Income deemed to accrue or arise in India.

9. (1) The following incomes shall be deemed to accrue or arise in India—

79
(i) all income accruing or arising, whether directly or indirectly, through or. from any
business connection in India, or through or from any property in India, or through or from
any asset or source of income in India, 80[***] or through the transfer of a capital asset situate
in India.

Explanation: For the purposes of this clause—

(a) in the case of a business of which all the operations are not carried out in India,-the
income of the business deemed under this clause to accrue or arise in India shall be only such
part of the income as is reasonably attributable to the operations carried out in India;

(b) in the case of a non-resident, no income shall be deemed to accrue or arise in India to him
through or from operations which are confined to the purchase of goods in India for the
purpose of export;
81
[***]

[(c) in the case of a non-resident, being a person engaged in the business of running a news
82

agency or of publishing newspapers, magazines or journals, no income shall be deemed to

accrue or arise in India to him through or from activities which are confined to the collection
of news and views in India for transmission out of India ;]
83
[(d) in the case of a non-resident, being—

(1) an individual who is not a citizen of India; or

(2) a firm which does not have any partner who is a citizen of India or who is resident in
India ; or

(3) a company which does not have any shareholder who is a citizen of India or who is
resident in India,

no income shall be deemed to accrue or arise in India to such individual, firm or company
through or from operations which are confined to the shooting of any cinematograph film in
India;]

(ii) income which falls under the head "Salaries", if it is earned in India.
84
[Explanation: For the removal of doubts, it is hereby declared that income of the nature
referred to in this clause payable for service rendered in India shall be regarded as income
earned in India;]

(iii) income chargeable under the head "Salaries" payable by the Government to a citizen of
India for service outside India;

(iv) a dividend paid by an Indian company outside India ;

85
[(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;

(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

(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:

Provided that nothing contained in this clause shall apply in relation to so much of the
income by way of royalty as consists of lump sum consideration for the transfer outside India
of, or the imparting of information outside India in respect of, any data, documentation,
drawing or specification relating to any patent, invention, model, design, secret formula or
process or trade mark or similar property, if such income is payable in pursuance of an
agreement made before the 1st day of April, 1976, and the agreement is approved by the
Central Government.

Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after the
1st day of April, 1976, shall be deemed to have been made before that date if the agreement is
made in accordance with proposals approved by the Central Government before that date; so,
however, that, where the recipient of the income by way of royalty is a foreign company, the
agreement shall not be deemed to have been made before that date unless, before the expiry
of the time allowed under sub-section (l) or sub-section (2) of section 139 (whether fixed
originally or on extension) for furnishing the return of income for the assessment year
commencing on the 1st day of April, 1977, or the assessment year in respect of which such
income first becomes chargeable to tax under this Act, whichever assessment year is later, the
company exercises an option by furnishing a declaration in writing to
the 85a[Assessing] Officer (such option being final for that assessment year and for every
subsequent assessment year) that the agreement may be regarded as an agreement made
before the 1st day of April, 1976.
Explanation 2: For the purposes of this clause, "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 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);

(vii) 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

(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:

[Provided that nothing contained in this clause shall apply in relation to any income by way
86

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.]
86
[Explanation 1 : For the purposes of the foregoing proviso, an agreement made on or after
the 1st day of April, 1976, shall be deemed to have been made before that date if the
agreement is made in accordance with proposals approved by the Central Government before
that date.]

Explanation 87[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".]

(2) Notwithstanding anything contained in sub-section (1), any pension payable outside India
to a person residing permanently outside India shall not be deemed to accrue or arise in India,
if the pension is payable to a person referred to in article 314 of the Constitution or to a
person who, having been appointed before the 15th day of August, 1947, to be a Judge of the
Federal Court or of a High Court within the meaning of the Government of India Act, 1935,
continues to serve on or after the commencement of the Constitution as a Judge in India.

79. See rule 10.

80. "or through or from any money lent at interest : and brought into India'in cash or in kind" omitted by the Finance Act,
1976, w.e.f. 1-6-1976.

81. Proviso omitted by the Finance Act, 1964, w.e.f. 1-4-1964.

82. Inserted by the Finance Act, 1983, with retrospective effect from 1-4-1962.

83. Inserted by the Taxation Laws (Amendment) Act, 1984, with retrospective effect from 1-4-1982.

84. Inserted by the Finance Act, 1983, with retrospective effect from 1-4-1979.

85. Clauses (v), (vi) and (vii) inserted by the Finance Act, 1976, w.e.f. 1-6-1976.

85a. Substituted for "Income-tax" by the Direct Tax Laws (Amendment) Act, 1987, w.e.f. 1-4-1988.

