The scope of Total Income is determined under Section 5 of the income Tax Act, 1961. It varies according to the Residential status of the assessee under the three recognized categories section 6 namely
Resident and ordinarily resident,
Resident but not ordinarily resident and
As per Section 5 the ‘Scope of Total income’ for the three categories of Residents contains within its ambit, ‘Income deemed to accrue or arise in India’.  Therefore it can be inferred that Section 9 which deals with ‘Income deemed to accrue or arise in India’ applies to all categories of Residents irrespective of their Residential status.
Section 9 serves the sole purpose of including within the tax net certain incomes which under normal circumstances would not be taxed by the Department. It employs a deeming provision whereby through a fiction of law; tax can be levied on certain Incomes of residents / non residents which may be deemed to accrue or arise in India. It includes within its ambit, Income of residents that accrue or arise outside India as well as incomes of non residents that accrue or arise in India. The constitutionality of Section 9 was tested and upheld in numerous cases. 
A contentious aspect falling in Section 9 is the meaning of Business Connection. Business Connection is not defined under the Income tax Act. Several courts have identified different parameters to establish business Connection under different circumstances. A consolidated framework to test the existence of Business connection has been developed through case law.
Income deemed to accrue or arise in India has different categories of Incomes within its ambit. They are as follows:
Any income accruing or arising to an assessee in any place outside india whether directly or indirectly
(a) through or from any business connection in India,
(b) through or from any property in India,
(c) through or from any asset or source of income in India
(d) through the transfer of any capital asset in India.
2) Income which falls under the head “Salaries”; if it is earned in India.
3) Income from “Salaries” which is payable by Government to a citizen of India for services rendered outside India.
4) Dividend by an Indian Company outside India
7) Fees for technical Services 
In order to fully understand the application of the Section an examination of its legislative history becomes pertinent. Section 9 Provisions relating to ‘Income deemed to accrue or arise in India’ were present in different places in the 1922 Act. It was later grouped together under Section 9 of the 1961 Act, ever since Section 9 has been subjected to numerous changes by the yearly enacted Finance Acts.  Section 9 as it reads now is the result of some significant legislative amendments by the Finance Acts. Some of them are reiterated below:
By the Finance Act, 1976, the fourth limb of section 9(1) (i), namely “or through or from any money lent at interest and brought into India in cash or kind” was omitted with effect from June 1, 1976. And by the same Act clauses (v), (vi) and (vii) were inserted. The abovementioned entries viz., Interest, Royalty and Fees for technical Service have their conceptual basis on the ‘Source Rule’.  Recently there have been many debates relating to the scope and ambit of the Income under the abovementioned heads. The confusion arose due to the judgment in Ishikawajima- Harima Heavy Industries  and the cases that followed, however the latest bill of 2010 seeks to put to rest such predicaments. The later chapters will deal exclusively with this issue.
By the Finance Act, 1983 vide section 4 two amendments were made to section 9(1) of the 1961 Act.
Firstly, a new clause (c) was added after clause (b) of the Explanation to Section 9(1) (i). It basically stated that in the case of a non resident engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India to him through or from activities confined to collection of news and views in India for transmission out of India. 
Secondly the Finance Act of 1983 also made an inclusion under section 9(1) (ii). This was a clarificatory amendment that came about as a result of the judgment in CIT v. S.G Pgnatale  . To supersede the judgment, the Finance Act of 1983 amendment stated that income chargeable under the head “Salaries” payable for service rendered in India will be regarded as income earned in India. 
It can be discerned that Section 9 being a deeming provision is rather positivistic in nature and it has been subject to changes in order to further enhance the policies of the Legislature that are in conflict with stand adopted by the Courts.
Chapter I: Examine the nature of income brought within the tax ambit under Section 9 (1) (i), (ii), (iii) and (iv) of the Income tax Act 1961
Income deemed to accrue or arise in India is covered under Section 9 of the Income tax Act of 1961. The words ‘accrue’ and ‘arise’ must be viewed in contradistinction to the word “receive”. Income is said to be received when it reaches the assessee; on the other hand when the right to receive the income becomes vested in the assessee it is said to accrue or arise.
