The officer says our oilfield services are fees for technical services effectively connected with our shore base, so s.44BB is out and s.44DA applies on the gross - how much of that survives, and does the goods and services tax we collected go into gross receipts?
The client is a Singapore company providing directional drilling, measurement-while-drilling and mud-logging services. Its contract with an Indian exploration and production company for an offshore block in the Krishna-Godavari basin was signed on 12 April 2023 for three years from 1 July 2023. It keeps a leased shore base at Kakinada with eleven people who mobilise tools and roster crews working on the operator's rig. For AY 2025-26 its receipts were Rs 1,48,00,00,000 - day-rate charges Rs 1,21,00,00,000, tool hire Rs 15,00,00,000, a mobilisation fee of Rs 6,00,00,000 and reimbursed customs duty and freight of Rs 6,00,00,000. Goods and services tax of Rs 26,64,00,000 was collected and paid over. The return of 29 October 2025 computed income under s.44BB at ten per cent, Rs 14,80,00,000, and tax of Rs 5,65,65,600 at thirty-five per cent with five per cent surcharge and four per cent cess. Its audited accounts show Indian costs of Rs 1,32,00,00,000, including a head office management charge of Rs 6,00,00,000 that is not a reimbursement of actual expenses. The operator deducted Rs 5,92,00,000 under s.195 on a s.197 certificate at four per cent of gross. A show-cause of 4 September 2026 says the receipts are fees for technical services under s.9(1)(vii) effectively connected with a permanent establishment, that s.44DA applies, that no books were kept and no audit report filed, and proposes to tax the gross Rs 1,74,64,00,000 including the indirect tax - Rs 66,74,74,080, an additional Rs 61,09,08,480 - with s.234B interest.
Get the contract, the scope of work and the rate schedules out and decide, on the documents and before drafting, what the dominant purpose of the agreement is. Everything in this file follows from that single characterisation: whether s.44DA can apply at all, whether the treaty's fees article is even reached, whether the mobilisation fee and the reimbursement are in gross receipts, and whether the shore base matters. An officer who has read the invoices and not the scope of work has characterised the contract from its ancillary parts, and the reply has to put the dominant purpose in front of him with the contract behind it.
The two provisions now shut each other out, by a mechanism inserted with effect from 1 April 2011. Section 44DA was added to the list in the proviso to s.44BB(1), and a second proviso was inserted into s.44DA(1) saying s.44BB shall not apply to the income referred to in that section. So the question is no longer which section is more specific; it is whether the receipt is royalty or fees for technical services at all. Section 44DA(1) reaches only royalty or such fees received under an agreement made after 31 March 2003 by a non-resident carrying on business in India through a permanent establishment, where the right, property or contract paid for is effectively connected with it. A High Court has held that from 1 April 2011 income within the scope of s.44DA(1) is excluded from s.44BB, but that the exclusion bites only if the receipt really is royalty or such fees - and that if the services are for a mining or like project the receipt is outside that definition and therefore outside s.44DA.
The Supreme Court has held that the choice is decided by the pith and substance of the agreement and not by picking out its ancillary parts: if the dominant purpose is prospecting for, or extraction or production of, mineral oils, the payment is assessable under s.44BB and not as fees for technical services. That is the whole of the characterisation answer and it is the ground the reply is built on. A High Court has held to the same effect on a non-resident supplying survey and data services to an offshore exploration block, upholding an Authority ruling that s.44BB governs the computation and not s.44DA, and treating s.44BB as the special provision for services in connection with prospecting for or extraction or production of mineral oils. Directional drilling, measurement-while-drilling and mud logging on a producing offshore block are as close to the centre of that description as the section gets.
This is the cleanest route and it is entirely domestic. Explanation 2 to s.9(1)(vii) defines fees for technical services and excludes in terms consideration for any construction, assembly, mining or like project undertaken by the recipient. Drilling on an exploration and production block is a mining or like project, and if the receipt is not fees for technical services at all then s.44DA(1) has nothing to work on, because that sub-section reaches only royalty and such fees. Taken in this order no treaty question arises and no permanent establishment question arises either. A High Court has held on the post-2011 provisos that if the services are for a mining or like project the receipt is outside the definition and so outside s.44DA, and that confining mining or like project to work performed onsite is an erroneous approach with no rationale. It did not decide that these receipts were such - it found no categorical finding had been returned on the nature of the receipts and remanded, so the proposition is conditional and the condition has to be proved.
