Section 9 of Income Tax Act 1961

SECTION 9 : INCOME DEEMED TO

ACCRUE OR ARISE IN INDIA
1)(i) Business Income, Professional Income, House
Property Income,
Capital Gains, Income from Other Sources
1)(ii) Any salary income, if it is earned in India

(1)(iii) Any salary payable by the Government to an

Indian citizen for
service outside India

1)(iv) Dividend paid by an Indian company outside

India
1)(v) Interest payable by Government, resident or
non-resident
1)(vi) Royalty payable by Government, resident or
non-resident
1)(vii). Fees for technical services payable by
Government, resident or
Section – 9 (1)(i)

 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).
 Any Business connection in India
 Any Property in India
 Any Asset or source of income in India
 Transfer of a Capital asset situate in India whether directly or
indirectly
 It has seven explanations
 Payments to Foreign Commission Agents
(u/S.9(1)(i))

 CBDT Circular No.23 of 1969 dt 23.07.1969

 A foreign agent of Indian exporter operates in his own country and no
part of his income arises in India.
 His commission is usually remitted directly to him and is, therefore, not
received by him or on his behalf in India.
 Such an agent is not liable for income tax on this commission.
 CBDT Circular No.786 dated 07.02.2000
 The deduction of tax at source under s.195 would arise if the payment of
commission to the non-resident agent is chargeable to tax in India
 In this regard attention to CBDT Circular No. 23, dated 23rd July, 1969
is drawn. It had been clarified then that where the non-resident agent
operates outside the country no part of his income arises in India.
 Such payments were therefore, held to be not taxable in India.
Payments to Foreign Commission Agents
Case Laws
 CIT v Toshoku Ltd (125 ITR 525, SC) the Hon’ble Supreme Court
held that when a non-resident, with no operation of business in India,
rendered services outside India to an Indian concern , then provisions
of Section 9 of the I.T Act 1961 are not attracted.
 CIT vs. Eon Technology (P) Ltd – 343 ITR 366 wherein the Hon’ble
Delhi High Court has held that foreign commission agent payments do
not require tax withholding
 CIT vs. Sheraton International Inc ((2009) 313 ITR 267) where the
Delhi High Court has reversed the order of Tribunal by holding that
the main service rendered by the U.S Company to Indian company
was advertisement, publicity and sales promotion and these would
neither fall under the category of ‘Royalty’ nor ‘Fees for Technical
Service’
Payments to Foreign Commission Agents
Case Laws
 CIT vs Indopel Garments (P) Ltd. Vs DCIT (2001 72 TTJ Mad 702)
where ITAT Chennai held no disallowance under s. 40(a)(i) could be
made for commission payment to foreign concern without acting as a
selling agent of assessee for canvassing orders outside India
 DCIT vs. Ardeshi B. Cursetjee & Sons Ltd (2008 115 TTJ Mumbai
916) where ITAT Mumbai held commission payment made to non-
resident for services rendered outside India not being chargeable to tax
in India could not be disallowed under Section 40(a)(i)
 JCIT vs. George Williamson (Assam) Ltd. (2009 116 ITD 328) where
in the ITAT Guwahati Bench held that with respect to payment of
selling commission, brokerage and other related charges to non-resident
agents in respect of sale of tea outside India, no income had accrued or
arisen in India either under Section 5(2) or under Section 9 and
therefore no tax was deductible under Section 195.
Payments to Foreign Commission Agents
Case Laws
 TVS Motor Company vs. ACIT (ITA Nos.697 &757/Mds/2009)
where the ITAT Chennai in an order dated 22nd December 2010,
amongst other issues, has affirmed that export commission payments
made to non-resident agents will not be liable to tax deduction at
source and disallowance u/s 40(a)(i) is to be deleted

