19-6-1981

Which challan to be used

The tax deducted at source is required to be deposited in Challan Form No. ITNS 281.

Use of computerised challan forms :-Taking into account the cumbersome and time-consuming process involved in filling up hundreds of challans for crediting tax deducted at source by the persons responsible for deducting tax at source on various payments, the Board has permitted all the persons to use computerised challan forms provided such forms are the exact replica of the one in use at present, having same format, colour and may be similar in size—Circular No. 796, dated 10-10-2000.

1.18 Furnishing of statements by tax deductor to department

In respect of tax deducted at source every tax deductor is required to prepare and transmit quarterly statements in Form No. 26Q.

Due date for sending the statement

The statement should be sent on or before the dates mentioned below :

Sl. No. Date of ending of quarter of financial year Due date
(1) (2) (3)
1. 30th June 31st July of the financial year
2. 30th September 31st October of the financial year
3. 31st December 31st January of the financial year
4. 31st March 31st May of the financial year immediately following the financial year in which the deduction is made.

Manner of furnishing statements

Following points may be noted :

(i)           The statement may be furnished in any of the following manners, namely:—

(a)          furnishing the statement in paper form;

(b)          furnishing the statement electronically under digital signature in accordance with the procedures, formats and standards specified by the Director General of Income-tax (Systems);

(c)          furnishing the statement electronically along with the verification of the statement in Form 27A or verified through an electronic process in accordance with the procedures, formats and standards specified by the Director General of Income-tax (Systems).

(ii)          Where,—

(a)          the deductor is an office of the Government; or

(b)          the deductor is the principal officer of a company; or

(c)          the deductor is a person who is required to get his accounts audited under section 44AB in the immediately preceding financial year; or

(d)          the number of deductee’s records in a statement for any quarter of the financial year are twenty or more,

               the deductor shall furnish the statement in the manner specified in (i)(b) or (i)(c) above.

(iii)         Where deductor is a person other than the person referred to in (ii), the statement may, at his option, be delivered or cause to be delivered in the manner specified in (i)(b) or (i)(c) above.

Fee payable for defaults

 In respect of statements to be delivered on or after 1-7-2012, section 234E of the Act provides that, where the deductor fails to deliver or cause to be delivered the statement within the due date mentioned, the deductor shall be liable to pay, by way of fee, a sum of Rs. 200 for every day during which the failure continues, subject to a maximum fee equal to the amount of tax deductible. This fee shall be paid by the deductor before the statement is delivered or caused to be delivered.

Penalty for failure to deliver statement or for furnishing incorrect information in statement

In respect of statements to be delivered prior to 1-7-2012, section 272A(2)(k) of the Act provides that if any deductor fails to deliver or cause to be delivered a copy of the statement within the prescribed due date then in force, the deductor is liable to pay, by way of penalty, a sum of Rs. 100 for every day during which the failure continues, subject to a maximum penalty equal to amount of tax deductible. This penalty shall not be imposed if the deductor proves reasonable cause for the failure.

In respect of statements to be delivered or cause to be delivered on or after 1-7-2012, under section 271H a deductor shall be liable to pay penalty, if the deductor, (a) fails to deliver or cause to be delivered the statement within the due date mentioned above or (b) furnishes incorrect information in the statement which is required to be delivered or cause to be delivered. The penalty leviable shall be a sum which shall not be less than Rs. 10,000 but which may extend to Rs. 1,00,000. However, no penalty shall be levied for the failure referred to in (a) above, if the deductor proves that, after paying tax deducted along with the fee and interest, if any, to the credit of the Central Government, he has delivered or cause to be delivered the statement before the expiry of a period of one year from the prescribed due date for delivering the statement mentioned above. Section 273B provides that no penalty shall be imposed, either for failure to furnish the statement or for furnishing incorrect information in the statement, if the deductor proves reasonable cause for the same.

1.19 Certificate/statement for tax deducted at source

In respect of tax deducted at source during the financial year, the payer should issue a certificate for tax deducted at source to payee in Form No. 16A after downloading from the traces website https://www.tdscpc.gov.in/. The deductor, issuing the TDS certificate in Form No.16A by downloading from the TIN Website shall authenticate such TDS certificate by either using digital signature or manual signature.

Time within which certificate is to be issued

The certificate shall be furnished quarterly within the time limit specified below :

Date of ending of quarter of financial year Due date
30th June 15th August of the financial year
30th September 15th November of the financial year
31st December 15th February of the financial year
31st March 15th June of the financial year immediately following the financial year in which deduction is made

Issue of duplicate certificate

The deductor may issue a duplicate certificate if the deductee has lost the original certificate so issued and makes a request for issuance of a duplicate certificate and such duplicate certificate is certified as duplicate by the deductor.

