Income Deemed to Accrue or Arise in India
Introduction
Section 9 of the Income-tax Act deems certain incomes to accrue or arise in India, even if earned outside India. These incomes are taxable in India, particularly for non-residents, unless a Double Taxation Avoidance Agreement (DTAA) provides relief.
Scope of Total Income
Section 5 of the Income-tax Act defines the scope of total income based on an individual’s residential status. The total income includes:
- Income received or deemed to be received in India.
- Income that accrues or arises in India.
- Income accruing outside India, but only in the case of a resident taxpayer.
Basis of Charge
The taxability of income is determined by the residential status of the assessee:
- Resident & Ordinarily Resident (ROR): Taxed on global income.
- Resident but Not Ordinarily Resident (RNOR): Taxed on Indian income and foreign income only if derived from a business controlled in or a profession set up in India.
- Non-Resident (NR): Taxed only on income received, accrued, or deemed to accrue or arise in India.
Taxability of Income Based on Residential Status
| Nature of Income | ROR | RNOR | NR |
| Income received or deemed to be received in India | Taxable | Taxable | Taxable |
| Income accrued or deemed to accrue in India | Taxable | Taxable | Taxable |
| Foreign income from business/profession controlled from India | Taxable | Taxable | Not Taxable |
| Foreign income from business/profession controlled from outside India | Taxable | Not Taxable | Not Taxable |
Accrual vs. Receipt Basis of Taxation
- Income is taxed on either an accrual or a receipt basis.
- If taxed on accrual, it cannot be taxed again upon receipt.
- The head under which an income is taxed (e.g., salary, business income) determines its chargeability.
Computation of Total Income
Total income is computed as follows:
- Aggregate income under different heads:
- Salaries
- House Property
- Business or Profession
- Capital Gains
- Other Sources
- Deduct current year losses and brought forward losses.
- Arrive at Gross Total Income (GTI).
- Deduct Chapter VI-A deductions (Section 80C to 80U).
- Arrive at Total Income.
Types of Income Deemed to Accrue or Arise in India
Section 9(1) provides the following income, which shall be deemed to accrue or arise in India:
- Income through business connection, property, asset, or source in India [Section 9(1)(i)].
- Income from salary earned in India [Section 9(1)(ii)].
- Salary paid by the Government of India to an Indian citizen working abroad [Section 9(1)(iii)].
- Dividend paid by an Indian company outside India [Section 9(1)(iv)].
- Interest payable by the Government, residents, or non-residents (in specific cases) [Section 9(1)(v)].
- Royalty payable by the Government, residents, or non-residents (in specific cases) [Section 9(1)(vi)].
- Fees for technical services payable by the Government, residents, or non-residents (in specific cases) [Section 9(1)(vii)].
- Gift of money paid by a resident to a non-resident or RNOR [Section 9(1)(viii)].
Business Connection in India
For the purpose of Section 9(1)(i), a business connection exists when a non-resident has a business activity in India, other than carried out through a broker, general commission agent or any other agent having an independent status.
This also includes the following:
- Significant economic presence (SEP) in India as defined in Explanation 2Ato Section 9(1)(i), or
- An agent acting on behalf of the non-resident.
Income from Transfer of Capital Assets in India
For the purpose of Section 9(1)(i), capital gains arising from the transfer of an asset situated in India are deemed to accrue in India. Indirect transfers of shares in a foreign entity that derive substantial value from Indian assets are also covered under this provision.
Exemptions Under Section 9(1)(i)
Certain business activities are not deemed to accrue in India, including:
- Purchases in India for export.
- News collection by foreign media agencies.
- Shooting of foreign films in India (subject to conditions).
- Display of uncut diamonds in special zones notified by the Indian government.
Taxation of Deemed Income
- Business profits are taxable in India only to the extent attributable to operations in India.
- Royalty, FTS, and interest income are taxed at specified rates under specified provisions unless a DTAA provides relief.
- Dividend and gift income are taxable under Income from Other Sources at applicable rates.
Impact of DTAA
- DTAA provisions override Section 9 if they offer more beneficial tax treatment.
- Tax credits may be available for tax paid abroad on such income.
Apportionment of Deemed Income
The apportionment of income is determined using reasonable methods, as specified in Rule 10 of the Income-tax Rules. If books of account do not accurately reflect income, the Assessing Officer may determine the taxable portion using:
- Presumptive Method – A fixed percentage of total turnover.
- Proportionate Method – Income apportioned based on the ratio of Indian receipts to total receipts.
- Discretionary Method – Any other reasonable method deemed suitable by the Assessing Officer.