 DCIT vs. Sanjiv Gupta (2011 135 TTJ Lucknow 641) where the
ITAT Lucknow had held that disallowance under Section 40(a)(i) for
the A.Y 2007-08 on the commission payments made to non-residents
was not called for as the withdrawal of Circulars 23 of 1969 and
786 of 2000 by Circular 7 of 2009 dated 22-10-2009 was only
operative from the date of issue of Circular 7 and did not have
retrospective effect
Explanations of Section 9
 Operations confined to collection of news and views in India for
transmission out of India by or on behalf of non-resident, who is
engaged in the business of running news agency or of publishing
newspaper or magazines or journals;
 Operations confined to the shooting of cinematograph film in India,
where such non-resident
 Dependent Agent Vs. Independent Agent
 Any income through the transfer of a capital asset situate in India
 CBDT Circular no. 4/2015 dt. 26.03.2015 clarifies that the
dividends declared and paid by a foreign company outside India in
respect of shares which derive their value substantially from assets
situated in India would not be deemed to be income accruing or
arising in India by virtue of the provisions of Explanation above.
Sec. 9(1)(ii) – Any salary income, if it
is earned in India
 Income which falls under the head “Salaries” shall be
regarded as income earned in India, if the income is
payable for:
i) Services rendered in India; and
ii) 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.
 However, Sec. 10(6) grants exemption in respect of salary
earned by foreign nationals under certain circumstances
and subject to certain conditions.
Sec. 9(1)(iii) – Any salary payable by the Government
to an Indian citizen for service outside India

 It 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
Sanofi Pasteur Holdings SA vs. Dept. of Revenue, GOI
(WP 1421 of 2010 dated 15-02-2013, Andhra HC)

 Two French companies named “Murieux Alliance” (‘MA’) and “Groupe

Industrial Marcel Dassault” (“GIMD”) held shares in another French
company named “ShanH”.
 MA & GIMD acquired shares in an Indian company named “Shantha
Biotechnics Ltd” (“Shantha”). The shares in Shantha were transferred to
ShanH.
 MA and GIMD subsequently sold the shares in ShanH to another French
company named “Sanofi Pasteur Holding”.
 The assessees filed an application for advance ruling claiming that as the
two French companies had sold the shares of another French company to
a third French company, the gains were not chargeable to tax in India.
 AAR upheld Dept.’s plea and on appeal AP High Court held in favour of
assessee that no capital gains was chargeable to tax in India under India-
France Treaty, even after Amendments to S.9(1)
Sec. 9(1)(iv) – Dividend paid by an Indian
INDIAN company outside India
 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.
 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.
 Dividend declared by a Domestic company is exempt
U/s.10(34)
Sec. 9(1)(v) – Interest
 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
Sec. 9(1)(v) – Interest payable by
government, resident or non-resident
 Explanation : for the purpose of clause (v) of section 9(1)
 (a) In case of a non-resident, being a person engaged in the
business of banking any interest payable by the Permanent
Establishment (PE) in India of such non-resident to
 The head office or
 Any permanent establishment or
 Any other part of such non-resident
 Outside India shall be deemed to accrue or arise in India and
Shall be chargeable to tax in addition to any income of the PE
 PE shall be deemed to be a separate and independent of non-
resident for
Sec. 9(1)(vi) – ROYALTY
General Meaning of Royalty -
 All these rights are valuable intellectual property rights
 This can be transferred by way of sale and purchase,
assignment, license or lease.
 Taxation of these rights needs to be analysed
 It has six explanations
Consideration may be in the form of

 - Lump sum
 - Proportionate
 - Progressive
 - Degressive
 - Based on Sales
 - Based on Profits
 - Based on Production
Payment for off-the-shelf software
 Tata Consultancy Services Vs. State of AP (271 ITR 401 SC)
• Issue was whether branded software amounts to “goods” (for sales
tax). The court held that the moment copies are made and
marketed, it becomes goods, which are susceptible to sales tax

 Motorola Vs. DCIT (2005) 96 TTJ Delhi 1 (SB)

• An important decision where software supplied was a copyrighted article and not a
copyright right the payment received by the assessee in respect of the software
cannot be considered as royalty either under the Income‐tax Act or the DTAA.

