TDS sobre honorarios profesionales, técnicos y regalías | Sección 194J de la Ley del Impuesto sobre la Renta

Tax deducted at source (“TDS”) is one of major compliance under Income Tax Act, 1961 (“The Act”) as it facilitates the Income Tax Department to keep track of income of all persons and also helps in collection of part of tax at the time of generation of Income. Provisions related to TDS are given under Chapter XVII-B of the act.

Section 194J contains provisions related to deduction of TDS on professional Fee and Technical fees which requires deduction of TDS @ 10%. However, the Finance Act, 2020 reduced the rate of TDS from 10% to 2% for few payments under section 194J.

1. Applicability of Provisions of Section 194J

Section 194J requires every person, other than Individual or a Hindu Undivided Family (HUF), to deduct TDS on any of the following payment made during the year:

1. fees for professional services*, or
2. fees for technical services**, or
3. any remuneration or fees or commission paid to the director of the company other than those payments on which tax is deductible under section 192, or
4. royalty, or
5. any sum referred to in clause (va) of section 28,

Liability to deduct TDS arises only if aggregate payment made or likely to be made to a payee during the year exceeds INR 30,000.

*Professional Service services rendered by a person in the course of carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or advertising etc.

**Fee for technical services means any consideration given for rendering any managerial, technical or consultancy services but it shall not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration given in form of "Salaries;

2. Who is liable to deduct TDS under Section 194J

TDS is to be deducted by every person other than Individual and HUF. However,  Individual and HUF will also be required to deduct TDS under section 194J if gross turnover or gross receipts exceeds INR 1 Crore (in case of Business) or INR 50 Lacs (in case of Profession) during preceding Financial Year.

Further, where fees for professional purpose is paid by Individual or HUF solely for personal purpose of such individual or any member of HUF, then such Individual or HUF will not be required to deduct TDS irrespective of turnover during preceding Financial year.

3. Rate at which TDS is required to be deducted

Every assessee who is liable to deduct TDS shall deduct TDS at following rates:

1. fees for technical services (not being a professional services) or royalty, where such royalty is in the nature of consideration for sale, distribution or exhibition of cinematographic films-2%

2. Any other payment covered under section 194J-10%

Rate on TDS on fee for technical services (not being a professional service) or royalty  for cinematographic films has been reduced from 10% to 2% by Finance Act, 2020 with effect from 01.04.2020.

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4. Issues faced by deductor under Section 194J

Prior to 01.04.2020, Fees for technical services was liable to TDS under section 194J. Similarly, section 194C created liability to deduct TDS @ 1% (in case of payment made to Individual or HUF) or 2% (In case payment made to any other person) for any work carried out in pursuance of a contract (including supply of labour for carrying out any work). 

However, certain nature of payments were creating confusion as to where they should be considered as “Fee for technical services” or “work carried out under a contract”. E.g. Service of Event management, Exhibition Service, services of photographer etc. 

Therefore, in many such cases, assessee ended up deducting TDS on such nature of service under section 194C @ 1% or 2%. However, Assessing officer contended that corresponding payments should get covered under section 194J and therefore, TDS should have been deducted @ 10% and consequently imposed interest and penalty.

Por lo tanto, con el fin de reducir los litigios y armonizar las disposiciones de ambas secciones, la Ley de Finanzas de 2020 reduce la tasa de retención de impuestos (TDS) bajo la sección 194J del 10% al 2% para los honorarios por servicios técnicos (distintos de los servicios profesionales). En consecuencia, pueden surgir diferencias de opinión sobre la clasificación de dichos pagos, ya sea bajo la sección 194C o la 194J. Sin embargo, esto no afectará la responsabilidad de retención de impuestos del agente retenedor.

Además, aún pueden surgir diferencias en la responsabilidad fiscal cuando el pago se realiza a una persona física o a una HUF (familia hindú indivisa), ya que la sección 194C requería una retención del 1%. No obstante, la sección 194J exige una retención del 2%.

5. Enmienda a la Sección 194J mediante la Ley de Finanzas de 2020

La Ley de Finanzas de 2020 modificó las disposiciones de la Sección 194J para reducir la tasa de TDS del 10% al 2% en los siguientes pagos, con efecto a partir del 01.04.2020:

1. Honorarios por servicios técnicos* (que no sean honorarios profesionales); o
2. Regalías, cuando dicha regalía sea una contraprestación por la venta, distribución o exhibición de películas cinematográficas.

