Tax Deducted at Source (TDS) from Fees for Professional Services/Technical Services/Royalty (Section-194J)

 

1.

Introduction to TDS U/s 194J

2.

Tax to be deducted by whom?

3.

When tax shall be deducted?

4.

When no tax shall be deducted?

5.

Rate of TDS

6.

Payment of tax to the credit of the Central Government

7.

Interest for delay in payment of TDS

8.

Issuance of TDS certificate

9.

Furnishing the TDS return

10.

Default in any prescribed procedure

11.

Disallowance of expenses while computing business income due to non-deduction of tax at source under section 194J

 

1.      Introduction to TDS U/s 194J

As per section 194J, tax is to be deducted in respect of the following payments to a resident :

 

a)         Fees for professional services, or

b)         Fees for technical services, or

c)         Director’s fees (not in the nature of salary), or

d)         Royalty, or

e)         Any sum referred to in clause (va) of section 28 [i.e. non-compete fee].

 

The provisions of section 194J are not applicable in case of payment of fees, royalty, etc. to a non-resident. Payments made to non-residents are also covered under TDS mechanism, however, tax in such a case is to be deducted as per section 195.

 

Illustration – 1

Essem Enterprises, a partnership firm took consultancy from a Chartered Accountant located at Delhi. The firm has paid fees of Rs. 84,000 to a Chartered Accountant. Should the firm deduct tax at source from the professional fees?

**

Tax is to be deducted under section 194J on the following payments to a resident:

 

(a)        Fees for professional services, or

(b)       Fees for technical services, or

(c)        Director’s fees (not in the nature of salary), or

(d)       Royalty, or

(e)        any sum referred to in clause (va) of section 28.

 

In this case, the professional fees are paid to a resident and hence, the firm has to deduct tax under section 194J from the fees of Rs. 84,000.

 

Illustration – 2

SM Trading Co., a partnership firm took consultancy from an engineer located at New York. The firm has paid fees of Rs. 84,000 to the engineer. Should the firm deduct tax at source under section 194J from the fees paid to the engineer?

**

Tax is to be deducted under section 194J on following payments to a resident:

 

(a)        Fees for professional services, or

(b)       Fees for technical services, or

(c)        Director’s fees (not in the nature of salary), or

(d)       Royalty, or

(e)        any sum referred to in clause (va) of section 28.

 

In this case, the professional fees are paid to a non-resident and hence, tax is not to be deducted under section 194J. However, section 195 requires deduction of tax at source from payment made to a non-resident. Hence, the firm is not required to deduct tax under section 194J but it is required to deduct tax at source under section 195.

 

2.      Tax to be deducted by whom?

Every person (i.e. payer) other than an individual or a Hindu undivided family (HUF), who is responsible to make payments covered under section 194J to a resident, is liable to deduct tax at source under section 194J.

 

An individual or a HUF, whose total sales, gross receipts or turnover from the business or profession carried on by him/it exceeds the monetary limits specified under section 44AB during the financial year immediately preceding the financial year in which aforesaid amount is credited or paid, shall be liable to deduct tax under this section. In other words, an individual or a HUF is liable to deduct TDS under this section, if such individual or HUF was liable to get accounts audited under section 44AB in the preceding financial year.

 

Illustration – 1

Mr. Kumar is running a plastic factory. The total turnover of the factory during the financial year 2015-16 amounted to Rs. 84,00,000. On 8-4-2016, he took consultancy of a Delhi based Company Secretary. The consultancy fees amounted to Rs. 84,000. Should Mr. Kumar deduct tax from consultancy fees of Rs. 84,000?

**

As per section 194J, an individual or a HUF has to deduct tax while making payments covered under section 194J if he/it was liable to get its account audited in the preceding financial year. In this case, professional fees pertain to the financial year 2016-17 and the immediately preceding financial year is 2015-16. Thus, if in the financial year 2015-16, Mr. Kumar was liable to get his account audited, then he will be liable to deduct tax on professional fees of Rs. 84,000 to be paid by him in the financial year 2016-17. However, if he was not liable to get his account audited during the financial year 2015-16, then he will not be liable to deduct tax from professional fees of Rs. 84,000.

 

For the financial year 2015-16, a person has to get his accounts audited if the turnover from the business exceeds Rs. 1,00,00,000. In this case, the turnover of Mr. Kumar for the financial year 2015-16 is Rs. 84,00,000 which is below Rs. 1,00,00,000 and hence he was not liable to get his account audited during the financial year 2015-16.

 

Mr. Kumar was not liable to get his account audited in the financial year 2015-16 and

hence, he will not be liable to deduct tax in respect of professional fees paid by him during the financial year 2016-17.

