Section 9

Income - deemed to accrue or arise in India

Constitutional validity

Section 9(1)(vii)(b) cannot be said to be unconstitutional - Section 9(1)(vii)(b) cannot be said to be unconstitutional for want of legislative competence and violation of article 14 of the Constitution - G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP).

Scope and object

General principles - Mere existence of business connection may not result in income to non-resident assessee from transaction with such a business connection accruing or arising in India.

It would be wrong to equate permanent establishment with a business connection, since former is for purpose of assessment of income of a non-resident under a Double Taxation Avoidance Agreement, and latter is for application of section 9.

Income arising out of turnkey project executed in India would not be assessable in India, only because a non-resident has a permanent establishment.

For attracting taxing statute, there has to be some activity through permanent establishment and, if income arises without any activity of permanent establishment, even under DTAA, taxation liability in respect of overseas services would not arise in India.

In cases where different severable parts of a composite contract are performed at different places, principle of apportionment as recognised by Explanation 1(a) of section 9(1)(i), can be applied, to determine which fiscal jurisdiction can tax that particular part of transaction.

Location of source of income within India would not render sufficient nexus to tax income from that source.

For section 9(1)(vii) to be applicable, it is necessary that services provided by a non-resident assessee under a contract should not only be utilized within India, but should also be rendered in India or should have such a live link with India that entire income from fees, etc., becomes taxable in India; thus, for a non-resident to be taxed on income for services, such a service needs to be rendered within India, and has to be a part of a business or profession carried on by such person in India. Whatever is payable by a resident to a non-resident by way of fees for technical services would not always come within purview of section 9(1)(vii) but it must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax - Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income-tax [2007] 158 Taxman 259 (SC).

Note : See also Explanation to section 9 inserted by Finance Act, 2007, with retrospective effect from 1-6-1970.

Income actually received is outside the scope of deeming fiction - Where the income, profits and gains are actually received in India, it is no longer necessary for the revenue authorities to have recourse to the fiction - Turner Morrison & Co. Ltd. v. CIT [1953] 23 ITR 152 (SC).

Actual accrual is different from deemed accrual - The concept of actual accrual or arising of income in the taxable territories, although not dependent upon the receipt of the income in the taxable territories, is quite distinct and apart from the notion of deemed accrual or arising of the income - Carborandum Co. v. CIT [1977] 108 ITR 335 (SC).

‘Deemed’ involves a number of concepts, like place, person and year - 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).

Conditions precedent - It is not necessary that income falling in one category under any one of the clauses of section 9(1) should also satisfy the requirements of the other clauses to bring it within the ambit of the expression ‘income deemed to accrue or arise in India’ - G.V.K. Industries Ltd. v. ITO [1997] 228 ITR 564 (AP).

Profits of PE must be computed as independent units - It is clear that under the Act, a taxable unit is a foreign company and not its branch or PE in India. A non-resident assessee may have several incomes accruing or arising to it in India or outside India but so far as taxability under section 5(2) is concerned, it is restricted to income which accrues or arises or is deemed to accrue or arise in India. The scope of this deeming fiction is mentioned in section 9. Therefore, as far as the income accruing or arising in India is concerned, an income which accrues or arises to a foreign enterprise in India can be only such portion of income accruing or arising to such a foreign enterprise as is attributable to its business carried out in India. This business could be carried out through its branch(es) or through some other form of its presence in India such as office, project site, factory, sales outlet, etc. [PE]. It is, therefore, important to note that under the Act, while the taxable subject is the foreign General Enterprise (GE), it is taxable only in respect of the income including business profits which accrue or arise to that foreign GE in India. The Act does not provide for taxation of PE of a foreign enterprise, except taxation on presumptive basis for certain types of income such as those mentioned under sections 44BB, 44BBA, 44BBB, etc. Therefore, since there is no specific provision under the Act to compute profits accruing in India in the hands of the foreign entities, the profits attributable to the Indian PE of foreign enterprise are required to be computed under normal accounting principles and in terms of the general provisions of the Act. Therefore, ascertainment of a foreign enterprise’s taxable business profits in India involves an artificial division between profits earned in India and profits earned outside India. The Act is concerned only with the profits earned in India and, therefore, a method is to be found out to ascertain the profits arising in India and the only way to do so is by treating the Indian PE as a separate profit centre vis-a-vis the foreign enterprise. This demarcation is necessary in order to earmark the tax jurisdiction over the operation of a company. Unless the PE is treated as a separate profit centre, it is not possible to ascertain the profits of the PE which, in turn, constitute prof­its arising to the foreign GE in India. The computation of profits in each PE (taxable jurisdiction) decides the quantum of income on which the source country can levy the tax. Therefore, it is necessary that the profits of the PE are computed as inde­pendent units - CIT v. Hyundai Heavy Industries Co. Ltd. [2007] 161 Taxman 191/291 ITR 482 (SC).

