Section 9

Income - Deemed to accrue or arise in India

Deemed - Sub-section (1)

n The term ‘deemed’ brings within the net of chargeability income not actually accruing but which is supposed notionally to have accrued. It involves a number of concepts. By statutory fiction income which can in no sense be said to accrue at all may be considered as so accruing. Similarly, the fiction may relate to the place, the person or be in respect of the year of taxability. - CIT/CEPT v. Bhogilal Laherchand [1954] 25 ITR 50 (SC).

Business connection - Clause (i) of sub-section (1)

n The phrase ‘business connection’ is different from, though doubtless not unrelated to the word ‘business’ of which there is a definition in the Act. - CIT v. Currimbhoy Ebrahim & Sons Ltd. [1935] 3 ITR 395 (PC).

n The expression ‘business connection’ undoubtedly means something more than ‘business’. The expression ‘business connection’ postulates a real and intimate relation between the trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in the trading activity. - CIT v. R.D. Agarwal & Co. [1965] 56 ITR 20 (SC).

n In the context in which the expression ‘business connection’ is used in section 9(1), there is no warrant for giving a restricted meaning to it by excluding ‘professional connection’ from its scope. - Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC).

n In order to constitute a ‘business connection’ as contemplated by section 42, there must be an activity of the non-resident in the taxable territories having an intimate and real relation of a continuous character with the business of the non-resident and contributing to the earning of profits by the non-resident in his business. The business connection must undoubtedly be a commercial connection but all commercial connections will not necessarily constitute business connection within the meaning of the concept unless the commercial connection is really and intimately connected with the business activity of non-resident in the taxable territories and is contributory to the earning of profits in the said trading activity - Blue Star Engg. Co. (Bombay) (P.) Ltd. CIT [1969] 73 ITR 283 (Bom.).

n The term ‘business connection’ used in the section has not been defined in the Act. However, the term has been the subject-matter of interpretation by various Courts. The scope of the expression ‘business connection’ has been explained by the Supreme Court in CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20. The expression ‘business connection’ means something more than a business. It presupposes an element of continuity between the business of the non-resident and the activity in the taxable territory. A stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms; it may include carrying on part of the main business or activity incidental to the non-resident through an agent or it may merely be a relation between the business of the non-resident and the activity in the taxable territory which facilitates or assists the carrying on of that business. A relation to be a ‘business connection’ must be real and intimate and through or from which income must accrue or arise whether directly or indirectly to the non-resident - Advance Ruling P. No. 8 of 1995, In re [1997] 90 Taxman 47/223 ITR 416 (AAR - New Delhi).

n The words ‘business connection’ denote some element of continuity in the relationship between the person in India who makes the profits and the non-resident who receives them. A single transaction would not fall within the section. - CIT v. Metro Goldwyn Mayer (India) Ltd. [1939] 7 ITR 176 (Bom.).

Property - Clause (i) of sub-section (1)

n The word ‘property’ used in section 9(1)(i) means something tangible; though, it is not confined to immovable property or to buildings or land appertaining thereto. - CIT v. Currimbhoy Ebrahim & Sons Ltd. [1935] 3 ITR 395 (PC).

Operations - Explanation (a) under clause (i) of sub-section (1)

n It is not every business activity of a manufacturer that comes within the expression ‘operation’; isolated transactions of purchases are not ‘operations’, but systematic and habitual purchases through an established agency are - Anglo-French Textile Co. Ltd. v. CIT [1953] 23 ITR 101 (SC).

Earned - Clause (ii) of sub-section (1)

n The word ‘earned’ has two meanings. One meaning is the narrower meaning in the sense of rendering of services, etc., and the wider meaning in the sense of equating it with ‘accrued’ and treating only that income as earned by the assessee to which the assessee has contributed to its accruing or arising by rendering services or otherwise but he must have created a debt in his favour. Therefore, unless there is a debt in favour of the assessee by reason of his rendering services, it cannot be said to be ‘income earned’ by the assessee and this is what may be called the wider meaning of the term. - CIT v. S.G. Pgnatale [1980] 124 ITR 391 (Guj.).

Royalty - Clause (vi) of sub-section (1)

n From the dictionary meaning of the term ‘royalty’, it appears that the said term connotes payments periodic or at a time for user by one person of certain exclusive rights belonging to another person. - M.V. Philips v. CIT [1987] 34 Taxman 274 (Cal.).

n The term ‘royalty’ normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of a machine which is tailor-made to meet the requirement of a buyer does not by itself amount to transfer of any right of exclusive user, so as to render the payment made therefor being regarded as ‘royalty’ - CIT v. Neyveli Lignite Corpn. Ltd. [2000] 109 Taxman 369/243 ITR 459 (Mad.)/CIT v. Neyveli Lignite Corpn. Ltd. [2000] 113 Taxman 206 (Mad.).

Fees for technical services - clause (vii) of sub-section (1)

n From a combined reading of clause (vii)(b) of section 9(1) and Explanation 2 it becomes clear that any consideration, whether lump sum or otherwise, paid by a person, who is a resident in India, to a non-resident for running any managerial or technical or consultancy service, would be income by way of fees for technical service and, would, therefore, be within the ambit of ‘income deemed to accrue or arise in India’. - G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP).

Construction - Explanation 2 under clause (vii) of sub-section (1)

n The word ‘construction’ occurring in Explanation 2 to section 9(1)(vii) implies and includes engineering and bid evaluations since it is a step-in-aid to construction. - Agland Investment Services Inc. v. ITO [1985] 22 Taxman 9 (Delhi).