Section 9: Incomes which Accrue or Arise in India or are Deemed to Accrue or Arise in India

Section 9 of the Income Tax Act, 1961, is a critical provision that determines when income is considered to accrue or arise in India, even if it is earned outside the country. This section is particularly important for non-residents (NRs) and foreign companies, as it expands India’s taxing jurisdiction over certain foreign-sourced incomes with an Indian connection.

Key Categories of Income Deemed to Accrue or Arise in India [Section 9(1)]

1. Income from Business Connection in India

• If a non-residenthas a business connection in India, the income attributable to such operations is taxable in India.
• Example:A foreign company selling goods in India through an agent may be taxed on profits linked to Indian operations.
• Exception:If the business activities are limited to purchasing goods from India, income is not deemed to accrue in India.

2. Income from Property, Asset, or Source in India

• Rental income from property located in India.
• Capital gains from the transfer of assets situated in India (e.g., real estate, shares of Indian companies).

3. Income from Salaries Earned in India

• Salary earned for services rendered in India, even if paid outside India.
• Exception:Salary received by an Indian citizen for services rendered outside India under a foreign government or international organization is exempt.

4. Income from Capital Gains on Indian Assets

• Profits from the sale of immovable property, shares of Indian companies, or other capital assetslocated in India.

5. Income from Royalty or Fees for Technical Services (FTS)

• Royalty:Payment for the use of intellectual property (patents, copyrights, trademarks) in India.
• FTS:Fees for managerial, technical, or consultancy services, even if rendered outside India, if utilized in India.
• Tax Withholding (TDS):10% for royalty, 10% for FTS (subject to DTAA benefits).

6. Dividend Paid by an Indian Company

• Dividends distributed by Indian companies are deemed to accrue in India.
• Taxability:Currently, dividends are taxable in the hands of shareholders (post-DDT abolition).

7. Interest Income from India

• Interest earned on loans, deposits, or bonds issued in India.
• Exception:Interest on NRE/FCNR accounts is tax-free for NRIs.

Special Cases & Judicial Interpretations

A.  “Business Connection” (Section 9(1)(i))

• Includes dependent agents, subsidiaries, or permanent establishments (PEs)in India.
• Supreme Court Ruling (CIT vs. R.D. Aggarwal, 1965):A foreign company with an Indian agent for sales is taxable on India-linked profits.

B.  “Royalty” & “FTS” (Section 9(1)(vi) & (vii))

• CBDT Clarification:Even payments for software licenses can be treated as royalty.
• DTAA Impact:If a tax treaty exists, lower rates may apply (e.g., 10% under India-US DTAA).

C.  “Virtual” Business Presence (Digital Taxation)

• Equalization Levy (2020):2% tax on e-commerce transactions by foreign companies without physical presence.
• Significant Economic Presence (SEP):Foreign companies with substantial digital transactions in India may be taxed under Section 9(1)(i).

Comparison: Actual vs. Deemed Accrual

Tax Implications for Non-Residents & Foreign Companies

• Tax Deduction at Source (TDS):Indian payers must deduct tax before remitting payments abroad.
• Double Taxation Avoidance (DTAA):Tax treaties may override Section 9 if beneficial.
• Permanent Establishment (PE) Risk:If deemed to have a PE in India, global profits attributable to India may be taxed.