Section 9 of the Income Tax Act - Income Deemed to Accrue or Arise in India

Taxability of income depends on two factors: (i) Accrual and (ii) Receipt. Income is taxed by any country based on these two factors, i.e., either the income should be accrued in that country, or it should be received in that country. Section 9 of the Income Tax Act 1961 lists the incomes that should be deemed to accrue or arise in India, which specifically applies to incomes that foreign entities or non-residents earn in India or are deemed to be earning in India. The section stipulates the categories of income considered to arise or accrue in India. The increasing interest of non-resident individuals and foreign companies in the Indian economy has paved the way for the determination of the taxability of income earned from India.  In this article, you will understand the incomes that are deemed to accrue or arise in India.

Understanding Section 9 of the Income Tax Act

Section 9 of the Income Tax Act considers the source of income and defines who is regarded as a taxpayer. The section administers income deemed to arise or accrue in India. It establishes transparency in the taxation of income and avoids tax evasion. This section specifies that income that has not accrued or arisen in India is to be considered income accrued or arisen in India.

The income arising or accruing in India may originate from different sources like property income, foreign income, salaries, capital gains, business income, and earnings from horse racing and lottery. The government has amended this section to incorporate the categories of income like royalty, interest, technical fees, etc.

Rules of Section 9 of the Income Tax Act

Under Section 9, the following three key provisions determine the tax implications of the income foreign entities or non-residents earn in India.

i. Territorial Nexus Rule:

Any income that arises or is deemed to arise in India is subject to tax. This rule applies to all kinds of income, including interest, capital gains, business earnings, etc.

ii. Specific Inclusions Rule:

This rule applies to specific kinds of income, including royalties, interest, or fees (either for technical services obtained from India or services provided in India. The rule states that the income is deemed to arise in India, so it is subject to tax.

iii. Residence Rule:

As per this rule's provision, any income that arises or accrues outside India shall not be taxable in India. The condition to fulfil this rule is that the recipient of such income must not be a resident of India. This implies that if a non-resident earns income abroad, then that income is not subject to tax in India. 

Scope of Section 9 of the Income Tax Act

The scope of this section applies to different types of income that foreign entities or non-residents earn in India.

It includes income obtained from:

• Any salary earned in India
• Any profession or business conducted in India
• Any property located in India
• Any dividend distributed by an Indian firm
• Any source of income or asset that is located in India
• Any interest earned on securities supplied by an Indian company or the Indian government

The scope also includes the following:

• Fees or royalties for technical services provided in India
• Capital gains resulting from the transfer of any asset located, in India whether directly or indirectly
• Gift of sum of money to non-residents
• Income from salaries payable by the government of India for the services rendered outside India.
• Any sum of money paid by a resident Indian to a non-resident or foreign company or to a resident but not ordinarily resident in India.

Implications of Section 9

This section has various implications for foreign entities or non-residents conducting business in India. Let’s go through the key implications:

i. Withholding Tax:

As per Section 195 of the Income Tax Act, any individual accountable for paying a non-resident must deduct tax at source. The corresponding tax rate depends on the type of income and the provisions of the DTAA (Double Taxation Avoidance Agreement) (if applicable).

ii. Taxation of Income:

An income that a foreign entity or a non-resident earns from an asset or business is subject to tax in India. The corresponding tax rate depends on the income tax slab rates valid for the particular financial year.

Provisions of Section 9

Let’s get familiar with various sub-sections under section 9 of the Income Tax Act.

a) Section 9(1)(i): Income Accruing/Arising from a Business Connection in India or from any property in India, or from any asset or source of income in India, or the transfer of a capital asset situated in India.

The sub-section 9(1)(i) outlines the income accruing/arising from a business connection in India or from any property in India, or from any asset or source of Income in India or through transferring capital assets in India. This subsection applies to an intimate connection between a resident and a non-resident. This connection fosters profits, and the non-resident earns an income.

