Income deemed to be accrue

or arise in India
 Income which are deemed to Accrue or Arise in India

• Income through or from business connection in India is deemed to Accrue or

Arise in India 9(1)(i)
From the assessment year 2004-05, it
Explanation 2 to Section 9(1) (i)
has been clarified that the term business connection will
include to the following: 
(a) Business activity through a person having an authority to
conclude contracts on behalf of the non resident provided
he/it habitually exercise such authority [ Exp 2(a) to Sec.9(1)].
(b) Business activities through a person who have habitually
maintain stock of goods on behalf of the non-resident from
which he regularly delivers good and  merchandise on behalf of
the non-resident without having any authority [Expl. 2(b) to Sec.
9(1)].
(c) Business activities through a person who habitually secures
order mainly or wholly for the non-resident or/ and other non-
resident entities controlling controlled by or under the same
control of the same non-resident person [Exp.2(c) to Sec 9(1)].
• Exceptions [Proviso to Sec 9(1)]: Business connection will
exclude any business activity through brokers are commission
agents of independent status acting in ordinary course of their
business [First proviso to Exp. 2 to Sec.9(1)].
• However where search broker or commission agent works
mainly on behalf of the non resident or and other non-resident
entities controlling controlled by or under the same control as
the non-resident, such brokers or agent will not be considered
as having an independent status.
• Lubrizol Corporation USA v. ADIT(2013) 60 SOT 118(URO)
(Mum)(Trib)
- Where Indian subsidiary only assisted in sale of products in
India and did not have any authority to negotiate terms of sales
or conclude contract on behalf of foreign assessee company, it
could not be considered as agency Permanent Establishment in
India and therefore no profit could be taxed in India.
Amendment made by Finance Act, 2018, w.e.f
A.Y. 2019-20
1. Business connection to include any activity
carried out through a dependent
agent[ Explanation 2 to section 9(1)(i)]
- Aligning the scope of “Business connection
with modified Permanent Establishment Rule
2. Significant Economic presence
Explanation 2A under section 9(1) (i)
Business connection shall include “Significant
Economic presence” also
• “Dependent Agent Permanent Establishment” DAPE
• Reasons for amendment
• Under the existing provisions of clause (a) of Explanation 2 to section 9 (1)(i), “ business
connection” includes business activities carried on by non-resident through dependent
agents. The scope of business connection under the Act is similar to the provisions
relating to Dependent Agent Permanent Establishment DAPE in India’s Double Taxation
Avoidance Agreements DTAAs in terms of the DAPE rules in tax treaties, if any person
acting on behalf of the non-resident is habitually authorised to conclude contracts for
the non-resident, then such agent would constitute a PE in the source country.
• However, in many cases, with a view to avoid establishing a
permanent establishment(PE) under Article 5(5) of the DTAA, the
person acting on the behalf of the non-resident, negotiates the
contract but does not conclude the contract.
• BEPS action plan 7 recommended modification to paragraph 5 of
Article 5 to provide that an agent would include not only a person
who have actually concludes contract on behalf of the non-
resident, but also a person who habitually plays a principal role
leading to the conclusion of contracts.
• BEPS Action Plan 7 have now been included in Article 12 of
Multilateral Convention to Implement Tax Treaty Related Measures
(here in referred as ‘MLI’), to which India is also a signatory
• Amendment in Explanation 2 to section 9(1)(i) relating to DAPE
• In view of the above, the Act has amended the provision of section 9 of the act so as to align
them with the provisions in the DTAA as modified by MLI so as to make the provisions in the
treaty effective.
• Accordingly, clause (a) of Explanation 2 to section 9(1)(i) has been substituted by a new
clause (a) to provide that business connection shall include any business activities carried
through a person who, acting on behalf of the non-resident—
• - has and habitually exercises in India, and authority to conclude contracts on behalf of the
non-resident or
• -habitually concludes contract or
• -habitually place the principal role leading to conclusion of contracts by that non-resident
and
• the contracts are –(i) in the name of the non-resident; or
• (ii) for the transfer of the ownership of, or for the granting of the right to use, property
owned by that non-resident or that non-resident has the right to use; or
• (iii) for the provision of services by the non-resident.
• “Significant Economic presence”
• The Finance Act, 2018 has inserted Explanation 2 A under
section 9(1)(i), w.e.f. 2019-20. According to Explanation 2A,
Business connection shall include “ Significant Economic
presence”.
• Reasons for making amendment relating to “Significant
Economic presence”
• BEPS Action plan1 – Taxation of digital taxation
• 2016- Equalisation of levy
• Significant economic presence shall mean-
(a) Transaction in respect of any goods, services, or property carried
out by a non-resident in India including provision of download of
data or software in India if the aggregate of payments arising
from such transaction or transactions during the previous year
exceeds the amount as may be prescribed; or
(b) Systematic and continuous soliciting of business activities or
engaging in interaction with such number of users as may be
prescribed, in India through digital means.
Provided that the transactions or activities shall constitute significant
economic presence in India, whether or not-
(i) The agreement for such transactions or activities is entered in
India; or
(ii) The non-resident has a residence or place of business in India ;
or
(iii) The non-resident renders services in India.
• A new Explanation 3A has been added to section 9(1)(i) so as to provide that the
income attributable to operations carried out in India, as referred to in Explanation 1 to
section 9(1)(i) shall include income from:
• such advertisement which targets a customer who resides in India or a customer who
accesses the advertisement through internet protocol address located in India;
• sale of data collected from a person who resides in India or from a person who uses
internet protocol address located in India; and
• sale of goods and services using data collected from a person who resides in India or
from a person who uses internet protocol address located in India.
• Explanation 3A – added by Union budget 2020-21
CIT v. Hindustan Shipyard Ltd .(1977) 109 ITR 158 AP