Section 9 encompasses all incomes that shall be deemed to accrue or arise in India and it consists of all income accruing or arising, whether directly or indirectly,
through or from any business connection in India
Explanation 1 to the above provision seeks to bring only such Income as deemed to be accrued or arise in India that is reasonably attributable to operations that are carried out in India.  Business Connection is not defined under the Income Tax Act, 1961 and recourse must be taken to the definitions attributed by the Courts. There was much confusion and uncertainty as to what was meant by Business Connection. Business Connection had to be established based on the factual matrix of each case. The Courts progressively started identifying certain parameters to establish business connection in India in different cases. The most important cases being CIT v. R.D. Aggarwal  and Barendra Prasad Roy v. ITO  Principles have also been laid down in G.V.K. Industries Ltd. v. ITO  Subsequently in an effort to provide guidance to determine the existence of Business Connection, Explanation 2 was appended to Section 9(1)(i) by the Finance Act of 2003 w.e.f. 1/4/2004 by which Business Connection was to include any business carried out through a person who, acting on or behalf of the non resident,
has and habitually exercises in India, authority to conclude contracts on behalf of the non resident, provided that such authority is not limited to purchase of goods or merchandise for the non resident.
In the event that he has no such authority but if he habitually maintains in India stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non resident a business connection is established.
A business connection is also established where he habitually secures orders in India mainly or wholly for the non resident. Such is the case even when non residents are controlled by non residents. 
The proviso categorically states that such business connection shall not include any activity carried out through a broker, general commission agent or any other agent having an independent status.  However this comes with a rider contained in the following proviso which states that where any of the abovementioned persons (broker, general commission agent, or any other agent) works wholly or partly for a non resident (hereinafter referred to as the principal non resident) or on behalf of non resident(s)) controlled by the principal non resident or having a controlling interest in the principal non resident or are subject to the same control as the principal non resident, he shall not be considered to have an independent status. 
Through or from any property / any asset or source of income in India
‘Property’ in the above clause has been given a wide import. It includes (movable, immovable, tangible and intangible property). Therefore any income accruing even to a non resident from rent paid outside India for the use of machinery or buildings situated in India shall be deemed to accrue or arise in India by virtue of this clause.
Through the transfer of a capital asset situated in India
Any capital gain within the meaning of Section 45 of the Act by the transfer of a capital asset situated in India, is deemed to accrue or arise in India.
(II) As per Section 9 (1) (ii) Income under Salaries, can be taxed, if it is earned in India.
This clause has been supplemented with an explanation inserted by the Finance Act 1976 as already stated in the introductory segment whereby it has been reiterated that the income of the nature referred to in this clause is payable for
Service rendered in India
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.
This insertion was to clarify the position after the verdict proclaimed in CIT v. S.G. Pgnatale 
(III) As per Section 9 (1) (iii) Income chargeable under the head “Salaries” is payable by the Government to a citizen of India for service outside India. However there is an exception under Section 9 (2) by which any pension payable outside India by the Government to its officials and judges who permanently reside outside India shall not be deemed to accrue or arise in India. 
Section 9 also includes within its ambit income by way of dividend paid by an Indian Company outside India. All dividends paid by an Indian Company are sought to be taxed by this provision. However Dividends mentioned in section 115- O are exempt from tax in the hands of the shareholder. 
Chapter ii : Income sought to be taxed under Section 9(v), (vi) and (vii) of the Income tax Act, 1961 by employing the Source Rule
Section 9 (v), (vi), and (vii) were inserted by the Finance Act, 1976. Through the abovementioned clauses, income is sought to be taxed by employing the ‘Source Rule’. The different types of Income falling within this ambit are
Fees for technical services
The taxability of Income for the abovementioned heads varies according to the Source of Income. The Source of Income for the abovementioned incomes can be classified under three broad heads as recognized by the Section. They are as follows:
By the Government
A person who is a resident
A person who is a non resident
By the Government:
Any form of Income in the form of Interest, Royalty or Fees for technical services are deemed to be income that accrue or arise in India and can be taxed.