 Lucent Technologies Hindustan Ltd. Vs. ITO (120 TTJ (Del.) 929)
• Software was such that it was customized for each of the machines imported and
could not have been duplicated for commercial purpose. The contract also forbids the
assessee from copying the software. No copyright in the software could be said to
have accrued to assessee
Payment for off-the-shelf software
 CIT Vs. Samsung Electronics Co. Ltd. & Others (245 CTR (Kar)
481) where in Karnataka HC has upheld the view of the Revenue
Department that the payments for off- the-shelf software to non-
residents is Royalty and hence liable to withholding of taxes in India.
 Samsung(supra) is a controversial decision for both S.195(2) as well
as Royalty for payment to acquire software
 Overturned multiple decisions wherein the Tribunals and Courts have upheld the
distinction between ‘copyright’ and ‘copyrighted article’ and decided in favour
of the assessee saying payments made for shrink-wrapped licensed software not to
be characterized as Royalty
Payment for off-the-shelf software
(Samsung decision - Karnataka HC)
“Accordingly, we hold that right to make a copy of the software and use it
for internal business by making copy of the same and storing the same in the
hard disk of the designated computer and taking back up copy would itself
amount to copyright work under s. 14(1) of the Act and licence is granted to
use the software by making copies, which work, but for the licence granted
would have constituted infringement of copyright and licencee is in
possession of the legal copy of the software under the licence. Therefore,
the contention of the learned senior counsel appearing for the respondents
that there is no transfer of any part of copyright or copyright and transaction
only involves sale of copy of the copyright software cannot be accepted……”
Payment for off-the-shelf software
 The Delhi Tribunal in Gracemac Vs. ADIT 134 TTJ (Del) 257 held that
 The term ‘copyrighted article’ is not defined anywhere OECD
Commentary and would not be a correct guide for interpreting domestic
provisions
 TCS case (supra) was in context of sales tax
 The amended definition of Royalty in the domestic provisions of the Act
will override any Treaty definition (relied on Gramophone Company Vs.
V.B. Pandey (AIR 1984 SC 667))
 The Mumbai Tribunal in ADIT Vs. TII Team Telecom International (60
DTR 177) considered the Gracemac decision (supra) in detail and arrived at
a contrary conclusion stating that the software payments were not Royalty
Royalty
 Halliburton Export (2016) – Del HC:
 India-USA DTAA − Del HC followed its earlier decision in Infrasoft
(2014) and upheld distinction between copyrighted article payment for
which is not Royalty and payment for copyright which constitute
Royalty
− Domestic provisions not to be considered as DTAA is more beneficial
 Baan Global (2016) – Mum AT: India-Netherlands DTAA − Limited
right to operated copyrighted article is not Royalty − Right to modify
source code is for own internal computing operations − Domestic
amendments not relevant for DTAA applicability
 Capgemini Business (2016) – Mum AT: India-Singapore DTAA −
Making copy for protection of damage or loss cannot be said to be
transfer of copyright − Domestic amendments not relevant for DTAA
applicability
 PAYMENTS FOR ONLINE ACCESS TO DATABASE
Payment for online access to database
(SUBSCRIPTIONS)
(subscriptions, journals etc.)
• The key issue here is whether the payments received for the
subscription access to an online database, reports, journal, e-zine
etc. came under the ambit of Royalty and hence deemed to be
taxable in India.

• This issue has been consistently litigated in various Tribunals and

Courts with disparate results. Few decisions below:

 CIT Vs. HEG Ltd. (263 ITR 230 MP High Court) :

