Section 9 of Income Tax Act

Section 9 of Income Tax Act deals with what type of Income are taxed in India.

Introduction

The Income Tax Act of 1961 is the legal framework that governs taxation in India. Section 9 of the Income Tax Act states that any income received by a taxpayer, whether in cash or in kind, that is deemed to accrue or arise in India is taxable.

Salary, Income from House Property, Business Income, Capital Gains, Foreign Income, and Income from winning Lottery and house races are all examples of money regarded to accrue or emerge in India. This article will analyse Section 9 of the Income Tax Act of 1961, as well as the types of income that are regarded to accrue or arise in India under the provisions of the Act.

Income from Business Connection in India

As per section 9(1)(i) following condition should be satisfied for an Income to accrue and arise in India.

Condition 1 :- Tax Payer has a “business connection” in India.

Condition 2 :- Due to business connection in India income accrues or arises outside India.

A business connection shall mean person has a business in India or his income is connected to business in India.

Thus, business connection involves a reaction between a business carried on by a non-resident which yields profits or gains and some activity in India which contributes to the earning of these profits or gains.

For any income to be considered to have arised from business connection in India there has to be an element of continuity between the business of a non-resident and the activity in India. A stray or isolated transaction is not normally regarded as business connection.

Business Connection also includes a profession connection. It includes person acting on behalf of a non-resident and who performs any one or more of the following :-

1) He exercises in India an authority to conclude contracts on behalf of the non-resident. It excludes activity of only purchase of Goods or Merchandise for the non-resident.

2) He has no authority but maintains in India a stock of goods or merchandise on behalf of a non-resident.

3) He habitually secures order in India for a non-resident or a non-resident under the same management.

4) He habitually plays the principal role leading to conclusion of contracts by the non-residents and the contracts are

a) in the name of Non-resident

b) for the transfer of ownership of (or for granting of right of use) property owned by the non-resident.

c) for the provision of services by the non-resident.

In other cases where business is done through an agent by Non-resident will not constitute business connection.

Significant Economic Presence

There has been a paradigm shift in business from physical to digital. With technological advancement it was possible for digitally enabled business to operate in various markets globally. Dependency on such technologies has helped businesses to earn gloabally with presence only in one country. Such Companies operate in multiple countries with limited managerial jurisdiction and without having physical presence in any of them.

Countries like India with huge market provide a big customer base to help them earn big. Therefore physical nexus based tax rules were never appropriate to bring those income under the ambit of taxation.

To address this issue the Finance Act of 2018, introduced a new concept of Significant Economic Presence [SEP] applicable from assessment year 2022-23. The entities escaping tax were those which had business outside India. Therefore the concept is applicable to Non Residents.

As per explanation 2A to section 9(1)(i) SEP for the purpose of the Act shall mean

i) transaction in respect of any goods, services or property carried out by a non resident in India. (including provision of download of data or software in India) If the aggregate pf payments arising from such transactions during the previous year exceeds Rs 2 crores: or

ii) systematic and continuous soliciting of business activities or engaging in interaction with such number of users as may be prescribed (i.e 3 lakhs) in India through digital means.

From the above transaction only such income that is attributable to India will be taxed in India

Government has extended attribution of deeming provision under explanation 3A to section 9(1)(i) to the SEP from AY 21-22

The deeming provision income attributable to operations in India shall include income from following activities:-

a. such advertisement which targets a customer who resides in India or a customer who access advertisement through internet protocol address located in India.

b. sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India : and

c. sale of goods or services using data collected from a person who resides in India or from a person who uses internet service protocol in India.

However, industry will still need clarity for determination of taxable value for deduction of TDS.

Income through and from asset, property or source of Income in India

Income through and from asset, property or source of Income in India is deemed to accrue or arise in India.

For the purpose of the Act term “property” shall mean real property and is not restricted to house property but includes tangible movable or immovable property.

The term “assets” shall include all intangible rights and consequently, interest, dividends, patents and copyrights, royalties rents, etc. [Ref sec 9(1)(i) of Income Tax Act]

Income from transfer of capital asset situated in India

Capital gain within the meaning of section 45 of the Act earned by a person by transfer of capital asset situated in India is deemed to accrue or arise in India.

The Finance Act 2012 inserted a classificatory amendment as explanation 5 to section 9(1)(i). This amendment clarifies that, a capital asset being any share or interest in a company or entity registered or incorporated outside in India shall be deemed to be situated in India if the share or interest derives directly or indirectly, its value substantially from the assets located in India. This clarification is added retrospectively from assessment 1962-63 onwards.

This clarification was introduced to supersede the ruling of Hon. Supreme Court in Vodafone International Holdings B.V. Union of India [2012]

In this amendment it is important to understand the meaning of the word substantially, The Finance Act 2015 amended the section 9(1) with effect from AY 2016-17 to define the meaning of word “Substantially”

As per the amendment the share or interest of a foreign company or entity shall be deemed to derive value substantially from the assets (whether tangible or intangible) located in India, if on the specified date, value the Indian assets

i) exceeds the amount of Rs 10 crore and

ii) represents 50% of the value of all assets owned by the company or entity.