By a person who is a resident: In case of a person who is a resident an exclusive definition is employed. Except where the Interest/ Royalty  / Fees for technical Service  is payable (in respect of any debt, or moneys borrowed/ in respect of any right, property or information used or services utilized, respectively) and is used for the purposes of a business or profession outside India or for the purposes of making or earning any income from any source outside India, the income will be deemed to accrue or arise in India. The nature of the definition is broad and it only excludes income used for business or profession outside India clearly showing the intention to bring within the tax net all income used in India, in keeping with the Source Rule.
By a person who is a non resident: In case of a person who is a non resident, the scope of income falling within the tax net is restricted due to the application of the Source Rule. It only includes such income where the interest/ royalty/ fees for technical services is payable (in respect of any debt, or moneys borrowed/ in respect of any right, property or information used or services utilized, respectively) for the purposes of a business or profession outside India or for the purposes of making or earning any income from any source outside India.
The Act however prescribes certain exceptions in the case of income derived from Royalty (Section 9 (1) (vi)) and income derived as part of fees for technical services (Section 9 (1) (vii)).
The proviso to Section 9 (1) (vi) creates an exception for income by way of royalty which is obtained as consideration for the transfer of any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process or trademark or similar property, if such income is payable in pursuance of an agreement made before April 1st 1976 and the agreement is approved by the Government of India  . An agreement entered into post April 1st 1976 could also be considered as an agreement because of the presence of a deeming provision in Explanation 1 to Section 9(1) (vi), provided the agreement in consonance with requirements prescribed in the explanation to the said section. 
Income by way of fees for technical services for certain agreements entered into prior to April 1st 1976 shall be exempt. An agreement would be deemed to fall within this category if it is made on or after 1st April 1976 only if it is accordance with the proposals approved by the central Government on that date.
In addition to this, an exception is created for any income by way of Royalty for transfer of rights for any computer software supplied by a non resident manufacturer along with a computer/ computer based equipment provided that the scheme has been approved under the Policy on Computer Software Export, Software Development and training, 1986 of the Government of India 
Current position in relation to income by way of Royalty/ Fees for technical Services payable by a non resident
The Judgment in Ishikawajima- Harina Heavy Industries  opened a Pandora’s box with respect to interpretation of income deemed to accrue or arise in India by way of fees for technical services payable by a non resident. It was decided by a bench comprising of Sinha S.B. J and Dalveer Bhandari J. The factual matrix of the case is as follows Ishikawajima A Japanese Company along with other members of the consortium entered into a contract with Petronet LNG Ltd. for setting up a liquefied natural gas facility at Dahej in the State of Gujarat. It was a turnkey project involving 1) offshore supply 2) Offshore services 3) Onshore supply and 4) Onshore Services and 5) Construction and erection. There was no dispute relating to the taxability of onshore supplies, however dispute arose in relation to taxability of off shore supplies. Question that arose was whether the fees for technical services would fall within the tax net under Section 9(1) (vii) of the Income tax Act, 1961. The Revenue contended that the contract was a composite contract, executable on a turn-key basis and was non severable (the onshore activities are not severable from the off shore activities) and therefore the fees for technical services would fall within the tax ambit in India. The Company contended that on the basis of the contract onshore services were considered distinct from off shore services and the same could be severable (payment was demarcated as per the contract), the apportion clause of Section 9(1) would be applicable and income attributable to fees for technical services could not be taxed in India. The court while subscribing to the view of the Company held that there was consensus ad idem between the parties as to the two activities being distinct from each other. Secondly, the Court also held that if the contention was upheld then there would be a situation wherein Income arising out of operation in more than one jurisdiction would have territorial nexus with each of the jurisdiction on actual basis. Stating that if that was the case, it may not be correct to contend that the entire income ‘accrues or arises’ in each of the jurisdiction. The Court held that such a situation was not envisaged under Indian tax law system. The Court, while adopting a conjoint reading of section 5(2)  and section 9(1); along with the terms of the contract (showing an intention to create distinct obligations for off shore and on shore obligations) were of the opinion that interpretation with respect to nexus to tax territories will assume significance.
