Section 9 of the Income Tax Act, 1961, outlines the provisions relating to income deemed to accrue or arise in India. This section is crucial for determining the taxability of various types of income, especially for non-residents. Here’s a detailed analysis of each subsection under Section 9 as per the current financial year:
Section 9(1): Income Deemed to Accrue or Arise in India
Section 9(1)(i): Business Connection
- Provision: Any income accruing or arising, whether directly or indirectly, through or from any business connection in India.
- Explanation 1: Income attributable to operations carried out in India is deemed to accrue in India. However, this does not include income arising from operations confined to purchase of goods in India for the purpose of export.
- Explanation 2: Defines “business connection” to include significant economic presence, a term further elaborated in later amendments.
- Explanation 3: Income from a “business connection” will include income from a business where a non-resident has a dependent agent in India who habitually exercises authority to conclude contracts, maintains stock, or secures orders.
Section 9(1)(ii): Salary Income
- Provision: Salary earned in India is deemed to accrue or arise in India. This includes salary payable for services rendered in India.
- Explanation: Includes rest periods or leave periods preceding or succeeding services rendered in India.
Section 9(1)(iii): Income from Property
- Provision: Income from any property, movable or immovable, situated in India.
- Explanation: Includes rent, sale proceeds, and other incomes derived from such properties.
Section 9(1)(iv): Dividend Income
- Provision: Dividend paid by an Indian company outside India is deemed to accrue in India.
- Explanation: Covers dividends distributed by Indian companies to non-residents.
Section 9(1)(v): Interest Income
- Provision: Interest payable by:
- The Government
- A resident (except where interest is payable in respect of funds borrowed and used for a business or profession carried out outside India or for making or earning any income outside India)
- A non-resident for funds used in a business or profession carried out in India.
Section 9(1)(vi): Royalty Income
- Provision: Royalty payable by:
- The Government
- A resident, except where royalty is payable in respect of any right, property, or information used or services utilized for a business or profession carried outside India or for earning income outside India.
- A non-resident if the right, property, or information is used or services are utilized for a business or profession carried out in India.
- Explanation: Defines “royalty” to include payments for the use of patents, copyrights, trademarks, designs, and similar properties.
Section 9(1)(vii): Fees for Technical Services
- Provision: Fees for technical services payable by:
- The Government
- A resident, except where fees are payable in respect of services utilized for a business or profession carried outside India or for earning income outside India.
- A non-resident if the services are utilized for a business or profession carried out in India.
- Explanation: Defines “fees for technical services” to include managerial, technical, or consultancy services.
Amendments and Clarifications
The provisions under Section 9 have been subject to various amendments and clarifications to adapt to changing economic scenarios, especially with the rise of the digital economy and cross-border transactions. Notable amendments include:
- Significant Economic Presence (SEP): Introduced to tax digital and e-commerce activities. SEP constitutes a business connection in India, even if the non-resident has no physical presence, based on:
- Transactions in respect of goods, services, or property carried out by a non-resident with any person in India exceeding a specified amount.
- Systematic and continuous soliciting of business activities or engaging in interaction with users in India through digital means.
- Attribution of Income: Guidelines on attributing income to Indian operations to ensure fair taxation of multinational enterprises.
Implications
- Non-Residents: Clearer guidelines on what constitutes income deemed to accrue or arise in India, affecting their tax obligations.
- Businesses: Need to reassess tax strategies, especially with the advent of SEP and digital transactions.
- Tax Authorities: Enhanced ability to tax a wider array of incomes and transactions, especially from digital and cross-border activities.
Case Laws and Judicial Interpretations
Several landmark judgments have further clarified the application of Section 9, such as:
- Ishikawajma-Harima Heavy Industries Ltd. vs. DIT: Clarified the scope of business connection and the necessity of actual operations in India for taxation.
- Vodafone International Holdings BV vs. UOI: Dealt with the interpretation of indirect transfer of Indian assets and the applicability of capital gains tax.
Summary
Section 9 of the Income Tax Act, 1961 is pivotal in determining the scope of income deemed to accrue or arise in India, especially for non-residents. The provisions aim to bring various incomes within the tax net, ensuring that income generated through business connections, property, asset transfers, services, salary, dividend, interest, royalty, and technical services in India is taxable in India. The amendments and judicial interpretations have further refined the application and scope of this section, adapting to evolving business practices and economic activities.
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