El TDS sobre otros pagos bajo la sección 194J es aplicable a una tasa original del 10%.

6. Explicación según el Memorando de la Ley de Finanzas de 2020

Según la Cláusula 104 del memorando de la Ley de Finanzas de 2020, para reducir los litigios sobre la clasificación entre la sección 194J o 194C, la Ley de Finanzas de 2020 reduce la tasa de TDS en la sección 194J en el caso de honorarios por servicios técnicos (distintos de los servicios profesionales) del 10% al 2%. La tasa de TDS en otros casos bajo la sección 194J se mantendrá en el diez por ciento.

7. ¿Cuándo surge la obligación de retener el TDS bajo la sección 194J?

La persona está obligada a retener el TDS en el primero de los siguientes momentos:

1. en el momento del abono de dicha suma en la cuenta del beneficiario o
2. en el momento del pago en efectivo, cheque, giro o cualquier otro medio.

8. Exención del TDS bajo la Sección 194J

Las siguientes personas no están obligadas a retener el TDS bajo la sección 194J:

1. Cuando el importe total del pago realizado o que se vaya a realizar a un beneficiario no supere ni se espere que supere los 30.000 INR durante un año financiero.
2. Cuando el pago sea realizado por una persona física o una HUF y su facturación no supere los 10 millones de INR (en caso de negocio) o los 5 millones de INR (en caso de profesión) durante el año financiero anterior.
3. Cuando el pago sea realizado por una persona física o una HUF en concepto de honorarios por servicios profesionales exclusivamente para fines personales de dicha persona o de cualquier miembro de la HUF, independientemente de su facturación.

9. Diferencia entre servicio técnico y servicio profesional

Antes de la enmienda de la Ley de Finanzas de 2020 a la Sección 194J, generalmente no surgía la necesidad de diferenciar entre "Honorarios por servicios técnicos" ("FTS") y "Honorarios por servicios profesionales" ("FPS"), ya que ambos tipos de servicios estaban sujetos a TDS a la misma tasa, es decir, el 10%. Sin embargo, la Ley de Finanzas de 2020 redujo la tasa de TDS para los FTS del 10% al 2%, mientras que el TDS sobre los FPS sigue siendo aplicable a la tasa del 10%. Ahora surge la cuestión de diferenciar un servicio entre FPS o FTS.

9.1. Definición de FTS y FPS según la Ley del Impuesto sobre la Renta

• Según la Explicación 2 de la Sección 9(1)(vii) de la Ley del Impuesto sobre la Renta, "honorarios por servicios técnicos" significa cualquier contraprestación (incluida cualquier suma global) por la prestación de cualquier servicio de gestión, técnico o de consultoría (incluida la prestación de servicios de personal técnico u otro) pero no incluye la contraprestación por cualquier proyecto de construcción, montaje, minería o similar emprendido por el receptor, ni la contraprestación que constituiría ingresos del receptor gravables bajo el concepto de "Salarios".

• Según la Explicación (a) de la Sección 194J de la Ley del Impuesto sobre la Renta, "servicios profesionales" significa los servicios prestados por una persona en el ejercicio de una profesión legal, médica, de ingeniería o arquitectura o la profesión de contabilidad, consultoría técnica, decoración de interiores, publicidad o cualquier otra profesión notificada por la Junta a efectos de la sección 44AA o de esta sección;

• No existe una lista separada de profesionales notificados para la Sección 44AA de la Ley del Impuesto sobre la Renta. Sin embargo, la Regla 6F de las Reglas del Impuesto sobre la Renta enumera a ciertos profesionales que están obligados a llevar libros de contabilidad bajo la Sección 44AA(3) de la Ley del Impuesto sobre la Renta. El extracto relevante de la Regla 6F(1) se reitera a continuación:

“(1) Every person carrying on legal, medical, engineering or architectural profession or the profession of accountancy or technical consultancy or interior decoration or authorised representative or film artist shall keep and maintain the books of account and other documents specified in sub-rule (2):

….”

• For the purpose of deduction of TDS, we are required to classify a service between FPS or FTS. Certain services are clearly differentiable between professional service and technical service. To say, Service provided by Chartered Accountants, Company Secretary, Doctors, Medical practitioners, Lawyers, Architects etc. are specifically covered under professional service. Whereas services such as event management, professional photography, recruitment companies etc. are not professional but technical services and therefore classified under FTS.