The court held that the income by way of fees for technical services by a non resident will not necessarily fall within the purview of Section 9(1)(vii). To substantiate this position the Court took assistance from section 9(1)(i) which states that all income accruing or arising, whether 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 in India.  Apart from that the Court by adopting a plain sense understanding of Section 9(1) (vii)  went on to hold that the fees for technical services payable by a non resident could only be taxed if two essential conditions are fulfilled namely;
Services have to be rendered in India
Services have to be utilized in India
This was despite the word “rendered” not being mentioned anywhere in the definition. The Court applied the principle of apportionment and held that fees for technical services for off shore services could not be taxed as there was no evidence to show that it was being utilized in India.
The Court did not employ the Source Rule embedded in Section 9(v), (vi) and (vii) but instead categorically nullified the rule by stating that the location of the Source of Income within India would not render sufficient income to tax that source.
This judgment was criticized by the Authority for Advanced Ruling in Worley Parsons Services Pvt. Ltd.  on the ground that the Court had interpreted Section 9(1) (vii)© instead of Section 9(1)(vii)(b)
As has been observed on past occasions the legislature, to supercede this judge made law inserted an Explanation to Section 9 by the Finance Act, 2007 w.e.f. 1/06/1976, however the ill drafted amendment did not fulfill the desired objective of clarifying the position in relation to section 9(1) (vii) and as a result the Ishikawajima Harina was made good law by the Bombay High Court decision in Clifford Chance  and the Karnataka High Court decision in Jindal Thermal Power Company 
The Finance Bill of 2010 seeks to put to rest all confusion regarding the current position by replacing the existing Explanation under section 9(1)(vii) inserted by the Finance Act of 2007 with the following explanation
“Explanation – For the removal of doubts, it is hereby declared that for the purpose of this section, income of a non resident shall be deemed to acrrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub section (1) and shall be included in the total income of the non resident, whether or not.-
The non resident has a residence or place of business or business connection in India
The non resident has rendered services in India” 
The above explanation has clearly done away with the territorial nexus principle and added more weight age to the Source Rule. Secondly the word ‘rendered’, included by the Courts has been removed.
The Finance Act of 1976 by which clauses (v), (vi) and (vii) were appended to Section 9(1) clearly employed the Source Rule to include income within the tax net. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India.
In view of this, the interpretation of the Court that in respect of income of resident by way of fees for technical services being taxed only if a territorial nexus is established seems like a departure from the intention of the framers of the legislation. Secondly the researcher believes that the Court erred in reading in Section 9(1) (i) while interpreting Section 9(1)(vii)(c) in order to justify territorial nexus as Section 9(1)(vii) is a special provision to determine income deemed to accrue or arise in India by way of fees for technical Services for a non resident as was explained in CIT v. Copes Vulcan Inc  . Thirdly a plain sense reading of Section 9(1) (vii)(c) would definitely indicate that as long as the income from a non resident by way of fees for technical services is utilized for any business or profession in India or for making or earning any source of income in India such income would be deemed to be accrued in India and would fall within the ambit of Section 9(1)(vii) (c) of the Income Tax Act, 1961.
An examination of the various legislative amendments to the sections of the Act in the form of addition of explanations and provisos is an indicator of the lack of clarity in the Act and the non uniformity in understanding of the law between the legislature and the judiciary. The Income tax Act, 1961 being a positivistic Act has witnessed constant overturning of judge made laws by the legislature, a disturbing trend.
Cite This Work
To export a reference to this article please select a referencing stye below:
Related ServicesView all
DMCA / Removal Request
If you are the original writer of this essay and no longer wish to have your work published on LawTeacher.net then please: