Section 9
Income - Deemed to accrue or arise in India
Scope
and ambit of ‘business connection’ in the case of a non-resident - The following are illustrative instances of a non-resident having
business connection in
- Maintaining a branch office in
- Appointing an agent in
- Erecting a factory in
- Forming a local subsidiary company to sell the products of the
non-resident parent company.
- Having financial association between a resident and a non-resident
company.
Clarifications
regarding applicability of provisions of section 9 in certain specified
situations :
1. Non-resident exporters selling goods from
abroad to Indian importer - No
liability will arise on accrual basis to the non-resident on the profits made
by him where the transactions of sale between the two parties are on a
principal-to-principal basis.
If the non-resident makes over
the shipping documents to a bank in his own country which discounts the
documents and sends them for collection to the bankers in India, who present
the sight or usance draft to the resident importer and deliver the documents to
him against payment or acceptance by the latter, the non-resident will not be liable
to tax on the profit arising out of the sales on receipt basis.
2. Non-resident company selling goods from abroad
to its Indian subsidiary - In
such a case, if the transactions are actually on a principal-to-principal basis
and are at arm’s length and the subsidiary company functions and carries on
business on its own, instead of functioning as an agent of the parent company,
the mere fact that the Indian company is a subsidiary of the non-resident
company will not be considered a valid ground for invoking section 9 for
assessing the non-resident.
Where a non-resident parent
company sells goods to its Indian subsidiary, the income from the transaction
will not be deemed to accrue or arise in India under section 9, provided that (a)
the contracts to sell are made outside India, (b) the sales are made on
a principal-to-principal basis and at arm’s length, and (c) the
subsidiary does not act as an agent of the parent company.
3. SALE OF PLANT AND MACHINERY TO AN INDIAN IMPORTER ON INSTALMENT BASIS - Where the transaction of sale and purchase
is on a principal-to-principal basis and the exporter and the importer have no
other business connection, the fact that the exporter allows the importer to
pay for the plant and machinery instalments will not, by itself, render the
exporter liable to tax on the ground that the income is deemed to arise to him
in India.
4. FOREIGN AGENTS OF INDIAN EXPORTERS - Where a foreign agent of Indian exporter operates in his own country
and his commission is usually remitted directly to him and is, therefore, not
received by him or on his behalf in
5. NON-RESIDENT PERSON PURCHASING GOODS IN INDIA - A non-resident will not be liable to tax in
6. SALES BY A NON-RESIDENT TO INDIAN CUSTOMERS EITHER DIRECTLY OR THROUGH
AGENTS - (a) Where
non-resident allows an Indian customer facilities of extended credit for
payment, there would be no assessment merely for this reason provided that (i)
the contracts to sell were made outside India; and (ii) the sales were
made on a principal-to-principal basis.
(b) Where a non-resident
has an agent in India and makes sales directly to Indian customers, section 9
of the Act will not be invoked, even if the resident pays his agent an
overriding commission on all sales to India, provided that (i) the agent
neither performs nor undertakes to perform any service directly or indirectly
in respect of these direct sales; (ii) the contracts to sell are made
outside India; and (iii) the sales are made on a principal-to-principal
basis.
(c) Where a non-resident’s
sales to Indian customers are secured through the services of an agent in
India, the assessment in India of the income arising out of the transaction
will be limited to the amount of profit which is attributable to the agent’s
services, provided that (i) the non-resident principal’s business
activities in India are wholly channelled through his agent, (ii) the
contracts to sell are made outside India, and (iii) the sales are made
on a principal-to-principal basis.
(d) Where a non-resident
principal’s business activities in
7. EXTENT OF THE PROFIT ASSESSABLE UNDER SECTION 9 - If a non-resident has a business connection
in India, it is only that portion of the profit which can reasonably be
attributed to the operations of the business carried out in India, which is
liable to income-tax —Circular : No. 23 [F. No.
7A/38/69-IT (A-II)], dated 23-7-1969.1
Agency engaged
in activity of purchase of goods for export - The mere existence of an agency established by a non-resident in India
will not be sufficient to make the non-resident liable to tax, if the sole
function of the agency is to purchase goods for export—Circular
: No. 163 [F. No. 488/23/73-FTD], dated 29-5-1975.
