Section 44BB – Income Tax for Non-Resident Oilfield Services Providers

Introduction to Section 44BB

Section 44BB of the Income Tax Act, 1961, provides a special provision for computing profits and gains of non-resident assessees engaged in the business of providing services or facilities in connection with, or supplying plant and machinery on hire for use in, the prospecting for, or extraction or production of, mineral oils. This section simplifies the tax compliance for such non-resident entities operating in India's oil and gas sector.

It aims to offer a straightforward mechanism for taxation, avoiding complex calculations of actual profits and expenses, which can be challenging for non-residents.

Applicability and Eligibility for Section 44BB

Section 44BB specifically applies to:

• Non-Resident Assessees: Only non-resident individuals, firms, or companies are eligible. Resident entities cannot opt for this section.
• Specific Activities: The assessee must be engaged in providing services or facilities in connection with, or supplying plant and machinery on hire for use in, the "prospecting for, or extraction or production of, mineral oils." This includes petroleum and natural gas.
• No Permanent Establishment (PE) Exception: This section typically applies when the non-resident does *not* have a Permanent Establishment (PE) in India for the relevant activities, or if it does, it opts for this presumptive method over the general provisions of business income (unless a Double Taxation Avoidance Agreement (DTAA) provides a more beneficial treatment).

The term "mineral oil" is broadly defined to include petroleum, natural gas, and shale oil.

Presumptive Income Rate under Section 44BB

Under Section 44BB, the profits and gains from such business are deemed to be 10% of the aggregate of the following amounts received or receivable by the non-resident assessee, whether in India or outside India, but derived from the specified activities in India:

1. The amount paid or payable to the assessee or to any person on his behalf on account of the provision of services and facilities.
2. The amount paid or payable to the assessee or to any person on his behalf on account of the supply of plant and machinery on hire.

The assessee can declare a higher income if their actual net profit is more than 10% of the gross receipts.

Example: A non-resident company provides oil exploration services in India, generating gross receipts of $5 Million in a financial year.

• Presumptive income under Section 44BB = 10% of $5 Million = $0.5 Million.
• The company would pay tax on this $0.5 Million at the applicable corporate tax rates for non-residents in India (typically 40% for foreign companies, plus surcharge and cess).

Benefits and Implications of Section 44BB

Opting for Section 44BB provides several benefits:

• Simplified Taxation: It offers a simple and predictable method of tax calculation, reducing complexity associated with determining actual income and expenses in a foreign jurisdiction.
• No Detailed Books of Accounts: The assessee is not required to maintain detailed books of accounts as per Section 44AA for the income covered under this section.
• Exemption from Tax Audit: There is no mandatory tax audit under Section 44AB if income is declared as per the presumptive rate or higher.
• Certainty in Tax Liability: It provides clarity on the tax liability upfront, which helps in financial planning and bidding for projects.

Interplay with Double Taxation Avoidance Agreements (DTAA)

For non-resident entities, the provisions of Section 44BB must always be read in conjunction with the applicable Double Taxation Avoidance Agreements (DTAA) between India and the country of residence of the non-resident. If the DTAA provides a more beneficial method of taxation (e.g., if there is no Permanent Establishment (PE) in India, the business profits may not be taxable in India, or a lower tax rate is specified), the provisions of the DTAA will prevail over Section 44BB, as per Section 90 of the Income Tax Act.

Non-residents should carefully analyze both the domestic law (Section 44BB) and the relevant DTAA to determine their actual tax liability and filing requirements.

Filing Income Tax Return and Other Considerations

• Income Tax Return Filing: Non-resident assessees opting for Section 44BB are required to file their Income Tax Return in India. The specific ITR form would depend on the legal status of the non-resident (e.g., ITR-6 for companies, ITR-5 for firms/LLPs, etc.).
• Tax Deducted at Source (TDS): Payments made to non-residents for services or hire of plant/machinery covered under Section 44BB may be subject to TDS provisions under Section 195 of the Income Tax Act. The payer in India generally has to deduct tax at source at the rates in force, which could be influenced by a DTAA.
• Advance Tax: Non-residents are also liable to pay advance tax in India on their income taxable under Section 44BB.