Income deemed to accrue or arise in India [Section 9] – Income Tax

Income deemed to accrue or arise in India [Section 9] :
Certain types of income are deemed to accrue or arise in India even though they may actually accrue or arise outside India. The categories of income which are deemed to accrue or arise in India are:

(1) Any income accruing or arising to an assessee in any place outside India whether directly or indirectly

(a) through or from any business connection in India,

(b) through or from any property in India,

(d) through the transfer of a capital asset situated in India [Section 9(1)(i)].

(2) Income, which falls under the head “Salaries”, if it is earned in India. Salary payable for service rendered in India would be treated as earned in India. Further, any income under the head “Salaries” payable for rest period or leave period which is preceded and succeeded by services rendered in India, and forms part of the service contract of employment, shall be regarded as income earned in India [Section 9(1)(ii)].

(3) Income from „Salaries‟ which is payable by the Government to a citizen of India for services rendered outside India (However, allowances and perquisites paid outside India by the Government is exempt) [Section 9(1)(iii)].

(4) Dividend paid by a Indian company outside India [Section 9(1)(iv)].

(5) Interest [Section 9(1)(v)] (discussed in para 5 below)

(6) Royalty [Section 9(1)(vi)] (discussed in para 6 below)

(7) Fees for technical services [Section 9(1)(vii)] (discussed in para 7 below)

(1) Income not deemed to accrue or arise in India [Explanation 1 to section 9(1)(i)]
Explanation 1 to section 9(1)(i) lists out income which shall not be deemed to accrue or arise in India. They are given below:

(i) In the case of a business, in respect of which all the operations are not carried out in India [Explanation 1(a) to section 9(1)(i)]: In the case of a business of which all the operations are not carried out in India, the income of the business deemed to accrue or arise in India shall be only such part of income as is reasonably at tributable to the operations carried out in India. Therefore, it follows that such part of income which cannot be reasonably attributed to the operations in India, is not deemed to accrue or arise in India.

(ii) Purchase of goods in India for export [Explanation 1(b) to section 9(1)(i)]: In the case of a non-resident, no income shall be deemed to accrue or arise in India to him
through or from operations which are confined to the purchase of goods in India for the purpose of export.

(iii) Collection of news and views in India for transmission out of India [Explanation 1(c) to section 9(1)(i)]: In the case of a non-resident, being a person engaged in the
business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities which are confined to the collection of news and views in India for transmission out of India.

(iv) Shooting of cinematograph films in India [Explanation 1(d) to section 9(1)(i)]: In the case of a non-resident, no income shall be deemed to accrue or arise in India through or from operations which are confined to the shooting of any cinematograph film in India, if such non-resident is :

(a) an individual, who is not a citizen of India or

(b) a firm which does not have any partner who is a citizen of India or who is resident in India ; or

(1) (a) Business Connection [Explanation 2 to section 9(1)(i)]:

(i) „Business connection‟ shall include any business activity carried out through a person acting on behalf of the non-resident.

(ii) He must have an authority which is habitually exercised to conclude contracts on behalf of the non-resident. However, if his activities are limited to the purchase of goods or merchandise for the non-resident, this provision will not apply.

(iii) Where he has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident, a business connection is established.

(iv) Business connection is also established where he habitually secures orders in India, mainly or wholly for the non-resident. Further, there may be situations when other non-residents control the above-mentioned non-resident. Secondly, this non-resident may also control other non-residents. Thirdly, all other non-residents may be subject to the same common control, as that of the non-resident. In all the three situations, business connection is established, where a person habitually secures orders in India, mainly or wholly for such non-residents. Exception: “Business connection”, however, shall not be held to be established in cases where the non-resident carries on business through a broker, general commission agent or any other agent of an independent status, if such a person is acting in the ordinary course of
his business. A broker, general commission agent or any other agent shall be deemed to have an independent status where he does not work mainly or wholly for the non-resident. He will however, not be considered to have an independent status in the three situations explained in

(iv) above, where he is employed by such a non-resident. Where a business is carried on in India through a person referred to in (ii), (iii) or (iv) mentioned above, only so much of income as is attributable to the operations carried out in India shall be deemed to accrue or arise in India. (1) (b) & (c) Income from property, asset or source of income. Any income which arises from any property (movable, immovable, tangible and intangible property) would be deemed to accrue or arise in India eg. hire charges or rent paid outside India for the use of the machinery or buildings situated in India, deposits with an Indian company for which interest is received outside India etc.