Value of asset shall mean fair value of asset without reduction in liabilities, if any in respect of the asset

The mode for determination of fair market value of the assets of the a foreign company is given in Rule 11UB

For the purpose of Rule 11UB fair market value shall be certified by a Chartered Accountant in Form No. 3CT.

Exemptions to Indirect Transfer of Assets

Exemption shall be available to the transferor of share or interest in a foreign entity if the transferor (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 percent.

This exemption is also extended to a foreign company that holds the shares indirectly, through another company provided conditions in (a) and (b) are satisfied.

The transfer of share to a foreign company on account of amalgamation and demerger will be also exempt from tax.

Dividend declared by a foreign company having substantial assets located in India will not be taxed in India [Ref:- Circular No 4/2015 dt. March 26, 2015]

Dividend paid by an Indian company shall be deemed to accrue or arise in India.

Income by way of Royalty

As per section 9(1)(iv) of Income Tax Act Royalty Income shall be deemed to accrue or arise in India provided following conditions are satisfied.

1. If Royalty paid by Indian Government
2. Royalty paid by a resident except if paid in respect of any right, property or information used for the purpose of business outside India or for purpose of making or earning any income from any source outside India.
3. Where royalty is payable by a non – resident in respect of right property or information utilised for the purpose of business in India.

In view of the above, royalty income (including lump sum consideration) for the transfer outside India of, or the imparting of information outside India in respect of any data, documentation, drawing or specification relating to any patent, invention, model, design secret formula or processor trade mark or similar property will become chargeable in India.

The definition of royalty is wide enough to cover industrial as well as copy right royalties.

Following is the extract of definition of Royalty as per Explanation 2,3,4.5 and 6 to section 9(1)(iv) of the Income Tax Act

Explanation 2.—For the purposes of this clause, “royalty” means consideration (including any lump sum 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 a 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 ;

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

  (v) the transfer of all or any rights (including the granting of a 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; or

  (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v).

Explanation 3.—For the purposes of this clause, “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 customized electronic data.

Explanation 4.—For the removal of doubts, it is hereby clarified that the 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.

Explanation 5.—For the removal of doubts, it is hereby clarified that the 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;

  (c) the location of such right, property or information is in India.

Explanation 6.—For the removal of doubts, it is hereby clarified that the expression “process” includes and shall be deemed to have always included transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic fibre or by any other similar technology, whether or not such process is secret;

Taken from – https://incometaxindia.gov.in/Pages/acts/income-tax-act.aspx

Income by way of fees for Technical Services

Clause (vii) to section 9(1) specifies the circumstances in which fees for technical services are deemed to accrue or arise in India. Under this clause income by way of “fees for technical services” of following types are deemed to accrue or arise in India in the hands of recipient:

a fees for technical services received from the central government or any state government.

b. fees for technical services received from a resident (except where the payment is relatable to a business or profession carried on by the payer outside India or any other sources of his income outside India)

c. fees for technical services received from a non-resident (if payment is relatable to a business or profession carried on by the payer in India or to any other source of his income in India)

If a non-resident receives technical fees from a resident person and the fees is relatable to business carried on by the payer outside India or fees pertains to a source of income situated outside India such fees is not deemed to accrue or arise in India.

Explanation 2 to Sec 9(1)(vii) explains the meaning of Technical services

The term ‘fees for technical services’ means any consideration for rendering of any managerial, technical or consultancy services including provision of services of technical or other personnel but does not include consideration for any construction assembly, mining or like project undertaken by the recipient or consideration which would be income of recipient chargeable under the head salaries.

For a particular income to be characterised as “fees for technical services” it is necessary that some of managerial, technical, or consultancy services should have been rendered for a consideration. The Income tax Act, doesn’t define managerial, technical or consultancy services and has to be understood in common parlance.

It is important to note that, in order to be covered in the definition of Technical service it has to be rendered by someone who has a special skills and expertise in rendering such services. As per explanation 2 to section 9(1)(vii) Technical services include managerial, technical and consultancy service and The word technical is sandwiched between the terms managerial and consultancy. Provision of managerial and consultancy is not possible without involvement of Human element. Therefore provision of technical services would have to be construed as provision of Human element.

Deemed accrual of gift of money to a non-resident or foreign company

As person who is a non resident is taxable in India if he receives monies in form of Gift. Following condition has be satisfied for receipt of Gift by a Non – resident.

1. Payer of gift in monies form should be a resident.
2. Recipient should be :-
   • a non – resident /foreign company and a sum of money received on or after July 5th, 2019 or
   • a resident but not ordinarily resident and a sum of money is received on or after April 1st, 2003.
   • Income arise outside India.
   • The transaction is not covered by any of the exception specified by section 56(2)(x).

If above conditions are satisfied, money received exceeding Rs 50000/- per financial year by a non-resident shall be deemed to accrue or arise in India.