Section 44BBB – Income Tax for Foreign Companies in Turnkey Power Projects

Introduction to Section 44BBB

Section 44BBB of the Income Tax Act, 1961, provides a special provision for computing the profits and gains of a foreign company engaged in specific activities related to certain turnkey power projects in India. This section aims to simplify the tax assessment process for foreign entities contributing to India's crucial power infrastructure development, offering a presumptive basis for income calculation.

It acts as a relief mechanism, enabling foreign companies to avoid the complexities of maintaining detailed accounts and undergoing extensive audits for their project-specific income.

Applicability and Eligibility for Section 44BBB

Section 44BBB specifically applies to:

• Foreign Companies: Only foreign companies are eligible to avail the benefits of this section. Indian resident companies or other entities cannot opt for this provision.
• Specific Business Activities: The foreign company must be engaged in the business of:
  • Civil Construction: Activities related to the construction of power plants or associated infrastructure.
  • Erection of Plant or Machinery: Installation of equipment and machinery for power generation.
  • Testing or Commissioning: Activities involved in testing and making the plant or machinery operational.
• Turnkey Power Project: These activities must be undertaken in connection with a "turnkey power project" approved by the Central Government. A turnkey project implies a contract where the foreign company is responsible for the entire project from design to completion and handover.

It's important to note that the benefit of this section is specifically for income derived from these approved turnkey power projects.

Presumptive Income Rate under Section 44BBB

Under Section 44BBB, the profits and gains from such eligible business are deemed to be 10% of the aggregate of the amount paid or payable (whether in India or outside India) to the foreign company or to any person on its behalf, on account of such civil construction, erection, testing, or commissioning activities.

The foreign company has the option to declare a higher amount than the 10% presumptive income if its actual net profit from the project is greater.

Example: A foreign company undertaking a turnkey power project in India receives total payments of $10 Million for civil construction and erection of machinery.

• Presumptive income under Section 44BBB = 10% of $10 Million = $1 Million.
• The foreign company would be taxed on this $1 Million at the applicable corporate tax rates for foreign companies in India (currently 40% plus applicable surcharge and cess).

Benefits and Conditions of Section 44BBB

The primary advantages of opting for Section 44BBB include:

• Simplified Tax Compliance: It significantly reduces the compliance burden by offering a fixed presumptive rate, eliminating the need for complex calculations of actual income and expenses.
• No Mandatory Books of Accounts: If the foreign company declares income at the presumptive rate or higher, it is generally not required to maintain detailed books of accounts as specified under Section 44AA.
• Exemption from Tax Audit: Similarly, there is no mandatory tax audit under Section 44AB if the income is declared as per the presumptive rate or higher. However, if the assessee claims lower profits than the presumptive rate, they must maintain books of accounts and get them audited.
• Certainty: Provides a clear and predictable tax liability, aiding in project budgeting and financial forecasting.

Interplay with Double Taxation Avoidance Agreements (DTAA)

For foreign companies, the provisions of Section 44BBB must always be considered alongside the relevant Double Taxation Avoidance Agreements (DTAA) that India has with the foreign company's country of residence. As per Section 90 of the Income Tax Act, if the DTAA offers a more beneficial tax treatment (e.g., if the business profits are not taxable in India in the absence of a Permanent Establishment (PE), or a lower tax rate applies), the DTAA provisions will prevail.

Foreign companies should conduct a thorough analysis of both the domestic law (Section 44BBB) and the applicable DTAA to ascertain their optimal tax position and compliance obligations.

Filing Requirements and Other Considerations

• Income Tax Return: Foreign companies operating under Section 44BBB are required to file their Income Tax Return in India, typically using ITR-6.
• Tax Deducted at Source (TDS): Payments made to foreign companies for services covered under Section 44BBB may be subject to TDS provisions under Section 195. The payer in India should deduct tax at source as per the applicable rates, which again can be influenced by the DTAA.
• Advance Tax: Foreign companies are also liable to pay advance tax in India on their deemed income under this section.
• Project Approval: The requirement for the turnkey power project to be "approved by the Central Government" is crucial for availing this section's benefits.