Section 44DA captures non-resident royalty / FTS income where the right / contract is EFFECTIVELY CONNECTED with the NR's Indian PE — taxed on net-income basis (allowing deduction of expenses incurred). The provision implements DTAA Article 7 framework (effectively-connected income taxed in source state on net basis). Where the connection is absent, s. 115A applies (gross-basis flat rate).
Historical context / FA amendment trail
Inserted by FA 2003, w.e.f. 1-4-2004, to align domestic law with DTAA Article 7 effectively-connected income framework. The dichotomy between s. 44DA (effectively connected — net basis) and s. 115A (not connected — gross basis) is now well-settled.
Operative consequences
• Applies to royalty / FTS received from Government / Indian concern by NR.
• Effectively-connected test: right / property / contract under which payment received must be CONNECTED to NR's Indian PE / fixed place of profession.
• Net-income basis: actual expenses incurred for earning the income may be deducted.
• Books of account + audit (Form 3CE) mandatory under s. 44DA(2).
• Deductions denied: s. 44C head-office overhead, royalty/FTS paid to other NR.
• Where NOT effectively connected: gross-basis under s. 115A at flat 10% / 20% rate.
Case Laws & Commentary
SECTION 44DA — Special provision for computing income by way of royalties, etc., in case of non-residents
Important Case Laws — 1961 Treatise (FA 2026)
Provision in brief: For non-resident (not being a company) or foreign company earning royalty or FTS pursuant to agreement made after 31.5.1997 AND the income is effectively connected with the assessee's PE in India — income chargeable under PGBP shall be computed after allowing for ALL expenses wholly and exclusively incurred for the business of the PE — but the assessee must (i) maintain books of account, (ii) get them audited, (iii) furnish the audit report along with return. Effectively allows net taxation rather than gross taxation under s. 115A. Section 44DA(2) excludes specific items (HO expense beyond s. 44C, etc.) from allowable deductions.
Section Commentary
Net-basis regime for PE-connected royalty / FTS
Section 44DA applies to NON-RESIDENT (not being a company) OR FOREIGN COMPANY earning royalty or FTS pursuant to agreement made AFTER 31.5.1997 AND the income is EFFECTIVELY CONNECTED with the assessee's PE in India. Under s. 44DA, income is computed under PGBP after allowing ALL expenses wholly and exclusively incurred for the business of the PE — BUT subject to specific conditions: (i) maintain books of account, (ii) get them audited, (iii) furnish audit report with return.
Section 44DA vs 115A — mutual exclusivity
Rio Tinto Technical Services (Del) — where royalty/FTS is effectively connected with a PE, s. 44DA mandates NET-BASIS taxation. Section 115A (10% / 20% on GROSS, with no expense deduction) does NOT apply where there is a PE. The two regimes are mutually exclusive — assessee with PE is automatically in s. 44DA; without PE, in s. 115A.
Section 44DA vs 44BB — Schlumberger SB boundary
Schlumberger Asia Services (Del ITAT SB) — for oil-exploration services rendered through PE, the boundary is delicate. Services 'in connection with' oil exploration that are NOT FTS go to s. 44BB. Services that QUALIFY as FTS / royalty AND have PE go to s. 44DA. FA 2010 amendment codified this. Practitioners must classify the service carefully.
Mandatory book / audit conditions
ABB FZ LLC (Bangalore ITAT) — sub-s. (2) book-maintenance and audit are MANDATORY conditions for net-basis taxation. Non-compliance forces the assessee BACK to gross-basis under s. 115A. Strict-compliance reading.
'Effectively connected' — substantive test
Cargo Community Network (Del / AAR) — 'effectively connected with PE' is a SUBSTANTIVE test. The PE must actively perform / participate in earning the royalty / FTS. Mere existence of PE is not sufficient. This is critical for foreign companies with India PE that earn some PE-connected and some non-PE-connected revenue.