(1) (d) Income through the transfer of a capital asset situated in India Capital gains arising from the transfer of a capital asset situated in India would be deemed to
accrue or arise in India in all cases irrespective of the fact whether (i) the capital asset is movable or immovable, tangible or intangible; (ii) the place of registration of the document of transfer etc., is in India or outside; and (iii) the place of payment of the consideration for the transfer is within India or outside. The legislative intent of section 9(1)(i) is to cover incomes, which are accruing or arising, directly or indirectly from a source in India. The section codifies the source rule of taxation, which
signifies that where a corporate structure is created to route funds, the actual gain or income arises only in consequence of the investment made in the activity to which such gains are attributable and not the mode through which such gains are realized. This principle which supports the source country‟s right to tax the gains derived from offshore transactions where the value is attributable to the underlying assets, is recognized internationally by several countries. Accordingly, Explanation 4 clarifies that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”. Further, Explanation 5, inserted by the Finance Act, 2012, clarifies that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest
derives, directly or indirectly, its value substantially from the assets located in India.

Declaration of dividend by a foreign company outside India does not have the effect of transfer of any underlying assets located in India. Circular No. 4/2015, dated 26-03-2015, therefore, clarifies that the dividends declared and paid by a foreign company outside India in respect of shares which derive their value substantially from assets situated in India would NOT be deemed to be income accruing or arising in India by virtue of the provisions of Explanation 5 to section 9(1)(i).

Taking into account the concerns raised by various stakeholders regarding the scope and impact of the amendments made by Finance Act, 2012, including inter alia Explanation 5 to section 9(1)(i), an Expert Committee under the Chairmanship of Dr. Parthasarathi Shome was constituted by the Government. On the basis of recommendations of the Expert Committee, the Finance Act, 2015 has inserted Explanations 6 & 7 to clarify the provisions of Explanation
5 to section 9(1)(i).
Explanation 6 provides that the share or interest in a company or entity registered or incorporated outside India, shall be deemed to derive its value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, the value of Indian assets,-
(a) exceeds the amount of Rs 10 crore; and
(b) represents at least 50% of the value of all the assets owned by the company or entity, as the case may be; Meaning of certain terms:

*Term*	*Meaning*
*Value of an asset*	The *fair market value as on the specified date*, of such asset *without reduction of liabilities*, if any, in respect of the asset, determined in prescribed manner
*Specified date*	The date on which the *accounting period* of the company or, as the case may be, the entity *ends* preceding the date of transfer of a share or an interest. However, the date of transfer shall be the specified date of valuation, in a case where the book value of the assets of the company or entity on the date of transfer exceeds by at least 15%, the book value of the assets as on the last balance sheet date preceding the date of transfer.
*Accounting* *period*	Each period of twelve months ending with 31st March. However, where a company or an entity, referred to in Explanation 5, regularly adopts a period of twelve months ending on a day other than 31st March for the purpose of— (a) complying with the provisions of the tax laws of the territory, of which it is a resident, for tax purposes; or (b) reporting to persons holding the share or interest, then, the period of twelve months ending with the other day shall be the accounting period of the company or, as the case may be, the entity:
*First Accounting* *Period*	First accounting period of the company or, as the case may be, the entity shall *begin from the date of its registration or incorporation* and *end* *with the 31st March* or such other day, as the case may be, following the date of such registration or incorporation.
*Later accounting* *period*	Later accounting period shall be the *successive periods of twelve Months*
*Accounting* *period of an* *entity which* *ceases to exist*	If the company or the entity ceases to exist before the end of accounting period, as aforesaid, then, the accounting period shall end immediately before the company or, as the case may be, the entity, ceases to exist.

