Executive Summary
This article provides a comprehensive and professional analysis of the presumptive tax provisions applicable to non‑resident taxpayers under the Income‑tax Act, 1961. The principal non‑resident presumptive provisions examined are Sections 44B (shipping), 44BB (services/facilities in connection with mineral oil exploration/extraction), 44BBA (operation of aircraft), and Section 44BBB (civil construction/erection/testing/commissioning in turnkey power projects — applicable to foreign companies). For each provision we discuss scope, legislative text (in summary), conditions of applicability, computation mechanism, interaction with charging provisions and Double Taxation Avoidance Agreements (DTAAs), withholding obligations, opportunities for electing normal computation, significant judicial precedents, practical difficulties and compliance considerations. Illustrative numerical examples and short corporate case studies are included to aid practitioners in applying these rules in real fact patterns.
1. Introduction and policy background
Presumptive taxation provisions for non‑residents were introduced into the Income‑tax Act to provide a simplified and administrable basis for taxing certain cross‑border activities that otherwise present challenging evidentiary and enforcement issues for Indian tax authorities. These provisions adopt a formulaic approach — a prescribed percentage of specified receipts is deemed to be the taxable profit arising from the specified activity. The percentages are typically lower than ordinary profit margins, reflecting a policy choice to tax inbound earnings from specialised international activities at a predictable and simplified rate while preserving the territorial nexus principle through sections 5 and 9 of the Act and through the structure of the relevant charging provisions.
2. Principal statutory provisions applicable to non‑residents
The Income‑tax Act contains several sections that operate as special or machinery provisions for computing taxable profits of non‑residents engaged in particular activities. The principal sections that are presently relied upon by tax authorities and non‑resident taxpayers are:
- Section 44B — Shipping business (non‑resident ship owners).
- Section 44BB — Business of providing services/facilities or supply of plant & machinery for exploration/extraction/production of mineral oils.
- Section 44BBA — Operation of aircraft (non‑residents).
- Section 44BBB — Civil construction/erection/testing/commissioning in connection with specified turnkey power projects (foreign companies only).
Each of these sections contains a non‑obstante clause; each prescribes the ‘aggregate of amounts’ which form the base for computation; and each specifies a percentage of that aggregate that is to be treated as ‘deemed profits and gains’ chargeable to tax under the head ‘Profits and Gains of Business or Profession’. The prescribed percentages in practice are (summary): Section 44B — 7.5% (shipping), Section 44BB — 10% (oil‑services), Section 44BBA — 5% (aircraft) and Section 44BBB — 10% (specific turnkey projects for foreign companies). Practitioners must verify the statutory text and subsequent amendments for a given assessment year before application.
3. Section‑by‑section analysis
3.1 Section 44B — Shipping business
Scope: Section 44B applies to a non‑resident engaged in the business of operation of ships. It deems the profits and gains to be a prescribed percentage (commonly applied as 7.5%) of the amounts received (or deemed to be received) for carriage of passengers, livestock, mail or goods shipped at an Indian port or carriage to or from India where receipts are brought to India.
Mechanics: The provision prescribes the ‘aggregate of amounts specified in sub‑section (2)’ as the base. A sum equal to 7.5% of that aggregate is deemed to be the profits and gains of such business. The provision is machinery‑driven but operates together with the charging provisions and the concept of ‘income’ under sections 4, 5 and 9 — a deemed computation under Section 44B requires that the receipts have sufficient nexus to India (e.g., loading at Indian port or deemed receipt in India).
Practical points: The shipping industry negotiates complex charterparty and voyage arrangements — disputes often arise on (i) whether a particular receipt falls within the ‘specified amounts’, (ii) whether GST or other surcharges are part of the base, and (iii) set‑off of brought forward losses in jurisdictions where books exist. Non‑residents sometimes contend that they should be permitted to demonstrate actual profits (by producing books) where the formula‑driven presumptive computation yields an excessive or inapplicable tax base.
3.2 Section 44BB — Services/facilities in connection with mineral oils
Scope: Section 44BB targets non‑resident persons (companies/individuals) providing services or facilities in connection with, or supplying plant and machinery on hire used or to be used in, the prospecting for or extraction or production of mineral oils (including petroleum and natural gas). The provision is widely used by international oil‑field service providers, drilling contractors and other specialised suppliers that render services to oil companies in Indian waters or whose service agreements have a cross‑border element.
Mechanics: The provision specifies amounts which shall be regarded as ‘aggregate’ (for example, amounts paid or payable to the non‑resident on account of provision of services/facilities in India and amounts received or deemed to be received in India for provision of such services/facilities outside India). A sum equal to 10% of this aggregate is deemed to be the taxable profit. Section 44BB contains a non‑obstante clause excluding (for calculation of the deemed profit) application of the regular computation provisions (Sections 28–41, 43 and 43A).