A foreign company non resident in India sell diesel engine with accessories to an Indian company. The
engines were agreed to be erected by the staff of the purchaser under the supervision of an engineer of
the foreign company. The agreement also provided overseas training course for some technical
employees of the purchaser. There will be no business connection in such case as the non resident
company merely agree to render certain limited services connected with the effective fulfilment of the
contract of sale. Such services as are merely incidental to the contract and are usually included in all
such contracts by way of guarantee of the efficient working of the product sold. To confirm with the
requirement of the expression business connection it is necessary that the common thread of mutual
interest beyond a contract of sale must run through the fabric of the trading activities. 
• Kanchanganga Sea Foods Ltd. v. CIT (2010) 192 Taxman 187 (SC)
Assessee company was engaged in sale and export of seafood and for that purpose it
obtained permit to fish in exclusive economic zone of India. To exploit fishing rights, it
entered into an agreement, chartering two fishing vessels with a non-resident
company. Charter fees was payable from earnings from sales of fish and for that
purpose 85% of gross earning from sale of fish was to be paid to non-resident
company. Actual fishing operations were done outside territorial waters of India but
with in exclusive economic zone. Thereafter chartered vessels with entire catch were
brought to Indian port, catch were certified for human consumption valued and after
customs and port clearances non resident company received 85 % of catch . It was held
at non resident company effectively received charter fees in India and same would be
chargeable to tax under section 5 (2). Assessee was liable to deduct tax under section
195 on payment made to non resident company because income of non-resident
company is deemed to be accrue or arise in India through business connection in
India. 
• Star Cruise Management Ltd. v. DCIT(2013) 58 SOT 3
(URO)Mum.(Trib)
- Assessee  company was receiving the remittance of ticket sold
by the Indian company outside India it was held  assessee was
not having any business connection in India within the meaning
of section 9(1)(i) of the Act. Hence no income has been accrued
to the assessee in India in respect of booking on sale of tickets
for tour packages of the cruise in India which was done through
Star Cruises (India) Travel services Pvt. Ltd.
• In the case of Mustaq Ahmed, In re(2008) a non-resident was
getting gold jewellery manufactured in India, but selling it
abroad with sale proceeds received in India in the non-
resident’s bank account in India, the income is taxable both on
accrual and receipt basis in India.
• In the case of Satellite Television Asian Region v DCIT(2006) Mumbai tribunal was
dealing with the case of an assessee, a non-resident company incorporated in Hong
Kong, selling television 'air ad time ' to various Indian advertisers through its
advertising sales agent(namely, Star India Private Limited, an Indian company), 
wherein the assessee acquired the air ad time meant for advertisement from various
television channel companies who were also non-resident; it was held that there exist
a business connection between the assessee and the television channel companies as
the assessee was acting as a functional agent of the television channel companies.
Although the assessee contended that the contract is between the assessee and the
television channel companies were principal -to -principal in nature, the tribunal held
that since the assessee and the television companies were ultimately controlled by a
mother holding company, the functions carried out by all the companies were there for
towards the commonness of interest involving in Carrying out this business activity
hence the proposition of principle to principal relationship is almost irrelevant and
theoretical in nature. Therefore the income earned by the television companies was
treated as taxable in India since the television channel companies had a business
connection in India.
• Income through or from property in India is deemed to Accrue or
Arise in India sec.9(1)(i).
• Income through or from any asset or source in India deemed to
Accrue or Arise in India sec.9(1)(i).
Performing Right Society Ltd. v. CIT(1977) 106 ITR 11SC.
Broadcasting fee paid in England by All India Radio to the Performing
Right Society of England for broadcasting the musical works belongs
to the society, such income will accrue or arise to the performing
society in India as the source of income lies in India.
• Income through the transfer of a Capital asset situated in
India deemed to Accrue or Arise in India sec.9(1)(i)

