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INCOME TAX ACT -1961 DEFINED SECTION 9 AS FOLLOWS-
INCOME TAX ACT -1961 DEFINED SECTION 9 AS FOLLOWS-
Section 9 enumerates various categories of income which shall be deemed to accrue or arise in India under certain circumstances. The income dealt with in each clause is distinct and independent of the other. It may be noted that in case of specific class of income one must look at the specific clause and not to general provisions of clause (i). [Meteor Satellite Ltd. v ITO 121 ITR 311 (Guj) and CIT v Copes Vulcan Inc. 167 ITR 884 (Mad)]
It may be noted that Rule 10 of Income Tax Rules provides that, in the case where the income accruing or arising to a non resident can not be definitely ascertained, the Assessing officer can determine the income either at such percentage of the turnover / profits and gains of the business or such other manner as he may deem suitable.
BUSINESS CONNECTION AND OTHERS - SECTION 9(1)(i)
Section 9(1)(i) provides that income is deemed to accrue or arise in India if it accrues, directly or indirectly
- through or from any business connection in India or
- through or from any property in India or
- through or from any asset or source of income in India or
- through the transfer of a capital asset situate in India
Explanation to section 9(1)(i) provides for following exemptions.
- In the case of business of which all the operations are not carried out in India, only such part of the income as is reasonably attributable to the operations carried out in India would be the income deemed to accrue or arise in India.
- No income shall be taxable in India if the operations of the non-resident is confined to the purchase of goods in India for the purpose of export
- In case of non-resident engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be taxable in India if the activities confined to the collection of news and views in India for transmission out of India
- In case of non-resident no income shall be taxable in India if the operations are confined to the shooting of any cinematograph film in India.
The deeming provisions of section 9 is careful to describe the connection or the nexus between such income and India. The nexus is either
- business connection in India or
- the property in India or
- asset or source in India or
- capital asset in India
Business Connection :
The expression "business" is defined in the Act as any trade, commerce, manufacture or any adventure or concern in the nature of trade, commerce or manufacture, but the Act contains no definition of the expression "business connection". The expression "business connection" undoubtedly means something more than "business". A business connection in section 9 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. It predicates an element of continuity between the business of the non resident and the activity in the taxable territories. An isolated transaction is
normally not to be regarded as a business connection. A relation to be a "business connection" must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non resident. [CIT v R.D.Aggarwal & Co. and others 56 ITR 20 (SC) and Barendra Prasad Roy v ITO 129 ITR 295 (SC)]. Various courts have taken different views in different cases where "business connection" was found to exit or otherwise. CBDT vide its circular no. 23 dated 23/7/1969 have clarify by way of certain illustrations where a non resident is said to have business connection in India. From the reading of all these judgements and circular one could conclude that for a relation to be a business connection following conditions are needs to be satisfied :
- a business in India
- a connection between non resident and that business
- a non resident has earned an income through such connection
- continuity about the business connection
However, in each case the question whether there is a business connection from or through which income arises or accrues must be determined upon the facts and circumstances of that case. [Blue Star Engg. Co. (Bom.) P. Ltd. v CIT 73 ITR 283 (Bom.)]
It may be noted that Supreme Court in case of Carborandum Co. v CIT reported in 108 ITR 335 has taken a view that in order to rope in the income of a non resident under the deeming provision it must be shown by the department that some of the operations were carried out in India in respect of which the income is sought to be assessed. Taking in to consideration the decision of the apex court it can be said that onus of proof is on revenue to show that the operations were carried out in India.
For income accruing or arising from any business connection in India even though the income may accrue or arise outside India is deemed to be income accruing or arising in India provided operations in connection with such business, either all or a part, are carried out in India. Income attributable to all activities is not taxed in India. Only that income which is attributable to activities in India will be taxable. If no operation are carried out in India, no income can be deemed to accrue or arise in India even though there may be a "business connection" in India [CIT v Toshoku Ltd. 125 ITR 525 (SC)].
Property in India :
Any income which arises from any property which is situated in India is deemed to accrue or arise in India. The term property includes any tangible property both movable or immovable. Intangible assets are covered within the term "asset".
Asset or source in India :
The term asset will include all intangible rights, unlike property which covers only tangible properties. The term source means not a legal concept but something which a practical man would regard as a real source of income. [CIT v Lady Kanchanbai 77 ITR 123 (SC)]. Bombay high court in case of Kusumben D. Mahadevia v CIT reported in 47 ITR 214 have observed that the expression source in section 9(1)(i) and the expression "head of income" in section 14 are used in one and the same sense and it means property, movable or immovable, belonging to an assessee or activity of a assessee that yields or brings income to him within the meaning of the Act. This clause is wide enough to cover the income accruing to non resident from undisclosed sources. [Hazoora Singh v CIT 160 ITR 746 (Punj. & Har.)]
