Section 44BB of the Income Tax Act: An Overview

The Income Tax Act's Section 44BB outlines the tax regulations for non-residents who work in the business of extracting or producing mineral oils. With respect to this section, "mineral oil" refers to natural gas and petroleum, whereas "plant" refers to the ships, planes, cars, drilling units, scientific apparatus, and equipment used to further the specified commercial goals. Their income is calculated using a presumptive basis. In this guide, we will provide a comprehensive overview of this section to taxpayers seeking information and guidance in this context.

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Table of content

What is Section 44BB of the Income Tax Act?

Presumptive Tax Rate under Section 44BB

Eligibility for Section 44BB

Non -Applicability of Section 44BB

Conclusion

Most Asked Questions

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What is Section 44BB of the Income Tax Act?

According to Section 44BB of the Income Tax Act, the following subsections determine the tax regulations for NRIs operating a business of extracting or producing mineral oils:

(1) Regardless of the contrary held in sections 28 to 41 and sections 43 and 43A, the taxpayer, as a non-resident engaged in the business of providing plant and machinery for hire that is used or intended to be used for the extraction, production, or examination of mineral oils, would be deemed to have earned an amount equal to 10% of the total of the amounts mentioned in sub-section(2). This would be subject to tax under the heading "Profits and gains of business or profession." Since the provisions of sections 42, 44D, 44DA, 115A, or 293A applied to calculate the gains or any additional income mentioned in those sections, the same subsection would not be applicable in that scenario. The proviso stated that the sub-section in question would not apply in situations where the provisions of sections 42, 44D, or 44DA (which go into effect in AY 2011–12), or sections 115A or 293A, would apply to calculate profits or any additional income mentioned in the same sections, would also apply.

(2)The sums mentioned in sub-section (1) would be described as:

• The amount submitted or assessed to be submitted (inside or outside of India) to the taxpayer or individual based on the latter's provision of services and utilities regarding the supply of plant and machinery for hire that is used, or is intended to be used, for the extraction, production, or examination of mineral oils in India.

• The sum received or deemed to have been received in India on behalf of the taxpayer in connection with the provision of utilities and services related to the plant and machinery rental used or intended to be used for the inspection, extraction, or production of mineral oils abroad.

Section 44BB (2) (a): Under the same rules, the sum submitted or required to be filed, whether in India or overseas, to the taxpayer or to any other individual on his grounds, shall be acknowledged here. India is the producer or extractor of mineral oils. 

Section 44BB (2)(b): The amount recognised for the extraction or production of mineral oils in foreign nations is the amount acquired or treated to be obtained in India by or on the taxpayer's behalf in accordance with the provision.

(3) If the taxpayer upholds and maintains the same books of account along with the additional documents required under sub-section (2) of section 44AA, gets his account audited, and files the report of the same audit as required under section 44AB, he may claim for even the lesser gains than the gains mentioned in sub-section (1). Then, the assessing officer will move for the assessment of the taxpayer's total income or loss under sub-section (3) of section 143 and reveal the amount subject to be paid by, or refundable to, the taxpayer. The assessing officer would proceed to carry out the assessment of that person in accordance with section 143 subsection (3) of the Act. The taxpayer may claim for the lesser gains for the same he needed to maintain the books of accounts and shall get them audited via a chartered accountant.

Presumptive Tax Rate under Section 44BB

The profits and gains for such activities will be deemed to be 10% of the following amounts if the non-resident chooses to use the presumptive tax requirements of Section 44BB of the Income Tax Act:

• Amounts paid or payable to the taxpayer or to any person acting on his behalf for services, facilities, or the supply of plant and machinery for the aforementioned purposes in India, whether in India or abroad; and

• Amounts that the taxpayer or any other person acting on his behalf receives or is presumed to receive in India in connection with the supply of plant and machinery for the aforementioned uses outside of India, or with the provision of such services or facilities.

When calculating income under Section 44BB, the provisions of Sections 28 to 41, 43, and 43A (it was decided in the Clough Projects International Pte Ltd. case that Section 43B provisions are not relevant as well) would not be applicable.

Eligibility for Section 44BB

A non-resident (whether an Indian or foreign person) may choose to utilise the presumptive tax provisions of Section 44BB of the Income Tax Act in the event that he engages in any of the following two activities:

• Offering facilities and services related to mineral oil prospecting, extraction, or production; or supplying plant and machinery for hire that is used or intended to be utilised in mineral oil prospecting, extraction, or production. 

• A person who is involved in the specific business mentioned above is not required to abide by the rules outlined in Income Tax Act Section 44BB. Such an individual may choose to be subject to the standard provisions of the Income Tax Act and keep the necessary books of accounts and other records to determine their taxable income in India.