PE-attribution methodology
SET Satellite (Bom) — only PE-connected portion goes to s. 44DA; non-PE-connected goes to s. 115A. OECD-style attribution methodology applies. Many foreign tech / consulting / media companies have mixed-revenue PE structures requiring careful allocation.
CA practical relevance
(i) Identify whether non-resident has India PE (s. 9 / DTAA test). (ii) Within PE, segregate PE-connected revenue from non-PE-connected. (iii) For PE-connected, ensure book maintenance + audit (s. 44DA(2)). (iv) For non-PE-connected, apply s. 115A gross basis. (v) Specific HO-cap interaction (s. 44C) for PE expense deduction. (vi) DTAA Article 7 (business profits) often runs parallel to s. 44DA — both must be reviewed.
FA 2026 impact: No FA 2026 amendment. Section 44DA continues as the 'net-basis' regime for PE-connected royalty/FTS of NRs.
Leading Decisions
1. DIT v. Rio Tinto Technical Services
Citation: (2012) 211 Taxman 50 (Del)
Forum: Delhi High Court
Facts & Issue: Foreign company providing technical services through Indian PE — question of net-vs-gross taxation, applicability of s. 44DA vs s. 115A.
Held / Ratio: Held that where royalty/FTS is effectively connected with a PE, s. 44DA mandates net-basis taxation. Section 115A (20% / 10% on gross) does not apply where there is a PE. The two regimes are mutually exclusive.
Section relevance: Defines mutual exclusivity of s. 44DA and s. 115A.
2. DCIT v. Schlumberger Asia Services Ltd.
Citation: (2013) 145 ITD 38 (Del ITAT)(SB)
Forum: ITAT Special Bench, Delhi
Facts & Issue: Question of priority between s. 44BB (services for oil exploration) and s. 44DA — both potentially applicable for foreign services in upstream sector.
Held / Ratio: Special Bench held that s. 44DA is a SPECIAL provision for royalty/FTS connected with PE, while s. 44BB is special for oil-exploration services. Where the receipt is purely 'in connection with' oil exploration but does not qualify as FTS/royalty, s. 44BB applies; where it qualifies as FTS/royalty with PE, s. 44DA applies. FA 2010 had codified the boundary.
Section relevance: Boundary between s. 44BB and s. 44DA.
Facts & Issue: Foreign company providing engineering services through PE in India. Question on book-maintenance and audit requirements under s. 44DA(2).
Held / Ratio: Held that s. 44DA(2) book-maintenance and audit are MANDATORY conditions for net-basis taxation. Non-compliance forces the assessee back to gross-basis taxation under s. 115A. The Tribunal endorsed the strict-compliance reading.
Section relevance: Defines mandatory nature of book/audit requirements under s. 44DA(2).
4. Cargo Community Network (P) Ltd. v. CIT
Citation: (2007) 289 ITR 355 (Del) — principles
Forum: AAR / Delhi HC
Facts & Issue: Foreign company providing IT services with PE in India — net-basis claim under s. 44DA.
Held / Ratio: Held that 'effectively connected with PE' is a substantive test — the PE must actively perform / participate in earning the royalty/FTS. Mere existence of PE not sufficient.
Section relevance: Defines 'effectively connected' test under s. 44DA.
5. DIT v. SET Satellite (Singapore) Pte. Ltd.
Citation: (2008) 307 ITR 205 (Bom) — principles
Forum: Bombay High Court
Facts & Issue: Foreign broadcaster's PE income — allocation of profits between PE-connected and non-PE-connected receipts. Application of s. 44DA mechanism.
Held / Ratio: Held that s. 44DA applies only to PE-connected portion; non-PE-connected receipts go to s. 115A. The Court endorsed PE-attribution methodology under OECD-style approach.
Section relevance: PE-attribution and s. 44DA application.