Capital Asset in India :
Income accruing or arising, directly or indirectly through the transfer of capital asset is deemed to accrue or arise in India provided such capital asset is situated in India. The capital asset may be movable or immovable, tangible or intangible. Such income should be chargeable under the head "Capital Gain" under section 45 of the Act. The fact that the documents of transfer are registered outside India or consideration for transfer is paid outside India is irrelevant for income to be chargeable under this clause.
SALARIES - SECTION 9(1)(ii) and 9(1)(iii)
Section 9 (1)(ii) of the Act requires that salaries is to be considered as deemed to be accrued or arise in India only if it is "earned in India". Further, to done away with the decisions of Gujarat High Court in case of CIT v S.G.Pgnatale reported in 124 ITR 391, it has been clarified by way of explanation to sub section that salary payable for "service rendered in India" and the rest period or leave period which is preceded and succeeded by services rendered in India and forms part of the service contract of employment shall be regarded as income earned in India. Although this explanation has been inserted with retrospective effect from 1/4/1979,it can be argued that as the Explanation specifically makes the aforesaid provision "for the removal of doubts", it should be taken to reflect the true legislative intention in regard to the relevant provisions from the commencement of the Income Tax Act, 1961. In view of the above, salaries payable for services rendered in India shall be regarded as income earned in India, though it may be paid in India or outside. i.e. the payment or receipt of salary is immaterial. What is important is the place of rendering of services. Section 9(2) makes an exception to the aforesaid rule in the case of certain retired civil servants and judges permanently residing out side India.
Section 9(1)(iii) provides that the salaries are chargeable to tax if the same is payable by the Government to a Indian Citizen for services rendered outside India. The residential status and the place of receipt of salary are not relevant for the purpose of this sub section. For income to be treated as deemed to accrue or arise in India following four conditions needs to be satisfied :
- Income should be chargeable under the head "Salaries"
- Salary should be payable by Government of India
- The recipient should be an Indian Citizen, irrespective of their residential status
- The services should be rendered out side India
It is important to note that all allowances or perquisites paid out side India by the Government to the Indian Citizens for their rendering services out side India are exempt under section 10(7).
DIVIDEND INCOME - SECTION 9(1)(iv)
Dividend paid by an Indian Company outside India is deemed to accrue or arise in India by virtue of the provisions of section 9(1)(iv). Therefore, any dividend paid by an Indian Company shall be chargeable to tax in India irrespective of the residential status of the assessee. Similarly, dividend from a foreign company paid in India shall be taxable in India on receipt basis as income is received in India. The place of accrual of dividend should be decided on the basis of the place of registered office of the company. The place of declaration or payment of such dividend is immaterial.
INTEREST - SECTION 9(1)(v)
Section 9(1)(v) provides that income by way of a interest is deemed to accrue or arise in India in case of interest is payable by
- the Government both Central or State
- resident person except where the interest pertains to any debt incurred or moneys borrowed and used for the purposes of business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India
- a non resident where interest pertains to any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on by such person in India
It should be noted that the words "or for the purpose of making or earning income from any source in India" as mentioned in clause (b) are not there in clause (c). By virtue of that interest payable by a non resident in respect of any debt incurred or money borrowed and used for a purpose other than business or profession carried on in India, the interest income is not deemed to accrue or arise in India under this clause. It has been clarified by CBDT vide its circular dated 5/7/1976 that if a lead bank obtains loans outside India from a consortium of foreign banks and lends the same to an Indian concern, interest paid by the lead bank to the members of the consortium will not attract liability towards income tax in India.
The term interest as defined in section 2(28A) of the Act is very wide and covers interest payable in any manner in respect of loans, debts, deposits, claims and other similar rights or obligations and includes any service fee or other charge in respect such loans, debts, deposits etc. While the term debt has been explained by Bombay High Court in case of CWT v Standard Mills Co. Ltd. 50 ITR 267, to include an existing obligation to pay an ascertained sum of money as well as existing obligation to pay money, though the amount may not have been yet ascertained. The views has been affirmed on appeal to the Supreme Court reported in 63 ITR 470. Similar views has been taken in case of Kesoram Industries and Cotton Mills Ltd. V CWT 59 ITR 767 (SC), Bhagwandas Jain v CWT 116 ITR 347 (MP), CWT v Dina Nath 136 ITR 499 (All). However, the decision of the Rajkot Bench in case of Vijay Ship Breaking Corporation v DCIT 76 TTJ 169 has made the issue interesting, by taking a view that interest amount on L.C., though separately mentioned in the MOA and though described as "interest", it partakes the character of the purchase price for the buyer and should be treated as part of purchase price.
ROYALTY - SECTION 9(1)(vi)
Section 9(1)(vi) provides that royalty income is deemed to accrue or arise in India in case it is payable by
- the Government both Central or State
- resident person except where the royalty pertains to any right, property or information used or services utilised for the purposes of business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India
- a non resident where royalty pertains to any right, property or information used or services utilised for the purposes of business or profession carried on by such person in India or for the purpose of making or earning any income from any source in India
For the purpose of this clause Explanation 2 to section 9(1)(vi) defines the term "royalty". This definition is very wide. It covers both industrial royalties as well as copyright royalties. However, it specifically excludes income which would be chargeable under the head "Capital Gains". Broadly speaking royalty income consisting of lumpsum consideration for the transfer outside India of, or the imparting of any information outside India in respect of any data, documentation, drawings or specification relating to any patent, invention, model, design, secret formula or process or trade mark or similar property or chargeable to tax in India under this clause.
