This article explains in detail Section 9 of the Income Tax Act 1961. Various legal precedents have been used for this.
Taxes are considered to be the cost of living in a society. The government levies taxes to cover the common expenses of society. Taxes can also be described as the state’s source of basic income.
Taxes can be roughly divided into two types –
- Direct Taxes: The incidence and impact of a direct tax fall on the same person. For example – income tax.
- Indirect tax: the incidence and impact fall on different people. For example – goods and services tax.
Section 2 (24) of the Income Tax Act 1961 provides the definition of income. It is a comprehensive and non-exhaustive definition where not only the items mentioned in this section are income, but also those items that fall under the general meaning of income, the term “income”.
Individuals are taxed in accordance with Section 2 (31) of the Income Tax Act 1961:
- Hindu undivided family,
- Association of persons or bodies of individuals,
- Local authorities and
- Artificial judges.
Taxes are levied on a person who resided in India the previous year. To understand the size of total income, we need to go through Section 5 of the Income Tax Act 1961.
Total Income Scope – Section 5
The Income Tax Act levies taxes on the income of foreign companies or non-residents based on their income accrued or accrued in India. Section 5 of the Income Tax Act of 1961 provides that a foreign corporation or non-resident in India must pay tax on income received or deemed to be received in India.
To better understand who is liable for tax, it is important to understand the following three terms:
- Resident & Ordinary Resident – If an Indian citizen or a person of Indian origin has been in India for a period of 182 days in the previous year, they are referred to as Resident & Ordinary Resident.
- Resident, but not usually resident – A person would qualify as a non-habitually resident if he or she has not been a resident for the past 9 out of 10 years or has been in India for less than 729 days in the past 7 years.
- Not resident – A person would qualify as a non-resident if they do not exceed their stay in India by 181 days.
Now, according to Section 5, the income is divided into three types and accordingly a person is taxed:
|details||Resident & Ordinary Resident||Resident, but not usually resident||Not resident|
|Income received or deemed to have been received in India||Taxable||Taxable||Taxable|
|Income accruing or accruing or accruing or accruing in India||Taxable||Taxable||Taxable|
|Income accruing or accruing outside of India||Taxable||Not taxable||Not taxable|
While section 5 mentions the total scope of income, section 9 lists the various categories of income that arise or arise in India.
Income Accrued or Accrued in India – Section 9
Section 9 deals with the categories of income incurred or incurred in India. This is important as only the income that is incurred or incurred or incurred or incurred or incurred in India is taxable. This section provides taxation for both residents and non-residents.
Section 9 essentially provides a “withholding income” tax rule, ranging from income from a business relationship to royalties deemed by the government to be incurred for tax purposes or incurred in India. Due to its way of taxing non-resident companies as well, this section has been challenged as ultra vires of the constitution of India because it lies outside the legislative competence of the legislature and violates fundamental rights.
Originally, Section 9 of the Income Tax Act of 1961 only dealt with the taxation of the following categories: business relationship, asset transfers, property income, dividends, and salary. Then Section 9 of the 1976 Finance Act was amended to include the following categories – interest, royalties, and technical service fees.
Nani Palkhivala criticized the 1976 additions to Section 9. He said that the additions ran on a totally inadequate territorial context and were ultra-vires. In his book, The Law and Practice of Income Tax, he writes: If the Indian Parliament can enlarge its territorial cohesion to such an extent that a transaction by a foreign resident in India falls under the scope of our tax laws, then this should also include taxes charge a hotel abroad for transactions with an Indian.
Now let’s start by understanding the very text of Section 9 of the Income Tax Act 1961:
- Section 9 (1) (i) deals with income arising from or arising from any business relationship in India or any source of income or from the transfer of any capital property resident in India.
- For a company that does not have all offices in India, only the portion of income that is incurred or deemed to be incurred in India is taxable.
- For a non-resident, doing business in India does not include: transactions limited to the export of goods, operations limited to gathering news and views for broadcast outside India, or operations limited to filming .
- A business relationship is understood to mean any business activity carried out on behalf of the non-resident who ordinarily exercises the authority to enter into contracts in India on behalf of the non-resident who ordinarily maintains inventory and manages the delivery of the goods, as well as someone who he’s basically not an independent agent.
- CIT against RD Aggarwal & Co.[i] – In this case, the Supreme Court discussed the meaning of the term “business relationship” and found that while the Income Tax Act of 1961 defined the term “business” in Section 2 (13), it did not define the term “business” relationship. ” RD Aggarwal & Co. was a registered company headquartered in Amritsar and carried out the business of importers and commission agents to non-residents from other parts of the world.
The question before the Supreme Court was whether the business relationship between the non-residents and the company could be described as a “business relationship”.
The Supreme Court provided a list of the essential features of a “business relationship”. These are: element of continuity, existence may vary from case to case, a real and intimate connection, mer-buying abroad for use in India is not a business relationship, capital gains from India are excluded.
- Two new explanations were added later in the 2003 Finance Act to facilitate the interpretation of the term “business relationship”.
- Ishikawajima-Harima Heavy Industries Ltd v Director of Income Tax, Mumbai[ii]:: The Supreme Court ruled that two conditions must be met in this case – the services, which are the source of income, which are to be taxed in India and which must also be used in India in order to be taxable in India.
- Section 9 (1) (ii) talks about income under the heading “Salaries” when it is earned in India or is payable for a service provided in India.
- Section 9 (1) (iii) talks about the salary the Government of India pays an Indian citizen for a service performed outside of India.
- Section 9 (1) (iv) deals with interest paid by an Indian company outside of India.
- Section 9 (1) (v) deals with income from interest payable by the Government of India or, in certain situations, by a resident or non-resident.
- Section 9 (1) (vi) deals with income from royalties payable by the government, a resident or a non-resident.
Section 9 is a very important section as it expands the territorial context of the Income Tax Act 1961. Until now, there have been many confusing judgments and situations where it has been difficult to understand whether a business relationship was difficult or not. Different scholars and lawyers have interpreted Section 9 differently, and some support it while others oppose it.
Section 5 is also essential to understanding the scope of Section 9. Section 5 provides a source rule and the courts rely heavily on it to determine issues under Section 9 of the Income Tax Act 1961.
[i] CIT v RD Aggarwal & Co, 1965 AIR 1526
[ii] Ishikawajima-Harima Heavy Industries Ltd v Director of Income Tax, Mumbai  288 ITR 408 (SC)