Section 9 : Income deemed to accrue or arise in India

Section 9 of  Income Tax Act , 1961

The Indian Income-tax Act provides for levy of income-tax on the income of foreign companies and non-residents, but only to the extent of their income sourced from India. Under section 5 of the Act, a foreign company or any other non-resident person is liable to tax on income which is received or is deemed to be received in India by or on behalf of such person, or income which accrues or arises or is deemed to accrue or arise to it in India. Income tax is payable by a taxpayer, regardless of whether he is a resident taxpayer, a non-resident taxpayer, or a non-resident Indian, on the total income computed by the Assessing Officer under the provisions of the Income Tax Act 1961. Section 9 thereafter specifies certain types of income that are deemed to accrue or arise in India in certain circumstances. These two sections embody the source rule of income taxation in the domestic law. No income of a non-resident can be taxed in India unless it falls within the four corners of section 5 read with section 9 of the Income-tax Act. Section 9(1) of the I.T. Act specifies that for the income to be taxed in India, it should deemed to accrue or arise in India.

Business income of a foreign company or other non-resident person is chargeable to tax to the extent it accrues or arises through a business connection in India or from any asset or source of income located in India, and to the extent such income is attributable to the operations carried out in India. Certain income is deemed to accrue or arise in India under section 9 of the said act, even though it may actually accrue or arise outside India. 

Section 5 :

SECTION 9 : INCOME DEEMED TO ACCRUE OR ARISE IN INDIA

Section-9 (1)(i)

• Section-9 enumerates various categories of income which shall be deemed to accrue or arise in India under certain circumstances. The income dealt with in each clause is distinct and independent of the other.  It may be noted that in case of a specific class of income one must look at the specific clause and not to general provisions of clause (i).

All Income accruing or arising  
Whether Directly or indirectly
Through or from any
Any Business connection in India or
Transfer of a capital asset situated in India or
Any property in India or
Any asset or source of income in India

Section-9(1)(i): Any income through or from any Business Connection in India

• Business: The expression 'Business' is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression 'Business Connection'
• Business Connection : For the purpose of Determination of Business Connection one must satisfies below Conditions

•  a business in India
•  a connection between non resident and that business
•  a non resident has earned an income through such connection
•  continuity about the business connection

Explanation 1 to Section 9(1)(i)

i. In the case of non-residents, the following shall not be considered as business connection in India and therefore, no income shall be deemed to accrue or arise in India.

ii. All Operations are not in India - reasonably attributable to the operations in India.

iii. Transactions that are confined to mere purchase of goods in India for export.

iv. Operations confined to collection of news and views in India for transmission out of India by or on behalf of non-resident, who is engaged in the business of running news agency or of publishing newspaper or magazines or journals.

Operations confined to the shooting of cinematograph film in India, where such non-resident is:

1. An individual - who is not a citizen of India;
2. A firm - not having any partner who is a citizen of India or who is resident in India;
3. A company - not having any shareholder who is a citizen of India or who is resident in India

Explanation 2 to Section 9(1)(i)

Meaning of 'Business Connection' shall include any business activity carried through a person who, acting on behalf of the non-resident

a. has and habitually exercises in India, an authority to conclude contract on behalf of the non-resident ; (activities limited to the purchase of goods or merchandise is excluded)

b. has no such authority, but habitually maintains in India stock of goods or merchandise and delivers the same on behalf of the non resident ;

c. habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same control, as that non-resident;

Dependent Agent Vs. Independent Agent

Business Connection shall not include business activity by an Independent Agent. Business Connection includes an activity by an agent working mainly or wholly for the non-resident and other non-residents controlling, controlled by, or subject to the same control, as that non-resident;

Agent means broker, general commission agent or other agent.

Amendment in the concept of 'Business Connection'

Background

One of the areas addressed by Base Erosion and Profit Shifting (BEPS) action plans is amendment to the definition of 'Permanent Establishment', which till date has been focused on legal and physical presence.

Issue

The I-T Act taxes a non-resident undertaking business activity in India through a 'business connection'. The term business connection, though wider than 'permanent establishment' as understood in the context of tax treaties, still does not cover business conducted by a non-resident through digital mode, without creating a physical presence in India.

Further, business connection can be created where a 'Dependent Agent' concludes contracts in India. However, under the multi-lateral Instrument (MLI), Dependent Agent PE definition has been widened. Thus, there was a need to realign the scope of 'business connection' under the Act with modified definition of PE.

Impact

The Finance Bill 2018 proposes to align the scope of 'business connection' by amending Section 9 of the Act to provide that 'business connection' shall include any business activity carried through a person who habitually plays the principle role leading to conclusion of contracts.

Further, in line with the observation made by OECD in Action 1 (Digital Economy), the term 'business connection' has been widened to include 'significant economic presence' in its ambit. 'Significant economic presence' shall be established in India if a non-resident transacts in India beyond a specified monetary threshold or undertakes a systematic and continuous soliciting of business through digital means with customers beyond a threshold as may be specified. Through this introduction, India is seeking to assert its right, as a source country or the market, to tax revenue from consumption in its territory.

Case laws on 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.

In the case of CIT v. R.D. Aggarwal & Co. , the contracts for the sale of goods took place outside the taxable territories, price was received by the non-residents outside the taxable territories, and delivery was also given outside the taxable territories. Therefore in the view of the court case such a relation w.r.t expression "business connection" must be real and intimate through or from which income must accrue or arise whether directly or indirectly to the non-resident. was absent. The Supreme Court in the same case further observed that 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.. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of 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 territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case. 

The expression "business" is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression "business connection" and its precise connotation is vague.