Foreign
company engaged in re-insurance with Indian companies - Regarding taxability of a foreign company on its profits of re-insurance
with companies in India no uniform principle could be laid down which will be
applicable in all cases. The ITOs will have to examine each case in the light
of its facts and decide, where tax liability is attracted and what portion of
the income from the re-insurance should be assessed—Circular
: No. 35(XXXIII-7) of 1956 [F. No. 51(5)-IT 54], dated 3-9-1956.
Pensions
received in India from abroad - Pensions received in
India from abroad by pensioners residing in this country, for past services
rendered in the foreign countries, will be income accruing to the pensioners
abroad, and will not, therefore, be liable to tax in India on the basis of
accrual. These pensions will also not be liable to tax in
While the
pension earned and received abroad will not be chargeable to tax in
Shares
allotted to non-residents in consideration for machinery and plant - Where shares in Indian companies are allotted to non-residents in
consideration for machinery and plant, the income embedded in the payments
would be received in India as the shares in the Indian companies are located in
India and would accordingly attract liability to income-tax as income received
in India—Circular : No. 382 [F. No.
484/12/78-FTD], dated 4-5-1984.
Taxation
of Business Process Outsourcing Units in
2. However, it is possible that the non-resident
entity may have a business connection with the resident Indian entity. In such
a case, the resident Indian entity could be treated as the Permanent
Establishment of the non-resident entity. The tax treatment of the Permanent
Establishment in such a case is under consideration in this circular.
3. During the last decade or so,
4. A non-resident or a foreign company is treated
as having a Permanent Establishment in India under Article 5 of the Double
Taxation Avoidance Agreements entered into by India with different countries if
the said non-resident or foreign company carries on business in India through a
branch, sales office, etc., or through an agent (other than an independent
agent) who habitually exercises an authority to conclude contracts or regularly
delivers goods or merchandise or habitually secures orders on behalf of the
non-resident principal. In such a case, the profits of the non-resident or
foreign company attributable to the business activities carried out in India by
the Permanent Establishment becomes taxable in India under Article 7 of the
Double Taxation Avoidance Agreement.
5. Paragraph 1 of Article 7 of the Double
Taxation Avoidance Agreement provides that if a foreign enterprise carries on
business in another country through a Permanent Establishment situated therein,
the profits of the enterprise may be taxed in the other country but only so
much of them as is attributable to the Permanent Establishment. Paragraph 2 of
the same Article provides that subject to the provisions of Paragraph 3, there
shall in each contracting State be attributed to that Permanent Establishment
the profits which it might be expected to make if it were a distinct and
separate enterprise engaged in the same or similar activities under the same or
similar conditions and dealing wholly independently with the enterprise of
which it is a Permanent Establishment. Paragraph 3 of the Article provides that
in determining the profits of a Permanent Establishment there shall be allowed
as deductions expenses which are incurred for the purposes of the Permanent
Establishment including executive and general administrative expenses so
incurred, whether in the State in which the Permanent Establishment is situated
or elsewhere. What are the expenses that are deductible would have to be
determined in accordance with the accepted principles of accountancy and the
provisions of the Income-tax Act, 1961.
6. Paragraph 2 contains the central directive on
which the allocation of profits to a Permanent Establishment is intended to be
based. The paragraph incorporates the view that the profits to be attributed to
a Permanent Establishment are those which that Permanent Establishment would
have made if instead of dealing with its Head Office, it had been dealing with
an entirely separate enterprise under conditions and at prices prevailing in
the ordinary market. This corresponds to the “arm’s length principle”.
Paragraph 3 only provides a rule applicable for the determination of the profits
of the Permanent Establishment, while paragraph 2 requires that the profits so
determined correspond to the profit that a separate and independent enterprise
would have made. Hence, in determining the profits attributable to an
IT-enabled BPO unit constituting a Permanent Establishment, it will be
necessary to determine the price of the services rendered by the Permanent
Establishment to the Head Office or by the Head Office to the Permanent
Establishment on the basis of “arm’s length principle”.
7. “Arm’s length price” would have the same
meaning as in the definition in section 92F(ii) of the Income-tax Act.
The arm’s length price would have to be determined in accordance with the
provisions of sections 92 to 92F of the Act.
8. The CBDT Circular No. 1/2004, dated 2-1-2004
is hereby withdrawn with immediate effect – Circular : No. 5/2004, dated
28-9-2004.