Section 9 of the Income Tax Act, 1961 is an important provision that deals with the taxation of income accruing or deemed to accrue or arise in India. This section lays down the rules for determining the tax liability of non-residents and foreign companies on income earned in India.
According to Section 9, any income that accrues or is deemed to accrue or arise in India shall be taxable in India, regardless of the residential status of the recipient. This means that even if a non-resident or foreign company earns income from a source in India, it will be subject to tax in India.
(1) Accrue or Arise in India
‘Accrue’ means ‘to arise or spring as a natural growth or result’, to come by way of increase. ‘Arising’ means ‘coming into existence or notice or presenting itself. ‘Accrue’ connotes growth or accumulation with a tangible shape so as to be receivable. In a secondary sense, the two words together mean ‘to become a present and enforceable right’ and ‘to become a present right of demand’.
Frequently, in the context of ‘accrual’ or ‘arisal’, the word ‘earned’ is used. The two are different concepts. A person may be said to have ‘earned’ his income in the sense that he has contributed to its production by rendering services or otherwise and the parenthood of the income can be traced to him. But in order that the income may be said to have ‘accrued’ to him, an additional clement is necessary, that he must have created a debt in his favor.
The following incomes shall be deemed to accrue or arise in India:
Any income which arises, directly or indirectly, from any activity or a business connection in India is deemed to be earned in India.
Business connections may be in several forms e.g. a branch office in India or an agent or an organization of a non-resident in India. Formation of a subsidiary company in India to carry on the business of the non-resident parent company would also be a business connection in India. Any profit of the non-resident which can be reasonably attributable to such part of operations carried out in India through business connections in India are deemed to be earned in India.
(I) Business connection to include any business activity carried out through a dependent agent [Explanation 2 to section 9(1)]
“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, an authority to conclude contracts on behalf of the non-resident or habitually concludes contracts or
— habitually plays 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.
(II) “Business connection” to include “Significant Economic Presence” also [ Explanation 2A inserted under Section 9(1)(i)]
For the removal of doubts, it is hereby declared that the significant economic presence of a non-resident in India shall constitute “business connection” in India and “significant economic presence” for this purpose. shall mean—
(a) transaction in respect of any goods, services or property carried out by a nonresident with any person 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 such amount as may be prescribed; or
(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed:
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:
Provided further that only so much of income as is attributable to the transactions or activities referred to in clause (a) or clause (b) shall he deemed to accrue or arise in India.
(III) Income attributable to (lie operations carried out iii India, as referred to in Explanation 1, shall include certain incomes I Explanation 3A]
For the removal of doubts, it is hereby declared that the income attributable to the operations carried out in India, as referred to in Explanation 1, shall include income from
(i) such advertisement which targets a customer who resides in India or a customer who accesses the advertisement through internet protocol address located in India;
(ii) sale of data collected from a person who resides in India or from a person who uses internet protocol address located in India and
(iii) sale of goods or services using data collected from a person who resides in India or from a person who uses internet protocol address located in India:
In the case of a Non-Resident, the following shall not, however, be treated as business connection in India:
(i) Operations confined to purchase of goods in India for purpose of exports;
(ii) Operations confined to collection of news and views for transmission outside India by or on behalf of Non-Resident who is engaged in the business of running news agency or of publishing newspapers. magazines or journals;
(iii) Operations confined to shooting of cinematograph films in India if such Non-Resident is:
(a) an individual—he should not be a citizen of India; or
(b) a firm- the firm should not have any partner who is a citizen of India or who is resident in India; or
(c) a company — the company does not have any shareholder who is a citizen of India or who is resident in India.
In the case of a business of which all the operations are not carried out in India. only such part of the income as is reasonably attributable to operations carried out in India shall be treated as deemed to accrue or arise in India.
(iv) In the case of a foreign company engaged in the business of mining of diamonds, no income shall he deemed to accrue or arise in India to it through or from the activities which are confined to display of uncut and unassorted diamond in any Special Zone notified by the Central Government in the Official Gazette in this behalf.
Any income which arises from any property movable or immovable, tangible or intangible which is situated in India, is deemed to accrue or arise in India.
Example: R who lives in London, has a house property situated in India which has been given by him on rent. Rent derived by R shall be taxable in India whether such rent is received by him in India or outside India as the house property is situated in India.
Where the capital asset is situated in India. regardless of the residential status of the transferor or the transferee, capital gain, arising on its transfer, would be deemed to be income accruing or arising in India and hence would be taxable.
Any income payable for services rendered in India shall be regarded as income earned in India though it may he paid in India or outside.