Judicial interpretation: Indian courts have extensively examined the scope of Section 44BB. A material line of authority (culminating in decisions from various high courts and considered by the Supreme Court) held that mobilisation and demobilisation fees and certain pass‑through reimbursements ought to be included in the aggregate for computing the 10% deemed profit, particularly where there exists a sufficient nexus with India. The Supreme Court confirmed in leading rulings that the operation of Section 44BB must be read together with Sections 4, 5 and 9 — territorial nexus remains vital. Tax authorities have relied on Section 44BB to tax mobilisation fees, but outcomes vary on the question of whether particular receipts lacking territorial nexus should be captured.
Practical points: Oil‑field service agreements frequently contain separate line items (mobilisation, demobilisation, standby, reimbursable costs, spares supply). Tax treatment differs depending upon contract drafting and the factual matrix. Non‑residents that wish to avoid the deemed computation may maintain books and seek to demonstrate actual profits under the ordinary regime subject to filing returns and facilitating assessments; however, the legislative intent to simplify taxing such activities is strong and the non‑obstante clause in Section 44BB is substantial.
3.3 Section 44BBA — Operation of aircraft
Scope: Section 44BBA applies to non‑residents engaged in operation of aircraft. This includes receipts for carriage of passengers, livestock, mail or goods from or to India. The provision functions similarly to Section 44B but prescribes a lower deemed profit percentage — commonly 5%.
Mechanics and judicial nuance: The provision deems 5% of the aggregate specified amounts to be the taxable profit. Several judicial decisions have noted that Section 44BBA is machinery provision and does not per se oust the right of an assessee to produce books to show nil or lower taxable profits, where factual evidence supports such a conclusion. This nuance matters in airline wet‑lease arrangements and complex interline settlements.
3.4 Section 44BBB — Turnkey power projects
Scope: Section 44BBB is a targeted provision that applies to foreign companies engaged in civil construction, erection, testing or commissioning in connection with turnkey power projects approved by the Central Government. The applicability is narrower (foreign companies only) and the deeming percentage is typically 10% of specified receipts for such projects.
Mechanics: Given the sector‑specific nature, the clause has been used in assessments of large turnkey contracts. The provision operates alongside the general charging section but aims to simplify profit computation where practical allocation of taxable profits is administratively difficult.
4. Interaction with charging provisions, territorial nexus and DTAAs
A central legal question in application of these presumptive provisions is how they interact with sections 4, 5 and 9 which determine the charge to tax in India. Sections 5 and 9 establish the territorial nexus — income shall be charged to tax in India only if it is received or deemed to be received in India, or accrues or arises in India or is deemed to accrue or arise in India. The machinery provisions (e.g., Section 44BB) prescribe a method to compute profits once the chargeable receipt has been established. Courts have repeatedly emphasised that presumptive computation cannot be applied if there is no charge to tax under sections 5 and 9 — i.e., the starting point is establishing that the receipt is within the charge.
Double Taxation Avoidance Agreements (DTAAs) can modify the incidence of tax in practice. For example, where the relevant DTAA allocates taxing rights to the other jurisdiction or contains special provisions for shipping and air transport, the presumptive regime could be displaced subject to the treaty operation. Practitioners must therefore undertake a two‑step analysis: (a) determine whether the receipt is taxable in India under domestic law (sections 5/9 and the charging provisions); and (b) if taxable domestically, consider DTAA relief (and treaty tie‑breaker rules, permanent establishment tests, and relief under section 90/91).
5. Withholding obligations (Section 195) and compliance implications
Tax deductibility at source is a pivotal compliance interface. Payments to non‑residents that are chargeable to tax in India typically attract withholding under Section 195. The payer‑in‑India must determine the liability to deduct tax at source on payments that fall within the ambit of the presumptive provisions. Tax is often required to be withheld on the full gross payment at the appropriate rate unless reduced by a DTAA or unless the payer obtains an order from the Assessing Officer under Section 195(2) specifying lower deduction. Practical consequences include the need for tax residency certifications, applicability of treaty rates for shipping/air transport (which in some treaties allocate exclusive taxing rights to source or to residence), and the frequent use of Section 195(2) applications by payers or payees to avoid excessive withholding on amounts where the ultimate tax incidence is limited by law or treaty.