• However, few services are still covered in grey areas such as Information Technology Service, Engineering service or technical consultancy service. At first, these services seem overlapping as FPS includes technical consultancy provided in the course of profession and FTS also includes Technical and consultancy services. Therefore, technical services seem to fall under both the categories. However, if technical consultancy is given in the course of profession then the same is covered under FPS and liable to TDS @ 10%. Whereas, if the same is given otherwise than in the course of profession then the same gets covered under FTS and shall be entitled to TDS @ 2%. 

• Let’s have a look at the detailed interpretation of both services.

9.2 Interpretation of Fee for Professional Service

As per definition given under Income Tax Act, following attributes are required to classify a service as “Professional Services”:

1. Service is provided by a person;
2. Service is provided in the course of carrying out any profession;
3. Such service falls under the list of professions given in definition itself or it falls under any other profession notified for Section 44AA.

These attributes are discussed below in detail:

9.2.1 Service is provided by a person

• Definition of FPS clearly states that “Professional Service” is the one which is rendered by a person. Whereas, no such word is mentioned in the definition of FTS. 
• Section 2(31) of Income Tax Act defines the word “person” as:

“person" includes—

(i) an individual,

(ii) a Hindu undivided family,

(iii) a company,

(iv) a firm,

(v) an association of persons or a body of individuals, whether incorporated or not,

(vi) a local authority, and

(vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

• So, as per definition given, a person can either be an individual or HUF or Firm or any other artificial person. 
• However, activities mentioned in the definition of FPS are more into intellectual and artistic nature and the same can be provided by a person only and not by any artificial person. 

9.2.2. “In course of Carrying out any profession”

• Profession is a business type which requires intellectual skills only. Further, all professional institutions permit their member professionals to practise in the capacity of Individual or Firm (Proprietorship Firm or Partnership Firm or Limited Liability Partnership Firm). Rationale behind such a condition is that artification persons have independent liability from its directors and employees. However, in case of profession, complete onus lies on a person providing service. Therefore, professionals can’t be differentiated from their associated liability and therefore, they are permitted to practise either in individual name or under name of firm.

• Therefore, interpretation can be drawn that services provided by a practising professional in individual capacity or through a firm can be said to be services rendered in course of carrying out profession. However, if service is provided through any artificial person then it can’t be said that such service is provided in professional capacity.

• E.g. If a Chartered Accountant is providing service of Indirect tax Consultancy in his individual professional capacity or through a firm registered with ICAI, then it can be said that such service is provided in the course of profession and will be liable to TDS @ 10%. Whereas, if such chartered Accountant forms a Private Limited company and renders such service then it can't be said that such service is provided in the course of profession as ICAI doesn’t permit practising in name of company and therefore, payment to the company shall be considered as FTS and therefore, shall be liable to TDS @ 2%.

9.2.3 Service falls under the list of professions given in definition itself or it falls under any other profession notified for Section 44AA

• As per definition of FPS, a list of professions are given which are covered for definition of professional service. However, the definition also covers the profession of Technical consultancy. Further,, the definition of FTS also covers technical services.

• In case technical service is obtained then confusion may arise whether it is covered under FTS or FPS. In such a scenario for the purpose of FPS definition, interpretation of words “Technical Consultancy” should  be drawn as per principle of interpretation noscitur a sociis which means meaning of the word should be derived from the company of the words in which it is placed.

• Therefore, for the purpose of FPS, the meaning of the word “Technical Consultancy” should be similar to the meaning of the words mentioned earlier. In the definition of FPS, all earlier mentioned services are related to professional qualification. Therefore, if “Technical Consultancy” is given by a person holding some professional qualification and such service is provided in course of carrying out any profession then it will get covered under FPS and therefore, will be liable to TDS @ 10%. Otherwise, such service will get covered under FTS and will be liable to TDS @ 2%.

10. Summary of Interpretation

11. Conclusion

As differentiation of service between FTS or FPS is a grey area and deduction of less TDS can result in various consequences such as expense disallowance, Interest, penalty etc. Therefore, for services which are clearly differentiable between FTS or FPS, taxpayers should deduct TDS at an applicable rate of TDS, i.e., 2% or 10%.

Further considering the complications involved in determination of nature of service and risk associated on account of lower deduction of TDS, it would be very helpful, if the department comes up with a clarification on what nature of services are covered under FTS and what services are covered under FPS.

Read more on New reduced TDS Rate for Fy 2020-21 | Impact On The Tax Liability