Explanation 7 to section 9(1)(i) provides that no income shall be deemed to accrue or arise to a non-resident from transfer, outside India, of any share of, or interest in, a company or an entity, registered or incorporated outside India, in the following cases;

(1)

Foreign company or entity directly owns the assets situated in India

AND

the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, does not hold
– the right of management or control in relation to foreign company or entity; or
-the voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of the foreign company or entity; or

(2)

Foreign company or entity indirectly owns the assets situated in India

AND

the transferor (whether individually or along with its associated enterprises), at any time in the twelve months preceding the date of transfer, does not hold

· the right of management or control in relation toforeign company or entity; or

· any right in, or in relation to, foreign company or entity which would entitle him to the right of management or control in the company or entity that directly owns the assets situated in India; or

· such percentage of voting power or share capital or interest in foreign company or entity which results in holding of (either individually or along with associated enterprises) a voting power or share capital or interest exceeding 5% of the total voting power or total share capital or total interest, as the case may be, of the company or entity that directly owns the assets situated in India;

In effect, the exemption shall be available to the transferor of a share of, or interest in, a foreign entity if he along with its associated enterprises, –

(a) neither holds the right of control or management,

(b) nor holds voting power or share capital or interest exceeding 5% of the total voting power or total share capital, in the foreign company or entity directly holding the Indian assets (direct holding company). In case the transfer is of shares or interest in a foreign entity which does not hold the Indian assets directly then the exemption shall be available to the transferor if he along with its associated enterprises,-

(a) neither holds the right of management or control in relation to such company or the entity,

(b) nor holds any rights in such company which would entitle it to either exercise control or management of the direct holding company or entity or entitle it to voting power exceeding 5% in the direct holding company or entity. Further, where all the assets owned, directly or indirectly, by a company or, as the case may be, an entity registered or incorporated outside India, are not located in India, the income of the non-resident transferor, from transfer outside India of a share of, or interest in the foreign company or entity, deemed to accrue or arise in India under this clause, shall be onl y such part of the income as is reasonably attributable to assets located in India and determined in the prescribed manner.

“Associated enterprise”, in relation to another enterprise, means an enterprise—

(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or

(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

(2) & (3) Income from salaries: Under section 9(1)(ii) income which falls under the head “salaries‟, would be deemed to accrue or arise in India, if it is in respect of services rendered in India.
Exception under section 9(2): Pension payable outside India by the Government to its officials and judges who permanently reside outside India shall not be deemed to accrue or arise in India. It may however, be noted here that the salary of an employee in the United Nations Organisation (UNO) or in its constituent bodies is exempt under United Nations (Privilege and Immunity) Act.

(4) Income from dividends: All dividends paid by an Indian company must be deemed to accrue or arise in India. Under section 10(34), income from dividends referred to in section 115-O are exempt from tax in the hands of the shareholder. It may be noted that dividend distribution tax under section 115-O does not apply to deemed dividend under section 2(22)(e), which is chargeable in the previous year in which such dividend is distributed or paid.

(5) Interest: Under section 9(1)(v), an interest is deemed to accrue or arise in India if it is payable by –

(i) the Central Government or any State Government.

(ii) a person resident in India (except where it is payable in respect of any money borrowed and used for the purposes of a business or profession carried on by him outside India or for the purposes of making or earning any income from any source outside India)

(iii) a non-resident when it is payable in respect of any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on in India by him. Interest on money borrowed by the non-resident for any purpose other than a business or profession, will not be deemed to accrue or arise in India. Thus, if a non-resident “A‟ borrows money from a non-resident „B‟ and invests the same in shares of an Indian company, interest payable by „A‟ to „B‟ will not be deemed to accrue or arise in India.

Taxability of interest payable by the Permanent Establishment of a non-resident engaged in banking business to the head office

In order to provide clarity and certainty, on the issue of taxability of interest payable by the PE of a non-resident engaged in banking business to the head office, an Explanation has been inserted in section 9(1)(v). Accordingly, in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the PE in India of such nonresident to the head office or any PE or any other part of such non-resident outside India, shall be deemed to accrue or arise in India. Such interest shall be chargeable to tax in addition to any income attributable to the PE in India. Further, the PE in India shall be deemed to be a person separate and independent of the non – resident person of which it is a PE and the provisions of the Act relating to computation o f total income, determination of tax and collection and recovery would apply accordingly. Also, the PE in India has to deduct tax at source on any interest payable to either the head office or any other branch or PE, etc. of the non-resident outside India. Non-deduction would result in disallowance of interest claimed as expenditure by the PE and may also attract levy of interest and penalty in accordance with relevant provisions of the Act. Permanent establishment includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.

