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Section 9 of the Income Tax Act, 1961 – Income Deemed to Accrue or Arise in India

Savvy Midha

| Updated: Oct 19, 2019 | Category: Income Tax, Taxation

Section 9 of the Income Tax Act, 1961 - Income Deemed to Accrue or Arise in India

As per Section 9 of the Income Tax Act, 1961, certain incomes are considered to have been earned in India even if they accrue or arise outside India.

Indian Income Tax Laws cover residents, non-residents, and residential but non-ordinary residents taxpayers, within its ambit of tax liability. The Act also imposes a tax liability on the income of the foreign companies and Non-resident Indians to the extent such income is sourced within India.

NOTE: It is pertinent to mention that Section 9 and Section 5 of the Act are co-related, and hence, it is necessary to have an understanding of Section 5 first.

Section-5 of the Income Tax Act, 1961

Section 5 defines the taxability under various heads such as:

  1. Income received or assumed to be received in India is taxable in the hands of Residents, Non-residents, and Residents but non-ordinarily residents.
  2. Income that has accrued or arisen or is deemed to be accrued or arisen within India is taxable in the hands of all three stated above.
  3. Income accruing or arising outside India is taxable in India in the hands of Resident but not taxable in the hands of Non-residents and Residents but non-ordinarily residents.

Residential Status

As per the Income Tax Act, 1961, the residential status of a taxpayer could be one of the following:

  • Resident
  • A Resident not Ordinarily Resident
  • Non-Resident
  • Resident

The taxpayer has to satisfy any one of the two conditions to be a resident of India:

a. Has resided in India for 182 days or more in the previous year

OR

b. Resided in India for 365 days or more in the 4 preceding years

And

Resides in India for 60 days or more in the relevant financial year

  • Resident Not Ordinarily Resident

A person falls under this category if he meets both the following conditions:

a. He has been “Resident of India” for at least 2 years out of 10 previous years.

AND

b. Has been in India for 730 days or more in the previous 7 years.

  • Non-Resident Indian (NRI)

The taxpayer is said to have the residential status of an NRI in case he doesn’t satisfy any of the above conditions of Resident or Resident Non-Ordinarily Resident.

Section 9 of the Income Tax Act, 1961

Section 9 is a deeming provision under the Income Tax Act. It specifies a certain income that is deemed or supposed to be accrued or arise in India in few circumstances. The income of non-residents cannot be taxed in India unless it falls within the four corners of Section 5 read with Section 9 of the Income Tax Act. 

As per Section 9(1), certain incomes are deemed to have arisen in India for taxability. Certain income is said to have incurred in India even if they accrue or arise outside India.

Business Income of foreign companies and NRIs is liable to be taxed in India up to the extent it accrues or arises:

  • through a business connection in India
  • through any asset located within India
  • through any source of income within India

Deemed Income- Section 9(2) of the Income Tax Act

Following income are said to be incurred or arisen in India for the purpose of taxation:

  1. Income from Business Connection in India: Business Connection can be:
    1. Branch office situated in India
    2. A subsidiary of a foreign holding company situated in India
    3. Agent or organization of Non-Residents

Any profit earned by non-residents through the connection from such business is said to have incurred within India and shall be taxable under the Income Tax Act, 1961.

  • Income from assets or property situated in India:  Any income earned from any property, whether movable, immovable, tangible, or intangible situated within India, is said to be incurred within India for levy of tax thereupon. For example, Mr. X lives in Beijing. He gets the royalty for the book published in India. Such royalty earned is taxable in India as it is deemed to be accrued in India irrespective of the fact whether the same is received in or outside in India.
  • Income from transfer of Capital Assets situated in India: Income arising from capital assets is said to have incurred in India if such an asset is situated in India irrespective of the residential status of transferor or transferee.
  • Salary earned for the service rendered within India: Any income earned as salary for the service rendered in India irrespective of the fact that the actual payment of such salary is made within or outside India.
  • Salary earned for services rendered outside India: Salary paid by the government of India to any Indian citizen for rendering services outside India shall be considered to have incurred in India.
  • Interest Income: Any interest paid by the following is taxable in the hands of recipient in India:
    • By Government; or
    • By Indian residents except when the interest is paid in connection with the money borrowed for using it in the business or profession situated outside India.
    • By NRIs, provided such interest shall be in connection with the money borrowed for using it in the business or profession carried on in India.
  • Royalty Income: Any royalty paid by the following is taxable in the hands of the recipient of such Income within India:
    • By Government; or
    • By Indian resident except the royalty is paid in connection with the right or information used in the business or profession situated outside India.
    • By NRIs, provided such royalty shall be in connection with the right or information is used in the business or profession carried on within India.
  • Fee for technical services: Fees paid for rendering technical services is taxable in the hands of the recipient of such income in India if paid by the following:
    • By Government; or
    • By Indian residents except the service is rendered in connection with the business or profession situated outside India.
    • By NRIs, provided such service shall be utilized in connection with the business or profession carried on within India.

Apportionment of Profit

In case the whole business operations are not confined within India and are operated worldwide, as per section 9(1)(I), only such part of the entire operation is deemed to be accrued in India, and taxable within India which is attributable to the operations carried out in India.

For instance, in any business operation, the manufacturing and selling part is attributable to different countries. Such as manufacturing is done in India, and goods produced are sold outside India. In that case, profit attributable to selling operations is deemed not to accrue in India.

Rule 10 of Income Tax Rules, 1962, prevails in case the income from the operations carried in India cannot be determined. As per this rule:

  1. Assessing Officers, after considering the facts and circumstances, ascertain such a percentage of total turnover that has accrued or arisen in India

OR

  • Any amount that bears the same proportion to the total profit as the receipt bears to the total receipts of the business.

OR

  • Any other manner the Assessing Officer deems suitable.
Savvy Midha

"Savvy Midha holds the degrees of Bachelor of Commerce(honors), LL.B and Company Secretary. She is an experienced Legal and Financial writer with expertise in research, drafting, and copy-writing."

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