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Section 9(1)(i). Income from Business Connection and Asset

Income from Business Connection
1. As per Explanation to section 9(1)

(i). Business connection shall include any business activity carried out through a person in India who is acting on behalf of the Non-resident; and
(a) conclude contracts on behalf of the Non-resident.
(b) maintains in India goods or merchandise from which he regularly delivers on behalf of the Non-resident;
or
(c) secures orders in India for the Non-resident.

2. A business connection can be established in following ways:
(i) A Non-resident opens a branch office in India.
(ii) A Non-resident appoints an agent in India.
(iii) A Non-resident forms an association in India. (Joint Venture)

Exceptions to the business connection (Following incomes not deemed to accrue or arise in India)

(a) Apportionment of profit. In case of a business where all its operations are not carried out in India only that part of income which is reasonably attributable to the operation carried out in India is deemed to accrue or arise in India. Suppose manufacturing work is done in India and sales are effected outside India, only a part of whole profit attributable to manufacturing process shall accrue in India.
(b) Income of a Non-resident from operations consisting only of purchase of goods in India for export shall not be deemed to accrue or arise in India.
(c) Income of a Non-resident engaged in the business of running a news agency or publishing newspapers, magazines or journals, or activities confined to collection of news and views in India for transmission out of India shall not be deemed to accrue or arise in India.
(d) Income of a Non-resident (who is not a citizen of India) from operations confined to shooting of any cinematographic film in India shall not be deemed to accrue or arise in India.

Income from Assets.
Any asset (land, building, plant, etc.) from which income is derived is located in India or any gain or loss arising
from transfer of that asset.

Section 9(1)(ii) Where services are rendered in India
If services are rendered in India income is deemed to accrue or arise in India and also for 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 shall be regarded as income earned in India. e.g. Pension, Gratuity and Leave Salary.

Section 9(1)(iii) Where services are rendered outside India
Income chargeable under the head “Salaries” payable by the Government of India to a citizen of India for services rendered outside India shall be deemed to be income earned in India.

However under section 10(7) any allowances or perquisites paid or allowed by Government of India to Indian
citizen for rendering services outside India is fully exempt from tax.

P1 : (A) Mr. Taxcrazy, an Indian Citizen, is an IFS officer. For the last 3 years he has been working in Indian
Embassy in France. From 5-1-2017 to 31-1-2017 he was in India for some official work. His emoluments for
the PY 2016-17 is Basic Salary ₹ 25,000 p.m.; Special Allowance ₹ 10,000 p.m.; Perquisites ₹ 1,00,000 p.a.
Compute his gross salary. (B) What if Mr. Taxcrazy is a foreign citizen. (C) What if Mr. Taxcrazy is working in
a private concern.
Ans: 3,00,000; NT; NT.

Basic Salary (25,000 x 12)		3,00,000
Allowance	1,20,000
Perquisites	1.00.000
Total	2,20,000
Less : Exempt u/s 10(7)	2,20,000	nil
Income from Salaries		3,00,000

Section 9(1)(iv). Dividend
Dividend from Indian company accrues in India whereas dividend from foreign company accrues outside
India. However section 10(34) and Section 10(35) provides exemption to dividend from Indian company and
Mutual Fund respectively.

Section 9(1)(v). Income by way of Interest
Source of earning interest is Loan.

Interest is payable by Govt. of India : Interest deemed to accrue or arise in India whether debt is used in India or outside India whether business connection is in India or outside India. (Rate of TDS u/s 195 : 10%)
Interest is payable by Resident :
- Debt is used in India for any purpose : Interest deemed to accrue or arise in India whether business connection is in India or outside India. (Rate of TDS u/s 195 : 10%)
- Debt is used outside India : Interest accrue or arise outside India. (No TDS)
Interest is payable by Non-Resident :
- Debt is used in India for business or profession : Interest deemed to accrue or arise in India whether business connection is in India or outside India. (Rate of TDS u/s 195 : 40%)
- Debt is used in India for any purpose other than business or profession : Interest accrue or arise outside India. (No TDS)
- Debt is used outside India for any purpose: Interest accrue or arise outside India. (No TDS)

P1: X, a non-resident, lent ₹ 5 lakhs to Y, a resident in India. Y used the money borrowed by him for the purposes of business in India. Y paid an interest of ₹ 75,000 during the previous year to X in the United Kingdom. Discuss the tax liability of such interest in the hands of X in India.

(CA - N92)

Ans: Interest income deemed to accrue or arise in India. Section 9(1)(v). NR is liable to pay tax in India on source basis Section 5. Y is liable to deduct tax at source u/s 195 @ 10%. Rate of tax u/s 115A 10%.

P2 : True or false.“Interest on loan payable by the Government of India to a non-resident outside India invariably deemed to accrue or arise in India (i.e., irrespective of place where money borrowed is utilised)”

Ans: True; As per section 9(1)(v) interest payable by Govt. of India is always deemed to accrue or arise in India
whether the loan is used in India or outside India.