Non -Applicability of Section 44BB

Section 44BB's restrictions do not apply to the following types of income:

• Section 42: Particular Provision for Deductions in the Event of Business for Mineral Oil Prospecting, etc.

• Section 44DA: Special rules for calculating royalties and fees for technical services when non-residents are involved.

• Section 115A: Dividend, royalties, and technical service fees taxes apply to foreign corporations.

• Section 293A: Authority to grant exemptions, etc., with regard to engaging in mineral oil prospecting, extraction, etc.

Conclusion 

The earnings and gains of NRIs involved in the mineral oil extraction industry, both inside and outside of India, are the focus of this section. The net present value of the assessee's profits and gains is computed at the rate of 10% of the total amount paid or payable for mineral oils in India, whether paid in India or abroad. Ten percent of the sum received, or deemed to have been received, in India for mineral oils outside of India is used to compute the earnings and gains of non-resident Indians (NRIs). 

FAQ

Q1. When is Section 44BB of the Income Tax Act applicable?

According to Section 44BB, 10% of the amount acquired or treated to be obtained in India for the mineral oils overseas is estimated to represent the NRI's profit. Wherever the provisions of sections 42, 44D, 44DA, 115A, or 293A are adopted, this section will be applicable.

Q2. What is income under Section 44BB?

The earnings and gains of NRIs involved in the mineral oil extraction industry, both inside and outside of India, are the focus of this section. Ten percent of the sum received, or deemed to have been received, in India for mineral oils outside of India is used to compute the earnings and gains of non-resident Indians (NRIs).

Q3. Is Section 44BB applicable to technical services?

Regardless of the type of business, non-residents' fees for technical services are only subject to taxation under section 44DA or section 115A. Only services and other facilities relevant to exploration activity—which do not fall under the category of technical services—would be covered under Section 44BB.

Q4. Can assessees claim lower profits under Section 44BB?

Instead of the 10% presumptive rate, an assessee who is covered by Section 44BB with regard to activities or the supply of plant and machinery may assert a lower income as long as he meets the following requirements: 

• Under section 44AA(2), the assessee keeps and maintains books of accounts

• Under section 44AB, they have them audited and provide the audit report.

Q5. What is the primary purpose of Section 44BB of the Income Tax Act?

Section 44BB provides a special taxation scheme for non-resident taxpayers engaged in the business of exploration, extraction, or production of mineral oils. It allows for a presumptive taxation method, simplifying tax compliance for these businesses.

Q6. How does Section 44BB determine taxable income for non-resident taxpayers?

Under Section 44BB, the taxable income of non-resident taxpayers is deemed to be 10% of the aggregate receipts from the business of exploration, extraction, or production of mineral oils. This presumptive income calculation reduces the need for detailed accounting.

Q7. What types of businesses are covered under Section 44BB?

Section 44BB applies to businesses involved in the exploration, extraction, or production of mineral oils, including petroleum and natural gas. This section specifically targets non-resident companies engaged in these activities within India.

Q8. Are there any special deductions allowed under Section 44BB?

Section 44BB does not allow for deductions of expenses beyond the deemed 10% income. The section simplifies taxation by providing a fixed percentage of income, thus not requiring detailed expense documentation.

Q9. How does Section 44BB impact the tax liability of non-resident companies compared to regular taxation?

Section 44BB simplifies tax liability for non-resident companies by using a presumptive taxation rate of 10% of gross receipts, compared to detailed tax assessments under regular tax provisions, which require comprehensive documentation and expense claims.

Q10. What is the procedure for non-resident companies to claim benefits under Section 44BB?

Non-resident companies must file their income tax return under Section 44BB, reporting their aggregate receipts and claiming the presumptive taxation benefit. The process includes maintaining documentation of their business activities and adhering to Indian tax regulations.

Q11. Can non-resident taxpayers opt out of Section 44BB and choose regular taxation instead?

Yes, non-resident taxpayers can choose to opt out of Section 44BB and be taxed under regular provisions if they prefer to claim actual expenses and deductions. This choice should be made with consideration of which method is more tax-efficient.

Q12. What are the consequences of not complying with Section 44BB requirements?

Non-compliance with Section 44BB can lead to the rejection of the presumptive taxation benefit and potential reassessment under regular tax provisions. This could result in a more complex tax filing process and possible penalties.

Q13. Are there any specific documentation requirements for non-resident taxpayers under Section 44BB?

While Section 44BB simplifies tax calculations, non-resident taxpayers must still maintain adequate records of their business receipts and activities. Documentation should support the business activities related to mineral oils and compliance with Indian tax laws.

Q14. How does Section 44BB interact with Double Taxation Avoidance Agreements (DTAAs)?

Section 44BB operates independently of DTAAs, but non-resident taxpayers can use DTAAs to claim relief from double taxation. The benefits under Section 44BB are subject to the provisions of applicable DTAAs, which may affect the overall tax liability.