TDS applicability on Printer rental charges, Income Tax

[Ramanathan Seshan]

Dear Experts,

Could you please advise on the applicability of TDS under the relevant section for the following transaction?

ABC Ltd. rents a digital copier cum printer from XYZ Ltd. The terms of the agreement are as follows:

1. Monthly rental fee: Rs 5000 per printer (includes 10,000 free A4 copies)

2. Additional copies: Rs 0.75 per copy for any prints beyond the free allowance

For the month of March 2025, ABC Ltd. uses the printer to print 20,000 A4 sheets.

Please advise on the withholding tax (WHT) applicability under the relevant section, considering the following scenarios:

a) If a single invoice is raised for the entire transaction.

b) If two separate invoices are issued—one for the rental charges and another for the printer usage charges.

Kind regards,

S Ram

Posts / Replies

[YAGAY andSUN]

It is essential to review the location of both the supplier and recipient carefully, as well as any specific exemptions or conditions that may apply to the transaction based on the nature of the goods and the entities involved.

Under the Income Tax Act, Tax Deducted at Source (TDS) applies to various types of payments made by businesses or individuals, and the rates and sections depend on the nature of the payment. In your scenario, ABC Ltd. is making a payment to XYZ Ltd. for both the rental of a digital copier and additional charges for excess printing.

Key Sections of the Income Tax Act to Consider

1. Section 194-I (Rent): This section covers payments made for the rental of any plant, machinery, or equipment, and the TDS rate under this section is typically 2% for payments to a corporate entity for machinery, plant, or equipment.
2. Section 194J (Fee for Technical Services): This section applies to payments for technical services, but it’s unlikely to apply here unless the charges are related to providing technical expertise or services related to the machine.
3. Section 194C (Contract Payments): This section applies to payments under contracts, including work contracts or contracts for services. However, this is less likely to apply to your scenario since the nature of the agreement seems to be rental, not contract-based work.

Understanding the Scenario

ABC Ltd. rents a digital copier and printer from XYZ Ltd. for a fixed monthly rent, and additional charges are levied for prints beyond a certain free allowance.

• Rental Charges: This pertains to the lease of equipment (the printer), which is typically covered under Section 194-I. The rental payments are subject to TDS at 2% (if the recipient is a company) for the lease of plant and machinery.
• Additional Copies: The charge of Rs. 0.75 per additional copy will likely be treated as a service fee rather than rent, and it could attract TDS under Section 194J (fees for professional/technical services), subject to a 10% TDS rate (if the recipient is a company). However, it’s important to clarify if this is purely a service charge or part of the rental agreement. If it's part of the rental agreement and there is no distinct service rendered by XYZ Ltd. that can be considered technical, the entire payment might be considered under Section 194-I.

Applicability of TDS Based on the Invoicing Scenario

a) If a single invoice is raised for the entire transaction:

In this case, a single invoice would include both the rental charges and the additional copy charges. Here's how TDS would apply:

• The rental fee of Rs. 5000 per printer would attract TDS under Section 194-I (2%) as it's considered rent for machinery.
• The additional copy charge of Rs. 0.75 per copy for the extra 10,000 copies (total Rs. 7,500) would likely be treated as a service charge and could attract TDS under Section 194J (10%).

Therefore, the total TDS would be calculated as follows:

• TDS on rental charges: Rs. 5000 x 2% = Rs. 100
• TDS on additional copy charges: Rs. 7,500 x 10% = Rs. 750

In total, ABC Ltd. would need to deduct Rs. 850 as TDS.

b) If two separate invoices are issued (one for the rental charges and another for the printer usage charges):

If ABC Ltd. receives two separate invoices:

1. Invoice for Rental Charges: The TDS on the rental payment of Rs. 5000 per printer would still be governed by Section 194-I, and the rate of TDS would be 2%.
   • TDS on rental: Rs. 5000 x 2% = Rs. 100.
2. Invoice for Additional Copy Charges: The TDS on the additional copy charge of Rs. 7,500 (for 10,000 extra copies) would likely be governed by Section 194J for services (technical or professional), with a 10% TDS rate.
   • TDS on additional copies: Rs. 7,500 x 10% = Rs. 750.

So, the total TDS deduction would still be Rs. 850, but the breakdown would be as follows:

• TDS on rental: Rs. 100 (under Section 194-I).
• TDS on additional copies: Rs. 750 (under Section 194J).

