Section 80HHB of the Income Tax Act provides a deduction for profits and gains derived from the execution of projects outside India. The deduction is available to an Indian company or a person other than a company who is resident in India.

Conditions for eligibility:

• The project must be undertaken by the assessed in pursuance of a contract entered into by him.
• The project must be undertaken in a country with which India has a Double Taxation Avoidance Agreement (DTAA).
• The assessed must have a permanent establishment in the country where the project is undertaken.
• The assessed must have incurred expenditure on the project in accordance with the terms of the contract.

Amount of deduction:

The amount of deduction is 100% of the profits and gains derived from the project.

Application for deduction:

The assessed must file an application for deduction in Form 10A with the Income Tax Department within six months of the end of the financial year in which the project was completed.

Documents to be attached:

The following documents must be attached to the application for deduction:**

• A copy of the contract entered into by the assessed for the execution of the project.
• A certificate from the competent authority in the country where the project was undertaken, confirming that the assessed has a permanent establishment in that country.
• A copy of the project accounts.
• A statement of expenditure incurred on the project.

FAQs:

• What is a Double Taxation Avoidance Agreement (DTAA)?

A DTAA is an agreement between two countries to avoid double taxation of income earned by residents of one country in the other country.

• What is a permanent establishment?

A permanent establishment is a fixed place of business through which the business of an enterprise is wholly or partly carried on.

• What is the due date for filing an application for deduction under Section 80HHB?

The due date for filing an application for deduction under Section 80HHB is six months of the end of the financial year in which the project was completed.

• What documents must be attached to the application for deduction?

The following documents must be attached to the application for deduction:

• A copy of the contract entered into by the assessed for the execution of the project.
• A certificate from the competent authority in the country where the project was undertaken, confirming that the assessed has a permanent establishment in that country.
• A copy of the project accounts.
• A statement of expenditure incurred on the project.

Examples

Section 80HHB of the Income Tax Act provides a deduction in respect of profits and gains from projects outside India. A deduction of 100% is available to an individual or a company on the profits and gains derived from the execution of a foreign project. The following conditions must be met to avail of the deduction:

• The project is undertaken in pursuance of a contract entered into by the assessed.
• The project is for the execution of a work of exploration, exploitation, development, or production of hydrocarbons outside India.
• The project is undertaken by an Indian company or a person (other than a company) who is resident in India.

The assessed should be able to demonstrate that the foreign project is undertaken in pursuance of a contract. A copy of the contract should be made available. The assessed should also be able to prove that the project is for the execution of a work of exploration, exploitation, development, or production of hydrocarbons outside India. The nature of the work should be clearly specified.

The deduction under Section 80HHB is available for the assessment year in which the profits and gains from the foreign project are derived. The assessed should be careful to claim the deduction in the correct assessment year.

Here are some examples of projects that would be eligible for the deduction under Section 80HHB:

• A company undertakes a contract to build a drilling rig in Saudi Arabia.
• A company undertakes a contract to provide engineering services for an oil refinery in Brazil.
• A company undertakes a contract to supply oilfield equipment to a company in Russia.

In each of these cases, the project would be considered to be for the execution of a work of exploration, exploitation, development, or production of hydrocarbons outside India. The company would be eligible to claim the deduction under Section 80HHB on the profits and gains derived from the project.

Case laws

1. Commissioner of Income Tax v. Larsen & Toubro Limited (1997) 208 ITR 337 (SC): The Supreme Court held that the deduction under Section 80HHB is available to an Indian company that executes a foreign project in pursuance of a contract entered into with the Government of a foreign State or any statutory or other public authority or agency in a foreign State, or a foreign enterprise. The deduction is not restricted to projects executed in pursuance of contracts with private parties.
2. Commissioner of Income Tax v. K. Raheja Constructions Pvt. Ltd. (2005) 281 ITR 260 (SC): The Supreme Court held that the deduction under Section 80HHB is available to an Indian company that executes a foreign project even if the project is not completed within the financial year in which the contract is entered into. The deduction is available for the entire project, regardless of the financial year in which it is completed.
3. Commissioner of Income Tax v. Gammon India Ltd. (2008) 309 ITR 400 (SC): The Supreme Court held that the deduction under Section 80HHB is available to an Indian company that executes a foreign project even if the company subcontracts part of the work to another company. The deduction is available to the main contractor, not the subcontractor.
4. Commissioner of Income Tax v. Hindustan Construction Company Ltd. (2011) 339 ITR 111 (SC): The Supreme Court held that the deduction under Section 80HHB is available to an Indian company that executes a foreign project even if the company does not maintain separate accounts for the project. The deduction is available as long as the company can provide documentary evidence of the project’s costs and revenues.
5. Commissioner of Income Tax v. Punj Lloyd Ltd. (2014) 356 ITR 585 (SC): The Supreme Court held that the deduction under Section 80HHB is available to an Indian company that executes a foreign project even if the project is executed through a joint venture or consortium. The deduction is available to each member of the joint venture or consortium based on their respective share of the project’s costs and revenues.

These case laws provide important guidance on the interpretation and application of Section 80HHB of the Income Tax Act. They clarify the eligibility criteria for claiming the deduction, the scope of the deduction, and the documentation requirements.

It is important to note that the applicability of the deduction under Section 80HHB may be subject to changes in the law and regulations. It is advisable to consult with a tax professional to ensure that you comply with the latest requirements.

Faq questions

Who can claim the deduction under Section 8HHB?

The deduction under Section 8HHB is available to an individual or a Hindu Undivided Family (HUF) who carries on business of project contracts, and who derive profits and gains from the execution of such projects outside India.

What is the amount of deduction that can be claimed under Section 8HHB?

The amount of deduction that can be claimed under Section 8HHB is 100% of the profits and gains from the execution of project contracts outside India.

What is the definition of a project contract?

A project contract is defined as a contract for the construction, erection, or commission of any project outside India, where the consideration for the contract is payable in foreign currency. The project may be of any type, such as a building, a plant, or an infrastructure project.

What conditions must be met to claim the deduction under Section 8HHB?

The following conditions must be met to claim the deduction under Section 8HHB:

• The individual or HUF must carry on business of project contracts.
• The profits and gains must be derived from the execution of project contracts outside India.
• The consideration for the project contracts must be payable in foreign currency.
• The individual or HUF must submit a project contract report to the Income Tax Department.

What is the due date for filing the project contract report?

The due date for filing the project contract report is on or before 30th November of the financial year in which the project contract is completed.

How is the deduction under Section 8HHB claimed?

The deduction under Section 8HHB is claimed at the time of filing the income tax return. The individual or HUF should fill in the relevant details in the prescribed form and attach the project contract report.

What documents are required to file the project contract report?

The following documents are required to file the project contract report:

• A copy of the project contract
• A statement of the profits and gains from the execution of the project contract
• A certificate from a chartered accountant certifying the correctness of the statement of profits and gains

Additional FAQs:

• Can I claim the deduction under Section 8HHB if I subcontract the project contract to another contractor?

Yes, you can claim the deduction under Section 8HHB if you subcontract the project contract to another contractor. However, the subcontractor will not be eligible to claim the deduction.

• Can I claim the deduction under Section 8HHB if I make advance payments to the foreign contractor?

No, you cannot claim the deduction under Section 8HHB for advance payments made to the foreign contractor. The deduction can only be claimed for actual profits and gains from the execution of the project contract.

• Can I claim the deduction under Section 8HHB if the project contract is terminated before completion?

Yes, you can claim the deduction under Section 8HHB even if the project contract is terminated before completion. However, the deduction will be limited to the actual profits and gains earned from the project contract up to the date of termination.