86. Inserted by the Finance (No. 2) Act, 1977, w.e.f. 1-4-1977.

87. Numbered as Explanation 2 by the Finance (No. 2) Act, 1977, w.e.f. 1-4-1977.
The Indian Income-tax Act provides for levy of income-tax on the income of
foreign companies and non-residents, but only to the extent of their income
sourced from India. Under section 5 of the Act, a foreign company or any other
non-resident person is liable to tax on income which is received or is deemed to be
received in India by or on behalf of such person, or income which accrues or arises
or is deemed to accrue or arise to it in India. Income tax is payable by a taxpayer,
regardless of whether he is a resident taxpayer, a non-resident taxpayer, or a non-
resident Indian, on the total income computed by the Assessing Officer under the
provisions of the Income Tax Act 1961. Section 9 thereafter specifies certain types
of income that are deemed to accrue or arise in India in certain circumstances.
These two sections embody the source rule of income taxation in the domestic law.
No income of a non-resident can be taxed in India unless it falls within the four
corners of section 5 read with section 9 of the Income-tax Act. Section 9(1) of the
I.T. Act specifies that for the income to be taxed in India, it should deemed to
accrue or arise in India.

And one among those incomes are income from business connection in India .The
basic aim of this paper work is to look into the series of judicial pronouncements
related to the term business connection and the changes which have been
introduced therein after.

Section 9 of IT Act: Broadly speaking, business income of a foreign company or

other non-resident person is chargeable to tax to the extent it accrues or arises
through a business connection in India or from any asset or source of income
located in India, and to the extent such income is attributable to the operations
carried out in India. Certain income is deemed to accrue or arise in India under
section 9 of the said act, even though it may actually accrue or arise outside
India .Section 9 applies to all assesses irrespective of their residential status and
place of business. Thus, only Indian income is liable to income tax in India in the
case of a non-resident person. This means that a non-resident person is not liable to
pay any income tax in India on his foreign income. Though an income may not
actually accrue or arise in India, yet it may be deemed to accrue or arise in India.

Thus, under Section 9, the following are the important types of income which are
deemed to accrue or arise in India:

• Income through any business connection in India, or through or from any

property in India, or through or from any asset or source of income in India
or through the transfer of a capital asset situated in India.
• Salary income for service rendered in India; and
Salary 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
from the A.Y. 2000.Also the following incomes which are payable outside India
are deemed to arise in India:-

a. Dividend paid by an Indian company outside India.

b. Interest payable on money borrowed and brought into India.
c. Royalty and technical service fees payable in respect of any right/ technical
services used for business / profession in India. However, royalty and fees
for technical services is exempt, where such royalty / fees earned is in
respect of computer software supplied by a Non-resident manufacturer along
with the computer or computer based equipment under an approved scheme.

Business Connection-The term business connection has undergone lot of changes.

The Hon’ble Courts have time and again interpreted the term business connection
with reference to facts, circumstances and prevailing conditions. A business
connection involves a relation between a business carried on by a non-resident
which yields profits or gains and some activity in India which contributes to the
earning of these profits or gains. A business connection can arise between a non-
resident and a resident if both of them carry on business and if the non-resident
earns income through such a connection. A business connection involves a relation
between business carried on by non-resident which yields profits or gains and
some activity in India which contributes to the earning of these profits or gains.

A business connection can arise between a non-resident and a resident of both of

then carry-on business and if the non-resident earns income through such
connections. It basically predicates an element of continuity between the business
of the non-resident and the activity in India: a stray or isolated transaction is not
normally regarded as business connection.

BUSINESS CONNECTION as defined in the Act (Sec. 9(1) I.T.ACT)

And also in Circular No 23, Section(s) Referred 9 of income tax

It includes a profession connection. It includes a person acting on behalf of a non-

resident and who performs any one or more of the following –

Activity 1: He exercises in India an authority to conclude contracts on behalf of

non-resident (it does not cover the activity of only the purchase of goods or
merchandise for then on-resident)
Activity 2: He has no such authority but habitually maintains in India a stock of
goods or merchandise from which he regularly delivers goods or merchandise on
behalf of the non-resident

Activity 3: He habitually secures order in India (mainly or wholly) for the non-
resident or for non-residents under the same management.

Where such a business is carried on in India through a person referred to in

Activity one, two or three (mentioned above) only so much of income is
attributable to the operations carried out in India shall be deemed to accrue or arise
in India.

Also according to the Circular No 23 , income tax some illustrative instances of a

non-resident having business connection in India, are given below:

(a) Maintaining a branch office in India for the purchase or sale of goods or
transacting other business.
(b) Appointing an agent in India for the systematic and regular purchase of raw
materials or other commodities, or for sale of the non-resident's goods, or for
other business purposes.
(c) Erecting a factory in India where the raw produce purchased locally is worked
into a form suitable for export abroad.
(d) Forming a local subsidiary company to sell the products of the non-resident
parent company.
(e) Having financial association between a resident and a non-resident company.