(6) Royalty: Royalty will be deemed to accrue or arise in India when it is payable by –

(i) the Government; or

(ii) a person who is a resident in India except in cases where it is payable for the transfer of any right or the use of any property or information or for the utilization of services for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(iii) a non-resident only when the royalty is payable in respect of any right, property or information used or services utilised for purposes of a business or profession carried on in India or for the purposes of making or earning any income from any source in India. Lumpsum royalty payments made by a resident for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a non-resident manufacturer along with computer hardware under any scheme approved by the Government under the Policy on Computer Software Export, Software Development and Training, 1986 shall not be deemed to accrue or arise in India. “Computer software” means any computer programme recorded on any disc, tape, perforated media or other information storage device and includes any such programme or any customised electronic data. The term „royalty‟ means consideration (including any lumpsum consideration but excluding any consideration which would be the income of the recipient chargeable under the head (“Capital gains‟) for:

(i) the transfer of all or any rights (including the granting of licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

(v) the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB;

(vi) the transfer of all or any rights (including the granting of licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films;

(vii) the rendering of any service in connection with the activities listed above.

The definition of „royalty‟ for this purpose is wide enough to cover both industrial royalties as well as copyright royalties. The deduction specially excludes income which should be charge – able to tax under the head “capital gains‟.

Consideration for use or right to use of computer software is royalty within the meaning of section 9(1)(vi)
As per section 9(1)(vi), any income payable by way of royalty in respect of any right, property or information is deemed to accrue or arise in India. The term “royalty” means consideration for
transfer of all or any right in respect of certain rights, property or information. There have been conflicting court rulings on the interpretation of the definition of royalty, on account of which there was a need to resolve the following issues –

(i) Does consideration for use of computer software constitute royalty?

(ii) Is it necessary that the right, property or information has to be used directly by the payer?

(iii) Is it necessary that the right, property or information has to be located in India or control or possession of it has to be with the payer?

(iv) What is the meaning of the term “process”?
In order to resolve the above issues arising on account of conflicting judicial decisions and to clarify the true legislative intent, Explanations 4, 5 & 6 have been inserted with retrospective effect from 1st June, 1976.

Explanation 4 clarifies that the consideration for use or right to use of computer software is royalty by clarifying that, transfer of all or any rights in respect of any right, property or information includes and has always included transfer of all or any right for use or right to use a computer software (including granting of a licence) irrespective of the medium through which such right is transferred. Consequently, the provisions of tax deduction at source under section 194J and section 195 would be attracted in respect of consideration for use or right to use computer software since the same falls within the definition of royalty.

Note – The Central Government has, vide Notification No.21/2012 dated 13.6.2012 to be effective from 1st July, 2012, exempted certain software payments from the applicability of tax deduction under section 194J. Accordingly, where payment is made by the transferee for acquisition of software from a resident-transferor, the provisions of section 194J would not be attracted if –

(1) the software is acquired in a subsequent transfer without any modification by the transferor;

(2) tax has been deducted either under section 194J or under section 195 on payment for any previous transfer of such software; and

(3) the transferee obtains a declaration from the transferor that tax has been so deducted along with the PAN of the transferor.

Explanation 5 clarifies that royalty includes and has always included consideration in respect of any right, property or information, whether or not,

(a) the possession or control of such right, property or information is with the payer;

(b) such right, property or information is used directly by the payer;

Explanation 6 clarifies that the term “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for downlinking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret.

(7) Fees for technical services: Any fees for technical services will be deemed to accrue or arise in India if they are payable by –

(i) the Government.

(ii) a person who is resident in India, except in cases where the fees are payable in respect of technical services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India.

(iii) a person who is a non-resident, only where the fees are payable in respect of services utilised in a business or profession carried on by the non-resident in India or where such services are utilised for the purpose of making or earning any income from any source in India. Fees for technical services means any consideration (including any lumpsum consideration) for the rendering of any managerial, technical or consultancy services (including providing the services of technical or other personnel). However, it does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “Salaries‟.

