Introduction – TDS on consultancy charges
When a payment is made to a person for rendering a professional or technical service, etc., TDS on payment of availing of such services will be deducted under Section 194J of the Income Tax Act 1961. Let’s understand the concept of TDS to be deducted on consultancy charges in detail.
Applicability of TDS provisions on payment of Consultancy Charges under Section 194J
Except for individuals and HUFs, any person making payments to a Resident shall be liable to deduct TDS on consultancy charges at a specified rate on any of the following services:
- Fees paid to recipient for availing Professional Services;
- Fees for providing Technical Services;
- Payment made towards Royalty;
- Amount paid to recipient as per Section 28 (va) for not sharing technical know-how, patent, copyright, license, franchise, etc with a person other than the payer;
- Fees, remuneration, or commission paid to the director of a company;
Note: All the above-mentioned payments are subject to deduction of TDS under Section 194J, only if the payer is not liable to deduct TDS under Section 192 of the Act on such payment.
What are “Professional Services” for the purpose of deduction of TDS on consultancy charges under Section 194J of the Income Tax Act, 1961?
“Professional Services”, as per Section 194J of the Act shall include the following:
- Legal Services
- Medical Services
- Engineering Services
- Architecture consultancy services
- Accountancy
- Technical Consultancy
- Interior Decoration
- Advertising
- Any other services as may be prescribed
Rate of deduction of TDS on payment made towards Consultancy Charges under Section 194J of the Income Tax Act, 1961
The rate of TDS is as under: –
- TDS shall be deducted at the rate of10%.
- In case of business operations of a call centre at the rate of 2%.
- TDS on Royalty paid for distribution, screening or sale of a film shall be deducted at the rate of 2%.
- No Surcharge and Higher Education Cess (“HEC”) shall be added to the 10% rate.
Time of deduction of TDS on consultancy charges under Section 194J of the Income Tax Act, 1961
TDS is required to be deducted in case of payment made for consultancy charges when –
- The payment is credited to the account of the payee; or
- Payment is made to the payee of consultancy charges in cash or by way of issue of cheque/ draft/ any other mode.
whichever event takes place earlier.
Deemed application of provisions of TDS on Consultancy Charges under Section 194J of the Income Tax Act, 1961
In case, where the amount is credited to Suspense Account or any other account in the books of the person who is liable to make payment to the payee.
Then, it will be deemed to have been credited in the account of the payee and the provisions for deduction of TDS on payment made on consultancy charges will apply.
Threshold Limit for deduction of TDS on Consultancy Charges under Section 194J of the Income Tax Act, 1961
The threshold limit for deduction of TDS on Consultancy Charges is as follows:
- For Professional Services – 30,000
- For Technical Services – 30,000
- For Royalties – 30,000
- For services under Section 28 (va) – 30,000
However, if a payment is made for availing any of the services (mentioned above) and such payment amount exceeds the threshold limit, the applicable rate of TDS will be 2% or 10%, as the case may be under Section 194J of the Act.
Exemptions from Income Tax Deductions on Consultancy Charges under Section 194J of the Income Tax Act, 1961
- Individual and HUFs: Section 194J will not apply to an individual or a Hindu Undivided Family or HUF.
But it will be applicable if the total sales, gross receipts, or turnover from the business or profession exceeds:
- In case of business – Rs. 1 crore, or
- In case of profession – Rs. 50 lakhs
It should be noted that such income must have been earned during the FY immediately preceding the FY in which such payment by way of professional or technical service is made.
- Personal Purpose: If the amount credited/ paid is for personal purposes in case of professional service of the individual or members of HUF, no TDS will be deducted.
- If any amount is credited/ paid to the deductee by the deductor before July 1, 1995.
- Aggregate sum doesn’t exceed Rs. 30,000: No TDS will be deducted where the amount or aggregate of amounts credited/ paid during the FY does not exceed Rs. 30,000 for:
- Professional services,
- Technical services,
- Royalties and
- Section 28 (va), i.e., non-competition fees.
Clarification by CBDT
- TDS on consultancy charges shall be deducted on invoice value. Further, it will be excluding the value of GST (if such value is mentioned separately in the invoice). – Circular No. 23/ 2017.
- However, TDS shall be deducted on the entire invoice value (if value of GST is not mentioned separately in the invoice) – Circular No. 23/ 2017.
- Rendering of services for procurement of orders might include technical or professional fees which then shall be subject to TDS under Section 194J. – Circular No. 715/ 1995.
- When third party administrators make payment on behalf of insurance company to hospital for insurance/ medical claims, it is subject to TDS under Section 194J. – Circular No. 8/ 2009
- In case, where fees is paid to a resident CA, advocate, solicitor or lawyer through regular banking channel by a non-resident who doesn’t have a/an:
- Permanent Establishment in India, or
- Business Connection in India, or
- Agent in India;
Then, it will not be subject to deduction of TDS under Section 194J. – Circular No.: 726/ 1995
- If technical services are rendered under a maintenance contract, then, the payment for availing such services shall be subject to deduction of TDS under Section 194J. – Circular No. 715/ 1995.
Landmark Judgements for Section 194J of the Income Tax Act, 1961
- In the case of Gujarat Sickle Cell Anemia Control Society v. Deputy Commissioner of Income-tax [2022], the assessee was carrying out the DTT test, HPLC test, etc. in the laboratory. So, the ITAT held that these services will constitute as professional services.
- In another case of Commissioner of Income-tax v. Mewar Hospital (P.) Ltd. [2022], the Rajasthan High Court held that where the hospital engaged the services of doctors on retainership, then, the payment to the doctors for their services will be subject to TDS under Section
Illustrations: –
XYZ Ltd. availed legal services of ABC Advocates and Solicitors for Rs. 50,000. Then, at what rate, will the TDS be deducted on consultancy services. Furthermore, how much TDS shall be deducted on such payment?
Solution: The legal services availed will be considered as professional services and thus, will be covered in the provision. The amount is above Rs. 30,000, i.e., the threshold limit.
Therefore, the rate and amount of TDS for consultancy charges as prescribed under Section 194J will be 10% and Rs. 5,000 respectively.
Illustration: Mr. X has availed medical services of Fortis hospital for Rs. 20,000. Then, at what rate, will TDS be deducted?
Solution: The services that are availed by Mr. X is covered under Section 194J. So, it constitutes as professional services. But the threshold limit provided is Rs. 30,000.
Thus, no TDS will be deducted under Section 194J.
For the Full text of Section 194J, please refer to this link
Explore our Full detailed Article on TDS.
CONCLUSION
In conclusion, TDS on consultancy charges is required to be deducted under Section 194J of the Income Tax Act, 1961 at the rate of 2% or 10%, as the case may be, for payments made to Residents.
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