• Payment for a compilation of technical information (“Carbon
databank”) to a US company cannot be construed as Royalty.
• In order to withhold tax on payments for information received,
the information should have some special features and should
not merely be of a pure commercial nature.
 PAYMENTS FOR ONLINE ACCESS TO DATABASE
Payment for online access to database
(SUBSCRIPTIONS)
(subscriptions, journals etc.)
• Similar view was taken by Tribunal in :
• Gartner Ireland Ltd v. DDIT (ITA No. 452/Mum/08 )
• TIS Two Administration(Sing.) Pte Ltd. vs. DDIT (Mumbai
ITAT)
• Hughes Escort Communications Ltd. (HECL) vs. DCIT (21
taxmann.com 171)
• Another well-considered decision was Wipro Ltd. Vs. ITO [2004]
278 ITR 57 (Bang. ITAT) which held that annual subscription for
providing access to database through the web by US company is not
information or advice given individually and cannot be considered
as Royalty.
 PAYMENTS FOR ONLINE ACCESS TO DATABASE
Payment for online access to database
(SUBSCRIPTIONS)
(subscriptions, journals etc.)
• However post-Samsung decision, the Karnataka High
Court in Wipro’s case (203 Taxmann 621) reversed
decision of ITAT and held:
• Though subscription access to journal may seem
different from software licence, it is in fact nothing
but a licence to use ('right to use') the journal and it
will come under S.9(1)(vi) of Act!
• Note also decision of the AAR in Cargo Community
Network Pte Ltd (289 ITR 355 AAR) held that
payments for online access to travel portal is Royalty
 Fees for use of satellite – Whether royalty?

• The key issue is whether the payments received for the use of
satellite were taxable as royalty under Section 9(1)(vi) .

• Explanation 2 Clauses (iii), (iv) and (iva) have all been

variously used to fight over this issue;

• The main questions to be answered are:

• Whether the use of the satellite is a “process”?

• Whether the use of a satellite transponder for uplinking and

downlinking is a use of (or right to use of) commercial,
industrial or scientific equipment.
 Fees for use of satellite – Whether royalty?

• Asia Satellite (85 ITD 478 Delhi ITAT) :

• Receipts were taxable as Royalty having been paid in

respect of a “process” as envisaged in Section 9(1)(vi)(iii).

• This decision was also applied in ACIT Vs. Sanskar Info.

TVP Ltd. (24 SOT 87 Mumbai ITAT)
• However, in DCIT Vs. PanAmSat International Systems Inc.
(9 SOT 100) it was held that :
• The term “royalty” in Art. 12 of the India-USA DTAA has a
‘comma’ after the words “secret formula or process”!
• it was only a ‘secret process’ which would qualify as
royalty and not what was provided by the assessee.
 Fees for use of satellite – Whether royalty?
• The Delhi Special Bench in New Skies Satellite N.V. Vs. ADIT (319
ITR 269) was constituted to resolve the conflict and held reversing the
PanAmSat decision (supra) that :

• The transponder provision through which uplink and downlink

happens in the desired area is a “process”

• To constitute “royalty”, it is not necessary that the process should

be a “secret process”.

• The fact there is a ‘comma’ after the words “secret formula or

process” in the DTAA does not mean that a different interpretation
has to be given to the DTAA as compared to Act

• To be Royalty it is not necessary that the instruments through

which the process is carried on should be in the possession of the
payer.
 Fees for use of satellite – Whether royalty?
 Subsequently, the Delhi High Court in Asia Satellite Telecommunications Co. Vs.
DIT (332 ITR 340) has held that :
• NO income is deemed to accrue in India from use of satellite outside
India to beam TV signals into India even if bulk of revenue arises due to
viewers in India
• The satellite was used by the assessee for providing services to its customers
• There is a well known distinction between “lease of equipment” and
“use of equipment” (ISRO Satellite Centre vs. DIT (307 ITR 59 (AAR))
• The transponder was in orbit and merely because its footprint was on India did
not mean that the “process” had taken place in India
• OECD and Klaus Vogel commentaries stating that the use of a satellite is a service
and not a rental cannot be discarded because the technical terms in the DTAA are
the same as that in s. 9(1)(vi) 
 Payment for leased line/ connectivity charges
• The key issue here is regarding the payment for dedicated internet connectivity
typically via ‘leased line’ or dedicated circuits or VSAT
(via uplink/downlink) by a non-resident telecom provider.
• Similar to the issue surrounding lease of transponder as the question is
whether there is a use of process and/or use of scientific, commercial or
industrial equipment.
 Moreover, in this issue there is significant overlap between the FTS and Royalty
issues because the Revenue’s contention has been two-fold –