Vodafone International Holdings B.V. Vs. Union of

India(2012)
Hutchison Essar Limited (HEL) – Indian Company
(Joint Venture of Hutchison Group and Essar Group )

Hutchison Telecommunication International Limited(HTIL) is a foreign company,

registered in Hong Kong

wholly owned subsidiary company CGP

Investments Ltd. (CGP)
foreign company registered in Cayman
Islands, Mauritius.

foreign subsidiary companies

CGP holds 51.95% shares in
CGP holds
HEL
15.05% shares in HEL.

Essar Group holds 33% shares in HEL.

• British telecom giant(V.I.Holding) registered in Netherland –
purchased the 100% shares in CGP from HTIL. The agreement of
sale of shares of CGP took place outside India.
• Two issues
First – HTIL by reason of instant transaction have earned income
liable for capital gain tax in India as this income was earned
towards sale consideration of transfer of its business, economic
interests in India as a group in fabour of Vodaphone.

Second – Whether on payment made by Vodaphone to HTIL on

such transaction, Vodaphone was liable deduct tax under section
195 from sale consideration paid to HTIL.
 The Finance Act, 2012 has retrospectively amended the
definition of:
• Section 2(14): Amendment in Definition of
Capital Asset
• Following Explanation has been added to section
2(14) i.e. the definition of Capital Asset:
• Explanation – For the removal of doubts, it is
hereby clarified that:
• “Property” includes and shall be deemed to have
always included any right in or in relation to  an
Indian company, including rights of management
or control or any other rights whatsoever.
 Section 2(47): Amendment in Definition of Transfer
• Following Explanation has been added to Section 2(47):
• For the removal of doubts, it is hereby clarified that:
• “transfer” includes and shall be deemed to have always
included disposing of or parting with an asset or any
interest therein, or  creating any interest in any asset in
any manner whatsoever, directly or indirectly,
absolutely or conditionally, voluntarily or involuntarily,
by way of an agreement (whether entered into in India
or outside India) or otherwise, notwithstanding that
such transfer of rights has been characterised as being
effected or dependent upon or flowing from the
transfer of a share or shares of a company registered or
incorporated outside India.
 Following two Explanation have been added by Finance Act,
2012:

• Explanation 4:- For the removal of doubts, it is hereby

clarified that the expression “through” shall mean and
include and shall be deemed to have always meant and
include “by means of “, “in consequence of” or “by
reason of”.
• Explanation 5:- For the removal of doubts, it is hereby
clarified that an asset or a capital asset being any share
or interest in a company or entity registered or
incorporated outside India shall be deemed to be and
shall always be deemed to have been situated in India, if
the share or interest derives, directly or indirectly, its
value substantially from the assets located in India.
• Cairn UK Holdings Limited v. DCIT(2017) 56 ITR 595 Delhi.
Assessee , a U K based company transferred to another Indian
group company its share held in non-resident subsidiary
company which in turn was holding controlling interest in nine
Indian subsidiary companies engaged in oil and gas sector in
India.
- It was held that there was a transfer of rights of control and
management of Indian subsidiaries hold through holding
subsidiary structure and assessee would be liable to tax in India.
• The Taxation Law (Amendment) Bill, 2021
 Income by way of Interest sec. 9(1) (v)