Business connection

There must be element of continuity as well as real and intimate connection - The expression ‘business connection’ undoubtedly means something more than ‘business’. A business connection involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories. The expression ‘business connection’ postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity - CIT v. R.D. Aggarwal & Co. [1965] 56 ITR 20 (SC).

‘Business’ include profession, vocation and callings - The expression ‘business’ does not necessarily mean trade or manufacture only. It is being used as including within its scope profession, vocations and calling from a fairly long-time.

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 excluding ‘professional’ connection, from its scope - Barendra Prasad Ray v. ITO [1981] 129 ITR 295 (SC).

Mere purchase abroad and use in India is not ‘continuing business’ - The term ‘business connection’ postulates a continuity of business relationship between the foreigner and the Indian. There is no question of continuing business relation when a person purchase the machinery or other goods abroad and uses them in India and earns profit. - CIT v. Fried Krupp Industries [1981] 128 ITR 27 (Mad.).

Isolated transactions are not covered - An isolated transaction between a non-resident and a resident in British India without any course of dealings such as might fairly be described as a business connection, does not attract the application of section 9, but when there is a continuity of business relationship between the person in British India who helps to make the profits and the person outside British India who receives or realises the profits, such relationship does constitute a business connection - Anglo-French Textile Co. Ltd. v. CIT (No. 2) [1953] 23 ITR 101 (SC).

Capital gains derived outside India is excluded - If the words ‘business connection in India’ were wide enough to cover all transactions including transactions in capital assets, there was no reason for Parliament to specifically include income (a) through or from any property in India, (b) through or from any asset or source of income from India, and (c) through or from sale of a capital asset situate in India. From the very fact that the transfer of a capital asset situate in India has been brought within the purview of section 9 and rule 10(2), the intention of Parliament was not to bring within its purview any income derived out of sale or purchase of a capital asset effected outside India - CIT v. Quantas Airways Ltd. [2002] 256 ITR 84/122 Taxman 935 (Delhi).

General business operations - General business operations, which have no nexus to income under consideration, would not satisfy requirements of section 9(1)(i); rights and obligations under agreement cannot be taken as proof of existence of business connection; business connection must exist between a non-resident and an Indian resident, which is responsible for giving rise to activities which yield income or profit to non-resident - ABC Ltd., In re [2007] 159 Taxman 344/289 ITR 438 (AAR - New Delhi).

Source/property

‘Source’ is a practical and not legal concept - All income accruing or arising from any ‘source of income in India’ is deemed to accrue or arise in India. The word ‘source’ does not mean any legal concept, but refers to that which a practical man would regard as a real source of income - Performing Right Society Ltd. v. CIT [1974] 93 ITR 44 (Cal.).

‘Property’ must be tangible, but not confined to immovables - The word ‘property’ used in sub-section (1) of section 42 of 1922 Act means something tangible; though it is not confined to immovable property or to buildings or lands appurtenant thereto - CIT v. Currimbhoy Ebrahim & Sons Ltd. [1935] 3 ITR 395 (PC).

Capital asset situated in India - Even if transaction relating to a capital asset takes place outside India but if capital asset is situated in India, profits or gains thereon, will accrue or arise in India in consonance with provisions of section 9(1)(i) and be assessable under head ‘Capital gains’ - Triniti Corpn., In re [2007] 165 Taxman 272/295 ITR 258 (AAR - New Delhi).

Business asset situated in India - Where dominant purpose of entering into agreements between two foreign companies was to acquire by one foreign company controlling interest, busi­ness economic interests, tangible and intangible, in an Indian company controlled by the other foreign company and not merely shares which the other foreign company held in said Indian company, it would be transfer of business asset situated in India and transactions would certainly be subjected to municipal laws of India, including Indian Income-tax Act and income from such transaction would be deemed to accrue or arise in India - Vodafone International Holdings B.V. v. UOI [2008] 175 Taxman 399 (Bom.).

Business operations

Onus is on revenue to prove existence of operations in India - In order to rope in the income of a non-resident under the deeming provision it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed - Carborandum Co. v. CIT [1977] 108 ITR 335 (SC).

If no operations are carried in India, deeming concept cannot apply - If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India - CIT v. Toshoku Ltd. [1980] 125 ITR 525 (SC)/CIT v. Fried Krupp Industries [1981] 128 ITR 27 (Mad.).

Transactions must be systematic and well-defined - It is not every business activity of a manufacturer that comes within the expression ‘operation’ to which the provisions of section 42(3) of the 1922 Act [corresponding to section 9 of the 1961 Act] are attracted. Activities which are not well defined or are of a casual or isolated character would not ordinarily fall within the ambit of this rule. In a case where all that may be known is that a few transactions of purchase of raw materials have taken place in British India, it could not ordinarily be said that the isolated acts were in their nature ‘operations’ within the meaning of that expression - Anglo-French Textile Co. Ltd. v. CIT (No. 2) [1953] 23 ITR 101 (SC).

