Section 44D

Section 44D — the law in short

What the courts have decided on section 44D, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• Oil & Natural Gas Corporation Ltd v CIT Supreme CourtHelps taxpayer
  The Assessing Officer says our contract with ONGC is really technical services, so 44BB is out and 44D applies. How is that decided?
  By the pith and substance of the contract, not by picking out its ancillary parts. If the dominant purpose of the agreement is prospecting for, or extraction or production of, mineral oils, the payment is assessable under s.44BB and not as fees for technical services under s.44D read with Explanation 2 to s.9(1)(vii).
• In re Timken India Ltd Advance RulingHelps departmentSuperseded by amendment
  Our US parent charges us only its actual cost for services it performs in America, with no mark-up. Must we still withhold tax under section 195?
  Yes. The Authority ruled against the applicant on every live question. Timken India paid its US parent USD 756,728.26 under an agreement of 2 August 2000 for management, system development, engineering and manufacturing services performed wholly in the United States, the compensation being confined to actual cost with no mark-up. The Authority held the sum was not a reimbursement of costs; that it was taxable as fees for technical services under article 12 of the India-US convention though the services were rendered abroad; that the absence of a profit element was irrelevant; and that no net-basis option could be read into section 44D. Withholding was required.
• In re Dun and Bradstreet Espana S.A. Advance RulingHelps taxpayerNo later treatment found
  We buy standardised business information reports from a Spanish company and resell them here. Do we have to withhold tax on what we pay, as royalty or technical fees?
  No. The Authority ruled that the payments made by Dun and Bradstreet Information Services India for electronic purchases of business information reports from its Spanish associate were the Spanish company's business profits within article 7 of the India-Spain agreement; that the Spanish company had no permanent establishment in India under article 5; that it was therefore not taxable in India on those profits; and that the Indian company was not required to withhold tax under section 195. Buying a finished report was likened to buying a book, not to acquiring intellectual property or a service. Three of the seven questions were not pressed. The ruling binds only that applicant.
• Ericsson Telephone Corporation India AB v CIT Advance RulingCuts both waysSuperseded by amendment
  Indian operators are about to deduct 55 per cent from what they pay my Swedish company for installing a GSM network. Can they deduct on my thin net margin instead?
  No, not on the margin, though the rate came down. The Authority ruled that the Indian companies should not withhold at 55 per cent but at 30 per cent, the rate applicable to such payments under the Finance Act 1995. It refused the applicant's case that only its net profit from local operations, said to be not more than 10 per cent of receipts, could be taxed. The receipts being fees for technical services and the agreements having been made after 31 March 1976, section 44D(b) barred any deduction for expenditure or allowance, and the entire gross receipts fell to be taxed at 30 per cent under section 115A. The net profit question was left open.
• In re Advance Ruling P. No. 13 of 1995 Advance RulingCuts both waysSuperseded by amendment
  Our French engineering group will build a turnkey plant in India, with some work done here and a great deal done abroad. Can India tax the work done abroad, and are the payments royalties, technical fees or business profits?
  Mostly against the applicant. The Authority ruled that the French company's Indian project headquarters and site office together were a permanent establishment; that the payments under the seven agreements were royalties and fees for technical services within articles 13.3 and 13.4 of the India-France agreement; and that the outside activities were effectively connected with that permanent establishment, so the receipts fell to be taxed under article 7 read with article 13.6 as business profits. Only profits referable to operations carried out in India were taxable. Payments to head office for licensed technology and subcontracted services were not deductible reimbursements. The ruling binds only that applicant.
• Statutory position — s.58: what can never be deducted against income from other sources CBDT Circulars & InstructionsCuts both ways
  The Assessing Officer has disallowed items in my other-sources computation without going near s.57(iii). What does s.58 actually shut out?
  Section 58 is headed 'Amounts not deductible' and opens with a non obstante clause overriding s.57. It bars personal expenses; expenditure of the nature referred to in s.40A(12); interest chargeable under the Act payable outside India on which tax has not been paid or deducted under Chapter XVII-B; and any payment chargeable under the head Salaries payable outside India unless tax has been paid or deducted. Sub-section (1A) carries s.40(a)(ia) and s.40(a)(iia) across, sub-section (2) carries the whole of s.40A across, sub-section (3) carries s.44D across for a foreign company, and sub-section (4) denies any deduction at all against winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.