Function in the statutory architecture
Section 44DA captures non-resident royalty / FTS income where the right / contract is EFFECTIVELY CONNECTED with the NR's Indian PE — taxed on net-income basis (allowing deduction of expenses incurred). The provision implements DTAA Article 7 framework (effectively-connected income taxed in source state on net basis). Where the connection is absent, s. 115A applies (gross-basis flat rate).
Historical context / FA amendment trail
Inserted by FA 2003, w.e.f. 1-4-2004, to align domestic law with DTAA Article 7 effectively-connected income framework. The dichotomy between s. 44DA (effectively connected — net basis) and s. 115A (not connected — gross basis) is now well-settled.
Operative consequences
• Applies to royalty / FTS received from Government / Indian concern by NR.
• Effectively-connected test: right / property / contract under which payment received must be CONNECTED to NR's Indian PE / fixed place of profession.
• Net-income basis: actual expenses incurred for earning the income may be deducted.
• Books of account + audit (Form 3CE) mandatory under s. 44DA(2).
• Deductions denied: s. 44C head-office overhead, royalty/FTS paid to other NR.
• Where NOT effectively connected: gross-basis under s. 115A at flat 10% / 20% rate.
Case Laws & Commentary
SECTION 44DA — Special provision for computing income by way of royalties, etc., in case of non-residents
Important Case Laws — 1961 Treatise (FA 2026)
Provision in brief: For non-resident (not being a company) or foreign company earning royalty or FTS pursuant to agreement made after 31.5.1997 AND the income is effectively connected with the assessee's PE in India — income chargeable under PGBP shall be computed after allowing for ALL expenses wholly and exclusively incurred for the business of the PE — but the assessee must (i) maintain books of account, (ii) get them audited, (iii) furnish the audit report along with return. Effectively allows net taxation rather than gross taxation under s. 115A. Section 44DA(2) excludes specific items (HO expense beyond s. 44C, etc.) from allowable deductions.
Section Commentary
Net-basis regime for PE-connected royalty / FTS
Section 44DA applies to NON-RESIDENT (not being a company) OR FOREIGN COMPANY earning royalty or FTS pursuant to agreement made AFTER 31.5.1997 AND the income is EFFECTIVELY CONNECTED with the assessee's PE in India. Under s. 44DA, income is computed under PGBP after allowing ALL expenses wholly and exclusively incurred for the business of the PE — BUT subject to specific conditions: (i) maintain books of account, (ii) get them audited, (iii) furnish audit report with return.
Section 44DA vs 115A — mutual exclusivity
Rio Tinto Technical Services (Del) — where royalty/FTS is effectively connected with a PE, s. 44DA mandates NET-BASIS taxation. Section 115A (10% / 20% on GROSS, with no expense deduction) does NOT apply where there is a PE. The two regimes are mutually exclusive — assessee with PE is automatically in s. 44DA; without PE, in s. 115A.
Section 44DA vs 44BB — Schlumberger SB boundary
Schlumberger Asia Services (Del ITAT SB) — for oil-exploration services rendered through PE, the boundary is delicate. Services 'in connection with' oil exploration that are NOT FTS go to s. 44BB. Services that QUALIFY as FTS / royalty AND have PE go to s. 44DA. FA 2010 amendment codified this. Practitioners must classify the service carefully.
Mandatory book / audit conditions
ABB FZ LLC (Bangalore ITAT) — sub-s. (2) book-maintenance and audit are MANDATORY conditions for net-basis taxation. Non-compliance forces the assessee BACK to gross-basis under s. 115A. Strict-compliance reading.
'Effectively connected' — substantive test
Cargo Community Network (Del / AAR) — 'effectively connected with PE' is a SUBSTANTIVE test. The PE must actively perform / participate in earning the royalty / FTS. Mere existence of PE is not sufficient. This is critical for foreign companies with India PE that earn some PE-connected and some non-PE-connected revenue.