• Income by way of interest payable by – 

(a) The Government; or
(b) A person who is a resident always except where the interest is paid on debt incurred or
on money borrowed and used for business or profession outside India or for earning any
income from any source outside India, it is not deemed to accrue or arise in India.
Accordingly, where a resident person borrows money outside India but uses the loan
money for earning income in India, interest payable or paid on such borrowing is
deemed to accrue or arise in India.
X(resident of India) - Y(Non-resident)
(c) A person who is non resident borrows money outside India and uses such loan money for
business purpose in India, interest payable on such loan is deemed to accrue or arise in
India.
X(Non-resident) - Y(Non-resident)
 Income by way of Interest sec. 9(1) (v)

• Income by way of interest payable by – 

(a) The Government; or
(b) A person who is a resident always except where the interest is paid on debt incurred or
on money borrowed and used for business or profession outside India or for earning any
income from any source outside India, it is not deemed to accrue or arise in India.
Accordingly, where a resident person borrows money outside India but uses the loan
money for earning income in India, interest payable or paid on such borrowing is
deemed to accrue or arise in India.
X(resident of India) - Y(Non-resident)
(c) A person who is non resident borrows money outside India and uses such loan money for
business purpose in India, interest payable on such loan is deemed to accrue or arise in
India.
X(Non-resident) - Y(Non-resident)
• Finance Act, 2015- Explanation has been inserted in Section
9(1)(v)
• Accordingly, in the case of a non-resident, being a person
engaged in the business of banking, any interest payable by the
PE in India of such non-resident to the head office or any PE or
any other part of such non-resident outside India, shall be
deemed to accrue or arise in India.
 Income by way of royalty sec. 9(1) (vi)
• Income by way of royalty payable by – 
(a) The Government; or
(b) A person who is a resident, except where the royalty is payable in respect of any right,
property or information used or services utilised for the purposes of a business or
profession carried on by such person outside India or for the purposes of making or
earning any income from any source outside India; or
X(resident of India) - Y(Non-resident)

