In its endeavor to reduce tax litigation, Government in the Budget 2020 has taken quite a few steps. One such step which is likely to be very effective is the proposal to reduce the rate of TDS u/s. 194J in cases of fees for technical services (other than professional services) from 10% to 2% to bring it on par with rates as provided u/s. 194C for any work pursuant to a contract. Authors Dindayal Dhandaria & Naveen Kumar Dhandaria (Chartered Accountants), while discussing the proposal state that “It is heartening to note that the Finance Bill, 2020 proposes to amend the existing provisions of section 194J of Income tax Act, 1961 (“the Act”) with a view to reducing litigation and to provide certainty in tax matters”. The authors highlight and discuss certain cases where this dispute has arisen. The authors sign of with a suggestion that similar to the different rates provided u/s. 194C based on the payees’ status (i.e., individual/HUFs & Others), “It is desirable that in section 194J also, different rates for deduction of tax at source from ‘fee or technical services” should be prescribed depending upon the payees concerned as is provided in section 194C.”
It is observed that in many cases, when the view of the Income Tax Department on the interpretation of a provision of law does not meet the approval of a Court of Law, the Department, invariably, takes follow up action by amending the relevant provision. Most of these amendments serve the interests of the Revenue and we rarely come across amendments which favour the assessees. It is heartening to note that the Finance Bill, 2020 proposes to amend the existing provisions of section 194J of Income tax Act, 1961 ("the Act") with a view to reducing litigation and to provide certainty in tax matters.
THE CONFLICT BETWEEN SECTION 194C AND 194J
The existing section 194J of the Act provides that any specified person, who is responsible for paying to a resident any sum by way of fees for professional services, fees for technical services, royalty, non-compete fees or director's fees, shall deduct an amount equal to ten per cent of such sum as income tax at the time of credit or payment thereof whichever is earlier. For the purpose of this section, the term "fees for technical services" is defined to have same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9.
The existing section 194C of the Act provides that any person responsible for paying any sum to any resident contractor for carrying out any work in pursuance of a contract is required to deduct an amount equal to one per cent if the payee is an individual or HUF and two percent in case of other payees.
If a person responsible for paying any fee for technical services deducts tax at source at a lower rate of 2% provided in section 194C and if it is held that he should have deducted tax at the rate of 10% as provided in section 194J, there would be an alleged shortfall in deduction of tax due to difference in opinion in interpretation of these two sections.
It has been a contentious issue as to whether a payment made is for fees for technical service or is for any work in pursuance of a contract. Some of the illustrative cases on the issue are stated below.
1. In the case of CIT, TDS2 v. Times Global Broadcasting Co. Ltd. [TS-5130-SC-2019-O] the issue was whether placement fees/carriage fees paid by assessee-company, engaged in business of distribution of television channels, to cable operators/MSO/DTH operators were payments for work contract covered under section 194C and not fees for technical service under section 194J.
2. In the case of CIT (TDS-1) Mumbai vs. Asian Heart Institute and Research Centre (P.) Ltd. [TS-5279-HC-2019(Bombay)-O], a dispute arose whether the payment towards Annual Maintenance Contract in respect of various specialised hospital equipments by assessee hospital would not be in nature of fees for technical services within meaning of section 194J but would fall under section 194C as payment to contractor
3. In the case of CIT v. Reliance Life Insurance Co. Ltd. [TS-5318-HC-2019(Bombay)-O] where assessee insurance company made payments for services hired for various works such as storage of data, scanning of documents, processing charges, call centre operations etc., assessee was required to deduct TDS under section 194C and not under section 194J. Another issue in this case was where assessee insurance company made payments towards travel agent services such as ticket booking and hotel facilities, assessee was required to deduct TDS under section 194C and not under section 194J.
4. In the case of Pr. CIT v. Star Entertainment Media (P.) Ltd. [TS-6001-HC-2019(BOMBAY)-O] the issue was whether the amount paid by assessee to cable operators for channel placement fee was subject to deduction of tax at source under section 194C and not under section 194J.
In case of an alleged shortfall in deduction of tax at source, an assessee would be declared as "assessee in default" under section 201 of the Act. There is a controversy as to whether the provisions of section 40(a)(ia) of the Act can also be invoked in such cases.
This kind of dilemma, which an assessee may have to face, has now arisen on account of conflicting decisions rendered by the Calcutta High Court in the case of CIT v. S. K. Tekriwal [TS-902-HC-2012(CAL)-O] and by the Kerala High Court in the case of CIT v. P V S Memorial Hospital Ltd. [TS-5380-HC-2015(Kerala)-O] while interpreting any shortfall due to any difference of opinion as to the taxability of any item or nature of payments falling under various TDS provisions. While the Calcutta High Court has held that if there is any shortfall due to any difference of opinion as to taxability of any item or nature of payments falling under various TDS provisions, assessee can be declared to be an assessee-in-default under section 201 of the Act, but no disallowance can be made by invoking provisions of section 40(a)(ia) of the Act, the Kerala High Court expressly dissenting from the decision of the Calcutta High Court has held that deduction under a wrong provision of law will not save an assessee from disallowance to be made under section 40(a)(ia) of the Act.
THE PROPOSED AMENDMENT
The Memorandum explaining the Finance Bill, 2020 states under the heading "Measures to provide tax certainty" as follows:
"It is noticed that there are large number of litigations on the issue of short deduction of tax treating assessee in default 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.
Therefore to reduce litigation, it is proposed to reduce rate for 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 TDS rate in other cases under section 194J would remain same at ten per cent.
This amendment will take effect from 1st April, 2020".
Thus, after the proposed amendment, there would be two different rates for deduction of tax at source in section 194J. In case of payments 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.
So long as the applicable rate for deduction of tax at source is two percent (both for payment for "fee for technical services" or for "any work pursuant to a contract"), it does not make any difference whether the deduction of tax at source is made under section 194J or under section 194C. There would not be any shortfall in deduction of tax in either case and the controversy relating to applicability of the provisions of section 40(a)(ia) would not arise.
To certain extent, the proposed amendment provides certainty and would reduce (not eliminate) litigation. Why it is stated that the proposed amendment would reduce litigation and not eliminate it? The answer lies in the fact that in Section 194C prescribes two different rates for deduction of tax at source - one in case of payments to an individual/HUF and another to other persons. In case of former, the rate for deduction of tax at source is one percent as against two percent in other cases.
It is desirable that in section 194J also, different rates for deduction of tax at source from 'fee or technical services" should be prescribed depending upon the payees concerned as is provided in section 194C.