Although the term business connection is nowhere defined in the act but the courts
have given various judicial pronouncements which have been categorically
classified below:

1) There must be element of continuity as well as real and intimate

connection - The expression business connection undoubtedly means
something more than business. A business connection involves a relation
between a business carried on by a non-resident which yields profits or
gains and some activity in the taxable territories which contributes
directly or indirectly to the earning of those profits or gains. It predicates
an element of continuity between the business of the non-resident and the
activity in the taxable territories. The expression business connection
postulates a real and intimate relation between trading activity carried on
outside the taxable territories and trading activity within the territories,
the relation between the two contributing to the earning of income by the
non-resident in his trading activity.

In the case of CIT v. R.D. Aggarwal & Co. ,the contracts for the sale of
goods took place outside the taxable territories, price was received by the
 non-residents outside the taxable territories, and delivery was also given
outside the taxable territories. Therefore in the view of the court case
such a relation w.r.t expression "business connection" must be real and
intimate through or from which income must accrue or arise whether
directly or indirectly to the non-resident. was absent. The Supreme Court
in the same case further observed that a business connection.....involves a
relation between a business carried on by a non-resident which yields
profits or gains and some activity in the taxable territories which
contributes directly or indirectly to the earning of those profits or gains..
Business connection may take several forms: it may include carrying on
a part of the main business or activity incidental to the main business of
the non-resident through an agent, or it may merely be a relation between
the business of the non-resident and the activity in the taxable territories,
which facilitates or assists the carrying on of that business. In each case
the question whether there is a business connection from or through
which income, profits or gains arise or accrue to a non-resident must be
determined upon the facts and circumstances of the case.

The expression "business" is defined in the Act as any trade, commerce,

manufacture or any adventure or concern in the nature of trade,
commerce or manufacture, but the Act contains no definition of the
expression "business connection" and its precise connotation is vague
and indefinite.

In CIT v. Fried Krupp Industries it was held that an isolated transaction

between a non-resident and a resident in India without any course of
dealings such as might fairly be described as business connection does
not attract section 9. There is no question of continuing business relating
when a person purchases machinery or other goods abroad or uses them
in India and earns profit

But where there is connection a continuity in business relationship

between the person in India who helps to make the profits and the person
outside India who receives and realizes the profit, such relationship
constitute a business connection In each of such case whether there is a
business connection from or through which income arises or accrues
must be determined upon the facts or circumstances of that case.

2) Business includes profession, vocation and callings - The expression

business does not necessarily mean trade or manufacture only. It is being
used as including within its scope profession, vocations and calling from
a fairly long-time.

In the context in which the expression business connection is used in

section 9(1), there is no warrant for giving a restricted meaning to it
excluding professional connection, from its scope .The definition of the
expression "business" given in the Act is an inclusive one. The
expression "business connection", however, is not defined in the Act It is
no doubt true that there is specific reference to "business" in section 9(1)
and there is no reference to "profession".

In CIT v. Currimbhoy Ebrahim & Sons Ltd ., Sir George Rankin,

speaking for the Judicial Committee of the Privy Council, while
construing the expression "business connection mentioned in the Indian
I.T. Act, 1922, observed (p. 400):

"The phrase 'business connection' is different from, though doubtless not

unrelated to, the word business of which there is a definition in the Act."

The expression "business" does not necessarily mean trade or

manufacture only. It is being used as including within its scope
professions, vocations and callings from a fairly long time. The Shorter
Oxford English Dictionary defines "business" as "stated occupation,
profession or trade" and "a man of business" is defined as meaning "an
attorney" also. In view of the above dictionary meaning of the word
"business", it cannot be said that the definition of business given in
section 45 of the Partnership Act, 1890 (53 & 54 Vict. clause 39), was an
extended definition intended for the purpose of that Act only. Section 45
of that Act says:

"........The expression 'business' includes every trade, occupation, or

profession."

Section 2(b) of the Indian Partnership Act, 1932, also defines

"business" thus:

" 'Business' includes every trade, occupation and profession."

The observation of Rowlett J. in Christopher Barker & Sons v. IRC ,

"All professions are businesses, but all businesses are not professions ..."
also supports the view that professions are generally regarded as
businesses. The same learned judge in another case, IRC v. Marine
Steam Turbine Co. Ltd. held:

"The word 'business', however, is also used in another and a very

different sense, as meaning an active occupation or profession
continuously carried on and it is in this sense that the word is used in the
Act with which we are here concerned."
 The word "business" is one of wide import and it means an activity
carried on continuously and systematically by a person by the application
of his labor or skill with a view to earning an income. The Courts are of
the view that in the context in which the expression "business
connection" is used in section 9(1) of the Act, there is no warrant for
giving a restricted meaning to it excluding "professional connections"
from its scope.

