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

In cross-border commerce and globalized economies, defining where a particular income originates is essential not only for compliance but for strategic decision-making. Section 9 of the Income Tax Act, 1961, lies at the heart of this determination in India. It elaborates on when income, even if earned abroad, is “deemed to accrue or arise in India”—effectively expanding the Indian tax net to non-residents and foreign entities under specific circumstances. For multinational corporations, foreign investors, and even expatriate professionals, navigating Section 9 is critical to avoiding unexpected tax liabilities and structuring operations efficiently.

The Scope of Section 9: Key Provisions and Overview

Section 9 of the Income Tax Act does not just concern itself with income physically received or earned in India. Instead, it defines and broadens the ambit of taxable income for both residents and non-residents. The core principle: certain categories of income, by their very nature or due to specific connections to India, are always deemed to have their source in India, regardless of where the actual transaction takes place.

Important Categories of Deemed Indian Income

Section 9(1) specifies several heads of income deemed to accrue or arise in India:

• Income from business connections in India: Profits attributable to business operations carried out in India, even if contract negotiation or execution happened abroad.
• Income from any property, asset, or source of income in India: This includes income from immovable property—rent, transfer, or related rights.
• Income by way of capital gains: When the asset is located in India, gains from its transfer fall under Indian taxation.
• Income from salaries: If services are rendered in India, regardless of where payment is made, it’s deemed as Indian income.
• Interest, royalties, and fees for technical services: If paid by an Indian resident (except in specific circumstances), or if used for a business or source in India.

A famous example is the Vodafone tax case, where the Indian tax authorities cited Section 9 in asserting capital gains tax on an offshore transaction because the underlying assets were in India.

Business Connection and the Expanding Digital Economy

The “business connection” clause has become especially significant given the rise of remote service delivery and digital business models.

What Constitutes a ‘Business Connection’?

Traditionally, business connection was interpreted narrowly—tied to a physical presence or agency in India. However, judicial interpretations and legislative changes in the last decade have broadened its scope.

Some modern developments include:

• Significant Economic Presence (SEP): Introduced to tax digital companies without a physical office but with substantial user base or digital sales in India.
• Agent or Dependent Agent: Activities of individuals or entities habitually acting on behalf of a non-resident may constitute a business connection.

“The SEP provisions are a clear response to global digitalization—tax authorities worldwide are seeking ways to capture value generated within their borders, even when the service provider is virtual or foreign,” notes Rahul Jain, tax partner at a prominent law firm.

Cross-Border E-commerce and Streaming

Online marketplaces, content streaming services, and global SaaS providers face Indian taxes on revenues linked to users or customers in India, even if all operations, servers, and teams are offshore. This shift is aligned with global discussions on ‘digital permanent establishment’ and is shaped by both domestic changes and international treaties.

Income by Way of Royalty and Technical Services

Intellectual property, technical know-how, and consultancy are central to modern businesses, and their cross-border use is a major revenue stream. Section 9(1)(vi) and 9(1)(vii) lay out when payments for royalties and technical services are deemed Indian income.

Royalty Provisions: Some Practical Scenarios

• An Indian manufacturing company licenses patented processes from a UK entity and pays royalties.
• An Indian IT firm subscribes to proprietary software hosted abroad.
• A media company pays for broadcasting rights sourced overseas.

Generally, if the payer is Indian, or if the payment is for use in India, the royalty is taxable in India. However, Double Taxation Avoidance Agreements (DTAAs) may override some clauses, lowering the applied rate or changing the definition.

Fees for Technical Services (FTS)

FTS covers a wide net: managerial, technical, or consultancy services. For instance, a US-based engineering firm designing parts for an Indian construction project will be taxed on its fees, even if the design works are performed outside India, so long as the service recipient is Indian.

Capital Gains: Offshore Transfers with Indian Nexus

The Vodafone case thrust Section 9’s global reach into the spotlight. In 2012, the Indian government clarified the law by stating that the transfer of shares or interests in a foreign entity will be taxable in India if the value is substantially derived from assets located within India.

