When it comes to international payments and cross-border services, Section 9(1)(vii) of the Income Tax Act, 1961 plays a major role in defining what’s taxable in India—even if the person receiving the money is sitting thousands of miles away.
This provision is critical for businesses dealing with overseas consultants, foreign service providers, & even multinational companies receiving royalties or fees for technical services (FTS). But what does this section say, and how can it impact your business or your international transactions?
Let’s break it down in a simple, jargon-free way.
🧾 What Is Section 9(1)(vii) of the Income Tax Act?
Section 9 of the Income Tax Act defines “Income deemed to accrue or arise in India.” Specifically, Section 9(1)(vii) deals with fees for technical services and royalties paid by an Indian resident to a non-resident.
In plain English, even if the services are rendered outside India & the recipient is a foreign national or company, the income may still be taxed in India.
Why? Because the law deems that such income arises in India due to its connection with the Indian payer.
🔍 What Falls Under Fees for Technical Services (FTS)?
The term "Fees for Technical Services" under this section includes:
- Managerial services
- Technical advisory or consultancy
- Any other services that require technical or professional skills
But here's the catch—if these services are like routine support and don’t involve any intellectual input, they may not qualify as “technical services.” This is often where litigation arises.
So if you’re an Indian company paying a foreign consultant for market research, and the consultant just compiles data without any expert analysis, it might not be considered taxable under this section."
💸 What About Royalties?
The section also covers royalty payable by the Indian Government to any non-resident or by a resident to a non-resident. Royalties can include:
- Payments for the use of patents, copyrights, trademarks
- Charges for transferring know-how or technical formulas
- Licensing fees for software, brands, or content
Even if these royalties are paid for work done entirely outside India, they may still be taxed in India because the income “accrues” to the non-resident from an Indian source."
🌍 How It Affects Non-Residents
Here’s where things get more interesting.
Section 9(1)(vii) seeks to charge a foreigner in respect of his income outside India if the source of income is connected to an Indian business or government.
This means that a US-based company providing technical design to an Indian firm will be taxed in India, even though the work was done in the US & the company has no Indian office.
The rationale? The income arose because of an Indian client.
📜 What Is Explanation 2 to Section 9(1)(vii)?
Explanation 2 clarifies the meaning of “fees for technical services.” It states that fees for managerial, technical, or consultancy services shall be considered as FTS, whether or not the services are rendered in India.
This closes a loophole where foreign service providers would argue that since the work wasn’t done in India, the income shouldn’t be taxed here. Now, that argument doesn't hold much ground.
📌 What Is Section 9(1)(vii)(b)?
There’s an important exception clause built into Section 9(1)(vii)(b).
It says that if a foreign company provides services to another foreign company, & the services have no connection with any business or source of income in India, then the income is not taxable in India.
This is a relief for truly global transactions that just happen to pass through India but are not related to Indian clients or operations.
🧾 When Should You Deduct TDS?
If you're an Indian company making payments for royalty or FTS to a non-resident, you're required to tax deduct at source (TDS) under Section 195 before making the payment.
Failure to deduct TDS could make you liable for the tax amount—and trust us, that's not a position you want to be in.
Also, make sure to check the applicable Double Taxation Avoidance Agreement (DTAA) with the recipient’s country. Sometimes, tax rates under DTAA are lower than what’s prescribed under the Income Tax Act.
✅ Final Thoughts
Section 9(1)(vii) of the Income Tax Act is India’s way of ensuring that income arising from its economy—whether directly or indirectly—doesn’t escape the tax net just because the recipient is sitting abroad.
If you're dealing with international payments, especially for technical services or royalties, make sure you know exactly where your tax obligations lie. With the right planning & documentation, you can avoid costly penalties and ensure smooth cross-border transactions.
👉 Need help with international taxation or TDS on foreign payments?
Let our tax experts at CallMyCA.com simplify it for you—book a consultation now and avoid penalties before it’s too late!