Income deemed to accrue or arise in India to a non-resident by way of interest, royalty and fee for technical services to be taxed irrespective of territorial nexus (Explanation to section 9)
Income by way of interest, royalty or fee for technical services which is deemed to ac crue or arise in India by virtue of clauses (v), (vi) and (vii) of section 9(1), shall be included in the total income of the non-resident, whether or not –

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.
In effect, the income by way of fee for technical services, interest or royalty, from services utilized in India would be deemed to accrue or arise in India in case of a non -resident and be included in his total income, whether or not such services were rendered in India.

Illustration 6
Compute the total income in the hands of an individual, being a resident and ordinarily resident, resident but not ordinarily resident, and non-resident for the A.Y. 2016-17 –

Particulars

Amount (Rs)

Interest on UK Development Bonds, 50% of interest received in India

Income from a business in Chennai (50% is received in India)

Profits on sale of shares of an Indian company received in London

Dividend from British company received in London

Profits on sale of plant at Germany 50% of profits are received in India

Income earned from business in Germany which is controlled from Delhi (Rs 40,000 is received in India)

Profits from a business in Delhi but managed entirely from London

Income from house property in London deposited in a Indian Bank at

London, brought to India (Computed)

Interest on debentures in an Indian company received in London.

Fees for technical services rendered in India but received in London

Profits from a business in Bombay managed from London

Pension for services rendered in India but received in Burma

Income from property situated in Pakistan received there

Past foreign untaxed income brought to India during the previous year

Income from agricultural land in Nepal received there and then brought to India

Income from profession in Kenya which was set up in India, received there but spent in India

Gift received on the occasion of his wedding

Interest on savings bank deposit in State Bank of India

Income from a business in Russia, controlled from Russia

Dividend from Reliance Petroleum Limited, an Indian Company

Agricultural income from a land in Rajasthan

10,000

20,000

5,000

40,000

70,000

15,000

50,000

12,000

8,000

26,000

4,000

16,000

5,000

18,000

5,000

20,000

12,000

20,000

5,000

15,000

Solution: Computation of total income for the A.Y. 2016-17

Particulars

Resident

and

ordinarily

resident

Resident

but not

ordinarily

resident

Non-resident

Interest on UK Development Bonds, 50% of interest received in India

Income from a business in Chennai (50% is received in India)

Profits on sale of shares of an Indian company

received in London (assuming that they are in the

nature of short-term capital gains)

Dividend from British company received in London

Profits on sale of plant at Germany, 50% of profits are received in India

Income earned from business in Germany which is controlled from Delhi, out of which Rs 40,000 is received in India

Profits from a business in Delhi but managed entirely from London

Income from property in London deposited in a Bank at London, later on remitted to India

Interest on debentures in an Indian company received in London.

Fees for technical services rendered in India but received in London

Profits from a business in Bombay managed from London

Pension for services rendered in India but received in Burma

Income from property situated in Pakistan received there

Past foreign untaxed income brought to India during the previous year

Income from agricultural land in Nepal received there and then brought to India

Income from profession in Kenya which was set up in India, received there but spent in India

Gift received on the occasion of his wedding [not taxable]

Interest on savings bank deposit in State Bank of India

Income from a business in Russia, controlled from Russia

Dividend from Reliance Petroleum Limited, an Indian Company [Exempt under section 10(34)]

Agricultural income from a land in Rajasthan [Exempt under section 10(1)]

Gross Total Income

Less: Deduction under section 80TTA

[Interest on savings bank account subject to a

maximum of Rs 10,000]

Total Income

10,000

20,000

5,000

40,000

70,000

15,000

50,000

12,000

8,000

26,000

4,000

16,000

–

18,000

5,000

–

12,000

20,000

–

3,51,000

10,000

3,41,000

5,000

20,000

–

20,000

70,000

15,000

–

12,000

8,000

26,000

4,000

–

5,000

–

12,000

–

2,17,000

10,000

2,07,000

5,000

20,000

–

20,000

40,000

15,000

–

12,000

8,000

26,000

4,000

–

12,000

–

1,82,000

10,000

1,72,000

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