Penalty for non-issue of certificate

If a deductor fails to issue certificate in Form No. 16A, he shall be liable to pay, by way of penalty, a sum of Rs. 100 for every day during which the failure continues, subject to a maximum of the amount of tax deductible at source for which certificate is required to be issued. No order imposing penalty shall be passed by any income-tax authority unless the person on whom the penalty is proposed to be imposed is given an opportunity of being heard in the matter by such authority. However, no penalty shall be imposed if the deductor proves reasonable cause for the failure.

For deduction of tax at source made on or after 1-4-2012 All deductors (including Government deductors who deposit TDS in the Central Government Account through book entry) shall issue TDS certificate in Form No. 16A generated through TIN Central System and which is downloaded from the TIN Website with a unique TDS certificate number in respect of all sums deducted on or after the 1st day of April, 2012 under any of the provisions of Chapter XVII-B other than section 192.-Circular No. 1/2012, dated 9-4-2012.

1.20 Annual statements to payees by department

With effect from 1-4-2008, the Director General of Income-tax (Systems) or the person authorised by him (i.e. NSDL) shall deliver to every payee from whose income-tax has been deducted, a statement in Form No. 26AS by the 31st July every year following the financial year during which taxes were deducted.

Recipient/Payee  can see the TDS details in form 26AS by logging into www.incometaxindiaefiling.gov.in

1.21 Credit for tax deducted at source

The Recipient/Payee can claim credit for the tax deducted at source as furnished in the certificate form No 16A in his return of income.

Recipient/Payee  can see the TDS details in form 26AS by logging into www.incometaxindiaefiling.gov.in

1.22 Claim for refund

Rule 31A(3A) provides that a claim for refund, for sum paid to the credit of the Central Government under Chapter XVII-B, shall be furnished by the deductor in Form 26B electronically under digital signature in accordance with the procedures, formats and standards prescribed by the Director General of Income-tax (Systems).

1.23 Consequences of non-deduction/short deduction of tax at source

Read Post TDS not Deducted ? -Consequences

1.24 Disallowance under section 40(a)

Section 40(a) provides that in the case of any assessee following amounts shall not be deducted in computing the income chargeable to tax

Thirty per cent of any sum payable to a resident, on which tax is deductible at source and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub-section (1) of section 139.’

Read More Disallowance under section 40(a)(i)/(ia)/(iii) for non Deduction of TDS

  1. 40(a)(ia) TDS default based on opinion of CA was bona fide mistake , No Penalty
  2. section 40(a)(i) No TDS Disallowance if Expenses Capitalised
  3. section 40(a)(ia) Payer not liable for TDS default due to retrospective amendments
  4. 40(a)(ia) Disallowance for TDS default if books rejected by AO

1.25 Information to be furnished by payer in case of payment to non-resident

Read Complete Post Payment to Non resident ?- Statement by Tax Deductor to Income Tax deptt.

1.26 Judgments on Section 194J

1.27 CBDT Circulars u/s 194J

1.27-1 DEDUCTION OF TAX AT SOURCE ON SERVICE TAX

CIRCULAR F. NO. 275/73/2007-IT(B), DATED 30-6-2008

Kindly refer to your letter No. Dir.Tax/761, dated 5-5-2008 on the subject mentioned above. Your request has been considered by the Board. The payments made under section 194-I differ significantly from payment made under section 194J in the way that in the case of 194-I TDS has to be deducted on any income paid as rent. However, in the case of section 194J TDS has to be deducted on any sum paid as professional and technical fees. The Board had decided to exclude TDS on service tax component on rental payment because it was construed that service tax payment cannot be regarded as income of the landlord. Since section 194J covers any sum paid, therefore the board has decided not to extend the scope of Circular No. 4/2008, dated April 28, 2008 to such payment under section 194J.

1.27-2 APPLICABILITY OF PROVISIONS UNDER SECTION 194J, IN THE CASE OF TRANSACTIONS BY THE THIRD PARTY ADMINISTRATORS (TPAs) WITH HOSPITALS ETC.

CIRCULAR NO. 8/2009 [F.NO. 385/08/2009-IT(B)], DATED 24-11-2009

A number of representations have been received from various stakeholders regarding applicability of provisions under section 194J of Income-tax Act, 1961 on payments made by Third Party Administrators (TPAs) to hospitals on behalf of insurance companies for settling medical/insurance claims etc. with the hospitals.

2. The matter was examined by the Board. As per provisions of 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
(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 ten per cent of such sum as income-tax on income comprised therein…. Further as perExplanation (a) to section 194J “professional services” means services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession etc.’.