Conclusion

In both scenarios (whether the invoice is raised as a single invoice or as two separate invoices), TDS would apply as follows:

• On the rental charge: TDS at 2% under Section 194-I.
• On the additional copy charge: TDS at 10% under Section 194J, unless the charge is treated as part of the rental agreement.

Make sure that ABC Ltd. complies with the relevant sections by deducting the correct amount of TDS and remitting it to the Government.

(This reply is only for the purpose of knowledge enrichment).

[Ramanathan Seshan]

Dear Yagay and Sun-sir,

Thanks for your detail response.

However, it would be of great help if you can give the logic or thought process why 194J will be applicable ? Instead of 194J should'nt 194C be applicable ??

Regards,

S Ram

[YAGAY andSUN]

To understand why Section 194J would be applicable instead of Section 194C under the Income Tax Act, 1961, let’s break down the differences between both sections and the logic behind applying one over the other.

Key Differences Between 194C and 194J:

Section 194C:

• Purpose: Deals with Payments for Contracts (specifically contracts for works and contracts for professional services).
• Applicability: Applied when a payment is made to a contractor for carrying out works or providing services (excluding technical services).
• Threshold Limit: TDS is required if the payment exceeds ₹30,000 in a financial year (for each contract).
• Nature of Work: It mainly covers supply of goods or services, not specifically professional or technical services.

Section 194J:

• Purpose: Deals with Fees for Professional or Technical Services.
• Applicability: This section is specifically applied when fees are paid for professional services, technical services, or royalty.
• Threshold Limit: TDS is required if the payment exceeds ₹30,000.
• Nature of Work: This section is applicable to payments made for professional or technical services (such as consultancy, legal services, accounting, engineering, IT, etc.).

When Section 194J is Applicable Instead of 194C:

The logic behind applying Section 194J instead of Section 194C depends on the nature of the services being provided. The critical determining factor here is the type of service and whether it falls under the category of professional or technical services.

1. Professional Services vs. Contractual Work:
   • Section 194C generally covers contracts for physical or routine works (e.g., supply of goods, construction, etc.) and non-professional services (e.g., labor, transportation).
   • Section 194J, on the other hand, applies to payments for professional services (like legal, consultancy, technical services), where the nature of work requires specialized knowledge, expertise, or qualifications.

For example:

1. • If you are paying a consultant or legal professional for advice, this falls under professional services, and Section 194J applies.
   • If you are paying a construction contractor or someone who provides routine work services (non-professional), then Section 194C would apply.
2. Nature of the Service:
   • Section 194J applies to fees for professional or technical services, and this is typically for services requiring a high level of expertise, such as consultancy, legal, accounting, technical design, software, or engineering.
   • Section 194C is more for contractual work such as building construction, transportation services, supply of goods, or routine labor contracts.
3. Example to Distinguish:
   • Example 1: Section 194J – If a company hires a legal consultant or IT professional for their expert services (advisory, technical work, etc.), Section 194J would apply because these services are classified as professional or technical.
   • Example 2: Section 194C – If a company hires a construction company or a labour contractor to complete a building project, Section 194C applies because it's related to a contractual agreement for performing physical work or services.

In summary:

• Section 194C applies to payments for contracts (work or services) that are not professional or technical in nature, such as routine or physical tasks.
• Section 194J applies when you make payments for professional or technical services, which require specialized skills or qualifications.

Conclusion:

If the payment made is for professional or technical services (e.g., legal, consultancy, IT, accounting, etc.), Section 194J is the correct section to apply, as it pertains to fees for professional services or technical services. However, if the payment pertains to a contractual agreement for physical work (like construction or delivery), Section 194C would be applicable instead. If you are still unsure about which section to apply, consider the nature of the contract and type of services provided to determine which section is more appropriate.

[Manish Kumar]

a) 2% u/s 194C or 194-I.

b) 2% u/s 194-I for rent and 2% u/s 194C for usage charges.

As TDS rate is same, take single invoice and deduct 2% u/s 194C.

[Ramanathan Seshan]

Dear, Manish Kumar-sir- Thanks for your clarification.

Regards,

S Ram

[Ramanathan Seshan]

Thanks Yagay and Sun-sir for your response.

Regards,

S Ram