(c) A person who is a non-resident, where the royalty is payable in respect of any right,
property or information used or services utilised for the purposes of a business or
profession carried on by such person in India, or for the purposes of making or earning any
income from any source in India .
X(Non-resident) - Y(Non-resident)
• Expln. 2 sec.9(1)(vi) – Royalty means-
• (i) The transfer of all or any rights (including the granting of a licence) in respect of
a patent, invention, model, design, secret formula or process or trade mark or
similar property;
• (ii) The imparting of any information concerning the working of or the use of, a
patent, invention, model, design, secret formula or process or trade mark or
similar property;
• (iii) The use of any patent, invention, model, design, secret formula or process or
trade mark or similar property;
•  (iv) The imparting of any information concerning technical, industrial, commercial
or scientific knowledge, experience or skill;
•  (v) The transfer of all or any rights (including the granting of a licence) in respect
of any copyright, literary, artistic or scientific work including films or video tapes
for use in connection with television or tapes for use in connection with radio
broadcasting, but not including consideration for the sale, distribution or
exhibition of cinematographic films; or
•  (vi) The rendering of any services in connection with the activities referred to in
sub-clauses (i) to (v);
• Qualcomm Incorporated v. ADIT(2013) 153 ITR Delhi.
‘X’ a US resident Company had licensed certain (IP) relating to the manufacture of Code
Division Multiple Access (CDMA) mobile hand sets and network equipment to ‘Y’ (Non-
resident) original equipment manufacturer.
The tax authority alleged that the royalty payment to the extent it related to equipment sold
to customers in India, was taxable in India as the IP that was licensed was utilized in a
business carried in India or was earning income from India sources
- The ITAT ruled that secondary source rule was not applicable in the present case as ‘Y’ did
not carry on a business in India nor did the customers who purchased the equipment
constitute the source of Income .
- Further ITAT ruled that onus on the tax authority to prove that royalty payable by NR for
the purpose of business carried in India
• XYZ In Re(1999) 238ITR 99
Royalty was paid by an NR company to another NR company for use
of trade mark in India by its Indian subsidiary.
The AAR observed that the trade mark in respect of which royalty was
payable was in effect used in India and therefore royalty must be
deemed to be sourced in India under secondary source rule
Google India(P) Ltd. v. Additional CIT(2017) 86 taxmann.com 237 Bang Trib
Assessee Google-India was appointed as a non exclusive authorized distributor of
Adword programs to advertisers in India by Google-Ireland. Google- Ireland’s
Adword program is a continuous targeted advertisement campaign making
available technology to Google India. Assessee had been provided access to IPR,
Google brand features, secret process embeded in Adwords Program as tool of
trade for generation of income. Assessee was also having right, title and interest
over IPR of Google standard advertisement with advertiser, which specifically
empowers assessee to delete, remove/ withdraw advertisement.
- Payment by Assessee to Google-Ireland = Royalty income not business income.
 Engineering Analysis Centre Of Excellence Private Limited vs. CIT
(Supreme Court) March 2, 2021 (Date of pronouncement)
• Facts : the appellant, Engineering Analysis Centre of Excellence Pvt. Ltd. (EAC),
is a resident Indian end-user of shrink-wrapped computer software, directly
imported from the United States of America.
• The Assessing Officer by an order dated 15.05.2002, after applying Article
12(3) of the Double Taxation Avoidance Agreement (DTAA), between India and
USA, and upon applying section 9(1)(vi) of the Income Tax Act, 1961 (Act),
found that what was in fact transferred in the transaction between the parties
was copyright which attracted the payment of royalty and thus, it was required
that tax be deducted at source by the Indian importer and end-user, EAC. Since
this was not done for both the assessment years, EAC was held liable to pay
the amount of Rs. 1,03,54,784 that it had not deducted as TDS, along with
interest under section 201(1A) of the Income Tax Act amounting to Rs.
15,76,567.
• The EULAs do not grant any such right or interest, least of all, a right
or interest to reproduce the computer software. In point of fact,
such reproduction is expressly interdicted, and it is also expressly
stated that no vestige of copyright is at all transferred, either to the
distributor or to the end-user.
• Further, What is “licensed” by the foreign, non-resident supplier to
the distributor and resold to the resident end-user, or directly
supplied to the resident end-user, is in fact the sale of a physical
object which contains an embedded computer programme, and is
therefore, a sale of goods, which, as has been correctly pointed out
by the learned counsel for the assessees, is the law declared by this
Court in the context of a sales tax statute in Tata Consultancy
Services v. State of A.P., 2005 (1) SCC 308.
 Sec. 9(1) (vii)Income by way of fees for technical services
• Income by way of fees for technical services payable by – 
• (a) The Government; or

•  (b) A person who is a resident, 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 purposes of making or earning any income
from any source outside India; or
X(resident of India) - Y(Non-resident)
•  (c) A person who is 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 purposes of making or earning any income from any
source in India .
X(Non-resident) - Y(Non-resident)
• Provided that nothing contained in this clause shall apply in relation to any income by way of fees for
technical services payable in pursuance of an agreement made before the 1st day of April, 1976, and
approved by the Central Government.
 Meaning of fees for technical services
• Sec.9(1)(vii) Explanation 2 : For the purposes of this
clause, “fees for technical services” means any
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 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”.
• ISRO v. CIT (2011) ITAT. Bangalore.

• Yash Raj Film Pvt. Ltd. V. CIT (2012) ITAT Mumbai.

• Endemol (P) Ltd. In Re (2013)40Taxmann.com 340 ( AAR New Delhi)

• CIT v. Indusind Bank Ltd.(2019) 415 ITR 115 Bom

- Amount paid by assessee to foreign bank for rendering financial services in
order to raise capital abroad through issuance of Global Depository
Receipts.
- Not liable to tax in India
Income not Deemed to Accrue or Arise in India[Expln. 1 to Sec. 9(1) ]

• Purchase of Goods in India by Non-resident for

Export is not Deemed to Accrue or Arise in India.
• Income from collection of News and views in
India by Non-resident for transmission out of
India is not Deemed to Accrue or Arise in India.
• Income from shooting of any Cinematograph
Film by any Non-resident in India is not Deemed
to Accrue or Arise in India.
• Ishikawajama-Harima Heavy Industries Ltd. v. Director of
Income Tax(2007)