 

Illustration – 2

Mr. Rajat is running a garments factory. The total turnover of the factory during the financial year 2015-16 amounted to Rs. 1,84,00,000. On 8-4-2016, he took consultancy of a Delhi based Chartered Accountant . The consultancy fees amounted to Rs. 1,84,000. Should Mr. Rajat deduct tax from consultancy fees of Rs. 1,84,000?

**

As per section 194J, an individual or HUF has to deduct tax while making payments covered under section 194J if he/it was liable to get its account audited in the preceding financial year. In this case, professional fees pertain to the financial year 2016-17 and immediately preceding financial year will be 2015-16. Thus, if in the financial year 2015-16, Mr. Rajat was liable to get his account audited then he will be liable to deduct tax on professional fees of Rs. 84,000 to be paid by him in the financial year 2016-17. However, if he was not liable to get his account audited during the financial year 2015-16, then he will not be liable to deduct tax from professional fees of Rs. 84,000.

 

For the financial year 2015-16, a person has to get his accounts audited if the turnover from the business exceeds Rs. 1,00,00,000. In this case, the turnover of Mr. Rajat for the financial year 2015-16 is Rs. 1,84,00,000 which is above Rs. 1,00,00,000 and hence he was liable to get his account audited during the financial year 2015-16.

Mr. Rajat is liable to get his account audited in the financial year 2015-16 and hence, he will be liable to deduct tax in respect of professional fees paid by him during the financial year 2016-17.

 

Illustration – 3

Kumar & Co., a partnership firm is engaged in the business of trading of food grains. The total turnover of the firm during the financial year 2015-16 amounted to Rs. 84,00,000. On 8-4-2016, it took consultancy of a Delhi based Chartered Account firm. The consultancy fees amounted to Rs. 84,000. Should the firm deduct tax from interest of Rs.84,000?

 

**

As per section 194J, any person other than an individual or HUF has to deduct tax from payment covered under section 194J irrespective of its obligation to gets accounts audited under Section 44AB during the preceding year. Hence, irrespective of obligation of the payer to gets accounts audited during the preceding year, the firm has to deduct tax from interest paid by it.

 

3.      When tax shall be deducted?

As per section 194J, tax is to be deducted at the time of payment or credit (to any account by whatever name called), whichever is earlier.

 

Illustration

Essem Publications, a partnership firm has to pay royalty of Rs. 1,84,000 to Mr. Kumar

residing in Delhi. The royalty is credited to the account of Mr. Kumar in the month of March 2016, but the same is actually paid in the month of May 2016. When is the firm liable to deduct tax, in March 2016 or in May 2016?

**

As per section 194J, tax is to be deducted at the time of payment or credit (to any account by whatever name called), whichever is earlier. In this case, royalty is credited to the account of the payee in March 2016 and the same is actually paid in the month of May 2016. In other words, the time of credit is March 2016 and the time of payment is May 2016, hence, the liability to deduct tax will arise in the month of March 2016.

 

4.      When no tax shall be deducted?

Following are few important instances in which there is no requirement of deduction of tax at source under section 194J.

 

1.         No tax is to be deducted if the amount of professional fees or technical fees or royalty or non-compete fee during the financial year does not exceed Rs. 30,000. However, there is no such limit in case of director’s fees.

 

Illustration – 1

Kumar & Co., a partnership firm is engaged in the business of trading of food grains. During the financial year 2016-17, it took consultancy of a Delhi based Chartered Accountant firm. The consultancy fees for the year amounted to Rs. 24,000. Should the firm deduct tax from fees of Rs. 24,000?

**

As per section 194J, no tax is to be deducted from professional fees if the aggregate fees for the year do not exceed Rs. 30,000. In this case, the aggregate fees for the year amounted to Rs. 24,000 which is below Rs. 30,000 and hence, the firm is not liable to deduct tax from the professional fees of Rs. 24,000.

 

Illustration – 2

Ratan & Co., a partnership firm is engaged in the business of trading of clothes. During the financial year 2016-17, it took consultancy of a Delhi based software engineer. The consultancy fees for the year amounted to Rs. 31,000. Should the firm deduct tax from fees of Rs. 31,000?

**

As per section 194J, no tax is to be deducted from professional fees if the aggregate fees for the year do not exceed Rs. 30,000. In this case, the aggregate fees for the year amounted to Rs. 31,000. Once the fees for the year exceeds Rs. 30,000, tax is to be deducted from the entire fees and not from fees in excess of Rs. 30,000. Hence, the firm will be liable to deduct tax on total fees of Rs. 31,000.

 

2.         No tax to be deducted from fees paid by an individual/a HUF for the professional service received by him/it for personal purposes. No tax is to be deducted by a payer being an individual or a HUF in respect of fees for professional service, if such fees are paid for any personal service of such individual or any member of the HUF.

 

3.         When the payee has obtained a certificate from the Assessing Officer for non -

deduction or lower deduction of tax.

