What is a Consultancy Agreement?
A Consultancy Agreement (also known as an Independent Contractor Agreement or Professional Services Agreement) is a contract between a company and an independent consultant who provides specialized services on a non-employment basis. It establishes the scope of work, payment terms, and the independent nature of the relationship.
Key Characteristics
- Independent Relationship: Consultant is not an employee; no employer-employee relationship
- Project-Based: Typically for specific deliverables or time period
- Self-Employed: Consultant handles own taxes, insurance, and benefits
- No Exclusivity: Consultant may work with other clients
- Results-Oriented: Payment based on deliverables, not time spent
When to Use a Consultancy Agreement
✓ Appropriate Use
- • Specialized expertise not available in-house
- • Short-term project requirements
- • Advisory or strategic guidance
- • Flexible workforce needs
- • Cost optimization
✗ Not Suitable For
- • Core business operations
- • Ongoing operational roles
- • Positions requiring supervision
- • Long-term exclusive relationships
- • Sham contracting (disguised employment)
Consultant vs Employee
It is crucial to distinguish between a consultant and an employee to avoid misclassification issues with tax authorities and labour departments.
| Factor | Consultant | Employee |
|---|---|---|
| Control | Controls how work is done | Subject to employer's control |
| Payment | Per project/deliverable | Regular salary |
| Taxes | Pays own taxes (TDS deducted) | TDS on salary; TDS on salary |
| Benefits | No employment benefits | PF, ESI, gratuity, leaves |
| Exclusivity | Can have multiple clients | Typically exclusive |
| Tools/Equipment | Uses own resources | Employer provides |
Key Elements
1. Parties & Relationship
- • Clear identification of parties
- • Independent contractor status
- • No partnership/employment
2. Scope of Work
- • Detailed services description
- • Deliverables and milestones
- • Exclusions from scope
3. Payment Terms
- • Fee structure (fixed/hourly)
- • Invoicing schedule
- • Payment timeline
4. IP & Confidentiality
- • IP assignment to company
- • Confidentiality obligations
- • Data protection
Scope of Work (SOW)
A clear Scope of Work is essential to avoid scope creep and disputes. It should be specific, measurable, and time-bound.
Components of Effective SOW
- Objectives: What the project aims to achieve
- Deliverables: Tangible outputs expected from consultant
- Timeline: Start date, milestones, completion date
- Resources: What company will provide vs consultant brings
- Exclusions: What is explicitly NOT included in scope
- Acceptance Criteria: How deliverables will be evaluated
Payment Terms & Invoicing
| Payment Model | Best For |
|---|---|
| Fixed Fee | Well-defined projects with clear deliverables |
| Hourly/Daily Rate | Ongoing advisory or uncertain scope work |
| Retainer | Regular ongoing support needs |
| Milestone-Based | Complex projects with staged deliverables |
| Success Fee | Performance-based outcomes (e.g., fundraising) |
GST & TDS Provisions
Tax compliance is critical in consultancy arrangements. Both GST and TDS may apply depending on the nature and value of services.
GST on Consultancy
- • Applicable if consultant is GST registered
- • Rate typically 18% (Management Consulting)
- • RCM may apply for services from unregistered persons
- • ITC available to recipient if for business purpose
TDS Provisions (Section 194J)
- • 10% TDS on professional/technical fees
- • Threshold: ₹30,000 per transaction or aggregate
- • 20% if PAN not provided
- • No TDS for payments below threshold
IP Ownership & Assignment
The agreement must clearly state that all work product and intellectual property created during the engagement belongs to the company, not the consultant.
IP Assignment Checklist
- ✓ All deliverables and work product
- ✓ Pre-existing IP used in deliverables (if any)
- ✓ Moral rights waiver
- ✓ Cooperation in filing registrations
- ✓ Representations about third-party IP infringement
Termination
Clear termination provisions protect both parties and ensure smooth transition of work.
| Termination Type | Typical Terms |
|---|---|
| Convenience | Either party with 15-30 days written notice |
| For Cause | Immediate for breach, non-performance, misconduct |
| Project Completion | Automatic upon delivery and acceptance |
Frequently Asked Questions
Can a consultant claim employment rights?
If the relationship is genuinely consultant-based (control over work, multiple clients, own equipment), they cannot claim employment rights. However, if misclassified, labour authorities may deem them employees.
Should a consultant have GST registration?
Yes, if their aggregate turnover exceeds ₹20 lakhs (₹10 lakhs for special category states) or if they provide interstate services.
Can consultancy agreements be oral?
While oral agreements are valid, written contracts are strongly recommended for evidence, clarity, and enforceability of terms like IP assignment and confidentiality.