TDS Demand Notice: Section 194C (Contractors) and 194J (Professional Fees)

Source: Sections 194C and 194J, Income Tax Act, 1961.

• •Any payment to a contractor or sub-contractor for carrying out any work (including supply of labour for carrying out work)
• •TDS rate: 1% if the contractor is an individual or HUF; 2% if the contractor is any other entity (company, firm, LLP)
• •Threshold: Rs. 30,000 per single payment, OR Rs. 1 lakh aggregate to the same contractor in a financial year. If either threshold is crossed, TDS applies on all payments, not just the amount above the threshold.
• •What counts as "work": Advertising, broadcasting, catering, manufacturing or supply of any product, civil work, transporting goods or passengers (if not covered by Goods Transport Agency provisions), toll collection - all these fall under 194C.
• •What does NOT require TDS under 194C: Pure purchase of goods from a manufacturer where no specific work is performed, payments to employees (covered by Section 192), payments below threshold.

• •Any payment by way of fees for professional services: medical, legal, engineering, architectural, accountancy, technical consultancy, interior decoration, advertising, any other notified profession
• •Technical services: Any fees for rendering any managerial, technical, or consultancy services (including providing services of technical or other personnel)
• •Royalty payments and non-compete fees
• •TDS rate: 10% on professional and technical services, royalty, and non-compete fees. However, technical services (where no professional qualification is involved) attract a reduced rate of 2% under an amendment effective April 1, 2020.
• •Threshold: Rs. 30,000 per year to the same person. Below this, no TDS.
• •Important: If the vendor provides you a GST invoice for "professional services" and the annual amount exceeds Rs. 30,000, you must deduct TDS before making payment.

• •Were the payments actually above the threshold? Check if any single payment was above Rs. 30,000 or aggregate was above Rs. 1 lakh for 194C.
• •Is the vendor exemption applicable? Transporters who own up to 10 goods carriages and furnish a declaration in Form 15I/15J are exempt from 194C TDS.
• •Did the vendor furnish a nil/lower TDS certificate? Under Section 197, vendors with low income can obtain a certificate from their Assessing Officer for nil or lower TDS. If such a certificate was provided to you, the demand is incorrect.
• •Is the rate correct? Verify whether the officer has applied the correct rate (1% vs 2% for 194C; 2% vs 10% for 194J based on nature of service).
• •Was TDS eventually deducted and deposited, just late? If yes, the demand amount may be just interest, not principal.