P3: A Ltd., a non-resident, gets interest from B Ltd. an Indian company outside India. The capital was borrowed
by B Ltd. for the purpose of a business carried on by it outside India. Discuss whether the interest is chargeable
to tax in India. (CS-J98)

Ans: Interest accrues or arise outside India. Non resident is not liable to pay tax in India therefore no question
of TDS.

P4: Mr. A, a citizen of India, left for USA for the purposes of employment on 1-5-2016. He has not visited India thereafter, Mr. A borrows money from his friend Mr. B who left India one week before Mr. A’s departure, to the extent of ₹ 10 lakhs and buys shares in X Ltd., an Indian company. Discuss the taxability of the interest charged
@ 10% in B’s hands where the same has been received in New York.

[CA M06]

Ans: Interest accrues or arise outside India. Non resident is not liable to pay tax in India therefore no question
of TDS.

Section 9(1)(vi). Income by way of Royalty

Source of earning royalty is knowledge.

Royalty is payable by Govt. of India : Royalty deemed to accrue or arise in India whether knowledge is used in India or outside India whether business connection is in India or outside India. (Rate of TDS u/s 195: 10%)
Royalty is payable by Resident :
- Knowledge is used in India : Royalty deemed to accrue or arise in India whether business connection is in India or outside India. (Rate of TDS u/s 195 : 10%)
- Knowledge is used outside India : Royalty accrue or arise outside India.
Royalty is payable by Non-Resident :

Knowledge is used in India : Royalty deemed to accrue or arise in India whether business connection is in India or outside India. (Rate of TDS u/s 195 : 40% Payee is Foreign Company)
Knowledge is used outside India : Royalty accrue or arise outside India.

Section 9(1)(vii). Income by way of fees for technical services (FTS)
1. Fees for technical services is payable by Govt. of India : Fees for technical services [FTS] deemed to accrue
or arise in India whether plant (Factory) is set up in India or outside India. (Rate of TDS u/s 195 : 10%)

2. Fees for technical services is payable by Resident :
• Technical agreement is implemented in India : FTS deemed to accrue or arise in India. (Rate of TDS u/s
195 : 10%)
• Technical agreement is implemented outside India : FTS accrue or arise outside India.

3. Fees for technical services is payable by Non-Resident :
• Technical agreement is implemented in India : FTS deemed to accrue or arise in India. (Rate of TDS u/s
195 : 40% Payee is Foreign Company)
• Technical agreement is implemented outside India : FTS accrue or arise outside India.

P1: X Ltd. an Indian company, appoints Lurgi Ltd a company registered in the United Kingdom to set up
factory in India. The principal terms of the proposed appointment are as under:

Foreign technicians were to be sent by Lurgi to India to supervise the erection and installation and commencement of production by X Ltd. For this purpose, X Ltd. was to pay Lurgi a sum calculated @ US $ 1,000 per day for each day of service in India by every technician so deputed.
Lurgi was to prepare the layout of the factory of X Ltd. for which work was to be done entirely in the United Kingdom and for this a fee of $ 1 million was to be paid.
Manufacturing formulae and similar technical know how were to be supplied by Lurgi to X Ltd. by postal service, all the necessary data being prepared outside India.
Indian personnel would be deputed by X Ltd. for training in the factory of Lurgi for which no fees would be charged but the actual expenses incurred for their stay abroad while on training would be reimbursed to Lurgi by X Ltd.

Consider in each case whether income deemed to accrue or arise in India.

Ans: All the above incomes deemed to accrue or arise in India. Non resident is liable to tax in India. X Ltd
is liable to deduct tax at source in India u/s 195.

Assignment
P1: Determine whether the following are Indian Income or Foreign Income?
a. A non - resident purchases garments from Delhi and sells these garments in Poland.

b. A non - resident is engaged in the business of publication of a magazine from Newyork. Some of the news
published in the magazine are collected from India.

c. MGM a non-resident foreign company, is engaged in the business of shooting a cinematograph film in Jaisalmer. The film after its completion is sold to another non - resident outside India. None of shareholders of X Ltd. is an Indian citizen or resident in India.

d. A Non - resident owns a commercial building in Mumbai which is transferred to another non - resident outside India. The consideration is payable in a foreign currency outside India.

e. A Non - resident owns a residential house in Delhi which is given on rent to a foreign embassy. Rent is, however, payable outside India in a foreign currency.

f. Interest on loan is paid by the Government of India to a non-resident, outside India.

g. K Ltd., a non-resident, gets royalty from M Ltd., a non-resident, outside India. Royalty is, however, payable by M Ltd. in relation to a business of manufacturing carried on by it in India.

h. O Ltd., a non - resident, gets interest from G Ltd., an Indian company, outside India. The capital was borrowed by G Ltd. for the purpose of a business carried on by it outside India.

i. H, an Indian Citizen, is presently appointed by the Government of India in its embassy at Tel Aviv. Salary for rendering service is paid to him in a foreign currency outside India.

j. E, an Indian Citizen, is presently appointed by an Indian company in its foreign branch at Barcelona. Salary is paid to him outside India in a foreign currency.

k. Mr. C a citizen of India received salary from the Govt. of India for the services rendered outside India.

