This research paper will be focusing on online poker sites with regards to non-residents whose income is accruing in India. There has been a certain boom when it comes online sites wherein more and more people are going online and getting involved in games such as rummy, poker and fantasy leagues. The industry has through a lot of changes in recent times after such games in many states in India have been held to be legal after being classified as ‘games of skill.’[1]The focus will be on online poker sites which come within the purview of Section 9 of the Income Tax Act. Section 9 talks about the methods of taxation for a non-resident whose income is accruing in India. Since a lot of these sites which are available to the consumers today are not operating in India per se, it is important to figure out how they are or should be taxed by looking at provisions of the Income Tax Act and also Double Tax Avoidance Agreements (DTAA).We will be elaborating on the concepts introduced under Section 9 and conducting a case study for the site ‘betway’.

Online Poker in India

Online poker rooms have been held to be legal in India although there is jurisprudence against the same. These online sites follow two types of business models in order to generate revenue. Firstly, is the rake system wherein a certain percentage of the pot goes to the respective house or room. It is said to be the commission taken for playing in that particular room. The second structure followed in certain tournament-based poker rooms is the fee structure wherein a certain amount and is levied on each player that is entering the tournament which is can be classified as ‘royalty’. Section 194B of the Income tax states that “the person responsible for paying to any person any income by way of winnings from any lottery or crossword puzzle or card game and other game of any sort in an amount exceeding ten thousand rupees shall, at the time of payment thereof, deduct income-tax thereon at the rates in force.”[2] Section 115BB on the other hand talk about how the percentage for such taxation would be 30%. For card games and lotteries in India.[3] This model of taxation under Section 194B is followed by, one of the leading online poker sites in India but this section will not apply to a site like, which has no permanent establishment in India. In order to tax such a company, one needs to look at taxation under Section 9 to establish how and under what it can be taxed.

Business Connection

The concept of business connection becomes important in order to determine the implications of the tax in India. Section 5 of the Income tax act states how a foreign company needs to pay tax on any income accrues or arises in India. Section 9 elaborates on the business connection that any non-resident has to pay tax only to the extent of the income that has arisen within the purview of India. Section 9 of the Act talks about the different types of income that accrue in India including royalty for technical services etc. The case of CIT v R.D Agarwal is the landmark judgment for ‘business connection’ test in India. The court elaborated on how “a relation with respect to the expression “business connection” must be real and intimate through or from which income must accrue or arise whether directly or indirectly to the non-resident.”[4] The case also talked about an element of continuity and how “a business connection involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains.” The court also held that a determination of such ‘business connection’ needs to be done on a case to case basis.

The territorial nexus is the other concept under Section 9 of the Income Tax Act that has been established in recent years. The case of Ishikawajima-Harima Heavy Industries v Director of Income Tax is the landmark judgment that has elaborated on this concept. The case mentioned the two pre-conditions that are to be fulfilled in order to establish territorial nexus i.e. – “the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India.”[5] The territorial nexus needs to be assessed for each jurisdiction on an ‘actual basis,’ and it would be incorrect to say that the entire income accrues in each of the jurisdictions. Thus, it was held that only such part of income as which was attributable to operations carried out in India would be taxable in India.

The income generated through digital mean has become a topic of debate and has become one of the major aspects that Section 9 has dealt with over the past few years in dealing with taxation matters for companies like Google, Yahoo etc. Article 7 of the Double Avoidance Agreement talks about how profits will only be taxed in those countries wherein the company has a ‘Permanent establishment.’ However, the new business models that have emerged in recent times require a different approach to deal with taxation of such companies. In the case of Yahoo India v. Deputy Commissioner of Income Tax, it was held that the advertisement money would constitute as royalty under Section 9 of the act.[6] The contention was made by Yahoo that it does have any physical presence in India and the services performed by Yahoo constitute outside India and hence should not be liable under the income tax act or in India. The tribunal held that the services rendered outside India had accrued in India and hence was taxable under Section 9 of the Income Tax Act.