The following conditions have to be satisfied before such income is treated as deemed to accrue or arise in India:
(i) Income should be chargeable under the head Salaries’;
(ii) The payer should be Government of India;
(iii) The recipient should be an Indian Citizen — whether Resident or Non-Resident;
(iv) The services should be rendered outside India.
While salary of Indian citizen in the above case shall be deemed to accrue or arise in India but all allowances or perquisites paid outside India by the Government to the above Indian citizens for their rendering services outside India are exempt under section 10(7).
(i) Government; or
(ii) A person who is a resident in India, except where interest is payable in respect of money borrowed and used by the purpose of business or profession carried on outside India or earning any income from any source outside India; or
(iii) A person who is a non-resident in India provided interest is payable in respect of money borrowed and used for a business or profession carried on in India.
shall be income which is deemed to accrue or arise in India in the hands of the recipient.
(i) Government; or
(ii) A person who is a resident in India except where it is payable in respect of any right/information/ property used for the purpose of a business or profession carried on outside India or earning any income from any source outside India; or
(iii) A person who is a non-resident provided royalty is payable in respect of any right/information/ property used for the purpose of the Business or Profession carried on in India or earning any income from an source in India.
shall be income which is deemed to accrue or arise in India in the hands of the recipient.
(i) Government; or
(ii) A person who is a resident in India, except where services are utilized for a business or profession carried on outside India or earning any income from any source outside India; or
(iii) A person who is a non-resident provided fee is payable in respect of services for a business or profession carried on in India or earning any income from any source in India,
shall be income which is deemed to accrue or arise in India in the hands of the recipient.
Income arising outside India, being any sum of money exceeding Rs. 50,000 paid on or after 5.7.2019 by a person resident in India to a non-resident, not being a company, or to a foreign company, shall be deemed to accrue or arise in India.
Where income is deemed to accrue or arise in India under clause (f), (g) or (h) above, such income shall he included in the total income of the non-resident, whether or not the non-resident:
(a) has a residence or place of business or business connection In India: or
(h) has rendered services in India, [Explanation to section 9j |
India has been attracting foreign investors and fund managers due to its growing economy and favorable investment climate. However, there has been some uncertainty regarding the tax implications for fund management activities carried out by non-resident entities in India.
To address this issue, the Indian government introduced Section 9A of the Income Tax Act, which clarifies the tax treatment of fund management activities carried out by offshore funds in India.
According to Section 9A, fund management activities carried out by an offshore fund in India will not constitute a business connection in India, provided certain conditions are met.
Section 9A lays down the following conditions for exemption:
- The fund should be an offshore fund, i.e., not a resident of India.
- The fund should be regulated under the securities laws of its home jurisdiction.
- The fund should not have more than 50% of its total investment in India.
- The fund should not have more than 50% of its total assets managed by an Indian fund manager.
- The fund manager should be an eligible fund manager, i.e., registered with the Securities and Exchange Board of India (SEBI) or any other regulatory authority.
If these conditions are met, the income arising from the fund management activities carried out by the offshore fund in India will not be deemed to accrue or arise in India. As a result, the offshore fund will not be liable to pay tax in India on such income.
(1) ‘Fund Management Activity’ in case of an ‘Eligible Investment Fund’ carried out through an ‘Eligible Fund Manager’ shall not constitute business connection in India [Section 9A (1)]
According to Section 9A(1) of the Income Tax Act, the fund management activity carried out by an eligible fund manager does not create a business connection in India. This means that the fund manager, despite carrying out these activities in India, will not be considered to have a permanent establishment or a business presence in the country.
This provision is significant as it provides clarity on the tax implications for eligible investment funds and their managers. By exempting fund management activity from constituting a business connection, it ensures that the income generated by the fund is not subject to tax in India.
However, it is important to note that certain conditions need to be met for the exemption to apply. These conditions include:
- The eligible fund manager should be located in India.
- The eligible investment fund should be an offshore fund.
- The eligible fund manager should not be an employee of the eligible investment fund.
- The eligible fund manager should not have a significant presence in India.
Meeting these conditions is crucial to avail the tax benefits under Section 9A(1). It is advisable for eligible investment funds and their managers to carefully review these conditions and ensure compliance to avoid any potential tax implications.
(2) ‘Eligible Investment Fund will not be treated as resident in India even if ‘Eligible Fund Manager’ is situated in India [Section 9A (2)]
According to Section 9A(2) of the Income Tax Act, an Eligible Investment Fund will not be treated as resident in India if the Eligible Fund Manager is situated in India. This provision is applicable to Category I and Category II Alternative Investment Funds (AIFs) registered with the Securities and Exchange Board of India (SEBI).