 That there is a technical service provided by the telecom provider to the

assessee (AND)

 That payment is for a process and the payment is for the use of industrial,
commercial or scientific equipment.
 Payment for leased line/ connectivity charges
• Infosys Technologies Ltd. Vs. DCIT (139 TTJ (Bang.)(UO) 18) :

• Payment towards bandwidth charges is not use of or right to use of

industrial, commercial or scientific equipment.

• Wipro Ltd. Vs. ITO (80 TTJ (Bang.) 191) :

• Held that payment for transmission of data and software through uplink
and downlink services is not Royalty as no process has been made
available to the assessee and Explanation 2 clause (iii) cannot apply.

• Dell International Services India (P) Ltd., In Re (305 ITR 37 AAR) hed that
providing telecom bandwidth by US company does not mean “the use or right
to use any industrial, commercial or scientific equipment” and under the
DTAA the term ‘secret’ covers both formula and process and there is no secret
process here used by the applicant.
 Payment for leased line/ connectivity charges
• However in Verizon Communications Singapore Pte Ltd. Vs. ITO (45 SOT
263 ITAT Chennai),
• The Tribunal in a very elaborate decision came to the conclusion that
the payment for providing international connectivity services is
Royalty under both Act and DTAA as it is for the use of ‘process’.
• The same has been approved by the Madras High Court in Verizon’s case on
7th Nov, 2013 and the Court has held that:
“In the circumstances, we affirm the order of the Tribunal holding that the
consideration paid by the customer to the assessee is ‘royalty’ within the
meaning of Explanation 2(iva) or in the alternative under Explanation 2(iii) of
Section 9(1)(vi) of the Income Tax Act and Article 12(3) of the DTAA between India
and Singapore.”
 Payment for know-how, designs, engg. drawings etc.

• The difference between Sale and Royalty transaction is

based on whether the sellor/licensor retains the ownership
rights in the property being sold/licensed i.e., is it an
outright sale or does it fall under one of the Royalty
clauses in Explanation 2 ?

• CIT Vs. Davy Ashmore India (190 ITR 626) : Sale of

know-how cannot be taxed as royalty

• Pro-Quip Incorporation Vs. CIT (255 ITR 354) : Royalty

payment must be in respect of a right to use designs and
drawings, and not for the purchase thereof.
 Payment for know-how, designs, engg. drawings etc.
• CIT Vs. Klayman Porcelains Ltd. (229 ITR 735 AP HC) : Amount paid
by Indian company to the non-resident company as payment for technical
drawings towards engineering for a kiln would not amount to imparting
any information concurring the working of, or the use of patent,
invention, model, design, secret formula or process and hence will not
constitute Royalty under Section 9(1)(vi) of the Act

• CIT Vs. Magronic Devices (P) Ltd., 329 ITR 442 HP HC : The foreign
company was to supply plant know-how and product know-how.
Agreement was concluded & data was delivered abroad. High Court held
that the transaction was that of a sale, hence, no income could be deemed
to accrue or arise to non-resident.
 Payment for know-how, designs, engg. drawings etc.

• ADIT Vs. Zimmer AG (2008 22 SOT 97 Kol) :

• Engineering documents were handed to the Indian purchaser

company SAPL by the German assessee company outside India
under a ‘Know-how and Engineering Agreement’

• These documents were an integral part of plant and machinery

and the transfer of engineering was complete with the handover
of the documents

• The payment for these documents could not constitute Royalty

under the Act or the DTAA as the German assessee sold and
transferred ownership, title and risk in the engineering
documents to SAPL at Germany for consideration paid outside
India
 Payment for know-how, designs, engg. drawings etc.

