Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects [Section 44BBB]

Section 44BBB provides that, notwithstanding anything to the contrary contained in Sections 28 to 44AA of the Income-tax Act, the income of foreign companies who are engaged in the business of civil construction or erection or testing or commissioning of plant or machinery in connection with a turnkey power project shall be deemed at 10 per cent of the amount paid or payable to such assessee or to any person on his behalf, whether in or out of India. For this purpose, the turnkey power project should be approved by the Central Government. It has also been clarified that erection of plant or machinery or testing or commissioning thereof will include lying of transmission lines and systems.

Text of Section 44BBB

^[1][44BBB. Special provision for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects.

^[2][(1) Notwithstanding anything to the contrary contained in sections 28 to 44AA, in the case of an assessee, being a foreign company, engaged in the business of civil construction or the business of erection of plant or machinery or testing or commissioning thereof, in connection with a turnkey power project approved by the Central Government in this behalf  ^[3][***], a sum equal to ten per cent of the amount paid or payable (whether in or out of India) to the said assessee or to any person on his behalf on account of such civil construction, erection, testing or commissioning shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession”.]

^[4][(2) Notwithstanding anything contained in sub-section (1), an assessee may claim lower profits and gains than the profits and gains specified in that sub-section, if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB, and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee under sub-section (3) of section 143 and determine the sum payable by, or refundable to, the assessee.]

^[5][(3) Notwithstanding anything contained in sub-section (2) of section 32 and sub-section (1) of section 72, where an assessee declares profits and gains of business for any previous year in accordance with the provisions of sub-section (1), no set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year.]

KEY NOTE

1.   Inserted by the Finance Act, 1989, with effect from 01.04.1990.

2.   Existing section numbered as sub-section (1) by the Finance Act, 2003, with effect from 01.04.2004.

3.   Words “and financed under any international anid programme” omitted by the Finance Act, 2003, with effect from 01.04.2004.

4.   Inserted by the Finance Act, 2003, with effect from 01.04.2004.

5.   Inserted by the Finance Act, 2023, with effect from 01.04.2024:

Turnkey Contract/Project

Turnkey contract is an arrangement under which a contractor completes a project and then hands it over in fully operational form to the client, which needs to do nothing but “turn a key”, as it were, to set it motion

In the context of turnkey contract, where a contractor is non-resident and client is an Indian party, being resident of India, the Turnkey contract involves the execution of following components:

§  Design & Engineering in relation to supply of equipment- Offshore Services2.

§  Supply of Equipment- Off Shore Activity3.

§  Installation- On shore Activity4.

§  Commissioning - On shore Activity.

Turnkey contract/project refers to contract where contractor is Non-resident and client is Resident of India and project situs is in India.

Section 44BBB(1)

Under sub-section (1) of section 44BBB in case of assessee being a foreign company engaged in the business of civil construction or business of erection of plant or machinery or testing or commissioning thereof in connection with a turnkey power project approved by the Central Government would be taxed at the rate of 10 per cent of the amount paid or payable to the assessee or to any person on behalf of the assessee on account of such civil construction, erection etc.

Option to claim profit lower than the deemed profits under Section 44BBB [Section 44BBB(2)]

An assessee may claim lower income than the presumptive rate of 10%, if such assessee :

§  Keeps and maintains books of account under section 44AA(2); and

§  Gets books of accounts audited and furnish a report of such audit under section 44AB.

Note: The assessment in all such cases shall be done by the Assessing Officer under section 143(3).

No set off of unabsorbed depreciation and brought forward loss shall be allowed if Income declared under presumptive scheme under section 44BBB [Section 44BBB(3)]

Where a non-resident assessee declares presumptive income under Section 44BB or Section 44BBB in any previous year, no set off of unabsorbed depreciation and brought forward loss shall be allowed to the assessee for such previous year.

Nature of Business

Business of civil construction in connection with the turnkey project; or

         (ii)     Business of Erection of plant or machinery in connection with the turnkey project; or

       (iii)     Testing or commissioning of such plant and machinery in connection with the turnkey project approved by the Central Government.

