The Indian tax system does not only focus on income directly earned within the country but also keeps a close watch on income that arises indirectly through connections with India. One of the most significant provisions governing this concept is Section 9(1)(i) of the Income Tax Act, 1961.
This section defines what constitutes “income deemed to accrue or arise in India”. Even if income originates outside India, it may still be taxable here if it has a sufficient nexus with India. That’s why multinational corporations, foreign investors, and non-residents dealing with India must carefully evaluate their tax exposure under this section.
What is Section 9(1)(i) of Income Tax Act?
Section 9(1)(i) deals with the concept of deemed income. It states that any income from a business connection in India is deemed to accrue or arise in India.
This provision ensures that income cannot escape taxation just because it is earned outside India but has a strong link to the Indian economy. For instance, if a foreign company earns profits through operations, services, or sales connected to India, such income may fall under this section.
Put simply, the law treats such income as if it was generated in India, even if the transaction happens overseas.
Key Situations Covered Under Section 9(1)(i)
The section identifies several scenarios where income is deemed to accrue or arise in India. These include:
- Business Connection in India – Income arising through activities like sales, operations, or agents in India.
- Property in India – A taxpayer’s income for a taxation year from a business or property located in India."
- Royalty or Fees – Royalty payable by the Indian Government to any non-resident is taxable in India.
- Indirect Transactions – Even if income accrues or arises outside India, it may be taxable if linked to Indian sources.
This wide net ensures that no entity avoids tax obligations merely by shifting the geographical location of its transactions.
Also Read: How India Taxes Foreign Fees and Royalties
Income Deemed to Accrue or Arise in India
The concept of income deemed to accrue or arise in India is central to Section 9. It ensures that even in cross-border deals, the Indian government gets its fair share of taxes.
For example:
- A foreign company selling goods in India through an agent has a business connection here. The profits earned from such sales will be deemed to accrue in India.
- If a foreign entity owns land or a building in India, rental income becomes taxable as it arises from property located in India.
- If the Indian government pays royalty to a non-resident for use of technology or rights, that income is deemed taxable in India.
Business Connection Explained
The term “business connection” is not strictly defined, but judicial precedents and CBDT circulars have clarified it.
- Any continuing relationship between a non-resident & business activities in India qualifies as a business connection.
- Mere purchase of goods for export does not count, but if the non-resident has agents or offices in India, that counts as a business connection.
- Digital businesses, software services, and e-commerce models are now also being scrutinized under this definition.
Thus, businesses must carefully examine their India operations to avoid unexpected tax liability.
Income Accruing or Arising Outside India but Taxable in India
Section 9(1)(i) also covers income accruing or arising outside India if it is linked with India.
Example:
A foreign company signs a contract abroad to supply equipment, but the installation & service happen in India. Even though part of the income arises outside India, the linked portion is deemed to accrue in India and taxed here.
This ensures India’s taxing rights are preserved in global trade.
Also Read: Relief from Double Taxation for Indian Residents
Royalty Payable by the Indian Government
Another crucial provision is that royalty payable by the Indian Government to any non-resident is deemed to accrue in India.
For instance, if the Government of India pays a foreign company for the use of patents, software, or specialized technology, the payment is taxable here regardless of where the foreign company is based."
This prevents revenue leakage & ensures India taxes payments made from its treasury.
Judicial Precedents on Section 9(1)(i)
Several landmark cases have shaped the understanding of this section:
- CIT vs. R.D. Aggarwal & Co. – Business connection requires a real & intimate relation between the business activity outside India & operations in India.
- Ishikawajima-Harima Heavy Industries Ltd. vs. DIT – Income earned abroad but linked to Indian operations was partly taxable in India.
- Vodafone International Holdings vs. UOI – Even indirect transfer of Indian assets by foreign companies came under scrutiny under this section.
These cases highlight that the scope of Section 9(1)(i) is wide and evolving.
International Taxation and Section 9(1)(i)
In today’s globalized world, cross-border taxation is complex. India has signed several Double Taxation Avoidance Agreements (DTAA) with other countries.
Section 9(1)(i) applies subject to treaty benefits. For example, if a treaty provides relief, the taxpayer can claim lower or no taxation in India despite the deeming provisions.
This balance ensures India attracts foreign investment while safeguarding its tax base.
Real-Life Example
Let’s assume Mr. David, a non-resident, owns property in Mumbai & earns rental income. Though he lives abroad, the income arises from property in India. Hence, under Section 9(1)(i), it is deemed to accrue in India & becomes taxable.
Similarly, if a UK-based IT company provides software services through its India office, the income attributable to that office will be taxed in India.
Also Read: Unilateral Relief from Double Taxation
Why Section 9(1)(i) is Important for Businesses and Investors
- It ensures fair taxation of cross-border business operations.
- Prevents tax avoidance by shifting transactions outside India."
- Protects Indian revenue from global digital & service models."
- Makes foreign investors cautious about how they structure deals in India.
For Indian companies partnering with global entities, understanding Section 9(1)(i) is critical to avoid disputes & penalties.
Conclusion
Section 9(1)(i) of the Income Tax Act is a cornerstone of India’s international taxation framework. By defining income deemed to accrue or arise in India, it ensures that even foreign entities contributing to the Indian economy pay their fair share of tax.
Whether it is income from a business connection in India, royalty payable by the Indian Government to any non-resident, or a taxpayer’s income for a taxation year from property in India, this provision casts a wide net.
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