Implications for Mergers, Acquisitions, and Startups

Startups often use overseas holding company structures to attract foreign investment. Section 9’s expanded capital gains provisions mean that if the Indian subsidiary represents the main value of the holding company, transfers or exits at the holding company level may trigger Indian capital gains tax.

• Safe Harbour Rules: Exemptions exist if the Indian assets are below a threshold.
• Reporting Requirements: Offshore deals with Indian connections must often be reported to Indian authorities.

Employment Income: Taxability for Global Workers

For salaried employees, Section 9 clarifies that salaries for services rendered in India are taxable, regardless of whether the employer is Indian and irrespective of where the salary is paid. This is particularly relevant for expatriates seconded to Indian projects or for foreign companies employing remote workers based in India.

Payroll Structuring and Typical Issues

Many multinationals have been scrutinized for payroll allocations, secondment, and “shadow payroll” systems. Structuring assignments to reflect the actual days of service in India and withholding appropriate taxes is crucial to remain compliant.

Section 9 and Double Taxation Avoidance Agreements (DTAAs)

India has signed over 90 DTAAs with other nations to avoid double taxation and prevent fiscal evasion. These treaties frequently modify the taxability envisioned under Section 9—lowering withholding rates, defining source rules differently, or completely exempting some incomes.

Key Takeaways on DTAA Interaction

• DTAA prevails over domestic law if it’s more beneficial to the taxpayer.
• Taxpayers must provide residency and other documentation to claim treaty benefits.
• Courts have repeatedly emphasized substance-over-form: mere structuring to exploit tax treaties without genuine commercial purpose may be disregarded by authorities.

Recent Amendments and Noteworthy Judicial Decisions

The Indian government continues updating Section 9 to address new forms of commerce and tax avoidance strategies. Introduction of SEP provisions, clarifications for indirect transfers, and anti-abuse rules have all widened Section 9’s ambit. Indian courts frequently interpret Section 9 in the context of rapidly evolving business environments, setting new precedents affecting domestic and international taxpayers.

Even as legal battles continue, the direction is clear: as business models become more global and digital, India’s approach to ‘source-based taxation’ is likely to keep evolving.

Conclusion: Navigating Section 9 In Practice

Section 9 of the Income Tax Act functions as a cornerstone of India’s tax system for cross-border income. Its provisions touch nearly every aspect of international transactions, from digital services and intellectual property to capital gains and payrolls. For businesses, investors, and professionals operating across Indian borders, understanding the intricacies of Section 9 is essential for compliance, effective tax planning, and minimizing legal disputes.

Moving forward, aligning contracts, transaction structures, and documentation with both Section 9 and applicable DTAAs remains the most prudent approach.

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FAQs

What types of income are covered under Section 9 of the Income Tax Act?
Section 9 covers income from business connections, property in India, capital gains from Indian assets, salaries for services in India, interest, royalties, and fees for technical services with an Indian nexus.

How does Section 9 affect foreign companies operating in India?
Foreign companies are taxed in India on incomes deemed to accrue or arise in India—even without physical presence—if they have business connections, significant economic presence, or receive payments for royalties or technical services from Indian sources.

Can Double Taxation Avoidance Agreements (DTAAs) override Section 9?
Yes, if an applicable DTAA provides more favorable treatment, such as reduced tax rates or different definitions, taxpayers may claim those benefits over the domestic provisions of Section 9.

What impact did the Vodafone case have on Section 9?
The Vodafone case highlighted Section 9’s application to indirect transfers; subsequent legislative clarification ensured that offshore transactions involving Indian assets can trigger Indian capital gains tax.

Is salary paid abroad for work done in India taxable under Section 9?
Yes, salary for services rendered in India is deemed to accrue in India, regardless of whether the employer is foreign or the payment is made outside India.

What should businesses do to ensure compliance with Section 9?
Businesses should carefully analyze cross-border transactions, maintain robust documentation, factor in DTAAs, and seek professional advice to optimize structures and remain compliant with evolving regulations.