Explanation 1 provides clarification on what is not treated as accrued or arise in India

• Attribution of Income: For a business (excluding those with significant economic presence in India), only the portion of income reasonably attributable to operations carried out in India is deemed to accrue or arise in India. Income not attributable to Indian operations is not taxable in India.
• Purchase of Goods for Export: A non-resident earning income solely from purchasing goods in India for export is not deemed to earn income in India.
• News Agencies and Publications: A non-resident engaged in the business of a news agency or publication (newspapers, magazines, journals), who collects news/views in India for transmission abroad, will not be taxed in India for such income.
• Film Shooting: A non-resident involved in shooting cinematograph films in India is not deemed to earn taxable income in India from such operations.
• Diamond Display in Special Zones: A foreign company engaged in diamond mining, which displays uncut and unassorted diamonds in a notified special zone, will not be deemed to earn income in India from such display.

Further Explanation 2 stipulates that any income earned by a non-resident from a business connection in India is considered to arise or accrue in India.

As per this subsection, the business connection is said to be established between a non-resident and a person in India if that person:

• Have authority to conclude contracts in India or plays the principal role in the conclusion of contract, 
  • that fulfil the purpose of ownership transfer of property being owned by that non-resident or
  • Where such agreements are being accomplished in the name of the non-resident or
  • For the purposes of rendering of services by the non-resident
• Holds a stock of goods and supplies it on behalf of the non-resident.
• Secures orders in India mainly for the non-resident.

Further, no business connection shall be established if the person securing the order is a broker or a general commission agent acting independently in the normal course of business.

Explanation 2A covers Significant Economic Presence(SEP): SEP of a non-resident in India shall be considered as business connection in India, and the income earned from SEP shall be deemed to be accrued or arise in India.

SEP shall be constituted if:

• If NR engages in a transaction with a person resident in India in respect of any goods, services or property (including the provision of download of data or software) - when the payments arising from such transactions exceed Rs. 2 crores in a year.
• If NR is engaged in soliciting business activities or engaging with users in India when the number of users is at least 3 lakhs.

Transactions shall be deemed to establish a significant economic presence in India, regardless of whether:

(i) the agreement related to such transactions is executed within India;

(ii) the non-resident maintains a residence or place of business in India; or

(iii) the non-resident provides services from within India.

b) Section 9(1)(ii) to Section 9(1)(vi): Other Incomes Deemed to Accure or Arise in India

In addition to business connections, the following types of income are subject to tax under Section 9(1):

Section 9(1)(ii): Salary obtained from services provided in India. It includes salary earnings from before and after delivering the services that are part of service/employment contracts such as gratuity, pension, etc.

Section 9(1)(iii): Salary paid by the Indian Government to citizens for services rendered outside India. Income from salaries payable by the government to a citizen of India for services rendered outside India would be deemed to accrue or arise in India.

The following conditions have to be satisfied to treat such income as deemed to accrue or arise in India:

• Income should be chargeable under the head salaries
• The payer should be government of India
• The recipient should be an Indian citizen, whether resident or Non-resident in India
• The services should be rendered outside India.

However allowances and perquisites paid or allowed outside India by the government to an Indian citizen for services rendered outside India is exempt, by virtue of Section 10(7)

Example: Mr. David, an Indian citizen aged 40 years, a Government employee serving in the Ministry of External Affairs, left India for the first time on 31.03.2024 due to his transfer to High Commission of Canada. He did not visit India any time during the FY 2024-25. He has received the following income for the F.Y. 2024-25

Compute his Gross Total Income for A.Y. 2025-26.

Solution: As per section 6(1), Mr. David is a non-resident for the A.Y. 2025-26, since he was not present in India at any time during the P.Y. 2024-25.

As per section 5(2), a non-resident is chargeable to tax in India only in respect of the following incomes:

(i) Income received or deemed to be received in India; and

(ii) Income accruing or arising or deemed to accrue or arise in India.

In view of the above provisions, income from agriculture in Nepal and income from house property in Nepal would not be chargeable to tax in the hands of David, assuming that the same were received in Nepal.

