ISSUES ON TDS

194C – TDS on Payments to Contractor 194J – TDS on fees for Professional or

Technical Services

Prepared By:Jagrati KookadaShaili Shah

M. V. Damania & Co. Chartered Accountants

INTRODUCTION TDS is one of the modes of collection of taxes, by

which a certain percentage of amounts are deducted by a person at the time of making/crediting certain specific nature of payment to the other person and deducted amount is remitted to the Government account.

We have mainly emphasized on section 194C and 194J as there is a confusion under which head TDS has to be deducted. There are certain overlapping issues under both the heads which are focused in this presentation along with supporting case laws.

194C – TDS on Contractor

Applies to a person responsible for “paying any sum to a resident contractor or sub-contractor” .

Time of Deduction : earlier of credit of any sum to the account of contractor or at the time of payment

Nature of Payment: deduction is to be done for payment for carrying out

any work(including supply of labour) in pursuance of a contract between the contractor and a specified person .

Meaning of Work "Any work" means

any work and not supply of labour to only a “contract carry out a work

for work"

Work includes:› advertising;

› Broadcasting and telecasting including production of programs for such broadcasting or telecasting ;

› carriage of goods or passengers by any mode of transport other than by railways;

Explanation III under Finance Act, 1995

› catering ;

› manufacturing or supplying a product according to the requirement or specification of a customer by using

INCLUDES DOES NOT INCLUDES

material supplied material purchased from by the customer a person other than (contract of work), such customer (Contract for sale) Therefore, 194C will cover all those cases where work is

carried out for any tangible product which is not equal to contract for sale.

contract A B

supply uniform as per A’s specification

purchasing material from

another person Dominant object is the sale of product as product and

not just execution of work.

Contract for sale

contract A B

supply uniform as per A’s specification

Material supplied by

A. Dominant object is the execution of work and not the

supply of uniforms.

Contract for Work

Contract for work v/s Contract for sale

main object is the transfer of property and the delivery of the possession of a movable property even though goods might have been manufactured as per the requirement and specification of the client

principal object of the contract is one of work and labour even though some material might have been used in the execution of the contract.

SC Case Law

Contract for work v/s Contract for sale

article has an identifiable existence prior to its delivery to the purchaser, and when the title to the property vests with the purchaser only upon delivery.

Article is brought into existence by applying work and labour and materials are consumed in execution of the work.

Novartis Healthcare (P) Ltd. v. ITO, TDS (Mum)

provides technical know how Assessee Third Party

Manufacturer raises an invoice for the goods

manufactured and accordingly supplied

purchases raw materials, obtains license, pays Sales tax, excise and owns manufacturing facility

Mr A. XYZ Advertising & Co. Sony TV(Client) (Advertising Agency) (Media)

Pays Rs. 1,00,000 for Makes payment for designing an adv. giving ad on their

194C Channel Makes payment to No 194C

models, artists etc. 194J

Payment directly to Sony TV – 194C

Advertising Contract-Circular 715 dated 08-08-1995

Regular Electrician under contract or Services of Electrician by a contractor

As per the circular no. 715 dated 08-08-1995,

Nature of payment for carrying out a workTherefore, 194C will be applied

Cannot be taken under technical service under 194J

Rate of TDS: 1% -for Individual and HUF recipient 2% - for any other person recipient

For 1 single Contract – 30,000/-For aggregate in a year – 75,000/-

Exemptions: No TDS by an Individual or an HUF -- personal purposes

No TDS-- for sum credited/paid to a contractor during the course of business of plying/hiring/leasing of good/carriages on furnishing Pan to the payer/ deductor .

194J-TDS On Professional Fees Applies to a person responsible for “paying any

sum to a resident as”:

1. Fees for professional services,2. Fees for technical services,3. Any remuneration , fee or commission by whatever name

called paid to a director, which is not in the nature of salary 4. Royalty,5. Any sum referred to in clause (va) of section 28 which relates

to non-compete payment, or

Point of deduction: Earlier of- The time of actual payment of such fees or its credit to the account of the payee.

Tax Rate Applicable: 10% on such income.

30,000

Professional Services

Technical Services Royalty

Non-Compete

Fees

Cut off amount:

No TDS – if aggregate of the amounts credited or paid to payee does not exceed:

Meaning of Professional Services Professional Services means services rendered by a person in

the course of carrying on:1. legal,2. Medical consultancy for business purpose, 3. engineering, 4. architectural profession,5. the profession of accountancy,6. technical consultancy ,7. interior decoration, 8. Advertising consultancy and add designs, 9. such other profession as is notified by the Board for the

purposes of section 44AA or of this section.

Meaning of “Fees for Technical Services” Fees for technical services means any consideration (including

any lump sum consideration) for the rendering of any:

1. managerial, 2. technical or 3. consultancy services (including the provision of services of

technical or other personnel) but does not include consideration for any service which would be income of the recipient under the head “Salaries”.

* As per the Supreme Court judgment in CIT v. Bharti Cellular LTD. (SC) , technical service would include services rendered by a human; it would not include any service provided by machines or robots.

CIT v/s Kotak Securities & DCIT v/s Angel Broking Ltd.

Mr. A. Paid To BSE for “Bolt” system(assessee)

Rs 5.17 crore as “transaction charges” (in the nature of managing

and maintaining the system)

? -Will TDS be deducted on amount paid as transaction charges?Ans-Such payments are included in definition of “fees for technical services”. Hence TDS u/s 194J will apply.

BSNL/ MTNL Provides services of

Interconnect/ port/access/toll

194J – Reference to only technical service rendered by a human; it would not include any service provided by machines or robots.

Therefore, it will not be construed as technical service and therefore 194J will not apply.

BSNL/ MTNL Services -CIT v. Bharti Cellular LTD. (SC)

Pacific Internet (India) (P) Ltd. v/s ITOAssessee Business Internet access

services

Availment of Network BSNL/MTNL operating infrastructure

Skycell Communication Ltd. v/s DCIT

Assessee Business “cellular mobile telephone facility“

Payment is made by

subscribers

Activity Work Service

Nature Physical and Tangible Intellectual or Mental

Service Contract

Not involving any work – No 194C Eg- Services of engineers, accountants, architects, consultants.

However, covered under 194J.

Contract for Professional Service -Circular No 93 & 86 of 1972

Recruitment Agency-Circular 715 dated 08-08-1995

Payment Recruitment Agency For services

rendered? -Will TDS on payment made to recruitment agency

will be deducted under section 194C or 194J?

Ans-Section 194C apply to a contract for carrying out any work which results into a tangible product. Payments to recruitment agencies are in the nature of payments for services rendered. Hence, TDS will be deducted under section 194J and not 194C.

Notes:

1. No surcharge, education cess or SHEC shall be added to the above rates. Hence, tax will be deducted at source at the ba-sic rate.

2. The rate of TDS will be 20% or higher as applicable in all cases, if PAN is not quoted / provided by the deductee on or after 1-4-2010.

3. An Individual or a Hindu undivided family, whose total sale, gross receipts or turnover from the business or profession carried on by him exceed 1 crore or 25 lakhs respectively.

4. Credit made in suspense/Adjustment a/c -TDS to be deducted.5. As per section 197, on application by payee in Form no. 13, if

the Assessing Officer is satisfied that this total income justifies no deduction of tax or deduction at lower rate, he may issue a certificate in Form No. 15AA to that effect directly to the payer.

Any Questions???

Thank You !!!!