 

The payee may approach the Assessing Officer by making an application in Form No. 13 for issuance of certificate for non-deduction of tax at source or lower deduction of tax. On receiving such an application, the AO may issue appropriate certificate in this regard if he is satisfied that the total income of the payee justifies the deduction of income-tax at any lower rate or nil deduction of income tax.

 

As per Income-tax (Ninth Amendment) Rules, 2014, Certificate for non-deduction of income-tax shall be issued directly to the person responsible for deducting the tax under an advice to the payee (i.e. who made an application for issue of such certificate).Whereas, certificate of lower deduction of income-tax shall be issued to payee itself.

 

If AO has issued certificate for no deduction of tax or lower deduction of tax, as the case may be, then payer should deduct tax accordingly.

5.      Rate of TDS

As per section 194J, tax is to be deducted @ 10% from the payments covered under section 194J. However, if the payee does not furnish his Permanent Account Number (PAN) then the payer has to deduct tax at the higher of following:

 

       At the rate specified in the relevant provision of the Income-tax Act.

       At the rate or rates in force, i.e., the rate prescribed in the Finance Act.

       At the rate of 20%.

 

6.      Payment of tax to the credit of the Central Government

The time limit for payment of tax to the credit of Government in respect of tax deducted at source under section 194J is same as discussed in case of section 194A.

 

Tax deducted from interest by the non-Government deductor is to be paid to the credit of the Central Government by the following due dates:

 

       Tax deducted during the month of April to February should be paid to the credit of the Government on or before 7 days from the end of the month in which the tax is deducted.

 

       Tax deducted during the month of March should be paid to the credit of the

Government on or before 30th day of April.

 

Illustration

Essem Traders, a partnership firm has taken a loan from Mr. Kaushal residing in Agra (friend of one of its partner). It is paying interest on monthly basis. Monthly interest amounted to Rs. 2,000 and is paid on the last day of each month. The firm deducts tax @ 10% from the monthly interest and pays the net interest to Mr. Kaushal. The tax deducted by the firm is deposited to the credit of Government by the following dates :

 

Month

Date of deposit with the

Government

Tax deducted during the month of April 2016

3/05/2016

Tax deducted during the month of May 2016

07/06/2016

Tax deducted during the month of June 2016

18/07/2016

Tax deducted during the month of July 2016

02/08/2016

Tax deducted during the month of August 2016

04/09/2016

Tax deducted during the month of September 2016

09/10/2016

Tax deducted during the month of October 2016

06/11/2016

Tax deducted during the month of November 2016

11/12/2016

Tax deducted during the month of December 2016

02/01/2017

Tax deducted during the month of January 2017

05/02/2017

Tax deducted during the month of February 2017

05/03/2017

Tax deducted during the month of March 2017

25/04/2017

 

Had the firm paid the tax to the credit of the Government within the prescribed time?

**

In respect of non-Government deductor, tax deducted during the month of April to February should be paid to the credit of the Government on or before 7 days from the end of the month in which the deduction is made and tax deducted during the month of March should be paid to the credit of the Government on or before 30th day of April. Thus, the due dates for payment of tax to the credit of the Government and the comparison of the due date with actual date of payment will be as per table given below:

 

TDS for the Month

Of

Due date of deposit

with Government

Date of deposit with

Government

Whether deposited

within the due

date?

April,2016

07/05/2016

03/05/2016

Yes

May, 2016

07/06/2016

07/06/2016

Yes

June, 2016

07/07/2016

18/07/2016

No

July, 2016

07/08/2016

02/08/2016

Yes

August, 2016

07/09/2016

04/09/2016

Yes

September, 2016

07/10/2016

09/10/2016

No

October, 2016

07/11/2016

06/11/2016

Yes

November, 2016

07/12/2016

11/12/2016

No

December, 2016

07/01/2017

02/01/2017

Yes

January, 2017

07/02/2017

05/02/2017

Yes

February, 2017

07/03/2017

05/03/2017

Yes

March, 2017

30/04/2017

25/04/2017

Yes

 

7.      Interest for delay in payment of TDS

Provisions relating to interest for delay in payment of TDS in respect of tax deducted at source under section 194J are same as discussed in case of section 194A.

 

As per section 201, if any person who is liable to deduct tax at source does not deduct tax at source, or after so deducting fails to pay the whole or any part of the tax to the credit of the Government, then such person shall be liable to pay simple interest at following rates:

 

       Interest shall be levied @ 1% for every month or part of a month on the amount of such tax from the date on which such tax was deductible to the date on which such tax is deducted. Interest shall be levied @ 1.5% for every month or part of a month on the amount of such tax from the date on which such tax was deducted to the date on which such tax is actually paid to the credit of the Government.