Explanation 1 - Explanation 1(b) to section 9 does not exclude income that has otherwise accrued to applicant from ambit of section 5(2)(b) and section 9(1)(i) - Mustaq Ahmed, In re [2009] 176 Taxman 65/[2008] 307 ITR 401 (AAR - New Delhi).

Salary

Explanation - Explanation to section 9(1)(ii) added by the Finance Act, 1983 with retrospective effect from 1-4-1979 cannot be considered to be declaratory nor can it apply to a period anterior to April 1, 1979 - CIT v. I.G. Belline [1999] 102 Taxman 339 (Guj.).

Explanation added to section 9(1)(ii) with retrospective effect from 1-4-1979 was not procedural in nature - CIT v. Goslino Mario [2000] 241 ITR 312 (SC).

From Explanation to section 9(1)(ii) it is not possible to infer corollary, that in all cases where services are rendered outside India, salary cannot be deemed to accrue in India ipso facto. In certain cases, even if the services are rendered outside India, the income can still accrue or arise in India. It would depend on the facts of each case - CIT v. Halliburton Offshore Services Inc. [2004] 140 Taxman 405/271 ITR 395 (Uttaranchal).

Explanation to section 9(1)(ii), substituted with effect from 1-4-2000, was not retrospective in nature; therefore in case of employees of appellant non-resident company working on rigs of Indian company, salary paid for field breaks in U.K. was not for service rendered in India within meaning of Explanation added to section 9 by Finance Act, 1983 and it could not be subjected to tax under section 9(1)(ii) for assessment years 1992-93 and 1993-94- Sedco Forex International Drills Inc. v. CIT [2005] 149 Taxman 352/279 ITR 310 (SC).

Payment to non-citizens are not covered under clause (iii) - If income is earned by a person who is not a citizen of India by rendering services outside India, then section 9(1)(iii) will have no application. Similar will be the case if salary is payable to a person by a private organisation for rendering services outside India - Grindlays Bank Ltd. v. CIT [1991] 56 Taxman 213 (Cal.).

Others - Where liability to pay salaries to assessees arose outside India in terms of contract between their employer - Italian company and Indian company and salary was payable outside India, section 9(1)(ii) would not apply - CIT v. Goslino Mario [2000] 241 ITR 312 (SC).

Salary payments to expatriated employees by foreign company - Question as to whether home salary payment made to expatriated employees by foreign company in foreign currency abroad can be held to be ‘deemed to accrue or arise in India’ would depend upon in-depth examination of facts in each case; where home salary/special allowance payment made by foreign company abroad is for rendition of services in India and no work is found to have been performed for foreign company, such payment would certainly come under section 192(1), read with section 9(1)(ii) - CIT v. Eli Lilly & Co. (India) (P.) Ltd. [2009] 178 Taxman 505/312 ITR 225 (SC).

Salary paid by Government

Payment to non-citizens are not covered under clause (iii) - If income is earned by a person who is not a citizen of India by rendering services outside India, then section 9(1)(iii) will have no application. Similar will be the case if salary is payable to a person by a private organisation for rendering services outside India - Grindlays  Bank Ltd. v. CIT [1991] 56 Taxman 213 (Cal.).

Dividend

Dividend income paid to a non-resident by Indian company is deemed to accrue in India only on payment and not on declaration - Under section 9(1)(iv), it is clearly stipulated that a dividend paid by an Indian company outside India will constitute income deemed to accrue in India on effecting such payment. In section 9(1)(iv), the words used are ‘a dividend paid by an Indian company outside India’. This is in contradistinction to section 8 which refers to a dividend declared, distributed or paid by a company. The words ‘declared or distributed’ occurring in section 8 do not find place in section 9(1)(iv). Therefore, it is clear that dividend income paid to a non-resident is deemed to accrue in India only on payment and not on declaration - Pfizer Corporation v. CIT [2003] 259 ITR 391/129 Taxman 459 (Bom.).

Royalty/fees for technical services

Deeming concept applies whether there is business connection or not - Whether there is a business connection or not, any income by way of fees for technical services should be taken to have been covered by the provision in section 9(1)(vii) - CIT v. Copes Vulcan Inc. [1987] 167 ITR 884 (Mad.).

Cases falling under clause (vi) cannot be brought under clause (vii) - If the case falls under clause (vi) of section 9(1) and is exempted from the operation of clause (vi) by virtue of the proviso, then one cannot refer to clause (vii) which is a general clause - Meteor Satellite Ltd. v. ITO [1980] 121 ITR 311 (Guj.).

Definition of royalty in Explanation 2 applies to clause (vi) only - The definition of the term ‘royalty’ in Explanation 2 to section 9(1)(vi) is not a general definition applicable wherever that term occurs but is applicable to section 9(1)(vi) only - Citizen Watch Co. Ltd. v. IAC [1984] 148 ITR 774 (Kar.).