By CA Surekha S Ahuja
Introduction
Classifying TDS correctly between Section 194C and Section 194J is one of the most frequent and consequential issues in TDS compliance. The difference is not just academic — it affects deductibility, expense acceptance, interest exposure, penalties, and appellate risk.
Misclassification commonly arises in payments for execution-oriented contracts, creative and digital services, IT services, maintenance agreements, and professional / advisory engagements. Assessing Officers, audit teams, and tribunals repeatedly emphasise that labels on invoices or contracts do not determine the law — substance and dominant purpose do.
This definitive guidance note consolidates law, statutory sub-section distinctions, thresholds, judicial tests, risk indicators, grey areas, compliance safeguards, and practical classification logic. It is meant for professionals, compliance teams, and clients to deduct the right TDS — sustainably and defensibly.
Statutory Framework & Section-Level Distinctions
Section 194C — Payments for Carrying Out Any Work
Section 194C applies to sums paid to a resident for carrying out any work (including supply of labour) in pursuance of a contract.
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Sub-section (1): Governs deduction by the payer from payments to a contractor.
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Sub-section (2): Extends the requirement to deduction by a contractor from payments to a sub-contractor.
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Explanation: Expands “work” to include activities like advertising, broadcasting, transport, catering, and manufacturing under supply contracts.
Section 194C is execution-oriented: the payer engages someone to accomplish a job and deliver output.
Section 194J — Fees for Professional or Technical Services
Section 194J applies to payments for:
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Professional services (sub-section (1)(a)), and
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Technical services (sub-section (1)(b)),
along with royalty, non-compete fees, and certain director remunerations.
Key internal sub-section points:
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Explanation (a): Defines “professional services” using a restrictive list — legal, medical, engineering/architectural, accountancy, and similar notified professions. Photography, videography, or creative execution is not included.
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Explanation (b): Defines “technical services” as managerial, technical, or consultancy services, excluding simple execution contracts.
Section 194J is intellect-oriented: it applies where service delivery involves independent application of specialised knowledge, professional judgment, or advisory functions.
Thresholds, Rates & Trigger Points (FY 2025–26)
| Section | Single Trigger | Aggregate Trigger | TDS Rate |
|---|---|---|---|
| 194C | ₹30,000 | ₹1,00,000/year | 1% (individual/HUF) / 2% (others) |
| 194J | ₹30,000 | ₹30,000/year | 10% (professional) / 2% (technical) |
Once the relevant threshold is crossed, TDS must be deducted on the entire amount, not merely the excess.
The Core Legal Test — Dominant Nature & Substance
Courts and tribunals uniformly apply the dominant purpose test. Neither the title of a contract nor the terminology on invoices determines the applicable section. The guiding questions are:
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Is the engagement primarily execution of work or primarily advisory/consultancy?
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Is the responsibility output-oriented or discretion/judgment-oriented?
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Does the service require independent application of specialised knowledge?
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If execution of work dominates, then Section 194C applies.
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If professional or technical judgment dominates, then Section 194J applies.
Skill or artistry alone does not elevate a contract to professional service.
When Section 194C Applies
Section 194C captures contractual work even if skill or technical ability is involved, provided the engagement is execution-driven.
Common classifications under Section 194C include:
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Event photography or videography
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Product catalogue shoots
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Corporate video production
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Advertising production and shoot execution
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Editing, retouching, post-production as part of the shoot agreement
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Fabrication, installation, routine maintenance contracts
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Transport, logistics, catering, housekeeping, security services
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Manpower supply and routine IT support/implementation
Judicial support:
In EMC v. ITO (ITAT Mumbai), payments to photographers and artists were held to be under Section 194C. The Tribunal emphasised that photography is not a notified profession and that skill alone does not transform execution into professional consultancy.
When Section 194J Applies
Section 194J applies in limited and clearly demonstrable situations involving:
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Advisory or professional judgment: legal, audit, valuation, certification, strategic consultancy
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Technical services: architectural design, management consulting, specialised IT architecture
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Professional experts engaged independently of execution (e.g., legal opinions, technical system designs)
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Notified film artists in cinematographic production
The dominant element must be intellectual or professional expertise, not mere delivery of an output.
Grey Areas & Overlap Situations
Real-world contracts often combine execution and advisory elements. In such cases the dominant nature must be established factually:
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Maintenance contracts: Routine servicing → Section 194C; Expert diagnostics → Section 194J
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Advertising: Shoot execution → Section 194C; Brand strategy/creative consultancy → Section 194J
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IT services: Implementation/support → Section 194C; System design/architecture → Section 194J
Artificial invoice splitting or naming conventions without contractual clarity will not persuade authorities.
Risk-Flag Checklist for Correct Classification
These indicators often trigger adverse findings and should prompt careful review before TDS deduction:
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Use of words like consultancy, advisory, professional without defined scope
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Absence of specific deliverables or timelines
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Responsibility extending beyond execution to design/strategy
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Independent discretion exercised by vendor, not client-directed execution
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Composite contracts without clear segregation of consulting vs execution elements
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Change in scope without re-review of TDS treatment
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Historical practice followed without re-classifying changed deliverables
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Deduction under a higher rate assuming it cures default
Presence of multiple risk flags generally suggests a default under Section 194J.
Common Compliance Errors
The most common mistakes are:
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Deducting under Section 194C solely because a contract exists
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Deducting under Section 194J due to “professional” terminology
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Assuming higher deduction under the wrong section neutralises default risk
Judicial precedents firmly establish that deduction under an incorrect section constitutes a default, regardless of the rate applied.
Compliance Safeguards & Best Practices
To ensure defensible TDS compliance:
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Draft contracts clearly: Define scope, deliverables, and responsibility
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Identify dominant nature: Execution vs advisory should be explicit
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Document reasoning: Maintain internal notes on section selection
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Segregate services: Separate execution from advisory components financially and contractually
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Annual review: Reassess recurring contracts for any scope changes
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Retain judicial references: Especially EMC v. ITO for creative/photography classifications
A well-reasoned and documented approach is the strongest defence in scrutiny and appellate proceedings.
Conclusion
Determining whether Section 194C or Section 194J applies is not a mechanical label exercise but a legal characterisation based on substance and dominant purpose. Courts and tribunals prioritise function over form.
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Execution-oriented work — clearly Section 194C
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Professional or technical advisory services — clearly Section 194J
Correct TDS classification today is the most effective strategy against tomorrow’s assessments, audits, and disputes. A contract-backed, function-driven, and judicially aligned approach ensures compliance certainty and long-term defensibility.
