If you are a non-resident earning income in India through royalties or fees for technical services, Section 44DA of the Income Tax Act might apply to you. This section deals with a special provision for computing income by way of royalties or fees for technical services received by non-residents or foreign companies, particularly when such income is effectively connected to a permanent establishment (PE) in India.
Let’s break it down in simple terms.
What Is Section 44DA of the Income Tax Act?
Section 44DA is a provision under the Income Tax Act, 1961, that governs how income by way of royalties or technical fees is taxed when earned by a non-resident or a foreign company from the Indian government or an Indian concern.
But this doesn’t apply to all royalty or technical income. This section kicks in only when the non-resident has a business connection or permanent establishment (PE) in India. If the income is effectively connected with the PE, then Section 44DA, not Section 115A, becomes applicable.
What Does Section 44DA Say?
Here’s the crux of the section:
- The income by way of royalty or fees for technical services earned by a non-resident (or foreign company) & connected to a permanent establishment in India must be computed under the head “Profits and Gains of Business or Profession.”
- This means that such income cannot be taxed on a gross basis, unlike in some other sections.
- The actual expenditure incurred wholly & exclusively for business in India shall be allowed as a deduction.
This special provision for computing income by way of royalties ensures that foreign entities doing long-term technical business in India pay taxes on their net income, not just gross receipts.
Why Is This Important?
The logic is simple: if a foreign company is operating through a permanent establishment in India, it should be taxed similarly to a domestic business for that part of the income.
This also prevents tax avoidance. Without Section 44DA, some foreign entities could simply route all their income through the royalty route, pay tax at concessional rates, & still operate a base in India.
Also Read: Taxation Rules for Non-Residents on Dividends, Interest, Royalties & Fees
Conditions Under Section 44DA
To be taxed under Section 44DA of the Income Tax Act, the following must apply:
- The non-resident or foreign company must have a permanent establishment (PE) in India.
- The royalty or technical fee must be effectively connected with the PE.
- The taxpayer must maintain proper books of accounts for the Indian operations.
- The accounts must be audited by a Chartered Accountant, and the audit report must be furnished along with the ITR.
How Is Income Computed?
Unlike other royalty taxation methods (like Section 115A, which allows gross basis), Section 44DA income is computed after allowing expenses."
This includes:
- Salaries paid in India
- Rent or lease expenses for Indian offices
- Professional charges
- Any other relevant business expenses incurred wholly and exclusively for operations in India
The net income is then taxed at the regular rates applicable to foreign companies (usually 40%).
Example to Understand
Let’s say a UK-based software company licenses its tech to an Indian company & earns ₹1 crore in royalty. If the UK company also has a project office in India to support this licensing agreement, it’s considered a permanent establishment.
If the company spends ₹30 lakh on staff, rent, and operations in India, only the remaining ₹70 lakh will be taxed under Section 44DA—not the whole ₹1 crore.
Also Read: Special Provisions for Non-Residents Turning Resident
Key Difference: Section 44DA vs 115A
|
Particulars |
Section 44DA |
Section 115A |
|
Applicable to |
Non-residents with PE in India |
Non-residents without PE |
|
Basis of Taxation |
Net income (after expenses) |
Gross income (no expense allowed) |
|
Rate of Tax |
As per the applicable slab (e.g., 40%) |
Fixed 10% or 15% |
|
Books of Accounts |
Mandatory |
Not required |
|
Audit Requirement |
Mandatory |
Not required |
Important Clarifications
- This section only applies to royalty or fees for technical services. Any other business income from PE will be taxed under normal provisions.
- The royalty must be for the use of a patent, invention, model, design, secret formula or process, or for imparting technical know-how."
- The provision is part of the scheme of presumptive taxation of profits & gains stemming from professions connected with India.
Final Thoughts
Section 44DA ensures fair taxation for foreign companies with actual operations in India. By taxing net profits (not gross receipts), it levels the playing field between Indian and foreign businesses, while keeping room for genuine business deductions.
If you're a non-resident service provider or working with one, it’s crucial to understand how this section affects your tax liability.
👉 Want to make sure you're calculating taxes right under Section 44DA? Our expert tax advisors at Callmyca.com are here to guide you—book a consultation now & avoid costly compliance mistakes!