Eligible Assessee

A foreign company, which is engaged in the following activities in connection with a turnkey power project approved by the Central Government (through Department of Power in Ministry of Energy in terms of Circular 552 dated 09.02.1990), may opt for presumptive taxation provisions of Section 44BBB of the Income Tax Act : –

  §  The business of civil construction in connection with the turnkey project ; or

§  Erection of plant or machinery in connection with the turnkey project ; or

§  Testing or commissioning of such plant and machinery in connection with the turnkey project

Presumptive income

A sum equal to 10% of the amounts paid or payable on account of such Civil Construction, erection, testing or commissioning (whether in or out of India) to the said taxpayer or to any person on his behalf, shall be deemed to be the profits and gains of such business.

Approval of Central Government of certain turnkey power projects [CBDT Circular No. 552, dated 09.02.1990]

1. The provisions contained in section44BBB of the Income-tax Act, 1961 refer to approval of certain turnkey power projects by the Central Government.

2. It is clarified that an approval issued by the Department of Power in the Ministry of Energy shall be deemed to be the approval of the Central Government for the purposes of section 44BBB of the Income-tax Act.

CBDT Circular No. 552, dated 09.02.1990.

Subject : Section 44BBB - Special provisions for computing profits and gains of foreign companies engaged in the business of civil construction, etc., in certain turnkey power projects

1.  The provisions contained in section 44BBB of the Income-tax Act, 1961 refer to approval of certain turnkey power projects by the Central Government.

2. It is clarified that an approval issued by the Department of Power in the Ministry of Energy shall be deemed to be the approval of the Central Government for the purposes of section 44BBB of the Income-tax Act.

No ‘artificial split’ of contract by GE Group Co.; Rejects ‘PE constitution’ plea

On applicability of Section 44BBB, ITAT states that Section 44BBB does not speak of engagement of a foreign company for ‘supply’ in connection with the turnkey power project, the provisions of Section 44BBB are not applicable;  Observes that It is established that the Assessee had no business connection or dependent agent PE or construction PE in India, therefore, the attribution of profit from off-shores supplies made to PGCIL to the alleged business connection or PE and application of Section 44BBB is not sustainable;

Delhi ITAT allows Assessee’s appeal, dislodges Revenue's finding that the Assessee artificially split a composite contract into three separate contracts for tax-avoidance in India; Relies on jurisdictional High Court ruling in Linde AG, Linde Engineering Division v. DDIT (2014) 365 ITR 1 (Del.) and AAR ruling in Hyundai Rotem Co., in re (2010) 323 ITR 277 : 190 taxman 314 (AAR) wherein under identical facts held that “It is an arrangement conceived of and agreed to by the parties keeping in view the overall objective of successful commissioning of the project.”; ITAT also remarks that the “adjudication of an issue should be on basis of wholesome reading of the contract and context of terms”, by relying on Supreme Court ruling in Ishika Wasma- Harima Heavy Industries Ltd. v. DIT (2007) 288 ITR 408 (SC); Rejects Revenue’s plea that Assessee’s Indian associate (responsible for on-shore supply and services of turnkey project) constituted Assessee’s DAPE, also rejects argument on constitution of Construction PE as the Assessee was merely liable to make offshore supplies and not engaged in any construction project in India and accordingly, deletes addition of Rs. 107 Cr made for taxing income from off shore supplies, applying provisions of Section 44BBB;  Assessee, a GE Group Company, is a tax resident of United Kingdom and engaged in business of designing, engineering, manufacturing and supply of electric equipment that help in the transmission and distribution of power, commissioning and servicing of transmission and distribution systems on turnkey basis; For Assessment year 2018-19, Assessee claimed that income from Indian customers was not taxable as the income was from offshore supplies only; Revenue noted that there were three contracts in respect of contract awarded by Power Grid Corporation India Ltd. (PGCIL) viz., (i) Offshore supplies contract between Assessee and PGCIL for supply of plant and equipment including spares outside India, type test and training to be conducted outside India, (ii) on shore supply contract and (iii) on shore service contract; The last two contracts were assigned to Assessee’s Indian associate GE T&D India Ltd. or ALSTOM-I; Revenue held that a composite contract was artificially split into three special contracts while all the responsibilities and liabilities of the project based with the Assessee and accordingly held that the Indian Associate constituted Assessee’s dependent agent PE and attributed business income by applying provisions of Section 44BBB; DRP sustained the draft order however directed Revenue to exclude the receipts on account of off-shore supplies made by the Assessee to two entities, if they are not related to PGCIL contract; ITAT peruses the major clauses of contracts entered between the PGCIL and the Assessee and the notification of award of off-shore contract and observes that in the bid itself was proposed and confirmed as an Associate for the purpose of executing the onshore supply and service contracts; Refers to the bid document which contained special conditions that successful bidder shall be under obligation for entering into three contracts, thus having an Indian Associate was an integral part of the bid and not at the discretion of the Assessee; Also refers to the scope of work in the notification of award whereby the Assessee’s work was limited to design, engineering, manufacture, testing at manufacturer’s works and CIF supply of all offshore equipment and materials from country(ies) outside India including type testing and training to be conducted outside India, observes that there was not a single scope of contract under which the Assessee and Indian Associate were working together; Likewise notes that ALSTOM-I was awarded a contract under a separate notification which specifically mentions that ALSTOM-I shall be ‘independent contractor’ of PGCIL; Opines that “at the stage of bid itself ALSTOM-I had joined the Assessee in terms of the requirement of the bid. These clauses and stipulations go on to establish that there was a collaborative effort of the assessee and the Indian associate and as such there was not actually a consortium to which one contract was awarded with bifurcation at level of the members of Consortium.”; States that Revenue erred to construing the clauses of the contract in a narrow and selective approach and failed to take note of it as a whole, further states that DRP also erred in making factual errors by observing that the signatories for all the three contracts were Assessee and PGCIL only. [In favour of assessee] (Related Assessment year : 2018-19) – [UK Grid Solution Ltd. v. DCIT (International Taxation) [TS-182-ITAT-2023(DEL)] – Date of Judgement : 12.04.2023 (ITAT Delhi)]