In the case of Barendra Prasad Ray v. ITO, the contention of the

appellants was that a professional connection cannot amount to a
business connection attracting section 9(1) of the Act. The Court held
that the word "business" is one of wide import and it means an activity
carried on continuously and systematically by a person by the application
of his labour or skill with a view to earning an income. The judges were
of the view that in the context in which the expression "business
connection" is used in section 9(1) of the Act, there is no warrant for
giving a restricted meaning to it excluding "professional connections"
from its scope.

3) Mere purchase abroad and use in India is not continuing business -

The term business connection postulates a continuity of business
relationship between the foreigner and the Indian. There is no question of
continuing business relation when a person purchase the machinery or
other goods abroad and uses them in India and earns profit as it was held
in CIT v. Fried Krupp Industries .In this case the court looked into the
question whether principal to principal transaction amounts to any
business connection.

The court observed that where a person purchased goods from a

foreigner without anything more, and the purchased goods are utilized in
commercial operations in India by the Indian, then the Indian merchant
or company is earning his own or its own income. The foreigner in such
a case has nothing to do with the Indian-assessee's transaction in India, as
by selling his machinery abroad, he had no further interest in the
business in India. The term "business connection" postulates a continuity
of business relationship between the foreigner and the Indian. The court
held that there is no question of continuing business relation when a
person purchases machinery or other goods abroad and uses them in
India and earns profit and the part of the foreigner has been played
wholly abroad, so that there is no connection as such with any business
in India. The Supreme Court referred and approved the decision of the
Bombay High Court in CIT v. Tata Chemicals Ltd. , wherein it had been
held that in order to rope in the income of a non-resident, under the
deeming provision, it must be shown by the department that some of the
operations were carried out in India in respect of which the income was
 sought, to be assessed. Therefore the court declared that in respect of
principal to principal transaction there is no question of any business
connection

4) Capital gains derived outside India is excluded - If the words business

connection in India were wide enough to cover all transactions including
transactions in capital assets, there was no reason for Parliament to
specifically include income

(a) through or from any property in India,

(b) through or from any asset or source of income from India, and
(c) through or from sale of a capital asset situate in India.

From the very fact that the transfer of a capital asset situate in India
has been brought within the purview of section 9 the intention of
Parliament was not to bring within its purview any income derived
out of sale or purchase of a capital asset effected outside India as it
was held in the case of CIT v. Quantas Airways Ltd.

5) If no operations are carried in India, deeming concept cannot apply-

In CIT v. Toshoku Ltd. the court observed that If no operations of
business are carried out in the taxable territories, it follows that the
income accruing or arising abroad through or from any business
connection in India cannot be deemed to accrue or arise in India.
6) Transactions must be systematic and well-defined - It is not every
business activity of a manufacturer that comes within the expression
operation to which the provisions of section 42(3) of the 1922 Act
[corresponding to section 9 of the 1961 Act] are attracted. In the case of
Anglo-French Textile Co. Ltd. v. CIT (No. 2) it was observed that
activities which are not well defined or are of a casual or isolated
character would not ordinarily fall within the ambit of this rule, in a case
where all that may be known is that a few transactions of purchase of
raw materials have taken place in British India, it could not ordinarily be
said that the isolated acts were in their nature operations within the
meaning of that expression.

Therefore, these were the changes introduced by the judiciary in the

definition of tern business connection. Other than the above
mentioned transactions, following transactions does not amount to
business connections:-

a. In respect of business operations carried out both in India and

overseas, transactions relating to overseas operations,
b. Transactions relating only to purchase of goods in India for
purpose of export by the non-resident,
 c. Transactions confined to the collection of news for
transmission outside India in the business of news agency or
publishing newspapers, magazines or journals, carried on by
non-resident,
d. Operations confined to shooting of cinematography films by a
non-resident foreign national.

Conclusion

The expression 'business connection' limits no precise definition. The import and
connotation of this expression has been explained by the Supreme Court in their
judgment in C.I.T. v. R.D. Aggarwal and Co. Which still holds good. Although the
question whether a non-resident has a 'business connection' in India from or
through which income, profits or gains can be said to accrue or arise to him within
the meaning of section 9 of the Income-tax Act, 1961, has to be determined on the
facts of each case but it’s definitely has given some reliefs so as do away with the
prevalent confusion regarding the term business connection. Generally, confusion
prevailed in a situation where few transactions of purchases of raw materials took
place in India and the manufacture and sale of goods took place outside India, the
profits arose from such sales were considered to have arisen out of a business
connection in India which was a wrong practice. Later the case of CIT v. Fried
Krupp Industries has made the concept even more clear by hinting at continuity of
business which is essential so as to establish business connections. Therefore, the
term business connection has been rationalized with the help of the judicial
interpretation and been successful to a larger extent in resolving various
complications related to transaction and unlike few years back.