6. Option to be assessed under normal provisions; books and audit considerations
Although the Act contains machinery provisions prescribing deemed profits, in many instances courts and tribunals have recognised that an assessee should not be denied the right to produce books and other evidence to demonstrate actual profits (or lack thereof) where the facts justify such a showing. The statutory language often includes an express option or an inbuilt allowance where an assessee maintains books and is willing to undergo scrutiny and audit. For non‑residents this right is technically available but practically constrained by enforcement difficulties. A key commercial choice for a non‑resident is therefore whether to accept the certainty of the presumptive tax or to subject itself to detailed assessment with the hope of demonstrating lower taxable profit. From the Indian tax administration’s perspective, the presumptive approach reduces resource intensity and minimizes treaty and transfer pricing controversies for clearly defined activities.
7. Leading judicial decisions and their practical lessons
Practitioners should be familiar with a set of judicial decisions that shape interpretation and application of these sections. Selected themes and illustrative rulings (not an exhaustive list) are set out below — case names are cited for practitioner’s reference and study:
- Mobilisation charges and Section 44BB: The Supreme Court and several High Courts considered whether mobilisation/demobilisation charges, reimbursements and other items fall within the ‘aggregate’ for Section 44BB. Courts have frequently affirmed that where services have a sufficient nexus to India, mobilisation fees can be captured within Section 44BB computation; landmark appellate and Supreme Court consideration in related matters were widely reported and have changed taxpayer practice.
- Choice to demonstrate actual profits: In cases concerning Section 44BBA (aircraft) tribunals and courts have taken the view that the machinery provision does not convert into a charging provision; an assessee should be permitted to adduce books to show no taxable profits in a given year. This line is fact‑sensitive and requires cogent evidence of commercial reality.
- Shipping receipts and GST: Courts and tax authorities have debated whether indirect taxes (e.g., GST) form part of the base for computing ‘aggregate’ amounts. The common practical position is to analyse the contract terms and the statutory charge carefully — recent administrative guidance and case law should be reviewed year‑on‑year.
Each of the above themes demonstrates that the application of presumptive sections is highly fact‑sensitive and practitioners must treat statutory text, the commercial contract and contemporaneous evidence as primary determinants of outcome. Recent authoritative discussions by the Supreme Court have reinforced the need to read the special machinery provisions together with Sections 5 and 9 (territorial nexus) and section 195 (withholding).
8. Corporate case studies and real‑life illustrations
Two brief corporate vignettes follow. These are anonymised composites based on common fact patterns experienced in practice and are intended for instructive purposes.
Case study 1 — Offshore drilling contractor (application of Section 44BB)
Facts: A foreign drilling contractor enters into a contract with an Indian oil exploration company to provide a drilling rig for exploration in an Exclusive Economic Zone (EEZ) adjacent to India. The contract includes mobilisation and demobilisation fees, daily rig hire, and reimbursement of certain consumables. The foreign contractor bills a mobilisation fee of USD 1,200,000 and rig hire of USD 3,000,000 for the year.
Application: The Indian tax department asserts that mobilisation fees and rig hire are part of the aggregate under Section 44BB. On a gross‑to‑deemed computation (assuming deemed base includes mobilisation), the aggregate receipts for the fiscal year would be USD 4,200,000 and the deemed taxable profit at 10% would be USD 420,000. The non‑resident may contest the inclusion of mobilisation fees if factual analysis shows the service was performed wholly outside India, but appellate jurisprudence shows Indian authorities frequently succeed in capturing mobilisation fees where the contract and flow of value create a sufficient nexus to Indian activity.
Numerical illustration (Case study 1)
Aggregate receipts (mobilisation + rig hire) = USD 4,200,000.
Deemed taxable profits under Section 44BB (10%) = USD 420,000.
Corporate tax (example, illustrative Indian rate) — apply the then‑applicable tax rates or treaty rate; for a quick illustration assume 25% tax on deemed profit = USD 105,000 (tax payable in India) subject to withholding rules and DTAA relief.
Case study 2 — International airline (application of Section 44BBA)
Facts: A foreign airline operates flights between an Indian city and international destinations. Receipts attributable to carriage to/from India (ticket receipts and cargo receipts) total INR 300,000,000 in a fiscal year.
Application: Under Section 44BBA the deemed taxable profit is 5% of specified receipts. Deemed profit = INR 15,000,000. The airline may present audited accounts to show that actual profit attributable to Indian operations is nil (for example, due to high interline settlement adjustments or marketing contributions). Courts have accepted that operational realities can, in certain circumstances, demonstrate a lower taxable profit than that produced by the presumptive formula.
Numerical illustration (Case study 2): Aggregate receipts = INR 300,000,000. Deemed taxable profits = 5% x 300,000,000 = INR 15,000,000. Tax payable at illustrative tax rate (say 25%) = INR 3,750,000 subject to DTAA and withholding adjustments.
