Sections 5 & 9
of the Income Tax Act Section 5 • Section 5. (1) . . . . • (2) …….. the total income of a person who is a non-resident includes all income from whatever source derived which-- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. • Explanation 1.—Income shall not be deemed to be received by reason only of the fact that it is taken into account in a balance sheet prepared in India.
• Explanation 2.-- income which has been included in the total income on the basis that it is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India
Section 9 • The following incomes are deemed to accrue or arise in India
• Sec 9 (i) - Income accruing or arising through business connection, etc.
• Sec 9(ii) - Salaries, if earned in India • Sec 9(iii) -`Salaries' payable by the Government • Sec 9(iv) - Dividends paid by an Indian company outside India
• Sec 9(v) - Income by way of interest • Sec 9(vi) - Income by way of royalty and • Sec 9(vii) - Income by way of fees for technical services Deemed income as per section 9(1)(i)
• (i) Income arising directly or indirectly from business connection ;
• (ii) Income from property ;
• (iii) Income from any asset or any source in India, and
• (iv) Transfer of capital asset situated in India. (i) Income arising directly or indirectly from business connection
Business connection requires continuity of action between the person in India and the person outside India who receives the profit. Isolated transactions between a resident and a non-resident will not constitute a business connection. A business connection must be a commercial connection intimately linked with the business of the non-resident, contributing to the non-resident's profits. One leading case [CIT v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC)] gives a sufficient idea of the concept of "business connection" for tax purposes
• Authority to conclude contract would be business connection
• Maintaining stock and delivery of goods
• If all the operations are not carried out in India, only such part of the income as is reasonably attributable to the operations carried out in India would be income
• no income if operations are confined to the purchase of goods in India for the purpose of export ;
• Branches of foreign companies
• Liaison offices
• Business connection not defined in the Act
• Is business connection same as Permanent Establishment
• Permanent Establishment defined under the DTAs
• In some cases there could be a business connection but no PE as per treaty. Beneficial provisions as per DTA would prevail.( Pl. see page no 1-183 of compendium) Illustrations on business connection
• Participation in exhibition held abroad
• Participation in exhibition held in India by a foreign party Other limbs of Section 9(i) • (ii) Income from property ;
• (iii) Income from any asset or any source in India, and
• (iv) Transfer of capital asset situated in India.
• Section 9(1)(ii)- Salaries, if earned in India
• Section 9(1)(iii)- `Salaries' payable by the Indian Government
• Section 9(1)(iv) - Dividends paid by an Indian company outside India Section 9(1)(v) - Income by way of interest
• (v) income by way of interest payable by
• (a) the Government ; or
• (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, 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
• (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India ; Section 9(1)(vi) - Income by way of royalty • Royalty means consideration paid for
• (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 ;
• (vi) the rendering of any services in connection with the above activities Section 9(1)(vii) - income by way of fees for technical services
• Fees for technical services means any consideration (including any lump sum consi-deration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) …. When is royalty & FTS treated as deemed income
• Royalty or FTS payable by
• (a) the Government ; or
• (b) a resident, except where the royalty is payable for services utilised for business carried on outside India or for the purposes of making or earning any income from any source outside India ; or
• (c) a non-resident for services utilised for business carried on in India or for the purposes of making or earning any income from any source in India : Illustration on FTS • Retainer Fee and commission for marketing services
• CBDT circular Nos 23 of 1969 and 786 of year 2000. ( both of them withdrawn ) Budget 2010 amendment in Section 9
• 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) or 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; or
• The non-resident has rendered services in India
Q. H Co. is a Hongkong company which provides investment advisory services to another non-resident for making investments in India. Whether the investment advisory fee received by H Co. from non-residents is taxable in India? If instead of Hongkong, would it make a difference if H Co. is a Company resident in a country with which India has a Tax Treaty?
Answer : Section 9 (1) (vi) ( c ) reads as under:
• (vi) income by way of royalty payable by—
• (a)
• (b)
• (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 :
• Going by the wordings of the section it appears that such payment would be treated as income accruing in India. If H Co is a company resident in a country with which India has a tax treaty, then what has to be seen is whether these services would fall within the definition of ‘royalty’ or ‘FTS’ as defined under the treaty. If the treaty provisions are beneficial they take precedence over Income Tax Act provisions
Q. If a loan is given by one non-resident company to another non-resident company and if such loan is utilized for undertaking investment in shares of Indian company, whether interest payable on that loan by the first non-resident company to the other non-resident company shall be taxable in India under the Act?
Answer : Section 9 (1) (v) © reads as under: • [(v) income by way of interest payable by—
• (a) • (b) • (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India ;
• From the above it is clear that the section covers interest payments made by one non-resident to another also. However, interest would be taxable in India only where the amount given as loan is used by the recipient for business carried on in India and not where the amount is invested in shares of Indian company.