Category I AIFs include venture capital funds, infrastructure funds, and social venture funds, while Category II AIFs include private equity funds, debt funds, and fund of funds. To qualify as an Eligible Investment Fund, these funds must meet certain conditions prescribed by the Indian government.
Conditions for Eligible Investment Funds
To be eligible for the tax benefits under the EIF regime, an investment fund must meet the following conditions:
- The fund must be registered as a Category I or Category II AIF with SEBI.
- The fund must be set up as a trust or a company under the laws of India or any other country.
- The fund must have an Eligible Fund Manager who is located in India.
- The fund must have a minimum corpus of INR 100 crore.
- The fund must have a minimum of 25 investors, with no single investor holding more than 10% of the corpus.
- The fund must have a specified investment strategy, as per the SEBI regulations.
(3) Meaning of ‘Eligible Fund Manager’ [Section 9A (4)]
According to Section 9A(4), an 'Eligible Fund Manager' refers to a fund manager who is responsible for managing the funds of an eligible investment fund. An eligible investment fund is a fund that meets certain criteria as specified by the Income Tax Act.
In order to be classified as an eligible investment fund, the fund must satisfy the following conditions:
- The fund must be a Category I or Category II Alternative Investment Fund registered with the Securities and Exchange Board of India (SEBI).
- The fund must have a minimum corpus of INR 100 crore.
- The fund must have a minimum of 25 investors.
An eligible fund manager plays a crucial role in managing the funds of an eligible investment fund. They are responsible for making investment decisions, conducting research, and ensuring compliance with the relevant laws and regulations. The fund manager's expertise and experience are essential in maximizing returns for the investors.
According to Section 9B, if a specific person receives a capital asset or stock in trade from a specified entity, the fair market value of such asset or stock shall be deemed to be the income of the specific person in the previous year in which the asset or stock is received. This income is taxable under the head 'Income from other sources'.
A specific person, as defined in Section 9B, includes any individual, Hindu Undivided Family (HUF), firm, association of persons (AOP), body of individuals (BOI), or any other person as may be specified by the Central Government. It is important to note that the term 'specific person' does not include a company or a trust.
A specified entity, on the other hand, refers to any trust, institution, fund, association, company, or body as may be specified by the Central Government. The Central Government has the power to specify the entities based on certain criteria and conditions.
It is important to understand that the income deemed to be received under Section 9B is not the actual receipt of income. It is a deemed income, which means that it is treated as income for taxation purposes, even if no actual income has been received by the specific person.
The fair market value of the capital asset or stock in trade is determined as per the prescribed rules and regulations. The valuation may vary depending on the nature of the asset or stock and the relevant provisions of the Income Tax Act.
Once the fair market value is determined, it is added to the total income of the specific person and taxed at the applicable rates. The specific person is required to include this income while filing their income tax return for the relevant assessment year.
Further, any profits and gains arising from such deemed transfer of capital asset or stock in trade or both, as the case may be, by the specified entity shall be—
(i) deemed to be the Income of such specified entity of the previous year in which such capital asset or stock in trade or both were received by the specified person and
(ii) chargeable to income-tax as income of such specified entity under the head “Profits and gains of business or profession” or under the head “Capital gains”, in accordance with the provisions of this Act.
It is important for individuals and entities to be aware of the provisions of Section 9B to ensure compliance with the income tax laws. Failure to comply with the provisions may result in penalties and other legal consequences.
Particulars of Income |
Whether taxable |
Resident
and
ordinarily
Resident |
Not-
ordinarily
Resident |
Non-
Resident |
1. |
Income received or deemed to be received in India whether earned in India or elsewhere. |
Yes |
Yes |
Yes |
2. |
Income which accrues or arises or is deemed to accrue or arise in India during the previous year, whether received in India or elsewhere. |
Yes |
Yes |
Yes |
3. |
Income which accrues or arises outside India and received outside India from a business controlled from India. |
Yes |
Yes |
No |
4. |
Income which accrues or arises outside India and received outside India in the previous year from any other source. |
Yes |
No |
No |
5. |
Income which accrues or arises outside India and received outside India during the years preceding the previous year and remitted to India during the previous year. |
No |
No |
No |
An analysis of the above provisions would highlight the following:
(a) Any income which is either received in India or deemed to be received in India is taxable in India, irrespective of the residential status.
(b) Any income which is either earned in India or is deemed to be earned in India is taxable in India, irrespective of the residential status.
(c) For a Resident in India (for individual & HUF, resident and ordinarily resident in India) all global income, wherever earned/received is taxable in India.
(d) For a non-resident, an income is taxable only if it is either earned in India or it is received in India.
(e) For not ordinarily resident, income earned and received outside India will be taxable, only when it is from a business or profession controlled or set up in India. |
