418. Whether new section 44D applies for the entire previous year relevant to assessment year 1977-78 onwards

1. Section 44D, which was inserted with effect from June 1, 1976 by the Finance Act, 1976, provides that the deductions admissible in computing the income of a foreign company by way of royalty or fees for technical services received in pursuance of agreements made before April 1, 1976 shall not exceed 20 per cent of the gross amount of such royalty or fees for technical services as reduced by any lump sum consideration received for transfer outside India of, or the imparting of information outside India in respect of any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property.  It has been brought to the notice of the Board by the audit that in the case of one assessee the Assessing Officer applied incorrectly the new provisions of section 44D on a pro rata basis with effect from June 1, 1976 for the assessment year 1977-78 instead of applying these for the entire previous year.

2. In para 26.4 of Circular No. 202, dated 5-7-1976 containing the Explanatory Notes to the Finance Act, 1976, it has been clarified that section 44D will apply in relation to the assessment year 1977-78 and subsequent years.  The relevance of the date June 1, 1976 is for purposes of section 195 only. In other words, it is merely intended to regularise any deduction made under that section up to May 31, 1976 in accordance with the earlier provision in this regard.

3. It is, therefore, once again emphasised that the restrictions placed by section 44D apply for the entire previous year relevant to the assessment year l977-78 onwards.

4. The above instructions may please be brought to the notice of all the Assessing Officers under your charge so that pending assessments are disposed of correctly and remedial action is taken in respect of assessments already completed.

Circular : No. 282 [F.  No. 454/1/80-FTD], dated 22-9-1980.

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