Ans: (a) Foreign income (b) Foreign income (c) Foreign income (d) Indian Income (e) Indian Income (f) Indian
Income (g) Indian Income (h) Foreign income (i) Indian Income (j) Foreign Income (k) Indian Income.

P2: Compute total income of Mr. X if he is R-OR, R-NOR and NR in India from the following information:

1	Salary paid by Govt. of India to a foreign citizen for services rendered outside India	40000
2	Mr. X who has head office in Delhi and branch office in London. Profit from head office Profit from branch office (50% income is received in India)	140000
3	Legal Consultancy fees received from a Company for infringement of copyright in Norway. Profession is set up in India	35000
4	Legal Consultancy fees received from a Foreign Company for infringement of copyright in India. Profession is set up outside India	90000
5	Income by way interest paid by Mr J (R-NOR). Loan is used outside India.	105000
6	Fees for technical services for setting up a manufacturing unit of digital equipment Unit to be set in Mizoram Unit to be set up in Nepal	154000 350000
7	Income from units of foreign mutual fund. (Investment is done out of income earned in India)	6000
8	Profit from sale of land situated in India. (Land is sold to a Non-Resident, agreement for sale is done in USA and sale consideration is payable outside India)	300000
9	Loss from house property situated outside India	100000

Ans: 12,05,000; 8,04,000; 7,26,500.

Extra topics

Explanation 2, Section 9(1)(vi). Meaning of “royalty”
Royalty means consideration including any lump sum consideration (but excluding any consideration which
would be the income of the recipient chargeable under the head “Capital gains”) for—

(i)	the transfer of all or anv 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. (PIMDSfpTS)
(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. (TICS)
(v)	the use or right to use any industrial, commercial or scientific equipment but not including the amounts referred to in section 44BB (Oil Rig).
(vi)	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
(vii)	the rendering of any services in connection with the above activities.

Exception when royalty accrues or arise outside India. (Foreign income)

Payment is made by a resident person for the transfer of rights (including the granting of a licence) in respect of
computer software supplied by a non-resident manufacturer along with a computer or computer-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Training, 1986 of the Government of India.

How to write answer
1. Mr. X is a Foreign citizen.
2. Mr. X is borne in undivided India since his DOB is 13-8-1947 which is before 15-8-1947 and place of birth is Hyderdabad which is in undivided India. Therefore he is a PIO.
3. Mr. X comes to India for the purpose of employment which is not treated as visit in India therefore do not fall in exception to the basic condition.
4. Check both the basic condition.
5. He is present in India for atleast 60 days in PY 16-17 and for atleast 365 days in PY 14-15.
6. He satisfies 2nd basic condition therefore his RS is R.

Business connection if following conditions satisfied.

There is a business of Non resident outside India	If all the above 3 conditions are satisfied then there is said to be business connection.
There is a person in India who is acting on behalf of such Non resident and
This person is concluding contract, securing orders or supplying goods from its godown.

If there is a business connection then profits attributable to the operation in India is deemed to accrue or arise
in India. E.g. Few business activities done in India and few business activities done outside India then only
profits attributable to Indian activities is deemed to accrue or arise in India.

Exceptions	Purchase in India only for export.
	Collection of news and views in India.
	Shooting of film by foreign citizens.

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FAQs on When Income is Deemed to Accrue or Arise in India - Taxation - Income Tax for assessment (Inter Level)

1. When does income accrue or arise in India for taxation purposes?

Ans. Income is deemed to accrue or arise in India for taxation purposes when it is received, deemed to be received, or accrued, deemed to be accrued in India. This means that if income is earned in India or has a connection with India, it will be subject to taxation in India.

2. What are some examples of income that accrues or arises in India?

Ans. Examples of income that accrues or arises in India include salary received for services rendered in India, rental income from property located in India, interest earned from investments in India, business income generated from operations in India, and capital gains from the sale of assets situated in India.

3. Are there any exceptions or exemptions for income that accrues or arises in India?

Ans. Yes, there are certain exceptions and exemptions for income that accrues or arises in India. For example, income earned by a non-resident individual or foreign company may be exempt if it is covered under a tax treaty between India and the individual's or company's home country. Additionally, certain categories of income may be subject to lower tax rates or eligible for deductions under the Indian Income Tax Act.

4. How is income deemed to accrue or arise in India if it is received outside of India?

Ans. If income is received outside of India but has a nexus with India, it may still be deemed to accrue or arise in India for taxation purposes. The income will be taxable in India if it is derived from a business connection in India, or if it is income from a source in India that is subject to tax under the Indian Income Tax Act.

5. What are the consequences of not declaring income that accrues or arises in India for taxation purposes?

Ans. Failing to declare income that accrues or arises in India for taxation purposes can lead to penalties and legal consequences. The Income Tax Department of India has the authority to initiate tax assessments, impose penalties, and even prosecute individuals or entities for tax evasion. It is important to accurately report and pay taxes on income that accrues or arises in India to avoid such consequences.

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