Section 44D of Income Tax Act – Taxation of Royalties & Technical Service Fees

In a global economy, cross-border business is no longer limited to physical goods. Technology, software, consultancy, and technical services flow across countries just as easily as physical trade. With this comes the challenge of taxing royalties and technical service fees, especially when paid to non-resident companies. To address this, the Indian legislature introduced Section 44D of the Income Tax Act, 1961, which lays down special provisions for computing income by way of royalties and fees for technical services (FTS).

This section plays a critical role in ensuring transparency & fairness in taxing payments made to foreign entities while keeping compliance straightforward for Indian payers.

What is Section 44D of Income Tax Act?

Section 44D governs the taxation of royalties or fees for technical services (FTS) received by a foreign company from an Indian concern. Normally, calculating net taxable income involves deducting expenses, but under Section 44D, deductions for expenses are restricted.

This means income by way of royalties and FTS is computed on a gross basis, i.e., without allowing most business-related expenses as deductions. This provision ensures that foreign companies cannot significantly reduce their taxable income in India by showing inflated expenses."

Key Objective of Section 44D

The primary objective of Section 44D is to provide special provisions for computing income by way of royalties and FTS paid to foreign companies.

• It creates a clear framework for taxing cross-border intellectual property & service-related payments.
• It helps prevent tax evasion by ensuring payments to foreign companies are taxed fairly.
• It maintains a balance between India’s right to tax and the need to attract foreign expertise.

Also Read: Earning Abroad from Royalties or Technical Services? Here’s the Tax Rule You Can’t Ignore

Who is Covered Under Section 44D?

Section 44D applies to:

1. Foreign Companies that receive royalties or FTS from Indian businesses.
2. Agreements made before 1st April 2003 (after this date, Section 44DA applies).
3. Payments relating to technology transfer, patents, trademarks, designs, or consultancy services.

For example, if an Indian IT company pays a U.S.-based consultant for technical expertise under an agreement made before April 2003, Section 44D governs the taxation.

How is Income Computed Under Section 44D?

The unique part of this section is that it calculates income on a gross basis.

• No deduction is allowed for expenses incurred to earn royalty or FTS (other than reimbursement of actual expenses).
• The income is directly taxed at the prescribed rate under the Act or relevant Double Tax Avoidance Agreement (DTAA).

This strict approach avoids disputes & ensures that the tax department gets its fair share from cross-border payments.

Section 44D vs Section 44DA

While Section 44D was applicable for agreements before April 2003, later agreements are governed by Section 44DA, which provides more relaxed rules by allowing certain expense deductions.

• Section 44D → Strict gross taxation, no deductions.
• Section 44DA → Net basis taxation, with limited deductions.

However, the fundamental principle of both sections remains taxation of royalties and FTS."

Relevance for Small Taxpayers

Though Section 44D mainly deals with foreign companies, the law has broader implications. For domestic businesses, the government has introduced presumptive taxation schemes such as Section 44AD and 44ADA, which give relief to small taxpayers having business income up to Rs. 2 Crores.

Also Read: Presumptive Taxation Scheme for Professionals

This means while big foreign companies face strict taxation on royalties and FTS under Section 44D, small Indian businesses can enjoy simplified compliance under presumptive taxation.

Examples of Payments Covered Under Section 44D

1. Software Licensing Fees – Paid by an Indian business to a foreign software provider.
2. Royalty for Patents/Trademarks – Payments made to use a foreign company’s intellectual property.
3. Technical Consultancy – Fees paid to a foreign consultant for specialized services in engineering, IT, or management.

All these fall under the special provisions for computing income by way of royalties & FTS when covered by old agreements.

Why Section 44D is Still Important Today?

Even though it applies only to older agreements, Section 44D is still important because:

• Many agreements signed before April 2003 are still active.
• It clarifies India’s approach toward taxing foreign companies.
• It set the groundwork for later sections like 44DA and 115A.

Thus, understanding Section 44D is key for tax professionals, multinational corporations, & businesses engaged in technology-related transactions.

Double Tax Avoidance Agreement (DTAA) and Section 44D

In many cases, the provisions of DTAA override domestic tax laws. If a DTAA provides a lower tax rate for royalties or FTS, the taxpayer can benefit from it. However, the computation method under Section 44D still applies unless overridden by treaty terms.

This makes it crucial for businesses to evaluate both domestic law & treaty provisions when making payments to foreign entities.

Also Read: Taxation Rules for Non-Residents on Dividends, Interest, Royalties & Fees

Practical Impact on Businesses

• Indian companies must deduct tax at source (TDS) when paying royalties or FTS to foreign companies.
• Foreign companies cannot reduce taxable income through expenses under Section 44D.
• Proper documentation of agreements is critical to determine whether Section 44D or 44DA applies.

Conclusion

Section 44D of Income Tax Act provides special provisions for computing income by way of royalties and fees for technical services (FTS). It ensures that foreign companies are taxed fairly on cross-border payments and prevents unnecessary deductions from reducing India’s tax revenue. While it applies only to agreements made before April 2003, it remains a cornerstone in the taxation of royalties & FTS.

At the same time, the government has introduced presumptive schemes like 44AD and 44ADA, which give relief to small taxpayers having business income up to Rs. 2 Crores. Together, these provisions balance strict compliance for large foreign corporations with simplified taxation for small domestic businesses.

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