Income from ‘Salaries’ payable by the Government to a citizen of India for services rendered outside India is deemed to accrue or arise in India as per section 9(1)(iii). Hence, such income is taxable in the hands of Mr. David, even though he is a non-resident.

However, allowances or perquisites paid or allowed as such outside India by the Government to a citizen of India for rendering service outside India is exempt under section 10(7). Hence, foreign allowance of ₹ 4,00,000 is exempt under section 10(7) in the hands of Mr. David.

Section 9(1)(iv): Dividend paid by Indian company outside India. Dividend paid by Indian companies outside India is deemed to accrue or arise in India and would be taxable in the hands of shareholders.

Section 9(1)(v): Interest shall be deemed to be accrued or arise in India. If paid,

• By the government; or
• By the resident except where the money borrowed are used for the purpose of business or profession outside India or for earning income from any source outside India or
• By the non-resident  utilised for the purpose of business or profession in India.
• By the non-resident,when it is payable in respect of any debt incurred or money borrowed and utilised for the purpose of business or profession in India.

Any interest paid by the permanent establishment of a non-resident (engaged in banking business) in India to such non-resident or any other PE or head office shall be deemed to be accrued or arise in India.

For example, if a branch of Shanghai Corporation India (PE)  pays interest to Shanghai Corporation China (HO), then the said interest shall be deemed to be accrued or arise in India.

Section 9(1)(vi)/(vii): Royalty or fees for technical services (FTS) shall be deemed to be accrued or arise in India. If paid,

• By the government; or
• By the resident except where it is used for the purpose of business or profession outside India or for earning income from any source outside India or
• By the non-resident where money are utilised for the purpose of business or profession in India or for earning income from any source in India.

Section 9(1)(viii): Any sum of money paid by a person resident in India to, to a non-corporate, non-resident or foreign company or to a RNOR without consideration, it shall be chargeable to tax under section 56(2)(x) where it exceeds ₹ 50,000.

Points to be kept in mind relating to Royalty/FTS:

• If the transfer of software/property is covered under the head capital gains, then it will not be taxable as a royalty.
• FTS means consideration paid for rendering of any managerial, technical or consultancy services.
• Royalty means:
  • Transfer of any right related to patent, model, design, formula
  • Imparting of any information related to patent, model, design, formula
  • Use of any industrial, commercial or scientific equipment.
  • Transfer of any right in respect of copyright, literary, artistic or scientific work.

c) Indirect Transfer (As per Explanation 5 to Section 9(1)(i))

As per Explanation 5 to Section 9(1)(i), any share or interest in a company or entity registered outside India (before the 28th day of May, 2012) shall deemed to have been situated in India if such company or entity either directly or indirectly substantially derives its value from the assets located in India. A company or entity shall be considered as substantially deriving its value from assets in India if on the specified date*:

• The value (Fair Market Value) of assets held in India exceeds Rs. 10 crores (without netting off the liabilities) and
• Such assets constitute at least 50% of the Value of all the assets owned. 

*Specified date means an ending date of the preceding accounting year of the transfer date. However, if there is an increase in the book value of assets by 15% or more then the date of transfer should be considered as the specified date.

The provision related to indirect transfer shall not be applicable if the transferor does not hold more than 5% of the share capital in the company or entity during the 12 months preceding the transfer date.

Illustration: Mr. X owns a 75% stake in XYZ GmbH (Germany), XYZ GmbH owns a wholly-owned subsidiary in India XYZ Pvt Ltd, XYZ GmbH derives its value substantially from its holding in XYZ Pvt Ltd.

Now, if Mr. X wants to sell his stake in XYZ GmbH, then income arising from such sale shall be deemed to be accrued or arise in India as XYZ GmbH derives its value substantially from XYZ Pvt Ltd (an Indian Company).

Conclusion

Section 9 of the Income Tax Act, 1961 administers the type of income considered to arise or accrue in India. The income a taxpayer gets, either in cash or other forms, deemed to arise or accrue in India shall be subject to tax. It is to be noted that Section 9 of the Act should be read alongside the Double Tax Avoidance Agreement (DTAA) with the country of which the non-resident is a tax resident.