• However, the Chandigarh ITAT in DCIT Vs. Majestic Auto Ltd. (51 ITD
313 (CHD)) took a contrary view and held that payment for supply of
drawings, designs etc. was taxable as Royalty.

• ITAT Calcutta Bench in Union Carbide Corporation Vs. Inspecting ACIT

(50 TTJ (Cal) 535) held that :

• The words “similar property” in clauses (ii), (iii) and (iv) of

Explanation 2 to Section 9(1)(vi) do not require, to constitute
‘royalty’, that there should be any legally protected right and
these words include specialized information and knowledge

• In other words, the absence of copyright or patent or one-time

parting with information does not mean the payment cannot be
Royalty under Explanation 2 to Section 9(1)(vi).
 Divisibility of Contracts, Composite Agreements and Royalty

• In many cases contracts between parties are such that a number of

activities are carried both offshore and onsite and are essentially
turnkey or EPC contracts.

• The issues relating to Royalty might be with respect to only one or few
components of the overall contract. The agreements and facts of each
contract are important

• The key takeaway is that if it is a composite, indivisible contract the

entirety of the transaction ought to be taken. If there are divisible,
identifiable parts, it is likely for the Revenue and the Courts thereafter to
call for the contract parts to be split and taxed independently on their
individual merits.
 Divisibility of Contracts, Composite Agreements and Royalty

• CIT Vs. Neyveli Lignite Corporation Ltd. (243 ITR 459 Mad HC) :
• The Court held amount paid by assessee to foreign company under
a comprehensive contract for design, manufacture, supply,
erection and commissioning of machinery not involving a transfer
of any licence or patent, invention, model or design could not be
regarded as Royalty under the Act

• CIT Vs. DCM Ltd. 336 ITR 599 :

• Delhi High Court held that payment to UK non-resident for
comprehensive technical know-how on non-exclusive basis and
supply of equipments with a right to sub- license the technology
and know-how subject to the approval of the non-resident is not
Royalty under Explanation 2 to Section 9(1)(vi).
 Divisibility of Contracts, Composite Agreements and
Royalty
• DIT Vs. Ericsson A.B (204 Taxman 192 Delhi HC)
• The supply contract of a non-resident to an Indian company
of a “GSM system” including hardware and software is not
divisible separately so as to tax the software component as
Royalty
• The definition of Royalty in the India-Sweden DTAA (Article
13(3)) is narrower than the Act and has to be considered. No
part of the payment can be classified as Royalty.
• It affirmed the decision of Special Bench in Motorola Inc.
Vs. DCIT (96 TTJ Del(SB) 1)

• Roxair Maximum Reservoir Performance WLL (AAR

977/2010) :
• The contract should be looked at as a whole and not
“looked through” following the Vodafone International
Holdings BV case (345 ITR 1 SC).
 Divisibility of Contracts, Composite Agreements & Royalty
• Raytheon Company Vs. DCIT 142 TTJ (Del) 137 :

• In a turnkey project for supply and installation of

equipment, composite contract could be conveniently
segregated into different components (milestones)

• Supply of equipment and software were taxable in

the year prior to relevant year as it was earlier
milestone but installation contract/services
milestone profits were taxable in current year

• Ansaldo Energia Spa Vs. IT (2009-TIOL-62-HC-MAD-IT)

• The Madras HC held that the four contracts which

the assessee entered into with Indian JV company
under single-bid system were to be consolidated
and read as single composite contract and the
divisibility into 4 contracts for tax was incorrect!
Amendments made to S.9(1)(vi)
Finance Act 2010

 In Finance Act 2010, w.e.f 1-6-1976, an Explanation was added which

applied to both Royalties and Fees for Technical Services which read:

“Explanation.—For the removal of doubts, it is hereby declared that for

the purposes of this section, income of a non-resident shall be deemed to
accrue 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,—

(i)  the non-resident has a residence or place of business or business

connection in India; or

(ii)  the non-resident has rendered services in India.”