• Explanation 2.-- income which has been included in the total income on the basis that it is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India
Section 9 • The following incomes are deemed to accrue or arise in India
• Sec 9 (i) - Income accruing or arising through business connection, etc.
• Sec 9(ii) - Salaries, if earned in India • Sec 9(iii) -`Salaries' payable by the Government • Sec 9(iv) - Dividends paid by an Indian company outside India
• Sec 9(v) - Income by way of interest • Sec 9(vi) - Income by way of royalty and • Sec 9(vii) - Income by way of fees for technical services Deemed income as per section 9(1)(i)
• (i) Income arising directly or indirectly from business connection ;
• (ii) Income from property ;
• (iii) Income from any asset or any source in India, and
• (iv) Transfer of capital asset situated in India. (i) Income arising directly or indirectly from business connection
Business connection requires continuity of action between the person in India and the person outside India who receives the profit. Isolated transactions between a resident and a non-resident will not constitute a business connection. A business connection must be a commercial connection intimately linked with the business of the non-resident, contributing to the non-resident's profits. One leading case [CIT v. R. D. Aggarwal and Co. [1965] 56 ITR 20 (SC)] gives a sufficient idea of the concept of "business connection" for tax purposes
• Authority to conclude contract would be business connection
• Maintaining stock and delivery of goods
• If all the operations are not carried out in India, only such part of the income as is reasonably attributable to the operations carried out in India would be income
• no income if operations are confined to the purchase of goods in India for the purpose of export ;
• Branches of foreign companies
• Liaison offices
• Business connection not defined in the Act
• Is business connection same as Permanent Establishment
• Permanent Establishment defined under the DTAs
• In some cases there could be a business connection but no PE as per treaty. Beneficial provisions as per DTA would prevail.( Pl. see page no 1-183 of compendium) Illustrations on business connection
• Participation in exhibition held abroad
• Participation in exhibition held in India by a foreign party Other limbs of Section 9(i) • (ii) Income from property ;
• (iii) Income from any asset or any source in India, and
• (iv) Transfer of capital asset situated in India.
• Section 9(1)(ii)- Salaries, if earned in India
• Section 9(1)(iii)- `Salaries' payable by the Indian Government
• Section 9(1)(iv) - Dividends paid by an Indian company outside India Section 9(1)(v) - Income by way of interest
• (v) income by way of interest payable by
• (a) the Government ; or
• (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, 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
• (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India ; Section 9(1)(vi) - Income by way of royalty • Royalty means consideration paid for
• (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 ;
• (vi) the rendering of any services in connection with the above activities Section 9(1)(vii) - income by way of fees for technical services
• Fees for technical services means any consideration (including any lump sum consi-deration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) …. When is royalty & FTS treated as deemed income
• Royalty or FTS payable by
• (a) the Government ; or
• (b) a resident, except where the royalty is payable for services utilised for business carried on outside India or for the purposes of making or earning any income from any source outside India ; or
• (c) a non-resident for services utilised for business carried on in India or for the purposes of making or earning any income from any source in India : Illustration on FTS • Retainer Fee and commission for marketing services
• CBDT circular Nos 23 of 1969 and 786 of year 2000. ( both of them withdrawn ) Budget 2010 amendment in Section 9
• 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) or 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; or
• The non-resident has rendered services in India
Q. H Co. is a Hongkong company which provides investment advisory services to another non-resident for making investments in India. Whether the investment advisory fee received by H Co. from non-residents is taxable in India? If instead of Hongkong, would it make a difference if H Co. is a Company resident in a country with which India has a Tax Treaty?
Answer : Section 9 (1) (vi) ( c ) reads as under:
• (vi) income by way of royalty payable by—
• (a)
• (b)
• (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 :
• Going by the wordings of the section it appears that such payment would be treated as income accruing in India. If H Co is a company resident in a country with which India has a tax treaty, then what has to be seen is whether these services would fall within the definition of ‘royalty’ or ‘FTS’ as defined under the treaty. If the treaty provisions are beneficial they take precedence over Income Tax Act provisions
Q. If a loan is given by one non-resident company to another non-resident company and if such loan is utilized for undertaking investment in shares of Indian company, whether interest payable on that loan by the first non-resident company to the other non-resident company shall be taxable in India under the Act?
Answer : Section 9 (1) (v) © reads as under: • [(v) income by way of interest payable by—
• (a) • (b) • (c) a person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India ;
• From the above it is clear that the section covers interest payments made by one non-resident to another also. However, interest would be taxable in India only where the amount given as loan is used by the recipient for business carried on in India and not where the amount is invested in shares of Indian company.
