What is 2% TDS on fees for technical services and what qualifies as technical services? (2024)

Introduction

In the case of fees for technical services, tax deducted at source (“TDS”) under Section 194J of the Income Tax Act, 1961 (“IT Act”) has been reduced to 2 per cent from the earlier 10 per cent. This reduction is in effect from 1 April 2020 and was brought through the Finance Act, 2020.

As per the Budget Speech of Finance for the Year 2020-21, this reduction in the rate of TDS under Section 194J of the IT Act for technical services has been done to reduce litigation, as in most cases, it was observed that an assessee was deducting tax under Section 194C of the IT Act, while the revenue department claimed that tax should have been deducted under Section 194J which prescribes a higher rate.

Meaning of fees for technical services

Section 194J of the IT Act deals with the TDS payment on fees for professional or technical services. What qualifies as the “fees for technical services” under the IT Act is mentioned in Explanation 2 to Section 9(1)(vii) of the IT Act which read as, “For the purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries”.

Meaning of technical services

The Supreme Court of India in the case of Commissioner of Income-Tax v. Bharti Cellular Ltd. observed that the words “technical services” have got to be read in the narrower sense.

Rule of noscitur a sociis: Since the word “technical” is sandwiched between the word “managerial” and “consultancy”, it would mean that the word “technical” would take colour from the words between which it is sandwiched.

The High Court of Delhi in the case of Commissioner of Income Tax v.Bharti Cellular Ltd. and Ors. held that the expression ‘technical service’ would have reference to only technical service rendered by a human and would not include any service provided by machines or robots. The Court held as aforesaid after considering that while interpreting the expression ‘technical service’, the individual meaning of the words ‘technical’ and ‘service’ has to be shed and only the meaning of the whole expression ‘technical services’ has to be seen.

Conclusion

This reduction in the rate of TDS in Section 194J brings this Section in parity with Section 194C. As such, after the instant amendment, there are two different rates for deduction of TDS under Section 194J which are 2 per cent in the case of “fees for technical services” and 10 per cent in the case of other payments covered under this Section.

Ashutosh Senger is a practicing advocate in New Delhi. Views expressed are the author's own