Amendments made to S.9(1)(vi)
Finance Act 2012

 Finance Act 2012, w.e.f 1-6-1976

Explanation 4.— For the removal of doubts, it is

hereby clarified that the transfer of all or any rights in
respect of any right, property or information includes
and has always included transfer of all or any right for
use or right to use a computer software (including
granting of a licence) irrespective of the medium through
which such right is transferred
Amendments made to S.9(1)(vi)
Finance Act 2012

 Finance Act 2012, w.e.f 1-6-1976

Explanation 5.—For the removal of doubts, it is hereby clarified that the

royalty includes and has always included consideration in respect of any

right, property or information, whether or not—

(a)  the possession or control of such right, property or information is

with the payer;

(b)  such right, property or information is used directly by the payer;

(c)  the location of such right, property or information is in India.

Amendments made to S.9(1)(vi)
Finance Act 2012

 Finance Act 2012, w.e.f 1-6-1976

Explanation 6.—For the removal of doubts, it is hereby clarified that the

expression "process" includes and shall be deemed to have always

included

transmission by satellite (including up-linking, amplification, conversion

for down-linking of any signal), cable, optic fibre or by any other similar

technology, whether or not such process is secret;

 These retrospective amendments have been introduced in the Finance Act

2012 w.e.f 1-6-1976 i.e., the start of the Royalty chapter.
 Amendments made to S.9(1)(vi)
Finance Act 2012
 Responding to the outcry from the industry, the CBDT has
issued a Circular F. No. 500/111 12009-FTD-l (Pt.) dated 29th
May 2012:
“The Finance Act 2012 has introduced certain clarificatory
amendments in Section 2 clause (14), Section 2 clause (47), Section
9 and Section 195, of the Income Tax Act, 1961 (“Act”), with
retrospective effect from 01.04.1962 or 01.04.1976, whereby
meaning of various terms used in these sections have been clarified
in order to remove any doubt regarding their interpretations.
2. These amendments have been introduced retrospectively in
order to clarify the legislative intent and state the position of law
from the date of coming into effect of these sections in the Act
…

4. The Board, after due consideration, hereby directs that in case where
assessment proceedings have been completed under section 143(3)
of the Act, before the first day of April, 2012, and no notice for
reassessment has been issued prior to that date; then such cases shall
not be reopened under Section 147/148 of the Act on account of the
abovementioned clarificatory amendments introduced by the Finance
Act, 2012. However, assessment or any other order which stand
validated due to the said clarificatory amendments in the Finance Act
2012 would of course be enforced…”
Formula One (2016) – Del HC:
 India-UK DTAA − UK company transferred of right to
host and promote ‘ Formula F1 Race’ to Indian Company /
Jaypee without any intention to license trademark − UK
Company had full access to circuit and dictate terms like
who could access circuits, prohibition of other event on
circuits, etc. (Circuit held to be PE of UK Company) −
AAR earlier concluded that Payments by Jaypee to UK
Company for use of trademark is Royalty − Del HC held
that Indian Company had no rights to use IP
independently of staging and hosting of event and no
other purposes - payments not in the nature of Royalty
Sec. 9(1)(vii) – technical service (FTS)
 Section 9(1)(vii) provides that income by way of technical
service is deemed to accrue or arise in India if 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
Fees for technical services means:

 Consideration (including any lump sum consideration)

 For the rendering of any
 Managerial, technical or consultancy services
 (including the provision of services of technical or other
 personnel)

But excludes:
 Consideration for any construction, assembly, mining or
like project undertaken by the recipient or
 Consideration which is chargeable under the head
“Salaries”
Evolution of FTS under the Act
(The Ishikawajima-Harima case)
Ishikawajima-Harima Heavy Industries Ltd. Vs DIT [(2007)
288 ITR 408 (SC)]
 The notion of “Territorial Nexus” was expounded by the SC.
 It ruled that Section 9(1)(vii) envisaged dual condition which
need to be met simultaneously namely:
1. Services had to be rendered in India.
2. And the said services should be utilized in India
 It held that mere “source” of income would not be sufficient
to tax an income.
 The Apex Court held that there should be Direct Link
between the services rendered and India.
Evolution of FTS under the Act
(Amendment in Finance Bill 2007)
 In response to the decision of SC in Ishikawajima-Harima
Heavy Industries Ltd. Vs DIT which is as follows