Assessee Japanese company having Liaison Office undertook power projects in India by entering into three separate contracts for offshore supplies, onshore supplies and onshore services, income from offshore supplies was not liable to tax in India both under section 44BBB as well as under article 7 of Indo-Japan DTAA

Assessee Japanese company had established a Liaison Office in New Delhi and undertook power projects. For execution of projects, assessee entered into separate contracts for offshore supplies, onshore supplies and onshore services. Assessee offered income from execution of these projects at rate of 10 per cent of gross receipts under section 44BBB in respect of onshore supplies and also for onshore services. According to Assessing Officer revenues from offshore supplies should also be attributed to project office of assessee in India and be taxed in India - Commissioner (Appeals), however, held that provisions of section 44BBB could not be applied to offshore supplies as goods were transferred outside India, as per terms of contract, on loading of goods on ship in Japan and that there was no involvement of Liaison Office. Commissioner (Appeals) was correct in holding that income from offshore supplies was not liable to tax in India both under section 44BBB as well as under provisions of article 7 of DTAA between India and Japan. [In favour of assessee] – [Deputy Director of Income Tax, International Taxation, v. Mitsui & Co. Ltd. (2020) 118 taxmann.com 379 : [TS-24-ITAT-2020(DEL)] (ITAT Delhi)]

Assessee, engaged in execution of turnkey projects, maintained books of account under section 44AA(2) and, moreover, said accounts were audited and audit report had been furnished before Assessing Officer, its claim for being taxed as per provisions of section 44BBB(2) was to be allowed

Assessee was a foreign company engaged in execution of turnkey projects. It availed of provision of sub-section (2) of section 44BBB while filing return before Assessing Officer. Assessing Officer took a view that assessee had not followed correct method of determining stage of completion of contract and accounts of assessee were not reliable. He thus taxed assessees income under section 44BBB(1).  Commissioner (Appeals) as well as Tribunal noted that assessee had maintained books of account as required under section 44AA(2). Moreover, assessee’s accounts were audited and audit report had been furnished before Assessing Officer. Tribunal thus granted benefit of section 44BBB(2) as claimed by assessee. Since findings recorded by Tribunal were findings of fact, no substantial question of law arose therefrom. [In favour of assessee]  - [CIT v. Shandong Tiejun Electric Power Engineering Co. (2018) 400 ITR 371 : (2017) 251 Taxman 131 : 86 taxmann.com 274 (Guj.)]