 

In other words, interest will be levied @ 1% for delay in deduction and @ 1.5% for delay in payment after deduction.

 

8.      Issuance of TDS certificate

The provisions relating to issuance of TDS certificate in respect of tax deducted at source under section 194J are same as discussed in case of section 194A.

 

Every deductor has to furnish a TDS certificate to the deductee in Form No. 16A (for tax deducted on payments other than salary). The certificate should be issued on quarterly basis by following dates:

 

Quarter

Due date for Non-Government Deductor

April to June

15 th August

July to September

15th. November

October to December

15th. February

January to March

15th. July

 

The certificate should be downloaded from http://contents.tdscpc.gov.in

 

9.      Furnishing the TDS return

The provisions relating to furnishing of TDS return in case of tax deducted at source under section 194J are same as discussed in case of section 194A.

 

Every deductor who has deducted tax at source has to furnish the details of tax deducted by him to the Government. These details are to be furnished to the Government in the prescribed form. These details are to be furnished on quarterly basis. In other words, every deductor has to furnish the details of tax deducted by him by filing quarterly TDS return in the prescribed form. The due dates for filing the quarterly TDS return by a non-Government deductor are as per table given below :

 

Quarter

Due date of filing of TDS return

April to June

31 st. July

July to September

31st. October

October to December

31st. January

January to March

31st. May

 

10.    Default in any prescribed procedure

The provisions relating to various defaults are same as discussed in case of section 194A.

 

The deductor will be liable to penalty/persecution in respect of following defaults:

 

1.         Default in obtaining Tax Deduction Account Number (*)

 

2.         Default in deduction of tax

 

3.         Default in payment of tax to the credit of the Government

 

4.         Default in furnishing the TDS return

 

5.         Default in furnishing the TDS certificate to the payee

 

(*) As per section 203A(1), every person liable to deduct tax at source has to obtain Tax Deduction Account Number (TAN), except person liable to deduct tax under section 194IA i.e. TDS on purchase of land/building and such person, as may be notified by the Central Government in this behalf.

 

11.    Disallowance of expenses while computing business income due to non-deduction of tax at source under section 194J

The provisions relating to disallowance are same as discussed in case of section 194A.

 

As per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance while computing income chargeable to tax under the head “Profits and gains of business or profession”:

 

If tax is deductible at source but is not deducted.

 

If tax is deducted during the year, and the same is not paid on or before the due

date of filing of return of income specified under section 139(1).

 

In other words, if tax is deducted during the year and the same is paid on or before the due date of filing the return as specified in section 139(1), then the concerned expenditure will be deductible in the year in which such expenditure is incurred.

 

However, any payment disallowed by aforesaid provision, shall be allowed as a deduction in computing the income of the year in which such tax deducted has been paid to the Government.

 

Illustration

Essem Traders a partnership firm has taken a loan from Mr. Varun residing at Agra. The annual interest for the financial year 2016-17 amounted to Rs. 84,000. In March 2017, the firm deducted tax of Rs. 8,400 from the interest and paid the same to the credit of the Government on 30th July, 2017. The due date of filing the return of income is 30th. September, 2017. Can the firm claim deduction of interest of Rs. 84,000 while computing its taxable business income?

**

In this case, the tax deduction pertains to the month of March 2017, hence, it should be deposited to the credit of Government by 30th April 2017. The firm has deposited the tax to the credit of Government by 30th July, 2017, hence, there is a delay by the firm in payment of TDS amount to the credit of Government. For this delay, the firm will be liable to pay interest @ 1.5% per month or part of the month. However, this delay will not impact the deductibility of the interest while computing taxable business income.

 

As per section 40(a)(ia), any sum payable to a resident, which is subject to deduction of tax at source, would attract 30% disallowance while computing income chargeable to tax under the head “Profits and gains of business or profession”:

 

       If tax is deductible at source but is not deducted.

 

       If tax is deducted during the year, and the same is not paid on or before the due date of filing of return of income specified under section 139(1).

 

In other words, if tax is deducted during the year and the same is paid on or before the due date of filing the return as specified in section 139(1), then the concerned expenditure will be deductible in the year in which such expenditure is incurred.

 

In this case, the due date of filing the return of income is 30th September and the firm has deposited the tax deducted by it to the credit of Government by 30th July, 2017 (i.e. before the due date of filing the return), hence, the firm can claim deduction of interest of Rs. 84,000 while computing its taxable business income.

 

Suppose in the given case, if instead of 30th July, the tax is deposited to the credit of the Government on 1st November, 2017, then the firm cannot claim deduction of interest to the tune of 30% i.e. of Rs. 25,200 while computing its taxable business income of the financial year 2016-17. In this case, it can claim deduction of Rs. 25,200 while computing its taxable business income of the financial year 2017-18.

 
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