Significant Economic Presence

The above case law would suggest how even without a proper ‘permanent establishment’. The tribunal dealt with these companies and brought them within the ambit of section 9. The OECD to deal such tax avoidance practices came up with the concept of ‘Significant economic practice’ in order to replace the concept of ‘permanent establishment.’ Post such judgments and recommendations of the OECD, the Finance Act, 2018 has introduced the concept of ‘Significant economic presence’ in order to widen the ambit of Section 9 of the Income Tax Act, 1961 through inculcation of Explanation 2A in the section.[7] It stated that transactions will constitute ‘significant economic presence’ in India, even if the agreement for such transactions is entered in India or the non-resident has a place of business in India or just renders services in India. The definition of ‘business connection’ of the non-resident in India and the ‘significant economic presence’ for this purpose shall mean:

(i) any transaction in respect of any goods, services or property carried out by a nonresident in India including provision of download of data or software in India if the

aggregate of payments arising from such transaction or transactions during the previous year exceeds the amount as may be prescribed; or

(ii) systematic and continuous soliciting of its business activities or engaging in interaction with such number of users as may be prescribed, in India through digital means.”

Tax Model

Now let us analyze the business model of ‘Betway’ in India with regards to the usage of online casino aspect of the website. Firstly, the betway site provides the service of a virtual poker room wherein the people can participate and play against each other. It can be stated that this is a technical service being provided through digital means on the internet. The Betway India domain name would suggest that the company has significant users interacting with it on a daily basis. The booming growth in recent times for such avenues has led to Betway investing heavily in the Indian market which would require that it be taxed as well. There is nothing to suggest that Betway India unlike adda52 is being taxed for the same due to relative grey area that online poker is operating in and the added fact that the company does not have a ‘permanent establishment’ in India. The income cannot come within the purview of Section 194B due to no permanent establishment and hence one needs to look at the tests established in under Section 9 to see the taxation process. Applying the pre-requisites mentioned in the case of Ishikawajima-Harima Heavy Industries v Director of Income Tax, we can see that the that service of the site to be taxed on that income wherein the site is being accessed in India. The service of the online poker is being rendered in India and also being utilized by consumers in India. A certain parallel can be drawn with the Yahoo and Google cases as well, but there is a certain difference with regards to the business model wherein in both cases the avenue for revenue is advertisement whereas in the case of betway, the revenue is the paid commission for entering such poker rooms. However, we can see in both judgments without a permanent establishment being present, tax was levied on in both cases due to the fact that the income was accruing in India. A similar stance can be taken for the case of betway where a ‘significant economic presence’ can be established through looking into the workings of the site and the economic revenue being generated. This revenue can be taxed under Section 9 where a certain royalty can be charged on the revenue earned by such sites. A look into the tax treaty between India and England should also be looked at in order to decide the best method to go about the taxation process.


The ‘Significant Economic Presence’ introduced by the Finance bill, 2018 test has helped widen the ambit of Section 9 of the Income Tax Act which is helping to bring these different business models within the purview of the act and avoid such taxation. It is also important to amend Article 7 of the Double Tax Avoidance Agreement, cause a foreign company may at times choose to be governed by this article and can avoid being taxed in the country. It is important for specific tests for such different models to be established as the digital medium has changed the way business is being undertaken by people and hence constant evolution of the tax regime and agreements between countries becomes of utmost importance.








Author Bio

Qualification: Student- Others
Company: N/A
Location: Gurgaon, Haryana, IN
Member Since: 24 Jun 2020 | Total Posts: 1

Join Taxguru’s Network for Latest updates on Income Tax, GST, Company Law, Corporate Laws and other related subjects.

Join us on Whatsapp

taxguru on whatsapp GROUP LINK

Join us on Telegram

taxguru on telegram GROUP LINK

Download our App


More Under Income Tax

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

February 2024