Assessee, a UK company was awarded a contract by RGPPL, an Indian company, and received certain sum for design and engineering service, import of equipments and procurements from within India and assessee did not offer income arising out of procurement of offshore equipments for taxation under section 44BBB, contractual revenue on account of offshore procurement could not be brought to tax under section 44BBB

Assessee, a UK company, and PLI had entered into a JV. They were awarded a contract by RGPPL, an Indian company on EPC basis. Assessee offered its income from engineering services and purchases within India for tax under section 44BBB but did not offer income arising out of procurement of offshore equipments for taxation. Assessing Officer held that provisions of section 44BBB were applicable to assessee on amount of offshore procurement as well, as it was part of same EPC contract. Contract entered into with RPPGL, in its consideration clause, had separately identified aggregate consideration payable in respect of different components of contract, namely, design and engineering services (onshore/offshore), import of equipment/material as well as equipment/material to be procured from within India. Thus, entire contractual revenue on account of offshore procurement could not be brought to tax under section 44BBB as consideration received by assessee for offshore supply of equipment was not chargeable to tax in India. [In favour of assessee] (Related Assessment year : 2008-09) – [DCIT (International Taxation), Mumbai v. Whessoe Oil & Gas Ltd. (2017) 87 taxmann.com 342 (ITAT Mumbai)]

Consideration for erection of power plant taxable @ 10% under section 44BBB : AAR

Applicant, a Japanese company, is an engineering, procurement and construction company and has been active in development of power projects on an international basis for last sixty six years - It has been awarded a contract by CGPL, an Indian company, for erection of steam turbines, turbo generators and auxiliary equipments/heaters for power project in India - Applicant would initially depute certain expats to project office set up in India for provision of services and further, in order to meet project schedule, it would, in course of execution of contract, deploy additional expats and workforce, if required - It is contemplated to engage services of a related party/third party for supply of labour for executing work under contract with CGPL. On facts, section 44BBB would apply and, therefore, consideration received by applicant for aforesaid project would be eligible for presumptive rate of taxation under section 44BBB.

The AAR, ruling in favour of the applicant, held that consideration received for erection and commissioning of Ultra Mega Power Project (UMPP) would be taxable under section 44BBB at gross rate of 10%. The ruling was pronounced in case of Toshiba Plant Systems and Services Corporation which was awarded execution contract for UMPP at Mundra by Costal Gujarat Power Limited (CGPL). The AAR held that gross rate of tax would be applicable on entire contract receipts, even if applicant hires external labour, where it retains overall responsibility of contract execution. The contract for supply of equipment was separately executed with CGPL by Toshiba Corporation, parent company of Applicant (which was not a part of AAR application). – [Toshiba Plant Systems and Services Corporation, In re, v. Director of Income-tax (International Taxation), Bangalore (2011) 332 ITR 456 : 239 CTR 163 : 198 Taxman 26 : 9 taxmann. com 326 : [TS-65-AAR-2011] – Date of Judgement : 22.02.2011 - (Authority for Advance Rulings (Income-tax) New Delhi)]

Where assessee, a German company, had set up a project office in India for providing engineering and technical services for various projects and it fulfilled all conditions stipulated in section 44BBB(1), profits and gains of assessee were to be computed at 10 per cent in accordance with said provision - Held, yes - Whether provision made in sub-section (2) of section 44BBB is for benefit of assessee under which assessee, on basis of books maintained by it, is given a chance to demonstrate and prove before Assessing Officer that actual profits earned by assessee were less than 10 per cent; on basis of this provision, revenue cannot plead or make out a case that profits earned by assessee are more than 10 per cent. (Related  Assessment years : 2004-05 and 2005-06) – [Director of Income-tax v. DSD Noell GMBH (2011) 333 ITR 304 : 199 Taxman 329 : 11 taxmann. com 212 (Del.)]

On facts stated under heading ‘Association of persons - Assessable as’ applicant should be taxed in accordance with principle embedded in section 44BBB and ten per cent of amount receivable by it under contract, whether in India or elsewhere, should be taken as its profits and gains of business under section 28 without any deduction or allowance or exemptions

The applicant, a company incorporated in the Netherlands, is engaged in the business of dredging and marine contractors. In 1996, Chennai Port Trust floated a tender for the Breakwater Construction at Ennore Port. The applicant, possessing technical knowledge and capabilities to perform a part of the work, participated in the said contract in joint venture with an Indian company. The joint venture agreement specifically provided that each party shall bear its own losses and retain all profits and, therefore, there would be no sharing of profits between the two parties. Both the parties have decided the work each party shall carry out. The applicant’s share of work is 17 per cent of the total price. The applicant has stated that the association is not incorporated to earn profit but the main objective is to coordinate for the completion of the contract. The case of the applicant is that no AOP has come into existence by joint venture and, therefore, the applicant should be assessed to income-tax in respect of profit earned from work done only by it separately and independent of income/loss of the Indian company. The applicant also seeks ruling in respect of applicability of section 44BBB to its case.