3. The services rendered by hospitals to various patients are primarily medical services and, therefore, provisions of section 194J are applicable on payments made by TPAs to hospitals etc. Further for invoking provisions of section 194J, there is no stipulation that the professional services have to be necessarily rendered to the person who makes payment to hospital. Therefore TPAs who are making payment on behalf of insurance companies to hospitals for settlement of medical/insurance claims etc. under various schemes including Cashless schemes are liable to deduct tax at source under section 194J on all such payments to hospitals etc.

3.1 In view of above, all such past transactions between TPAs and hospitals fall within provisions of section 194J and consequence of failure to deduct tax or after deducting tax failure to pay on all such transactions would make the deductor (TPAs) deemed to be an assessee in default in respect of such tax and also liable for charging of interest under section 201(1A) and penalty under section 271C.

4. Considering the facts and circumstances of the class of cases of TPAs and insurance companies, the Board has decided that no proceedings under section 201 may be initiated after the expiry of six years from the end of financial year in which such payment have been made without deducting tax at source etc. by the TPAs. The Board is also of the view that tax demand arising out of section 201(1) in situations arising above, may not be enforced if the deductor (TPA) satisfies the officer in charge of TDS that the relevant taxes have been paid by the deductee-assessee (hospitals etc.). A certificate from the auditor of the deductee assessee stating that the tax and interest due from deductee-assessee has been paid for the assessment year concerned would be sufficient compliance for the above purpose. However, this will not alter the liability to charge interest under section 201(1A) of the Income-tax Act till payment of taxes by the deductee assessee or liability for penalty under section 271C of the Income-tax Act as the case may be.

5. The contents of the circular may be brought to the notice of officers and officials working under you for strict compliance.

1.27-3 NOTIFIED PAYMENTS UNDER SECTION 197A(1F)

NOTIFICATION NO. S.O. 3069(E), DATED 31-12-2012

In exercise of the powers conferred by sub-section (1F) of section 197A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that no deduction of tax under Chapter XVII of the said Act shall be made on the payments of the nature specified below, in case such payment is made by a person to a bank listed in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), excluding a foreign bank, namely:—

(i) bank guarantee commission;
(ii) cash management service charges;
(iii) depository charges on maintenance of DEMAT accounts;
(iv) charges for warehousing services for commodities;
(v) underwriting service charges;
(vi) clearing charges (MICR charges);
(vii) credit card or debit card commission for transaction between the merchant establishment and acquirer bank.

2. This notification shall come into force from the 1st day of January, 2013.

NOTIFICATION NO. S.O. 1323(E), DATED 13-6-2012

In exercise of the powers conferred by sub-section (1F) of section 197A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that no deduction of tax shall be made on the following specified payment under section 194J of the Act, namely:-

Payment by a person (hereafter referred to as the transferee) for acquisition of software from another person, being a resident, (hereafter referred to as the transferor), where—

(i) the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification,
(ii) tax has been deducted—
(a) under section 194J on payment for any previous transfer of such software; or
(b) under section 195 on payment for any previous transfer of such software from a non-resident, and
(iii) the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor.

2. This notification shall come into force from the 1st day of July, 2012.

1.27-4 CLARIFICATION REGARDING TDS UNDER CHAPTER XVII-B ON SERVICE TAX COMPONENT COMPRISED OF PAYMENTS MADE TO RESIDENTS

CIRCULAR NO. 1/2014, DATED 13-1-2014

The Board had issued a Circular No. 4/2008, dated 28-4-2008 (Annex 15.3) wherein it was clarified that tax is to be deducted at source under section 194-I of the Income-tax Act, 1961 (hereafter referred to as ‘the Act’), on the amount of rent paid/payable without including the service tax component. Representations/letters has been received seeking clarification whether such principle can be extended to other provisions of the Act also.

2. Attention of CBDT has also been drawn to the judgment of the Hon’ble Rajasthan High Court dated 1-7-2013, in the case of CIT (TDS) Jaipur v. Rajasthan Urban Infrastructure (Income-tax Appeal Nos. 235, 222, 238 and 239/2011), holding that if as per the terms of the agreement between the payer and the payee, the amount of service tax is to be paid separately and was not included in the fees for professional services or technical services, no TDS is required to be made on the service tax component u/s 194J of the Act.

3. The matter has been examined afresh. In exercise of the powers conferred under section 119 of the Act, the Board has decided that wherever in terms of the agreement/contract between the payer and the payee, the service tax component comprised in the amount payable to a resident is indicated separately, tax shall be deducted at source under Chapter XVII-B of the Act on the amount paid/payable without including such service tax component.

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