Explanation.—
For the removal of doubts, it is hereby declared that for the purposes
of this section, where income is deemed to accrue or arise in India
under clauses (v), (vi) and (vii) of sub-section (1), such income 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
Evolution of FTS under the Act
(Post-2007 Amendment)
 Not surprisingly, there were many conflicting decisions in the wake of
Ishikawajima case and the amendment made thereafter.
 However at least two High Courts held that twin condition of rendering
& utilization still held sway and hence Ishikwajima-Harima holds good
even after 2007 amendment
 Jindal Thermal Power Company Ltd. Vs. DCIT [182 Taxman 252
Karnataka HC] The Karnataka High Court had to decide whether the
technical services carried off-shore were FTS even after the amendment to
Section 9(1)(vii) by Finance Act, 2007.
 Clifford Chance Vs. DCIT [176 Taxmann 458 Mumbai HC] In this case,
the Bombay HC discussed the SC decision in the case of Ishikawajima-
Harima case and the amendment passed in the Finance Act, 2007.
 Both decisions were in favour of the assesse averring that, even after the
2007 amendment, only income from services rendered and utilized in India
is taxable in India.
Evolution of FTS under the Act
(Amendment in Finance Bill 2010)
 A new revised Amendment in Finance Bill, 2010 was
passed. The Memorandum to finance Bill elaborately
explained the intention of the legislature which is as
follows:
 The ‘Source Rule’ means the situs of rendering services is irrelevant
 The interpretation in the case of Ishikawajima was NOT IN
accordance with law as it expounded that there should be ‘Territorial
Nexus’ to classify a payment as FTS.
 To clarify the position, an amendment was inserted below Section 9
vide the Finance Act, 2007.
 However, even after the amendment, the Karnataka HC in the case of
Jindal Thermal Power Company Ltd. has held that the amendment
does not do away the requirement of rendering services in India
Evolution of FTS
(Amendment in Finance Bill 2010)
 The new retrospective Explanation which substituted the
earlier explanation is as follows:

Explanation.—For the removal of doubts, it is hereby declared that for the

purposes of this section, income of a non-resident shall be deemed to
accrue 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,—
(i)  the non-resident has a residence or place of business or business
connection in India; or
(ii)  the non-resident has rendered services in India.
Latest Position on FTS
 CIT vs. M/s Kotak Securities Limited 2016-TIOL-37-SC-IT
 The Members of Bombay Stock Exchange (BSE) pay transaction charges for using BSE
Online Trading (BOLT) system.
The Bom HC held that the BOLT services are FTS as they were managerial due to various
functions performed (monitoring, surveillance, remedial actions, scrips transfer, etc.).
The SC held that payments are not in the nature of FTS as:
− Modern day scientific and technological developments ten to blur the specific human
element in an otherwise fully automated process.
− The service was fully automated and available to all members in respect of every
transaction that is entered into the system
− There is nothing special, exclusive or customized service which is rendered by BSE.
− Bharti Cellular (SC) decision relied to hold that technical services need to be with
human effort as they occur between managerial and consultancy which can be rendered
only by humans.
− The BOLT system was a standard facility provided by the stock exchange for transacting
business and not a technical service.
Cases -FTS
Diamond Services Intl. Ltd. Vs UOI (2007) 304 UTR 201 Bom.
HC)
 Payments made to Gemological Institute for grading and
certification of diamonds.
 Held that the payments cannot be treated as neither FIS (nor
Royalty). because it does impart any technical knowledge,
experience, skill, etc.

Mahindra & Mahindra Vs. DCIT (2009) 313 ITR 263 (Mum SB)
 The Mumbai Special Bench held that the management
commission cannot be considered as FTS under India- UK DTAA
since it did not make available the technical knowledge