Held : The parties have specifically ruled out constitution of any partnership between them. There is no sharing of profits or loss. They have specifically provided in the agreement that each party will bear its own loss and retain its profits as and when such profits or loss arise. Having regard to the agreement the applicant cannot be treated as a partnership which can only be created by an agreement. Nor can it be treated as an AOP. In order to constitute an AOP, there will have to be a common purpose or common action and the object of the association must be to produce income jointly. It is not enough that the persons receive the income jointly.

In the instant case, each of the two parties has agreed to bear its own loss or retain its own profit separately. Both have agreed to execute the job together for better co-operation in their relationship with the Chennai Port Trust. The intention is not to carry out any business in common, only a part of the job will be done by the applicant, according to its technical skill and capability. The other part of the contract will be executed by the Indian company. The applicant’s share of work is 17 per cent of the total value of the contract. The association with the Indian company is not with the object of earning this income but for coordination in executing the contract so that the Indian company can also make its own profit. The Indian company’s work and income arising therefrom is quite separate and independent of the applicant’s work and income. If the costs incurred by the Indian company or the applicant are more than their income, each party will have to bear its loss without any adjustment from the other party. The association of the petitioner-company with the Indian company is undoubtedly for mutual benefit but such association will not make them a single assessable unit and liable to tax as an AOP. In the instant case, the applicant has stated that the applicant has made its own arrangement for execution of work independent from that of the Indian company. There is no control or connection between the work done by the applicant and the Indian company.

On the facts as stated hereinabove, the applicant and the Indian company cannot be treated as an AOP for the purpose of levy of income-tax.

As regards the applicability of section 44BBB, section 44BBB literally applies only to a foreign company engaged in construction and other specified businesses in connection with a powerproject financed under an International Aid programme. A sum equal to 10 per cent of the amount payable to the assessee is treated as its profits and gains of business assessable under section 28. In other words, the assessee is taxed on 10 per cent of the entire amount received by it under the contract without any deduction or allowance permissible under Chapter IV-D as provided by section 29. It will not have to go through the procedure of assessment of business income under sections 30 to 43D. This procedure is of advantage also to the department. 10 per cent of the amount payable to the assessee, whether in India or abroad, is straightaway taken as its deemed profit. No deduction or allowance or exemption from this income is allowable at all. Having regard to the facts and circumstances of the case, the applicant should be taxed in accordance with the principle embedded in section 44BBB and 10 per cent of the amount receivable by it under the contract, whether in India or elsewhere, should be taken as its profits and gains of business under section 28 without any deduction or allowance or exemptions. – [Van Oord Acz. BV, In re. (2001) 248 ITR 399 : 115 Taxman 317 (AAR - New Delhi)]

Applicant, a company incorporated in Belgium and engaged in business of dredging and marine contracting, has been awarded a contract in India by Chennai Port Trust for work of dredging their new port - Applicant has opened a temporary project office in India and will deploy from abroad technical people and all plant and machinery required - On facts as stated by applicant section 44BBB is applicable

The applicant is a company incorporated in Belgium and engaged in the business of dredging and marine contracting. Control and management of the affairs of the company is situated wholly outside India. The company has no branches in India. The applicant has been awarded a contract by the Chennai Port Trust for the work of dredging at their new port. The applicant has opened a temporary project office in India to execute the said contract after obtaining permission from the Reserve Bank of India. The applicant shall deploy from abroad its dredgers, survey equipments, boats, computers, technical people and other relevant plant and machinery required to execute the said contract.

This application is made with an objective of ascertaining the confirmed legal status about the tax liability of the company in India. The residential status of the applicant, for the purpose of taxation, would be non-resident. The main question raised by the applicant is whether on the facts and circumstances of its case, the provision of section 44BBB is applicable in its case.

Held : The contract obtained by the applicant will go on for a number of years. This contract has been given to the applicant in connection with the turnkey power project which has been approved by the Central Government. It would be more advantageous for the department as well as the applicant to proceed with the assessment of the profits made by the applicant by having recourse to section 44BBB. On the facts as stated by the applicant section 44BBB is applicable. – [Jan De Nul N.V. v. CIT (1999) 236 ITR 489 : 151 ITR 553 : 103 Taxman 164 (AAR)]