Business Connection

Under Section 9 of Income Tax Act

Section Income
9(1)(i) Business Income, Professional Income, House Property
Income, Capital Gains, Income from Other Sources
9(1)(ii) Any salary income, if it is earned in India
9(1)(iii) Any salary payable by the Government to an Indian citizen
for service outside India
9(1)(iv) Dividend paid by an Indian company outside India
9(1)(v) Interest payable by Government, resident or non-resident
9(1)(vi) Royalty payable by Government, resident or non-resident
9(1)(vii) Fees for technical services payable by Government, resident
or non-resident
• ‘Business connection’ has for long been recognized as a mode of determining
the tax liability of non-residents. 

• Although there is a passing reference to the term “business connection" in

the Income Tax Act 1961, there is no explicit definition assigned to it. 

• Both sections 5 and 9, read together, embody the ‘source rule’ of income
taxation in India. Under S.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".
• Section 9 thereafter specifies certain types of income that are deemed to accrue or
arise in India in certain circumstances.

• A non-resident’s income cannot be taxed in India unless it falls within ambit of S.5 and
S.9 read together. Section 9(1) of the Act specifies that for the income to be taxed in
India, it should deemed to accrue or arise in India. 

• The business income of a non-resident (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 S.9 of the Act, even though
it may actually accrue or arise outside India. Therefore, an income need not necessarily
actually accrue or arise in India but may be deemed to accrue or arise in India. 
• The Hon’ble Courts have time and again interpreted the term “business
connection" with reference to facts, circumstances and prevailing conditions.
• The settled view was that the expression limits of no precise definition. In
C.I.T. v R.D. Aggarwal & Co. , the Supreme Court discussed the import and
connotation of the expression.
• 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 meaning of section 9 of the Income Tax Act, 1961, had to be
determined on the facts of each case.
• In the landmark judgment of C.I.T. v R.D. Aggarwal & Co. , the Supreme Court
discussed the meaning of the term “business connection". It held that
although the Income Tax Act defines the expression “business" as any trade,
commerce, manufacture or any adventure or concern in the nature of trade
commerce of manufacture, it contains no definition of the expression
“business connection". 
• The facts of the case are as follows. RD Aggarwal & Co (the assessees) were a
registered firm having their place of business in Amritsar. The assessees were
carrying on business as importers and as commission agents of non-resident
exporters from Italy and Belgium, who were manufacturers of woolen yarn.

• The question which came up for consideration in the instant case was whether
the relationship of assessee with the non residents for whom he was
canvassing orders in taxable territories without authority to accept orders,
amounted to business connection.

• The Supreme Court, in interpreting “business connection", has touched upon a

number of ingredients or essential characteristics to establish the business
connection between the non-resident and the taxable territories. 
• These may be classified as -
1)Element of Continuity
In discussing the meaning of “business connection", the Supreme Court in the
instant case held that the expression “business connection" meant something
more than “business" as defined under the Act. It held more specifically  -
“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 a stray or isolated
transaction is normally not to be regarded as a business connection."
2) Existence of ‘Business Connection’ may vary on facts of each case
The Supreme Court also held, in this respect that the business connection from
or through which income arose or was deemed to accrue to a non resident
would depend on the facts of each case. It specifically held in C.I.T. v R.D.
Aggarwal that  –

“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
nonresident 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 is a business connection from or through which income, profits or gains
arise or accrue to a non-resident must be determined upon the fact and
circumstances of the case."
3) Business Connection as a real and intimate connection
• For a business relation to qualify as a business connection, it must be “real and intimate"
and one through which income would accrue or arise directly or indirectly to the non
resident. 

Position after C.I.T. v R.D. Aggarwal

• With the introduction of the Finance Act 2003, two new explanations were inserted to the
expression “business connection" under S.9(i) with effect from the assessment year 2004-
05, clarifying that the expression will include a person acting on behalf of the non-
resident, who: 
• has, and habitually or regularly exercises in India, an authority to conclude contracts on
behalf of the non-resident, unless his activities are limited to the purchase of goods or
merchandise for the non-resident;
• 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; or
• habitually secures orders in India, mainly or wholly for the non-resident or
for that non-resident and other non-residents controlling, controlled by, or
subject to the same common control, as that non-resident.
• The ‘business connection’ will, however, not include cases where the
business activity is carried out through a broker, general commission agent
or any other agent having an independent status, if such person is acting
in the ordinary course of his business. It has also been explained that were
a business is carried on in India through a person referred to in clauses (a),
(b) and (c) of Explanation 2, only so much of the income as is attributable
to the operations carried out in India shall be deemed to accrue or arise in
India. 
• S.9 was interpreted in a 2007 decision of the Supreme Court, Ishikawajima-
Harima Heavy Industries Ltd v Director of Income Tax, Mumbai . The Apex Court
held: 
“Reading the provision in its plain sense, it can be seen that it requires two
conditions to be met – the services which are the source of the income that is
sought to be taxed, has to be rendered in India, as well as utilized in India, to be
taxable in India. In the present case, both these conditions have not been
satisfied simultaneously, therefore, excluding this income from the ambit of
taxation in India. Thus, for a non-resident to be taxed on income for services,
such a service needs to be rendered within India, and has to be part of a business
or profession carried on by such person in India.
The petitioners in the present case have provided services to persons resident in
India, and though the same have been used here, they have not been rendered
in India."
Thus under Ishikawajima, it was not the mere place where a
service was utilized which was determinative of the taxability of
the fees received in lieu of the service. For the fees to be
taxable, the services rendered to non-residents must have been
both rendered in India and utilized in India. In effect, a
territorial nexus requirement was sought to be established
before the income would come within the purview of the Indian
tax net.