PE-attribution methodology
SET Satellite (Bom) — only PE-connected portion goes to s. 44DA; non-PE-connected goes to s. 115A. OECD-style attribution methodology applies. Many foreign tech / consulting / media companies have mixed-revenue PE structures requiring careful allocation.
CA practical relevance
(i) Identify whether non-resident has India PE (s. 9 / DTAA test). (ii) Within PE, segregate PE-connected revenue from non-PE-connected. (iii) For PE-connected, ensure book maintenance + audit (s. 44DA(2)). (iv) For non-PE-connected, apply s. 115A gross basis. (v) Specific HO-cap interaction (s. 44C) for PE expense deduction. (vi) DTAA Article 7 (business profits) often runs parallel to s. 44DA — both must be reviewed.
FA 2026 impact: No FA 2026 amendment. Section 44DA continues as the 'net-basis' regime for PE-connected royalty/FTS of NRs.
Leading Decisions
1. DIT v. Rio Tinto Technical Services
Citation: (2012) 211 Taxman 50 (Del)
Forum: Delhi High Court
Facts & Issue: Foreign company providing technical services through Indian PE — question of net-vs-gross taxation, applicability of s. 44DA vs s. 115A.
Held / Ratio: Held that where royalty/FTS is effectively connected with a PE, s. 44DA mandates net-basis taxation. Section 115A (20% / 10% on gross) does not apply where there is a PE. The two regimes are mutually exclusive.
Section relevance: Defines mutual exclusivity of s. 44DA and s. 115A.
2. DCIT v. Schlumberger Asia Services Ltd.
Citation: (2013) 145 ITD 38 (Del ITAT)(SB)
Forum: ITAT Special Bench, Delhi
Facts & Issue: Question of priority between s. 44BB (services for oil exploration) and s. 44DA — both potentially applicable for foreign services in upstream sector.
Held / Ratio: Special Bench held that s. 44DA is a SPECIAL provision for royalty/FTS connected with PE, while s. 44BB is special for oil-exploration services. Where the receipt is purely 'in connection with' oil exploration but does not qualify as FTS/royalty, s. 44BB applies; where it qualifies as FTS/royalty with PE, s. 44DA applies. FA 2010 had codified the boundary.
Section relevance: Boundary between s. 44BB and s. 44DA.
3. ABB FZ LLC v. DCIT
Citation: (2017) 83 taxmann.com 86 (Bangalore ITAT)
Forum: ITAT Bangalore
Facts & Issue: Foreign company providing engineering services through PE in India. Question on book-maintenance and audit requirements under s. 44DA(2).
Held / Ratio: Held that s. 44DA(2) book-maintenance and audit are MANDATORY conditions for net-basis taxation. Non-compliance forces the assessee back to gross-basis taxation under s. 115A. The Tribunal endorsed the strict-compliance reading.
Section relevance: Defines mandatory nature of book/audit requirements under s. 44DA(2).
4. Cargo Community Network (P) Ltd. v. CIT
Citation: (2007) 289 ITR 355 (Del) — principles
Forum: AAR / Delhi HC
Facts & Issue: Foreign company providing IT services with PE in India — net-basis claim under s. 44DA.
Held / Ratio: Held that 'effectively connected with PE' is a substantive test — the PE must actively perform / participate in earning the royalty/FTS. Mere existence of PE not sufficient.
Section relevance: Defines 'effectively connected' test under s. 44DA.
5. DIT v. SET Satellite (Singapore) Pte. Ltd.
Citation: (2008) 307 ITR 205 (Bom) — principles
Forum: Bombay High Court
Facts & Issue: Foreign broadcaster's PE income — allocation of profits between PE-connected and non-PE-connected receipts. Application of s. 44DA mechanism.
Held / Ratio: Held that s. 44DA applies only to PE-connected portion; non-PE-connected receipts go to s. 115A. The Court endorsed PE-attribution methodology under OECD-style approach.
Section relevance: PE-attribution and s. 44DA application.
— End of Section 44DA Case-Law Note —