Where the treaty's fees article carries a make-available condition, merely rendering technical or consultancy services does not satisfy it: the service must be aimed at and result in transmitting the technical knowledge, skill or process, so that it remains with the recipient and can be applied independently. A High Court has held that delivering the fruit of the expertise, survey data, makes nothing available; a Tribunal Bench read the same requirement into another treaty's article; an Authority ruled that project monitoring receipts were not caught because merely rendering services is not enough. Here the operator receives a directional drilling outcome and a log. On the permanent establishment, the library holds two decisions on the boundary: the Supreme Court has held an installation permanent establishment comes into existence only at the installation stage, so offshore supply profits are not attributable to it, and a High Court held there was none where the treaty's nine-month test looked to the period the enterprise was actually involved at the site and a long interruption broke the count.
A High Court has held that service tax collected by the assessee and passed on to the Government is not to be included in the gross receipts under s.44BB(2) read with s.44BB(1), because it is not an amount paid or payable, or received or deemed to be received, for the services rendered - the assessee being only a collecting agency. A Full Bench of another High Court answered a reference in the same terms, holding that the amount reimbursed by the operator representing service tax the provider had already paid to the Government does not form part of the aggregate amount in s.44BB(2). Both reason from the words of the sub-section, which take in amounts paid on account of the provision of services and facilities, and an indirect tax collected for the Government is not that. The same words carry the same answer for the goods and services tax.
The Supreme Court has held that a fixed mobilisation fee paid for moving a drilling unit to the Indian location falls within clause (a) of s.44BB(2), as an amount paid on account of the provision of services and facilities in connection with, or the supply of plant and machinery on hire used in, prospecting for or extraction or production of mineral oils. The Rs 6,00,00,000 is therefore in and arguing it wastes the hearing. The Rs 6,00,00,000 of customs duty and freight is a different question, because the sub-section takes in amounts paid on account of the provision of services and facilities and a pure pass-through of a third-party cost with no mark-up is not that. The Supreme Court has held, on the characterisation of income, that a proportionate share of the cost of a common facility recovered without profit was a reimbursement and not fees for technical services; an Authority went the other way where the charge was a contractual percentage of revenue with no nexus to actual cost.
Section 44DA(1) does not tax receipts. Where it applies, the income is computed under the head profits and gains of business or profession in accordance with the provisions of the Act - that is, on a net basis - subject only to the two disallowances its first proviso names: no deduction for expenditure or allowance not wholly and exclusively incurred for the business of the permanent establishment in India, and no deduction for amounts paid by the permanent establishment to its head office otherwise than towards reimbursement of actual expenses. On these accounts that means Rs 1,48,00,00,000 less Rs 1,32,00,00,000 of Indian costs, add back the Rs 6,00,00,000 head office management charge, giving Rs 22,00,00,000 and tax of Rs 8,40,84,000. The officer's Rs 66,74,74,080 is thirty-five per cent of gross receipts, which is not a s.44DA computation at all - Rs 58,33,90,080 of the proposal has no statutory basis whichever way the characterisation goes.
Section 44BB(3) lets an assessee claim lower profits than ten per cent if he keeps and maintains books under s.44AA(2), gets them audited under s.44AB and furnishes the report, and the officer then makes an assessment under s.143(3). That option is not a general feature of the presumptive provisions and has to be found in the section: this library's note on the turnkey power project provision records that its equivalent was inserted only with effect from 1 April 2004, and its note on another companion section records that no such option exists there at all. The mirror is s.44DA(2), which requires the same books, an audit by an accountant and the report furnished with the return - and without them the net computation in the previous step cannot be put in. On interest, a Tribunal Bench has held that the proviso in s.209(1)(d) applies only where the person responsible for deducting has paid or credited the income without deducting, so where the operator did deduct, s.234B interest does not follow.
Where the contract is dominantly oilfield services, s.44BB usually holds, but generally on appeal rather than in the assessment order. The quantum point lands sooner and harder: a gross-basis computation under a net-basis section does not survive scrutiny anywhere, and it is the fastest route to cutting the demand from Rs 66,74,74,080 to something between Rs 5,65,65,600 and Rs 8,40,84,000 whichever section wins. The indirect tax point is usually won on reasoning accepted twice for the earlier levy. The mobilisation fee is lost and should not be run. The reimbursement head is split more often than won outright and turns on invoices. The s.234B objection is a coin toss. The permanent establishment point is lost on facts like these. Four to seven years end to end.