However, as a result of insertion of the provisos to section 9(1)(vi), under two cases income shall not be deemed to accrue or arise in India. First proviso states that lumpsum payments received under certain approved agreements made before 1/4/1976 will not be deemed to accrue or arise in India if conditions specified in Explanation 1 to section 9(1)(vi) have been satisfied. As decided in case of Meteor Satellite Ltd. v ITO 121 ITR 311 (Guj) even if the approval of the Central Government is accorded on or after 1/4/1976 will not necessarily take the case out of the protection of this proviso. While second proviso states that so much of the income by way of royalty as consists of lumpsum payment made by a person who is a resident for the transfer of all or any rights (including the granting of a license) in respect of computer software supplied by a non resident manufacturer along with a computer or computer based equipment under approved scheme shall not be deemed to accrue or arise in India. Explanation 3 to section 9(1)(vi) defines the term "computer software".
FEES FOR TECHNICAL SERVICES - SECTION 9(1)(vii)
Section 9(1)(vii) provides that fees for technical services is deemed to accrue or arise in India in case it is payable by
- the Government both Central or State
- resident person except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India
- a non resident where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purpose of making or earning any income from any source in India
For the purpose of this clause the term "Fees for technical services" has been defined in Explanation 2 to section 9(1)(vii) to mean any consideration (including any lumpsum consideration) for the rendering of managerial, technical or consultancy services, including the provision of services of technical or other personnel. It does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".
The proviso to section 9(1)(vii) saves from the operation of deeming provisions contained in the said section. Fees for technical services payable in pursuance of an agreement made before 1/4/1976 and approved by the Central Government shall not be deemed to accrue or arise in India. Further Explanation 1 to section 9(1)(vii) provides that an agreement made on or after 1/4/1976 shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Having regard to the language used in section 9(1)(vii), the income by way of fees for technical services arising out of even a business connection should be taken to have been covered by section 9(1)(vii) and not by section 9(1)(i), section 9(1)(vii) being a special provision for that type of income. [CIT v Copes Vulcan Inc. 167 ITR 884 (Mad)]
On the interpretation of the provisions of section 9(1)(vi) and 9(1)(vii) it may be noted that the section provides for services utilised and not the place of rendering of services. Therefore, in both the clauses if the information is used or services are utilised in India will be chargeable to tax irrespective of the fact that information or services are rendered outside India or some preparatory work has been done outside India or patent etc. have been delivered outside India.
CONCLUDING REMARKS
Supreme Court in case of CIT v Ahmedbhai Umarbhai & Co. 18 ITR 472 has held that the provisions of section 9 applies to all the assessee irrespective of their residential status, nationality, domicile and place of business. Taking in to consideration the decision of the Apex Court the question arose is whether the provisions of Double Taxation Avoidance Agreement (DTAA) prevail over section 9. In case of CIT v Visakhapatnam Port Trust 144 ITR 146 Andhra Pradesh High Court has taken a view that "Though under section 9 (1)(i) of the Act, all income arising, whether directly or indirectly, through or from any "business connection" in India or other income mentioned in that section shall be deemed to accrue or arise in India, the charging section 4 as well as the definition of "total income" in section 5 are expressly made subject to the provisions of the Act, which means that they are subject to the provisions of section 90. By necessary implication it is subject to the terms of the DTAA, if any, entered in to by the Government of India with foreign countries. Even assuming that all the profits of a foreign company are to be deemed to accrue or arise in India under section 9 of the Act, the provisions of the articles of DTAA will prevail over section 9. In effect, such profits of a foreign company will not be liable to tax under section 9 except to the extent allowed by the DTAA with the foreign country." A similar view was taken by the House of Lords in Ostine (Inspector of Taxes) v Australian Mutual Provident Society 39 ITR 210 where it was
held that if there is a conflict between the terms of the agreement and the taxation statute, the agreement alone would prevail. The issue is further explained by the CBDT vide its circular no. 333 dated 2/4/1982 where it was observed that "The correct legal position is that, where a specific provision is made in the DTAA, that provisions will prevail over the general provisions contained in the Income Tax Act. Thus, where a DTAA provides for a particular mode of computation of Income, the same should be followed, irrespective of the provisions in the Income Tax Act." This principle has been accepted in a series of decisions. In view of the above it can be said that provisions of DTAA would prevail over section 9 unless the statutory provision is more beneficial to the assessee and, therefore, the conclusion about the chargeability of income under section 9 of the Act is to be made after taking in to considerations the overriding impact of various provisions of DTAA with the concern country.
BY-MEHUL.F.SHAH, FCA
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