9. Representative numerical example with journal entries
For readers who require a practical accounting perspective, below is a simplified example (domestic currency INR) showing contract billing, tax provisioning and journal entries for a foreign contractor who is assessed under Section 44BB.
Assume: Mobilisation receipts credited to the contractor in India = INR 80,000,000; rig hire receipts for the year = INR 120,000,000; aggregate = INR 200,000,000; deemed profit at 10% = INR 20,000,000; tax at 25% on deemed profit = INR 5,000,000. Withholding under Section 195 was made by the payer at 10% on mobilization and 10% on rig hire (paid / adjusted). The foreign contractor will receive a credit for tax withheld against final liability in India and may claim DTAA relief for the residual.
Journal entries (illustrative) — contractor’s Indian branch books or payer’s withholding entries:
1. On receipt of mobilisation amount and rig hire to contractor’s receivable / bank (payer’s perspective):
Dr Bank (payment to contractor) 200,000,000
Cr Payable to Contractor (gross) 200,000,000
2. Withholding by payer under Section 195 (assume 10% withholding applied on gross):
Dr Expense / Contract Payment 200,000,000
Cr Bank (net paid to contractor) 180,000,000
Cr TDS payable (to govt) 20,000,000
3. On computation under Section 44BB (assessor’s view):
Deemed profit recognised for tax basis: INR 20,000,000; tax payable INR 5,000,000 (after considering treaty or credit for TDS). The payer and the non‑resident should reconcile withheld taxes to avoid double withholding and ensure creditability under DTAA/Indian law.
10. Practical compliance checklist for practitioners
- Establish territorial nexus before invoking presumptive sections — document contract locations, place of performance, port/airport loadings, and receipts brought to India.
- Carefully analyse contract line items: mobilisation/demobilisation, reimbursables, pass‑through costs and separately quantified charges.
- For payers in India, evaluate Section 195 withholding exposure and obtain tax residency certificate and DTAA applicability at the time of payment to prevent over‑withholding.
- Consider advance applications under Section 195(2) where withholding at source would be excessive relative to computed presumptive tax liability or treaty entitlement.
- Where non‑residents maintain global books that can reliably allocate profits, consider whether electing to be assessed under ordinary computation is commercially preferable to presumptive taxation.
- Maintain contemporaneous documentation and witness statements where operations occur offshore (e.g., rigs, platforms) to support the factual nexus with India or absence thereof.
- Reconcile tax withheld with final assessed liability and ensure claim for credit under DTAA or Indian domestic law is preserved.
11. Limitations, controversy and areas for careful drafting
Limitations of the presumptive approach include: (i) the potential mismatch between the deemed profit and actual economic profit in a given year, (ii) inclusion/exclusion disputes over particular receipts (mobilisation, reimbursements), (iii) treaty conflicts and variance in treaty wording, and (iv) compliance friction for payers faced with withholding obligations. From a contracting perspective, clarity in drafting (explicitly identifying reimbursements vs. receipts for services, linking performance locations, and documenting risk allocation) materially reduces tax controversy.
12. Concluding observations
Presumptive taxation of non‑residents under the Income‑tax Act, 1961 is a significant and technically nuanced area of practice. For chartered accountants advising corporate and non‑resident clients, the principal professional responsibilities are to (a) determine the correct territorial and contractual nexus, (b) advise on withholding and treaty relief at the time of payment, (c) evaluate whether the presumptive route or ordinary assessment is preferable, and (d) document factual positions thoroughly to withstand scrutiny. Leading judicial decisions (particularly those concerning mobilisation fees in the context of oil‑field services) emphasise that the machinery provisions must be applied in harmony with charging provisions, making careful fact analysis indispensable. In cross‑border contexts, a combined tax‑commercial treatment (contract drafting, payment structuring and contemporaneous certificates) can reduce dispute and enhance certainty.
13. Selected references and further reading
Readers are recommended to consult the Income‑tax Act 1961 (text of Sections 44B, 44BB, 44BBA and 44BBB), official Income‑tax Department pamphlets and FAQs on non‑resident taxation, leading Supreme Court and High Court decisions on Section 44BB (mobilisation charges jurisprudence), and recent tax journal commentary on the interface between presumptive rules and DTAAs. This article is an analytical guide and does not substitute for professional advice based on the precise facts of a case; readers should engage with source judgments, the statutory text and updated administrative guidance when advising clients.
Notes: This document summarises the principal presumptive provisions applicable to non‑residents under the Income‑tax Act, 1961, and is intended for professional use by chartered accountants. It relies on then‑current judicial and administrative positions; readers should verify subsequent developments.
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