1. Introduction to Section 194J

1.1. Section 194J of Income Tax Act 1961 (“the Act”) provides for tax deduction at source (TDS) on any sum payable to a resident by way of-

i. fees for professional services or

ii.  fees for technical services or

iii. any sum payable as royalty or

iv. any sum referred to in section 28(va) of the Act, generally known as ‘non-compete fees’.

1.2. Sec 194J further provided that TDS is to be deducted on the above-specified payments at 10%, except in case of a payee, engaged only in the business of operation of a call centre w.e.f 1-6-2017, rate of TDS is 2%.

1.3. Further, section 194C of the Act also provides TDS is to be deducted if payment is for a contract. TDS equal to 1% in case payment is made to an individual or a HUF and 2% in other cases to be deducted.

1.4. Now, the similar language used by both the section mentioned above gave rise to a large number of litigations on the issue of short deduction of tax treating assessee in default. The assessee deducts tax under section 194C at 2%. In contrast, the tax officers claim that tax should have been deducted at 10% under section 194J of the Act.

1.5. Therefore, to decrease litigation Finance Act 2020 proposed to reduce the rate for TDS in section 194J in case of fees for technical services (other than professional services) to 2% from the existing 10%. The TDS rate in other cases under section 194J would remain the same at 10%. This amendment will take effect from 1st April 2020.

1.6. Given the amendment proposed in the Finance Act 2020 need arises to find out the meaning of Professional Services and Technical Services, where the line of distinction is fragile.

2. Professional Services under Section 194J

Meaning of the term Professional Service is given in the explanation (a) to section 194J of the Act. Any service falling under this category will be termed as Professional Service, and the applicable TDS rate will be 10%.

Under Explanation (a) to section 194J, the term ‘professional services’ means —

2.1. Services rendered by a person in the course of carrying on any of the following professions:

2.1.1. Legal profession

2.1.2. Medical profession

2.1.3. Engineering profession

2.1.4. Architectural profession

2.1.5. Profession of accountancy

2.1.6. Profession of technical consultancy

2.1.7. Profession of interior decoration

2.2. Services rendered by a person in the course of carrying on a ‘notified profession’. The professions notified in this regard so far are as follows:

2.2.1. Authorised Representative – A person who represents another person, for a payment of fee or remuneration. The authorised representative is answerable to any tribunal or authority. The authority can be constituted or appointed by or under any law for the time being in force. Above excludes an employee of the person so represented, or a person of a legal profession, or a person who is a professional accountant.

2.2.2. Film artist – Any person engaged in his professional capacity in the production of a cinematograph film, whether produced by him or by any other person. The various roles that fall under this category include:

2.2.3. an actor;

2.2.4. a cameraman;

2.2.5. director including an assistant director;

2.2.6. a music director including an assistant music director;

2.2.7. an art director including an assistant art director;

2.2.8. a dance director including an assistant dance director;

2.2.9. an editor;

2.2.10. a singer

2.2.11. a lyricist;

2.2.12. a story writer;

2.2.13. a screenplay writer;

2.2.14. a dialogue writer; and

2.2.15. a costume designer.

2.3. The profession of company secretary

In this context, a ‘company secretary’ means a person who is a member of the Institute of Company Secretaries of India in practice within the meaning of section 2(2) of the Company Secretaries Act, 1980.

2.4. Profession of information technology

2.5. Sports Persons

2.5.1. Umpires and Referees

2.5.2. Coaches and Trainers

2.5.3. Team Physicians and Physiotherapists

2.5.4. Event Managers

2.5.5. Commentators

2.5.6. Anchors

2.5.7. Sports Columnist

3. Technical Services under Section 194J

Explanation (b) to section 194J provides that ‘fees for technical services’ shall have the same meaning as in Explanation 2 to clause (vii) of section 9(1). Explanation 2 to section 9(1)(vii) reads as under:

Explanation 2 —For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any

3.1. managerial,

3.2. technical or

3.3. consultancy services (including the provision of services of technical or other personnel)

3.4. but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or

3.5. consideration which would be income of the recipient as “Salaries”.

4. Analysis

4.1. Meaning of ‘professional fees’ is exhaustive and shall include only those professionals or services which are mentioned in the definition. Further, one can observe from the list of profession mentioned, to qualify as a profession one requires prerequisite qualification or skills acquired mainly through experience.

4.2. Whereas on the other hand, the meaning of technical service is inclusive. The said definition is in two parts. The first part includes the type of definition, and the second part does not include definition. In the first part, what is included is managerial, technical and consultancy service. Meaning of managerial and consultancy is simple and creates no doubt, whereas the meaning of technical is unclear.

4.3. Since the expression ‘technical’ (as mentioned in para 3.2.2. supra) is in doubt and is unclear, the rule of noscitur a sociis is clearly applicable. This would mean that the word ‘technical’ would take colour from the words ‘managerial and consultancy’, between which it is sandwiched. Ongoing through the dictionary meaning of the words ‘managerial and consultancy’, it is apparent that both the words ‘managerial and consultancy’ involve a human element and both, managerial service and consultancy service, are provided by humans. Consequently, applying the rule of noscitur a sociis, the word ‘technical’ as appearing in the Explanation 2 to section 9(1)(vii) would also have to be construed as involving a human element. [CIT v. Bharti Cellular Ltd. [2008] 175 Taxman 573 (Delhi).]

4.4. For the purpose of section 194J, one can conclude that any service which includes the human element in it and which is not covered the definition of the profession, royalty or non compete fees will be covered under the meaning of Technical Services.

4.5. Further, as per Memorandum to the Finance Act 2020 Para 4, “TDS in section 194J in case of fees for technical services (other than professional services) to two per cent from existing ten per cent”. The wording used is “other than professional services”. So, reliance can be placed that anything which is not covered under the explanation (a) to section 194J will get covered under explanation (b) to section 194J for section 194 J.