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New rate of TDS on fees for technical services – 194J

The Finance Act received the President’s assent and was published in the official gazette on 27.03.2020. Prior to the amendment by The Finance Act 2020, the rate of 10% TDS under section 194J of the Act applied to the following types of payment:

  1. fees for professional services

  2. fees for technical services

  3. royalty

It was noticed that there are a large number of litigations where the assessee deducts tax under section 194C, while the tax officers claim that tax should have been deducted under section 194J of the Act. It has been an issue as to whether to treat a payment as paid for technical service or in pursuance of a contract. Since section 194J prescribes a higher rate, the Revenue would contend that payments should be covered under this section.

Few such matters that were litigated and decided as not technical services covered u/s 194J are

  1. maintenance work of air conditioners and lifts[1]

  2. carriage fees and subtitling charges paid by a broadcaster of television channels[2]

  3. payments made to pest control agency[3]

  4. services of maintenance of hospital equipment by the supplier being of routine nature, to ensure proper maintenance of the machinery/equipment[4]

In case of a shortfall in deduction of tax at source, an assessee would be declared as an assesee in default. Another disadvantage of not deducting tax under appropriate provisions of TDS is that such a deduction would not satisfy requirements of section 40(a)(ia) and the payment would be disallowed (30% of the amount) while computing tax.

Therefore, to reduce litigation, the rate for TDS in section 194J in case of fees for technical services (other than professional services and royalty) is now reduced to two per cent from existing ten per cent.The TDS rate in other cases under section 194J would remain same at ten per cent.

Thus, after the amendment, there would be two different rates for deduction of tax at source in section 194J. In case for “fees for technical services”, the applicable rate would be two percent and in case of other payments covered by this section, the applicable rate would continue to be ten percent.

This amendment will take effect for payment made from 1st April, 2020.

(Contributed by Dijo George)

[1] Commissioner of Income-tax (TDS-1) v. Mumbai Metropolitan Regional Development Authority [2018] 408 ITR 111 (Bombay)

[2] Commissioner of Income-tax, TDS-2, Mumbai v. Zee Entertainment Enterprises Ltd [2018] 254 Taxman 370 (Bombay)

[3] Commissioner of Income-tax, (TDS-1), Mumbai v. Asian Heart Institute and Research Centre (P.) Ltd.

[4] Commissioner of Income-tax (TDS)-2 v. Saifee Hospital* [2019] 262 Taxman 343 (Bombay)